UNIVERSITY OF OREGON
INVESTMENT GROUP
March 12th, 2010
Consumer Goods
Buffalo Wild Wings (BWLD)
RECOMMENDATION:
Stock Data
Price (52 weeks)
Symbol/Exchange
Beta
Shares Outstanding
Average daily volume
(3 month average)
Current market cap
Current Price
Dividend
Dividend Yield
Valuation (per share)
DCF Analysis
Comparables Analysis
Target Price
Current Price
SELL
29.18 - 48.73
BWLD / NASDAQ
0.85
18.17M
439,672
= 839M
$46.49
-
$55.01 (70%)
$30.29 (30%)
$47.60
$47.00
Summary Financials
Revenue:
Net Income:
Operating Cash Flow
LTM (Thousands)
$538,900
$30,671
$79,286
BUSINESS OVERVIEW
Buffalo Wild Wings was founded in 1982 by Scott Lowery and Jim Disbrow. Based primarily in the
Midwest, they own, operate, and franchise restaurants throughout the United States. Featuring their New
York style chicken wings, the company has continually expanded their menu offerings to include salads,
ribs, burgers, and a variety of other dishes.
Covering Analyst: Lee Lenker
Email: LLenker@uoregon.edu
The University of Oregon Investment Group (UOIG) is a student run organization whose purpose is strictly educational.
Member students are not certified or licensed to give investment advice or analyze securities, nor do they purport to be.
Members of UOIG may have clerked, interned or held various employment positions with firms held in UOIG’s portfolio. In
addition, members of UOIG may attempt to obtain employment positions with firms held in UOIG’s portfolio.
Buffalo Wild Wings
university of oregon investment group
http://uoig.uoregon.edu
The company began operations in Ohio, and 15% of company-owned and franchised stores are located
within the state. 90% of total revenue is derived from the company-owned stores while the remaining 10%
is allocated from a 5% royalty of sales from franchised restaurants. Food and nonalcoholic beverages
account for 74% of restaurant sales. The remaining 26% of restaurant sales is from alcoholic beverages.
The BWLD chain and restaurant model has evolved to serve an encompassing group of patrons. With
geographic locations ranging from 5500-9500 sq/ft, BWLD offers furnishings, up to 10 projection screens,
a full bar, BuzzTime trivia games, and 50 televisions. It provides an upbeat atmosphere that utilizes their
flexible-service model for customers.
FINANCIAL OVERVIEW
In November of 2003, Buffalo Wild Wings raised roughly $50 million through an initial public offering.
This served as a catalyst for their growth and expansion. Currently, the company holds 652 retail locations
with 232 company-owned and 420 franchised throughout the U.S. Management seeks to increase their
expansion to entail operating 1000 restaurants domestically with hopes of a company-owned/franchisee
ratio of 36/64. Their debt-free capital structure is a primary strength of the company, whereas many of
their competitors contain significant debt. (See the Beta table in the DCF to see the comps. L-T Debt)
As seen in the table, during 2007, 2008 and 2009 the company‘s margins are expanding as the company has
become more efficient. Some of their margin increases in 2009 can be attributed to the casual transition
from traditional chicken wings to boneless wings (a better margin item), lower conference costs, better
leverage of rent expense from sales, and cheaper cable costs.
Liquidity remained steady from 2003-2007. This was due to the significant portions of cash and marketable
securities. In 2008, marketable securities decline significantly from $66 million, to $36 million moving the %
of cash and securities of total assets from 34% to 18%. The securities were sold and allocated to pay for an
increase property and equipment.
The Return on Assets has shown on average to be 9.01% for the last three fiscal years. This is reference to
the company‘s increasing net income in relation to assets.
2
Buffalo Wild Wings
university of oregon investment group
http://uoig.uoregon.edu
INDUSTRY ANALYSIS
The industry is composed primarily of full service restaurants engaged in providing food services to
patrons along with alcoholic beverages, take out services, and entertainment. There are also a limited
number of restaurants that require patrons to pay before obtaining their food. The top five market share
holders are Darden, Brinker, CBRL Group, DineEquity, and Buffets Holdings, whom compile 8% of the
total industry market share. This references the competitive nature of the industry, and the significance of
not only differentiating oneself from competitors, but increasing the company‘s brand loyalty and
recognition. As Buffalo Wild Wings continues to expand into new thriving markets, it will be imperative
they portray and maintain a strong brand image to consumers.
