Zachary Taylor
12/6/16
Where Does Buffalo Wild Wings Stand?
Buffalo Wild Wings, Inc. (BWLD) owns, operates, and franchises fullservice, casual dining restaurants. BWLD features made-to-order menu
items. It is best known for its Buffalo-style chicken wings, which are
available in 21 different sauces.
SMIF owns 59 shares of BWLD at an average value of $144.69. Currently
priced at $152.26, the fund has earned a 5.23% return. BWLD usually
experiences a seasonal upswing in sales during September thanks to the
start of American Football season. BWLD has also decided to sell wings at
a 50% discount to normal prices on Tuesdays to boost sales, a possible
offset to the 2% reduction in same store sales over the last quarter.
Comparable analysis began by sorting 13 comparable companies by: Expected Revenue Growth, Gross
Profit Margin, EBITDA Margin, EBIT Margin, Operating Cash Flow Margin, and Free Cash Flow Margin.
The list of comparable companies was reduced to five based on their relative similarities to BWLD. The
five companies were: BJ’s Restaurants Inc. (BJRI), Cheesecake Factory Inc. (CAKE), Chipotle Mexican Grill
Inc. (CMG), Panera Bread Co. (PNRA), and Texas Roadhouse Inc. (TXRH). BWLD has excellent expected
revenue growth relative to its peers, while exhibiting relatively average margins overall.
Exp. Rev. Growth
MCD
-7%
BOBE
1%
YUM
1%
BLMN
2%
DRI
3%
CBRL
3%
CAKE
6%
PNRA
8%
RRGB
9%
SBUX
10%
TXRH
10%
BJRI
10%
CMG
13%
Gross Profit Margin
CBRL
15%
BLMN
17%
CMG
19%
BOBE
19%
TXRH
19%
CAKE
20%
BJRI
20%
PNRA
21%
DRI
22%
BWLD
23%
RRGB
23%
EBITDA Margin
BLMN
10%
BOBE
10%
RRGB
11%
CMG
12%
CBRL
12%
CAKE
12%
TXRH
13%
BJRI
14%
DRI
14%
PNRA
15%
BWLD
15%
YUM
MCD SBUX
27%
40%
60%
Potential Comps?
YUM SBUX
MCD
23%
24%
37%
EBIT Margin
BOBE
5%
BLMN
5%
RRGB
5%
BJRI
7%
BWLD
8%
CAKE
9%
CMG
9%
TXRH
9%
PNRA
10%
CBRL
10%
DRI
10%
YUM
17%
SBUX
19%
MCD
31%
OCF Margin
BOBE
6%
CBRL
9%
BLMN
9%
RRGB
11%
DRI
11%
CAKE
12%
PNRA
13%
TXRH
13%
BWLD
15%
BJRI
15%
YUM
16%
CMG
17%
SBUX
21%
MCD
25%
FCF Margin
RRGB
-4%
BOBE
0%
TXRH
4%
BLMN
5%
BJRI
5%
CMG
5%
PNRA
5%
BWLD
6%
CBRL
6%
CAKE
6%
DRI
8%
YUM
9%
SBUX
14%
MCD
18%
DRI
MCD
PNRA RRGB SBUX TXRH YUM
6
2
1
5
1
Comp Selection
BJRI
6
BLMN BOBE CAKE
CBRL
CMG
1
0
4
3
5
4
0
BWLD
13%
OCF exhibited the lowest volatility from our comparable firm metrics, and was chosen as the preferred
value driver for our valuation using Price Multiples. Across all three measured periods, BWLD seems to
be relatively undervalued.
