Buffalo Wild Wings Inc.’s (BWLD) third quarter 2010 earnings of 47 cents per share outdid the Zacks Consensus Estimate of 43 cents and soared 23.7% from 38 cents posted in the prior-year quarter. The better-than-expected results were driven by double-digit growth in the top line and lower chicken wing prices.

Total revenue climbed 14.0% year over year to $151.3 million and also outperformed the Zacks Consensus Estimate of $150.0 million. Sales at company-operated restaurants rose 13.9% to $137.0 million, fueled by 24 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 15.6% year over year to $14.4 million, propelled by 57 additional restaurants in operation at the end of the quarter compared with the year-ago quarter and an improvement in same-store sales. After experiencing a drop in its comparable-store sales in the last quarter, same store sales increased 2.6% and 0.3% at company-operated restaurants and franchised restaurants, respectively.

Average weekly sales for company-operated restaurants increased 4.2% from the prior-year quarter to $44,394 and for franchised restaurants, it inched up 1.1% to $49,005.

Based in Minneapolis, Minnesota, the company’s restaurant operating margin perked up 110 basis points (bps) to 18.1%, aided by a 190 bps contraction in cost of sales to 27.9% due to an 11% fall in cost of traditional wings and a 20 bps decrease in occupancy costs to 6.7%, partially offset by a 50 bps expansion in labor costs to 30.7% and rise of 60 bps in operating costs to 16.7%.

During the quarter, Buffalo Wild Wings opened 10 company-owned restaurants and 10 franchise restaurants.

Financial Position

Buffalo Wild Wings ended the quarter  with cash and cash equivalents of $7.3 million and shareholders’ equity of $243.4 million. As of September 26, 2010, operating cash flow was $63.0 million.

Outlook

Buffalo Wild Wings plans to open 15 company-owned and 17 franchised restaurants in the fourth quarter, thus meeting its 13% unit growth target for 2010. The company also remains on track to achieve unit growth of 13% for fiscal 2011, implying  the opening of 100 new restaurants.

Management hinted that comparable-store sales in October are down 0.7% and 1.7% at company-operated restaurants and franchised restaurants, respectively, indicating negative signals for fourth quarter 2010. However, the company believes that it will be able to achieve flat same store sales at company-owned restaurants for the fourth quarter, driven by an increased media spending to attract higher customers during the football season. Moreover, the company will be able to sustain its net earnings growth target of 20% in fiscal 2010. Buffalo Wild Wings also expects to achieve net earnings growth target of 18% in fiscal 2011.

Our Take

The bar-and-grill restaurant chain surpassed the Zacks Consensus Estimate for the third quarter of 2010, but reported lower same-store sales for the first four weeks of fourth quarter 2010. This was considerably disappointing; as a result, share price fell 6% to $45.40 during the trading session and closed at $48.53 on Tuesday. Thus, estimates for the next quarter are most likely to decline in the coming days.

We remain encouraged by the company’s long track record of success, a viable business strategy and a debt-free balance sheet. The company is also on track to achieve 13% unit and 20% net earnings growth in fiscal 2010. Moreover, it provides ample growth opportunities, given its targets to open 1,000 restaurants in the United States by 2013 and 50 in Canada by 2015.

However, we remain cautious on the stock as competition among casual dining restaurants remains fierce with respect to price, service, location and concept in order to drive traffic. Moreover, same-store sales are expected to be sluggish in the next quarter, as consumer spending remains low.

Hence, we have a Zacks #3 Rank (short-term Hold recommendation) on the shares. We also reiterate our long-term Neutral rating.

One of Buffalo Wild Wings’ primary competitors, Cheesecake Factory Inc. (CAKE) has reported third quarter 2010 earnings of 37 cents a share, which surpassed the Zacks Consensus Estimate of 34 cents. The better-than-expected results were driven by comparable-store sales growth, higher traffic and effective cost management.

 
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