BWLD Buffalo Wild Wings, Inc. (delisted)

We are upgrading our rating on Buffalo Wild Wings Inc. (BWLD) to Outperform from Neutral.

The rating upgrade is based on solid first quarter 2011 results, which outpaced the Zacks Consensus Estimate, primarily driven by double-digit growth in the top line and lower traditional wing prices. The company is also on track to achieve 13% unit and 18% net earnings growth in fiscal 2011, based on improved comparable store sales and favorable wing costs.

During the first quarter, cost of traditional wings declined 36% year over year to $1.22 per pound. For the first two months of second quarter 2011, the company expects traditional wings cost to be $1.02 per pound, lower than any quarterly price since 2003. Buffalo Wild Wings has also contracted for the price of boneless wings, a higher margin product, till March 2012 at a cost similar to fiscal 2010.

Buffalo Wild Wings is witnessing an improvement in comps with company-operated and franchised restaurants growing 3.9% and 1.6%, respectively, during the quarter. Additionally, the comps are expected to be up 5.3% at company-owned restaurants and 1.6% at franchise locations for the first four week of the second quarter of 2011. The upside in comps is mainly driven by menu price increase, marketing spending, operating enhancements and easier comparisons. Comps for the month of April benefited from the favorable Easter shift and NCAA men's tournament championship. Moreover, to improve comps, the company is taking initiatives such as higher media spending, roll out of the Happy Hour program (expanded to 75% of the company-owned restaurants in March), gift card sales, remodeling of restaurant, closure of underperforming restaurants and new menu additions.

Additionally, given a long track record of success, a viable strategy and a debt-free balance sheet, Buffalo Wild Wings offers one of the strongest growth profiles in the restaurant industry. Moreover, the company plans to open 1,000 units in the United States by 2013, thus providing further growth opportunities.

The company is also planning expansion outside the U.S. by opening more than 50 company-owned and franchised restaurants in Canada over the next 5 years. Buffalo Wild Wings has limited presence in the international markets, and thus the expansion plan in Canada provides it with ample scope to strengthen its international footprint.

First Quarter Results Ahead of Estimates

Buffalo Wild Wings’ first quarter 2011 earnings of 81 cents per share exceeded the Zacks Consensus Estimate of 73 cents and increased 39.7% from 58 cents posted in the prior-year quarter.

Total revenue climbed 19.6% year over year to $182.2 million and outperformed the Zacks Consensus Estimate of $177.0 million. Sales at company-operated restaurants rose 20.0% to $165.5 million, fueled by 28 additional restaurants in operation at the end of the quarter compared with the prior-year quarter and a rise in same-store sales.

Franchise royalties and fees grew 16.2% year over year to $16.6 million, propelled by 58 additional restaurants in operation at the end of the quarter compared with the year-ago quarter and an improvement in comps.

Restaurant operating margin perked up 360 basis points (bp) to 21.5%, aided by a 270-bp contraction in cost of sales to 27.9% of restaurant sales arising from a 36% fall in cost of traditional wings, 80-bp drop in operating costs to 14.8% and a 30-bp decrease in occupancy costs to 6.2%.

Earnings Estimate Revisions: Overview

Following the first quarter earnings release, the Zacks Consensus Estimate for the company has increased; with the analysts adopting a bullish stance on the stock. The earnings estimate details are discussed below.

Agreement of Estimate Revisions

Revision trends in the last 30 days have drifted toward the positive side. For fiscal 2011, 14 out of the 17 analysts covering the stock raised their estimates, while 12 out of  the16 analysts hiked their estimates for fiscal 2012. However, none moved in the opposite direction. Analysts have increased their estimates based on strong first quarter results. Moreover, the company’s top line is expected to witness significant upside based on unit expansion and same-store sales growth. Additionally, moderation in wing costs will likely drive restaurant margins going forward.

Magnitude of Estimate Revisions

Earnings estimates shot up 13 cents to $2.64 per share and 12 cents to $3.15 per share for fiscal 2011 and 2012, respectively, over the last 30 days.

 
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