BWLD
EPS Basic Before XO
Book Value
(Operating) Cash Flow
Per Share
Values
(TTM)
12/31/2016 12/31/2017
$5.34
$5.74
$6.86
$33.61
$32.84
$33.24
$15.13
$15.46
$17.32
Estimated
Price
(TTM)
BWLD
$182.44
Firm Metric $15.13
Driver
OCF
Multiple
12.1
12/31/2016 12/31/2017
$178.91
$222.36
$15.46
$17.32
OCF
OCF
11.6
12.8
Value Drivers
Comps Multiples
BJRI
CAKE
CMG
PNRA
TXRH
Mean
Median
Inter Value % Change
TTM
P/Earnings
P/Book Value
P/(Operating) Cash Flow
19.58
2.87
6.70
19.27
4.04
9.11
60.69
8.36
28.10
31.48
13.20
14.41
25.55
4.17
12.06
31.31
6.53
14.07
25.55
4.17
12.06
28.43
5.35
13.07
18.40%
36.14%
14.31%
12/31/2016
P/Earnings
P/Book Value
P/(Operating) Cash Flow
20.53
2.86
6.96
18.17
3.86
8.98
113.02
7.65
40.20
31.24
12.40
15.83
23.90
4.07
11.57
41.37
6.17
16.71
23.90
4.07
11.57
32.63
5.12
14.14
42.23%
34.07%
30.74%
12/31/2017
P/Earnings
P/Book Value
P/(Operating) Cash Flow
17.76
2.47
6.27
16.75
3.55
8.37
41.62
7.16
25.19
26.85
9.77
15.21
20.84
3.74
12.84
24.77
5.34
13.57
20.84
3.74
12.84
22.80
4.54
13.21
15.85%
29.96%
5.42%
Using Enterprise Value comparable measures we find conflicting results. EBITDA finds BWLD
undervalued, Sales finds BWLD fairly valued, and EBIT finds BWLD overvalued.
From BWLD's
Enterprise Value Multiples from Comp Set
EV/S
EV/EBITDA
EV/EBIT
Mean
1.71
13.61
20.74
Current
Valuations
Median Average
1.55
1.63
12.18
12.89
17.75
19.25
Income Statement
Sales (LTM)
EBITDA (LTM)
EBIT (LTM)
$1,944.18
$297.81
$152.08
Enterprise Value Based on
Comp EV Multiples
Mean Median Average
$3,330 $3,004 $3,167
$4,052 $3,628 $3,840
$3,154 $2,700 $2,927
Indirect Equity Valuation
Indirect Equity Valuation
Indirect Equity Valuation
Enterprise Value to Equity Value
Enterprise Value to Equity Value
Enterprise Value to Equity Value
Enterprise Value Estimated Mean Median Average
From EBITDA Multiple
$4,052 $3,628 $3,840
Less Debt
$99
$99
$99
Less Preferred
$0
$0
$0
Plus Cash
$14
$14
$14
Eq Equity Value
$3,967 $3,542 $3,755
Div. Num Diluted Shs
18.64
18.64
18.64
Eq Equity Per Share
$212.85 $190.09 $201.47
Enterprise Value Estimated
From Sales Multiple
Less Debt
Less Preferred
Plus Cash
Eq Equity Value
Div. Num Diluted Shs
Eq Equity Per Share
Mean
$3,330
$99
$0
$14
$3,245
18.64
$174.10
Median
$3,004
$99
$0
$14
$2,918
18.64
$156.60
Average
$3,167
$99
$0
$14
$3,081
18.64
$165.35
Enterprise Value Estimated Mean Median Average
From EBIT Multiple
$3,154 $2,700 $2,927
Less Debt
$99
$99
$99
Less Preferred
$0
$0
$0
Plus Cash
$14
$14
$14
Eq Equity Value
$3,069 $2,614 $2,842
Div. Num Diluted Shs
18.64
18.64
18.64
Eq Equity Per Share
$164.69 $140.29 $152.49
Due to such conflicting results, a correlation matrix was constructed to find the strongest relationships
exhibited by the relevant value drivers and company multiples. It was concluded that OCF Margin was
the strongest value driver for both Price and EV multiples.
Exp. Rev. Growth Gross Profit Margin EBITDA Margin EBIT Margin OCF Margin
P/Earnings
0.739002266
-0.568276198
-0.438331441 0.200233442 0.778471641
P/Book Value
0.081189207
0.373371968
0.447271204 0.67246342 0.037018562
P/(Operating) Cash Flow
0.677304303
-0.584709218
-0.459069198 0.298042557 0.70135134
EV/S
EV/EBITDA
EV/EBIT
0.707604587
0.71538226
0.757071421
-0.49908093
-0.603512881
-0.523715959
FCF Margin
-0.194889721
-0.028675579
-0.166766091
-0.335333006 0.342781124 0.690326721 -0.254542528
-0.4619985 0.272430788
0.7270126 -0.210020663
-0.372626655 0.222608071 0.773823976 -0.243983114
Multiple Value EPS EBIT
Diluted Shares Price
P/E
36.64596792 5.34
$ 195.69
EV/EBIT
23.66781286
152.078
18.636 $ 193.14
The above table shows the resulting prices when OCF Margin was plugged into the equations listed at
the bottom of the two graphs below. When these equations were graphed below and current BWLD
characteristics were applied, it was found that BWLD is indeed undervalued. My price target based on
multiple relative value comparables is a HOLD at $175 - $195 per share because although BWLD is
undervalued, the consumer discretionary sector as a whole is currently facing serious headwinds.