Upholding a strong brand image during times of economic uncertainty is vital to Buffalo‘s aggressive
growth model. People look for stable brands that will be strong and dependable, especially during a poor
economy (BpPost). Judy Shoulak, senior vice-president, credited BWW‘s success during the current
recession by fostering guest loyalty. The company cultivates allegiance through supporting local
communities with causes like the Great American Dine-Out (NRN). Buffalo Wild Wings‘ restaurants that
have been open for at least a year in 2008 had increased sales of 4.5%, while the casual dining sector as a
whole saw a decline of 6.3%.
The restaurant industry is also showing an increase in food and labor costs. Labor cost increases can be
attributed to the Fair Labor Standards Act raising minimum wage standards annually. What is more
significant, especially for Buffalo Wild Wings, is the rise in price of fresh chicken wings as can be seen
below:
Average Quarterly Wing Prices
2004-2008
3
Buffalo Wild Wings
university of oregon investment group
http://uoig.uoregon.edu
While it is not included in this chart, wing prices grew to $1.63/lb in 2009Q1. Restaurants compensate for
the increases costs by raising their menu prices which increased by 5% for the industry as a whole in 2008.
Increasing food and labor costs are not the only concern for the restaurant industry. The current economic
recession has put a stranglehold on disposable income in the United States. Disposable income can be
defined as money available after tax and non-tax payments have been paid. It is a major concern and risk for
an industry that is subject to the whim of the consumer‘s dollar. The following graph taken from Ibisworld
illustrates the projected % change in disposable income through 2015.
Per-Capita Disposable Income Through 2015
While disposable income is expected to show growth in 2010, an important note is that higher
unemployment rates are predicted to likely offset any positive advance. With unemployment expected to
continue increasing through 2010, and consumer confidence remaining low (Ben Bernanke), the economy
will continue to recover at a sluggish rate.
Unemployment Rate Through 2014
4
Buffalo Wild Wings
university of oregon investment group
http://uoig.uoregon.edu
BUSINESS AND GROWTH STRATEGIES
Buffalo Wild Wings implements a flexible service model that enables the company to appease a wide sample
of patrons. This gives customers the opportunity to call in take out, sit at the bar or at a table, or get quick
counter service. This model allows Buffalo Wild Wings to cater to customers with differing time demands
and preferences. The takeout option has accounted for 16-18% of sales the last three years.
The menu has evolved from a traditional greasy bar menu, to include a wide-array of wraps and salads as an
attempt to appeal to women. The flexible service model in accordance with their geographic layout in
restaurants, allows Buffalo Wild Wings to appeal to families, drinkers, and sports viewers alike. The bar and
family segments are effectively separated, and having forty plus televisions allows families to request shows
to keep their kids entertained and happy.
A focal point of Buffalo Wild Wings operational strategy is focus on increasing same-table sales, rather than
turning tables as fast as possible. Most restaurants in the industry aim to have high table turnover rates for
greater sales volume. Buffalo takes a creative stance by trying to increase same-table orders. This is most
effective during sporting events, especially with their wide array of cheap appetizers, 20 domestic and
imported beers on tap, along with other cheap menu offerings that are made quickly.
The Company‘s aggressive growth strategy is to add company-owned restaurants in existing markets while
seeking franchise partners in new areas. This allocates the risk of entering a new market onto the franchisee.
If the restaurant is successful, the company could potentially add a company-owned restaurant to the area
and continue expansion into the new market. The company therefore takes little risk in expanding into new
areas and this growth model has enabled them to see an extremely low restaurant closure and relocation
percentage.
MANAGEMENT AND EMPLOYEE RELATIONS
A unique aspect of Buffalo Wild Wings is the fact that women hold five of the seven executive positions.
