Submitted by Mark Hanna
Courtesy of MarketMontage. View original post here.
Buffalo Wild Wings (BWLD) usually is a “go to” name in March as this chain seems to be in the sweet spot for the NCAA basketball tournament crowd. Unfortunately, last Friday an analyst raised the notion of higher than average chicken wing prices cutting into profits this quarter, which has pushed the stock into the penalty box the past few days.
IBD takes a closer look at the company:
- With college basketball’s championship tournament under way, many fans are settling down in front of a big screen while reaching for a cold beer and a hot, spicy chicken wing. Two of those three are in ample supply.
- Wholesale inventories of those bony little wings have been down all year. That dearth of supply, and the seasonal run-up demand from last month’s Super Bowl and this month’s March Madness tournament has elevated wholesale chicken wing prices to their highest levels in years.
- But that hasn’t clipped the wings of one of the nation’s largest sports bar and wings joint chain, Buffalo Wild Wings (BWLD). It was knocked down a notch by a downgrade on Friday, over those persistently high wing prices. Still, shares are trading near all-time highs, and have been on a tear since last month’s earnings. The company reaffirmed forecasts of 20% net earnings growth this year, in spite of wholesale wing prices — nearly 20% of its orders last quarter — nearly doubling in price.
- Despite this, the chain doesn’t lock in deals under long-term contract. “We found that if we float with the market, it’s always been better for the long term for the company,” Sally Smith, Buffalo Wild Wings CEO told IBD. “Sure, it can drive analysts crazy because they like everything buttoned up.”
- Wedbush Securities analyst Nick Setyan lowered shares to “neutral” from “outperform” on Friday, forecasting the company has paid $2.04 per pound for those wings in the first quarter, vs. an average cost over the past five years of about $1.39 a pound.
- Some analysts see wing prices 60% higher this year, vs. a 4% hike in other food costs. “Wings just have more impact on them than any individual commodity in most other restaurants,” KeyBanc Capital Markets analyst Brad Ludington said.
- Corn-based feed was so expensive last year, it killed chicken producers’ margins. So they harvested more birds — slaughtered and sent them to market — and didn’t replace as many of them, she said. That led to last year’s unusually high supply and low price. That trend reversed this year, with low supply sending prices up.
- Wholesale prices per pound peaked at $1.82 in February, vs. 98 cents that same month a year ago, according to SpenDifference data. March’s delivery price was expected to average about $1.73, more than double last year’s 86-cent price. The run-up is stark based on last year’s low prices. But over the past three years, prices averaged $1.24 a pound, swinging from a sports-fueled high of $1.41 and summer lows of $1.09.
- Rose said supermarkets locked up supplies of frozen chicken wings at discount prices in the fourth quarter. But restaurants that typically use fresh wings were left paying sharp premiums to keep their customers’ favorite appetizers on the menu.
- Buffalo Wild paid an average of $1.42 per pound in the fourth quarter, down 7 cents from a year ago. But that was up 22% from the third quarter. And those prices continued to rise in the first two months of the fiscal year that began Dec. 26. It averaged $1.89 per pound, and in early February its prices topped $2, Smith said.
- David Tarantino, an analyst with Robert W. Baird, thinks Buffalo Wild has room to up its prices if needed without turning off too many customers. Its prices were up 1.5% in the last quarter vs. a year ago, and customers didn’t balk. And he sees the higher wholesale wing prices in part as a reflection of Buffalo Wild’s and other wing chains’ success.
- The company ended last year with more than 800 restaurants in 44 states and Canada, and says it’s on pace to hit 1,500 in North America in five to seven years. On Super Bowl Sunday — its single-biggest wing day of the year, it sold a record 7.7 million wings, up from 6 million the year before.
Disclosure Notice
Any securities mentioned on this page are not held by the author in his personal portfolio. Securities mentioned may or may not be held by the author in the mutual fund he manages, the Paladin Long Short Fund (PALFX). For a list of the aforementioned fund’s holdings at the end of the prior quarter, visit the Paladin Funds website at http://www.paladinfunds.com/holdings/blog