After performing a relative valuation of Buffalo Wild Wings, Inc. (BWLD) using comparables, a
discounted cash flow (DCF) analysis was performed to decide if a HOLD recommendation was justified.
The DCF began by gathering historical values for Sales, EBITDA, Depreciation, Taxes, Capital
Expenditures and Changes in Net Working Capital. Values were collected for BWLD and its most
comparable peers (BJ’s Restaurants Inc. (BJRI) and Panera Bread Co. (PNRA)). Using the collected values,
growth rate projections for each value could be made based on the past history of BWLD and its peers.
Sales
EBITDA
Historical Percentages: BWLD
Historical Percentages: BJRI
Historical Percentages: PNRA
2013 2014 2015 Current 2013 2014 2015 Current 2013 2014 2015 Current
1,266.7 1,516.2 1,812.7 2,013.8 775.1 845.6 919.6 993.0 2385.0 2529.2 2681.6 2796.6
% Sales Growth
19.70% 19.56% 11.09%
9.10% 8.75% 7.98%
6.05% 6.03% 4.29%
189.1 237.7 273.5
EBITDA Margin 14.9% 15.7% 15.1%
Depreciation/Amortization
EBIT
EBIT Margin
Taxes
303.8
81.0 95.2 122.5
15.1% 10.5% 11.3% 13.3%
85.0
98.5
127.5
150.5
49.0
55.4
104.1
8.2%
139.2
9.2%
146.0
8.1%
153.3
7.6%
32.0
4.1%
39.8 63.1
4.7% 6.9%
30.0
41.4
41.3
Tax Rate 28.8% 29.7% 28.3%
59.4
42.1
4.0
8.9 16.8
27.5% 12.5% 22.4% 26.6%
125.5 417.1 399.9 397.9
12.6% 17.5% 15.8% 14.8%
63.3
106.5
407.7
14.6%
124.1
135.4
149.3
62.2 310.6 275.8
6.3% 13.0% 10.9%
262.5
9.8%
258.4
9.2%
16.6 116.6
98.0
87.2
26.7% 37.5% 35.5% 33.2%
86.2
33.4%
EBIAT
74.1
97.8
104.7
111.2
28.0
30.9
46.3
45.6
194.0
177.8
175.3
172.2
Depreciation/Amortization
D&A/Sales
85.0
6.7%
98.5
6.5%
127.5
7.0%
150.5
7.5%
49.0
6.3%
55.4 59.4
6.6% 6.5%
63.3
6.4%
106.5
4.5%
124.1
4.9%
135.4
5.0%
149.3
5.3%
Less Capex
(138.7) (137.5) (172.5) (159.4) (117.1) (88.1) (86.1) (112.0) (192.0) (224.2) (223.9) (212.1)
Capex/Sales -10.9% -9.1% -9.5% -7.9% -15.1% -10.4% -9.4% -11.3% -8.1% -8.9% -8.3% -7.6%
Less Increase in NWC
NWC/Sales
(11.7)
-0.9%
(9.5)
-0.6%
(1.2)
-0.1%
(13.7) (16.2) (5.4) (8.9)
-0.7% -2.1% -0.6% -1.0%
(13.7) (23.0)
-1.4% -1.0%
(5.9) (18.0)
-0.2% -0.7%
(24.6)
-0.9%
Growth rate estimates used for the DCF valuation are listed below; accompanied with reasoning:
Operating Scenario
% Sales Growth
EBITDA Margin
D&A/Sales
EBIT Margin
Tax Rate
Unlevered Free Cash Flow
Capex/Sales
NWC/Sales
Discounting of Annual Free Cash Flow
Discount Period (Mid-Year Convention)
WACC
Terminal (Continuing) Value Multiple / GGM
Exit Year EBITDA / FCF
Exit Multiple / (r-g)
Current
11.1%
15.1%
7.5%
7.6%
27.5%
Current
-7.9%
-0.7%
Current
2017
2018
2019
2020 2021
9.0%
9.0%
8.0%
7.0% 6.0%
14.0% 15.4% 15.6% 15.8% 16.0%
7.2%
7.4%
7.6%
7.8% 8.0%
6.8%
8.0%
8.0%
8.0% 8.0%
29.0% 29.0% 29.0% 29.0% 29.0%
2017
2018
2019
2020 2021
-7.7% -8.4% -8.6% -8.8% -9.0%
-0.60% -0.40% -0.20% -0.10% 0.00%
2017
2018
2019
2020 2021
0.5
1.5
2.5
3.5
4.5
8.1%
8.1%
8.1%
8.1%
8.1% 8.1%
Multiple GGM
468.9
145.4
10.6
3.1%
Value Reasoning
o
Sales Growth – Sales growth is expected to slow in 2017 due to lower consumer demand, Sales