CEO Sally Smith, and CFO Mary Twinem have helped lead a successful turnaround since their initiation to
the company in 1994. A standard point-of-sale management information system has been successfully
implemented, and the company feels it is scalable for the continuing growth. This was an important factor,
especially after having serious IT issues in the mid-nineties. When Smith was Chief Executive Officer in
1996 the company had less than 75 restaurants and through her leadership has grown it to nearly 652
locations across 40 states.
PORTFOLIO STATUS
Tall Firs: Currently hold 425 shares with a cost basis $8,975. Current market value is $18,428 for a purchase
return of 105.33%
Svigals: Currently hold 50 shares with a cost basis of $1,008.18. Current market value of $2,168.00 for a
purchase return of 115.04%
Dadco: Currently hold 175 shares with a cost basis of $3,624. Current market value of $8,225 for a 127%
purchase return.
5
Buffalo Wild Wings
university of oregon investment group
http://uoig.uoregon.edu
RECENT NEWS
―Woman Asked to leave dining area for Breast Feeding,‖ ConnectMidMichigan.com—March 7th
―UPDATE 1-Buffalo Wild Wings keeps 2010 outlook on 2010 20% EPS growth,‖ -- Reuters
―Buffalo Wild Wings Inc. (BWLD) Executive VP, CFO & Treasurer Mary J Twinem sells 2,000
Shares,‖ – GuruFocus.com
S.W.O.T. ANALYSIS
Strengths
The Business Growth Model that enables them to transfer much of the risk to others when
expanding into new markets is invaluable.
Flexible Service model
Experienced and stable management team that has overseen the rapid growth of the company in the
last 14 years.
Weaknesses
Highly concentrated in the Midwest and specifically Ohio. Susceptible to more risk if a regional
recession were to take place, especially in Ohio (84 locations).
Chicken wings account for 20% of restaurant non-alcoholic sales. A disruption in the supply of
chicken wings would be disastrous for the company.
Opportunities
Yet to move company-owned stores into the ―Western Frontier,‖ including the company‘s primary
target of California.
Potential for an international market, two specialists have been hired on to begin the planning stages
for taking BWLD global.
Threats
Economic recession continuing into 2010
Volatility of chicken wing prices.
Subject to intense competition in the restaurant industry.
6
Buffalo Wild Wings
university of oregon investment group
http://uoig.uoregon.edu
CATALYSTS
Upside: Stronger same-store sales than competitors.
Downside: Decrease in consumer spending, lower disposable income, and higher unemployment.
COMPARABLES ANALYSIS
I selected my comparable companies based on the following criteria:
1. Similarity in size (as measured by market capitalization w/ exception of DRI and EAT).
2. Similar profitability and operating margins.
3. Similar growth strategy (In the case of Brinker w/Chilis).
In the initial report, Red Robin, Texas Roadhouse, BJ‘s, and Darden were used for conducting an analysis.
However, I felt that including Brinker (Chilis), Cheesecake factory, and California Pizza Kitchen were
conducive to the analysis. RRGB, TXRH, BJ‘s, and Chilis all franchise their restaurants (with the exception
of Darden who operates all of its restaurants through its‘ subsidiaries).
Here‘s a brief description of the companies pulled directly from their respective 10-k‘s:
Red Robin Gourmet Burgers, Inc., together with its subsidiaries, is a casual dining
restaurant chain focused on serving an imaginative selection of high quality
gourmet burgers in a family-friendly atmosphere. As of the end of our fiscal year
on December 28, 2008, the system included 423 restaurants, of which 294 were
company-owned, and 129 were operated under franchise agreements including
one restaurant that was managed by the Company under a management
agreement with the franchisee. As of December 28, 2008, there were Red Robin® restaurants in 40 states
and two Canadian provinces.
Texas Roadhouse is a growing, moderately priced, full-service, casual dining
restaurant chain. Our founder and chairman, W. Kent Taylor, started the business
in 1993. Our mission statement is "Legendary Food, Legendary Service®." Our
operating strategy is designed to position each of our restaurants as the local
hometown destination for a broad segment of consumers seeking high quality, affordable meals served with
friendly, attentive service. As of December 30, 2008, there were 314 Texas Roadhouse restaurants operating
in 46 states. We owned and operated 245 restaurants in 43 states and franchised and licensed an additional
69 restaurants in 23 states.
