BWLD - Buffalo Wild Wings

[rockket]

Any thoughts on this one? Arguably the best established sports bar/grill in the US that has been beat down (~15% drop) by 2 consecutive earnings misses and lowered guidance.

 

Gross margin has been under pressure due to high chicken prices (caused by drought/high feed costs) - company's shown some pricing power, though not enough to cover the chicken prices, but at the end of the day wings only make ~25% of revenues and I'd choose BWLD to weather the rise in chicken prices over the competition due to its purchasing power, brand loyalty, and strong cash flow.

 

 

 

[Palantir]

How would you value it though? It does not generate much free cash flow, so are you expecting CapX to decline, or are you valuing through an alternative method?

[eclecticvalue]

How would you value it though? It does not generate much free cash flow, so are you expecting CapX to decline, or are you valuing through an alternative method?

 

Dont forget Earnings power value or the simple EPS method.

[rockket]

Back of the envelope calculation:

 

Using Greenwald's EPV methodology gets me to ~$98mm in free cash flow (maintenance capex of $20m, 6-yr avg EBIT margin of 8.6%). Discounted at 9.5% and subtracting out cash gets to $60 per share of EPV (ie. no credit for growth).

 

Current prices of $74-$75 implies approximately 2% long term growth rate is priced in.

 

Basically a free option on the rest of growth - considering EPS has been growing 15-20% per year (10% unit growth for the next ~7 years plus mid-high single digit store growth), that may be a decent value.

 

However, I'm not sure exactly how to get to a target price/the appropriate multiple. PE has ranged between 18-28x in recent history. A case could be made for a "premium" valuation due to its brand/niche/size/purchasing power, but premium to what exactly?

 

And please correct me if I've made any egregious mistakes in the above analysis - still figuring this stuff out.

[AJDelphi]

I attended the Annual Shareholder meeting today in Minneapolis. Only about 30 people attended mostly lawyers, accountants, team members, and the board. The company continues to grow by adding new restaurants and in my opinion is allocating their capital perfectly by not paying a dividend or buying back shares ( I feel they are not undervalued).

 

I spoke with some board members about that and they completely agreed with that rational. When you have a company that has grown Net Income, and for me more importantly owner earnings at over 20% over nearly any time frame it would be dumb to pay a dividend.

 

In 2015 I think the company will produce a little over $10 in owner earnings per share. Current price is $155.45

[no_free_lunch]

In 2015 I think the company will produce a little over $10 in owner earnings per share. Current price is $155.45

 

I like your thesis on this one.  You must be breaking out growth capex from maintenance capex in the cash flow statement to get to your $10 owner earnings.  Since I am not familiar with the stock I just wonder what your reference is for these figures?

[AJDelphi]

Yep I am most definitely taking out growth capex. They actually break it out for you so makes the math easy. They spent just under $40 Million in upgrading existing restaurants. In 2014 they also spent $26 Million for technology improvements, in 2013 they only spent $5 Million. I'm assuming they did some major system upgrade. I would ask management before I bought the stock why the big increase.

 

So I assume $40 Mil for existing restaurant maintenance and $7 Million for IT maintenance capex.

 

Also about $17 Million for stock based comp, my estimate for 2015.

 

And I think cash from operations will come in at close to $260 Million.

 

Gets me to $196 Million in OE with 19.074 Mil diluted shares out

[bci23]

Don't give BWLD mgmt credit for being "good capital allocators", If you saw how they make capital decisions internally you would cry. Mgmt is overpaying for franchises in order to hit their EPS growth targets, real estate decisions (new stores, relocations, closures) are made by middle management with little/no thought given to the financials, and their Guest Experience Captain is a complete waste of money and is whats causing their labor rates to get out of control. They are getting no sales lift from it. Once the hype goes away, BWLD will be a great activist target in my opinion. This mgmt team is just riding the wave of a strong/popular brand and good times for restaurants.

[Scudbucket]

Can you expand on how they make capital allocation decisions?  What is your source?

[bci23]

Can you expand on how they make capital allocation decisions?  What is your source?

 

Sure. Let's take the example of deciding whether to

1. relocate a restaurant a mile down the road or

2. renew your lease in the current location

 

A logical person who thinks like an owner would want to model out the NPV of cashflows from staying in the same spot and compare that to the expected cashflows from closing the current store and building a new store (capex!) a mile away to run for the next 5-10 years. To financially justify a relocation when you have the option to stay in the current location, you really need either a huge lift in sales or a huge decrease in rent for it to be financially viable because of the significant CapEx required to build a new store.

 

Some reasons that are not acceptable (in my opinion) for relocating a restaurant (but are apparently acceptable at BWLD):

1. "The current location is old!"

2. "We could get a 10% lift in sales if we move!"

3.  "The new location has better visibility!"

4. "I like this location better"

5. "the current location has negative comp store sales"

 

 

Now who in the company should be making this decision? Relocating a restaurant is a multi-million dollar decision both in terms of CapEx and NPV of Cashflows from operating the restaurant. The CEO? How about the CFO? Nah, lets let the real estate guy who doesn't even know how to spell capital allocation make the decision. In my mind, the CEO and/or CFO should be the sole decision makers on matters like this.