growth will continue to decline towards mean sales growth rate of peers (5%) as company
matures.
o
EBITDA Margin – EBITDA Margin will decline in 2017 due to BWLD’s use of discount prices to try
to stimulate sales. Margins should recover to EBITDA Margin rate of peers (16%) as demand
returns.
o
D&A & Capex/Sales – In order for a company to continue to grow, Capital Expenditures must
outpace Depreciation. Capital Expenditures will decline in 2017 due to lower sales productivity.
When demand returns, Capex will grow as a percentage of sales because increasing amounts of
Capex will be needed to boost sales due to the declining marginal benefits of subsequent
investments. Capex will continue to outpace depreciation by one percent of sales per year.
o
EBIT Margin - EBIT Margin will also decline in 2017 due to BWLD’s use of discount prices to try to
stimulate sales. Margins should rebound to BWLD’s previous EBIT Margin rate (8%) as BWLD’s
efficiency returns and discounts are no longer needed to support sales growth.
o
Tax Rate – The Tax Rate has been very consistent, so the average over the past four years was
used as long-run estimate
o
NWC/Sales – Over time NWC usually averages out to zero, for this reason NWC slowly declines
to zero.
o
WACC – Assumed that WACC will remain constant throughout life of BWLD.
o
Exit Multiple / (r-g) – Two types of terminal values were used to calculate the DCF value: Exit
Multiple and Gordon Growth Model. The Exit Multiple method used an average EV/EBITDA
ratio of BJRI & PNRA to calculate terminal value, while the Gordon Growth Model (GGM) used
WACC (weighted average cost of capital) minus a perpetual growth rate of 5%( 5% was chosen
as the long-term growth rate because it is the average revenue growth rate of all peers, and only
slightly higher than the long-term growth rate of GDP (3%) which insinuates growth, but not
excessive growth).
The valuations resulting from the DCF analysis using an Exit Multiple approach for terminal value or a
Gordon Growth Model were $202.80 and $192.90 respectively. Both price targets were very similar to
the results generated using the comparables method of $175 - $195. In addition, a recent run-up in
price has occurred subsequent to the comparables valuation. Based on the similarity to previous price
targets and the reduced return expectations due to the aforementioned run-up, I continue to issue a
HOLD recommendation for BWLD with a revised price target of $185 - $205.
Enterprise Value
Multiple GGM
Cumulative Present Value of Unlevered FCFF 458.1 458.1
Present Value of Terminal Value 3359.3 3177.2
% of Enterprise Value
88.0% 87.4%
Enterprise Value 3817.5 3635.3
Implied Equity Value
Enterprise Value 3817.5 3635.3
Total Debt (100.7) (100.7)
Preferred Stock
0.0
0.0
Non-Controlling Interest
0.0
0.0
Cash and Cash Equivalents
14.8
14.8
Implied Equity Value (Market Cap) 3731.6 3549.4
Fully Diluted Shares Outstanding
18.4
18.4
Implied Price Per Share 202.80 192.90