BJ‘s Restaurants, Inc. owned and operated 82 restaurants at the end of fiscal 2008,
located in California, Texas, Arizona, Colorado, Oregon, Nevada, Florida, Ohio,
Oklahoma, Kentucky, Indiana, Louisiana and Washington. A licensee also operates one
7
Buffalo Wild Wings
university of oregon investment group
http://uoig.uoregon.edu
restaurant in Lahaina, Maui. Each of our restaurants is operated either as a BJ‘s Restaurant & Brewery ®
which includes a brewery within the restaurant, a BJ‘s Restaurant & Brewhouse ® which receives the beer it
sells from one of our breweries or an approved third-party craft brewer of our proprietary recipe beers
(―contract brewer‖), or a BJ‘s Pizza & Grill ® which is a smaller format, full service restaurant with a more
limited menu than our other restaurants. Several of our BJ‘s Restaurant & Brewery restaurants feature inhouse brewing facilities where BJ‘s proprietary handcrafted beers are produced for many of our restaurants.
Darden Restaurants, Inc. (Darden) operates in the full-service dining segment of the
restaurant industry, primarily in the United States. As of May 25, 2008, the Company
operated, through its subsidiaries, 1,702 restaurants in the United States and Canada. In
the United States, it operated 1,667 restaurants in 49 states (the exception being
Alaska), including 651 Red Lobster, 647 Olive Garden, 305 LongHorn Steakhouse, 32
The Capital Grille, 23 Bahama Breeze and seven Seasons 52 restaurants, and two specialty restaurants:
Hemenway‘s Seafood Grille & Oyster Bar and The Old Grist Mill Tavern. In Canada, Darden operated 35
restaurants, including 29 Red Lobster and six Olive Garden restaurants. Through subsidiaries, the Company
owns and operates all of its restaurants in the United States and Canada, except three restaurants, which are
located in Central Florida and are owned by joint ventures managed by Darden.
I weighted each of the comparables at 25% for risk. The metrics I used in the comparable valuation were
EV/EBITDA, EV/OCF, and EV/Revenue. Here are each of the comparables respective operating and
profit margins taken from Google Finance for the fiscal year 2008.
8
Buffalo Wild Wings
university of oregon investment group
http://uoig.uoregon.edu
DISCOUNTED CASH FLOW ANALYSIS
Revenues: The percent of sales method was used for this analysis. I chose to use an terminal rate of 3%
moving into perpetuity.
Revenue was projected as a function of the number of new company-owned restaurants added each year.
Average unit sales and same store sales were both known, therefore projecting my restaurant sales this way
made sense. To arrive at the level of revenue for each year, I projected the total amount of new restaurants
assuming the company moving towards a 40/60 ratio of company-owned stores to franchised stores and
that each new store would have a lower level of sales than existing restaurants. The following chart takes
the total revenue from new stores from the last three years and averages them to arrive at average revenue
per new store.
Thus, the average revenue per new store was $854,577. Taking this figure and dividing it by the average
sales of existing stores of $1,927,340 arrives at .4433. This means new stores produce 44.33% of the sales of
an existing restaurant. The company projects to open 98 stores in 2010 (15% unit growth), and in
accordance with their historical benchmarks, this is very feasible. Taking 98 * .365 arrives at 35.77. This is
the number of new company-owned stores. Then taking (35.77) * (.443) we arrive at 15.52. This was done
to account for the revenues those new restaurants will produce which is approximately the same as 15
existing company-owned restaurants. Adding 15 onto the number of existing company owned restaurants
of 232 equates to a projection of having 247 company owned stores in 2010.
