Buffalo Wild Wings Flutters

But another, BB&T Capital Markets, lowered its rating from "buy" to "hold," effectively clipping the company's wings, at least momentarily in a stock-market climate that is equally fluttery. The stock, which trades as BWLD and had more than doubled since the IPO, dropped 13% to $32.50, following the BB&T downgrade and shed another almost two points the following day.

By contrast, in a report, issued just after the earnings conference, analyst Paul Westra of SG Cowen & Co., said, "We recommend aggressive purchase of BWLD shares this morning, especially on any weakness."

By nearly every measure, the report showed positive growth. Total revenue rose 26.4% to $50.8 million during this first quarter, compared with $40.2 million in the same quarter a year ago. Company-owned store sales were up 25.5% to $45.1 million, aided by an increase of 6.1% in same store sales at company-owned units and an addition of 18 more company-owned units during the quarter.

Franchise royalties and fees increased 34.4% to $5.7 million versus $4.3 million in first-quarter the year before. This was boosted by a same store sales increase of 3.2% in franchised units and the addition of 44 more franchised units during the quarter.

Of all existing 318 Buffalo Wild Wings' units in 32 states, 108 are company owned, a ratio the company plans to follow as it grows by 20% to 25% this year and next. In 2005, for example, it plans about 20 new company-owned units and about 45 franchised ones.

Sally Smith, CEO, acknowledged the need to "bridge the gap" between company-owned and franchise units during a conference call and said programs, including more regionally based managers, are in place to narrow that gap. "In terms of profitability, favorable chicken wing prices helped partially offset high operating costs in new markets," Smith also said.

The company's costs of labor during the quarter jumped, particularly at new stores in the Atlanta market, in which the company made its debut during first quarter. "It's true, we have some inefficiencies to date," she said, "and we are working to whittle away at them, but don't expect improvement in labor costs until the last half of the year.

"Labor and occupancy costs are up in all new markets," she said, noting it typically takes from three to four months for them to stabilize. She also noted, "80% of our new company-owned units (in first quarter) were in new markets: Atlanta, Dallas, North Carolina and Denver," and called Atlanta "particularly challenging." In addition to improving "efficiencies" in that market, the company "is targeting extra marketing dollars in that market in second quarter."

It is primarily, nearly singularly, the first-quarter rise in labor costs that prompted BB&T to downgrade the stock. Dougherty & Co., however, reiterated its buy recommendation following the first-quarter report. SG Cowan's Westra said the company's second-quarter guidance, which calls for same store sales increases of from 2% to 4% at both company-owned and franchised units "will again prove too conservative. Our unchanged investment thesis remains that success-to-date in new metro markets has already largely assured the likelihood that BWLD can grow to a 1,000-plus unit system." The report also suggested its continued view "that BWLD will outperform the market by 20% to 30% in the next 12 months."

Asked about the precipitous drop on the Nasdaq, Michael Fox, the company's spokesman, tells GSR, "people focused in on labor costs, but the company is confident that it's got those costs under control," and reiterated, "it always costs more to operate in a new market, before efficiencies are up and running and the brand becomes established." He also noted that, in comparison with many public companies, BWLD has fewer shares outstanding, "The smaller the base," he says, "the more volatile activity is impacted by fewer shareholders."

Currently, a new prototype Buffalo Wild Wings unit, 5,500 sf versus the current 6,000 sf, is under study. There are three in operation. "We're gauging guest reaction and studying every aspect of it, from building materials to the audio/video package," Smith said. "We're getting better feedback," she said, but did not indicate when it would begin a rollout.

The menu, too, is under review. One unpredictable, but welcome note lies in the cost of fresh chicken wings. The cost was projected to rise to $1.52 per lb. in first quarter, fell to $1.45. Furthermore, it is expected to drop to $1.16 per lb. this year. While that cost is subject to many variables, Smith said, "given falling wing prices, we don't see any price increases" at units.

Naked Tenders were added to the menu this month, and Honey BBQ versions will be added in June, both backed by promotions. The company typically devotes 3% of sales to marketing per store. With unit growth, the expenditure becomes increasingly efficient, Smith also pointed out.