9
Buffalo Wild Wings
university of oregon investment group
http://uoig.uoregon.edu
However, we must take into account the assumption that previous years new stores that were producing
―new store revenue‖ are now producing existing store revenue. For 2010, there will be 47 stores from
previous years that will now produce ―existing store revenues.‖ Adding (47+253) and then multiplying by
$1,927,340 arrives at the restaurant sales projection for 2010 of $691,204,143. This calculation was done for
each projected year, and the outline can be seen in the appendix. I increased average unit sales per
restaurant by 9% for 2010 and 2011, and slowly trending down to growth rate of 5% in the terminal year.
Having backdated the last 2-3 years, these increases are normal given a constant trend of increased samestore sales. Also, the number of projected store openings followed managerial guidance of a 15% unit
growth rate through 2012, and then declines steadily moving towards the terminal year (See Appendix IV
for more details on revenue projections).
Buffalo Wild Wings collects a 5% royalty from franchised restaurant sales. Data was found to show that on
average franchised stores generate $2,340,917. Therefore, coming up with a total restaurant sales figure
from the difference between total projected and company-owned, and multiplying it by $2.3 million gives us
franchised sales. Multiplying this by 5% arrives at franchised royalties. Note: average revenue per franchisee
was grown at a conservative rate of 3% due to historical performance, and to account for inflation.
Capital Expenditures:
The company has given guidance that each new restaurant costs $1.75M and maintenance costs are roughly
$98, 253 for each restaurant. Thus, I took the number of projected company owned restaurants for the year
and multiplied it by $1.5 million. Then, the following year, the new projected restaurants are added in and
the total is multiplied against the maintenance cost. Summing these figures arrives at capital expenditures.
The following model illustrates my calculation.
Costs of sales: Cost of sales is influenced primarily by the volatile swings in fresh chicken wing prices.
Fresh chicken wing prices in 2008 averaged 4.7% lower than 2007 as the average price per pound dropped
to $1.22 in 2008 from $1.28 in 2007. Currently, the wings account for approximately 21%, 24%, and 24%
of the cost of sales in 2008, 2007, and 2006. Management noted that a 10% increase in 2008 in wing prices
would have increased restaurant sales costs by $2.3 million. After reviewing the 2009Q4, wing prices soared
to $1.70/lb increasing cost of sales to 30.2% of revenue from 29.8%. Management expects the steady shift
from traditional wings to boneless wings to lower the cost of goods percentage. I have cost of sales
remaining constant as the company is becoming larger, more efficient and with the volatility of chicken wing
prices being offset with the transition of wing styles.
10
Buffalo Wild Wings
university of oregon investment group
http://uoig.uoregon.edu
Labor expense: Increased by $9.7 million, or 37.5%, to $35.5 million in 2009 from $25.9 million in 2008
due to more restaurants being operated in 2009. Labor expenses as a percentage of restaurant sales
decreased in 2009 to 30.0% due to lower hourly labor costs but were partially offset by increased incentives
and medical costs. The Fair Labor Standards Act (FLSA) has will increase labor costs in the future with
rising minimum wage standards. Hence I have adjusted the figures to be slightly higher in the projection at
30.1% of restaurant sales.
Operating expense: This includes repair and maintenance costs, general liability insurance costs, credit
card fees, utilities, and some others. This figure has gradually declined as a % of restaurant sales in the last
four years. This is attributable to the company‘s extensive operational efficiency measures that have been
taken include the WCT Program, a new ERP system, as well as the implementation of point-of-sale systems.
This expense as a percentage of revenue was projected to decline steadily through 2013, and then held
constant.
Occupancy expense: Occupancy expenses as a percentage of restaurant sales was flat at 6.6% for both
2009 and 2008. Historically it has ranged from 6.5%-7.1%and was projected on this basis along with the
increase in number of restaurants to be operated.
Depreciation: Has increased annually because of the increase in restaurant openings. I projected
depreciation to correlate directly w/ the increased openings, with store opening unit growth beginning to
decline 2013 and continuing to decline into the terminal year.
General and administrative expense: As a percentage of total revenue, G&A decreased to 9.2% in 2009
from 9.5% in 2008. Exclusive of stock-based compensation, the G&A expenses decreased to 8.0% of total
revenue in 2009 from 8.3% in 2008. This decrease was primarily due better leverage of wage-related
expenses.
Restaurant Impairment Expense: Related directly to underperforming restaurants that are either closed
or relocated. Held constant moving forward.
Income Tax Expense: As can be seen on the DCF, the effective tax rate has fluctuated over the past five
years. I have projected the company being subject to a 35% tax rate moving forward both due to guidance,
Working Capital: Current assets declined significantly from 2007 to 2008 due to a sell of around $30
million in marketable securities most likely allocated to plant property and equipment. Current assets were
held constant at 20.2% moving forward with current liabilities at 13.6%.
Beta: Calculating the beta for BWLD has been troublesome historically due to its debt-free position relative
to all of its‘ comparable companies. A 5yr monthly regression against the S&P500 yielded a beta of 1.11,
with a Hamada (using industry means) yielding a beta of 1.29. If the Hamada is conducted excluding CAKE
and EAT which are both over 2, and skewing the data, the respective beta is 1.04. Yahoo Finance exhibited
a beta of .85 with Google finance at .94 and a Factset 52-weekly at .68. Below is the Hamada:
11
Buffalo Wild Wings
university of oregon investment group
http://uoig.uoregon.edu
After weighing the different options, I felt the Hamada and 5 yr monthly regressions were not
representative of BWLD‘s current risk to the market. With a Factset 52-weekly at .68 as of December,
along with Google and Yahoo at .94 and .85, I could not justify using a beta greater than 1. I decided to use
a Beta of .85 for the valuation, as I feel it fits in the middle of the two outliers, and yields a target DCF price
comparable to analyst projections.
RECOMMENDATION
Buffalo Wild Wings has generated purchase returns of over 100% in all three UOIG portfolios. My
comparables analysis yielded a target price of $30.29 with my discounted cash flows analysis yielding a target
price of $55.01 which is right in line with the target prices of all ‗Buy Analyst recommendations.‘ I feel that
my comparables analysis does not accurately reflect truly comparable companies, as BWLD has experienced
extreme growth during the last two years that no other competitors have exhibited. I feel that my
quantitative analysis in the DCF is extremely accurate after having backdated the revenue model; however
my projections are not entirely conservative. With that said, I chose to weight the DCF 70% and the
Comps 30%, generating a weighted average implied price of $47.60 and resulting in a 1% undervaluation.
While I feel that the DCF price of $55.01 is a more accurate indicator, it assumes nearly perfect performance
for BWLD in their continued aggressive expansion. Given the transaction costs of Dadco, the inability to
adequately turnover the portfolio holdings quickly, and the returns already generated, I do not feel that
holding out for an additional 10-17% is a smart hold. Therefore, I am recommending to sell Buffalo Wild
Wings for ALL portfolios.
12
Buffalo Wild Wings
university of oregon investment group
http://uoig.uoregon.edu
APPENDIX I– COMPARABLES ANALYSIS
13
Buffalo Wild Wings
university of oregon investment group
http://uoig.uoregon.edu
APPENDIX II – DISCOUNTED CASH FLOWS ANALYSIS
14
Buffalo Wild Wings
university of oregon investment group
http://uoig.uoregon.edu
APPENDIX III – DISCOUNTED CASH FLOWS ANALYSIS ASSUMPTIONS
APPENDIX IV – REVENUE PROJECTIONS
15
Buffalo Wild Wings
university of oregon investment group
http://uoig.uoregon.edu
APPENDIX V – STORE OPENINGS/RELEVANT COMPARABLE STATISTICS
Comparable Company Store Openings:
BWLD SAME STORE SALES:
16
Buffalo Wild Wings
university of oregon investment group
http://uoig.uoregon.edu
ADVERTISING ALLOCATIONS (BWLD, CPKI, RRGB):
APPENDIX VI – SOURCES
IBISWORLD
10K DRI, RRGB, TXRH, BWLD
10Q DRI, RRGB, TXRH, BWLD
National Restaurant Association
Google Finance
Yahoo Finance
Factset
Franchise.business-opportunities.com
www.buffalowildwings.com
17