 

direct quote i was told: "If you asked BWLD mgmt to describe what good capital allocation means, they won't know what you are talking about"

 

A the end of the day, BWLD is a great brand in a very hot sector. When things are going well, big companies coast along not paying attention to the details or scrutinizing the decision making. Just a complete lack of discipline because everything is working (for now).

 

Another thing, I think the chairman of the board is a joke. He claims he "revolutionized retail" while at Best Buy when in fact the little pet project he worked on at BBY was so unprofitable that even the terrible mgmt that was in place there at the time realized that it had to be shut down. It no longer exists in any form at BBY. How revolutionary.  The guy hasn't had a job since 2010, but who needs one when you pull in $175k as chairman of BWLD!

 

The companies ventures into fast casual Pizza (Pizza Rev) and Tacos (Rusty Taco) are classic cases of empire building and the need to find new sources of "growth" at any cost.

 

Obviously my sources are employees (current or former) (I don't work there)

[kfh227]

Are those quotes above actually from execs?  During Conference calls?  I guess I am asking who and when.  I don't care to show links (would be nice) but I was wondering who (where in the management chain) said these things when.

 

As an aside, I heard a recent rumor that he BWLD in our local mall might be closing.  It's been there for about 2 years.

[bci23]

not from execs, not from conference calls, this is stuff I've been told by former employees who were involved recently enough that i'm confident the process hasn't changed (big companies don't change when times are good).

 

The location that you hear is closing is probably being relocated

[AJDelphi]

1. Sure, maybe I would cry at how the internal capital allocation decisions are made but these are impossible things for me to know unless of course I had insider information. Generally, a good thing to stay away from in the investing business.

 

So yes they might have a terrible system for deciding that.

 

2. The chairman might be a joke, the management might not know capital allocation, but they are a great brand and customers like it. A good business can make up for less than adequate management (though I don’t think that is the case here).

 

So I’m sure things don’t run perfectly (at what company do they?)  but the fact is that earnings and cash flows(owner earnings) have still been growing  at over 20% for a long period of time. They have about 1050 stores now, management says they can get to 1600 and are building about a 100 a year. So there is still have some store growth and if same store comps keep increasing (7% last quarter) BWLD will have meaningfully higher profits in the future.

 

3. I agree that they are trying to find new sources of growth, but I disagree with at any cost because the cost has been minimal. Once BWLD builds out 1600 stores they won’t be able to expand that business so it would be wise to maybe have another business to allocate that capital too.

 

For context, like I said earlier I think BWLD will generate about $200 Mil in owner earnings (Cash) in 2015.

 

In 2013 they spent $6 Million to purchase licensing rights for Pizza Rev, that appears to be their total investment. That year they spent $10.2 Mil in Acquisition of businesses/investments in a affiliates which includes franchises purchased. $4.2 Mil was spent on buying existing franchises.

 

From 2013 10-k

In March 2013, we acquired a minority equity investment in PizzaRev, a California-based restaurant concept, as well as licensing rights for $6,000. As of December 29, 2013, PizzaRev had six fast casual pizza restaurants in California. If certain financial thresholds are met, we have the obligation to make additional investments in PizzaRev. We also have the right to open company-owned locations in certain states. Investments in affiliates is included in other assets in our Consolidated Balance Sheets.

 

In 2014 they spent $30.5 Million on Acquisitions of Businesses. They bought 13 BWLD franchises and invested in Rusty Taco. The majority of that $30.5 Million was likely spent on the franchise BWLD’s. So the Rusty Taco investment cost was also extremely minor in the scheme of things.

 

If either of these concepts prove to be very popular and they could open hundreds of stores the upside is HUGE! And Buffalo Wild Wings has proven that they know how to expand in the restaurant business. So it isn’t like they are going into something completely different.  They also would have the capital to expand which many small chains have problems with.

 

The downside of these new investments is very small, but the upside could be huge. I think these are intelligent decisions.

 

Disclosure: I do not own the stock. To expensive for me right now. I did own it a couple of years ago and made a very nice return on it. Sold it because I thought it became overpriced.

 

[bci23]

Well, looks like Marcato took note of the obvious poor capital allocation decisions going on at BWLD. The capital allocation definitely needs to be improved, the company should not be overpaying to buyback franchisees in order to drive up EPS or mindlessly buying back stock to drive up EPS (a major flaw in exec comp program), and the Guest Experience Captain needs to be eliminated in the restaurants (no revenue increase, big SG&A increase). The company needs to lower their prices as well as that has been mgmts solution to all problems in the last few years, just raise prices. I think BWLD customer perception has probably been hurt by the price increases, which is now leading to SSS problems. The capital allocation and guest experience captain can be fixed quickly, winning back customers is harder and will take longer.

 

http://www.bloomberg.com/news/articles/2016-07-25/buffalo-wild-wings-jumps-after-activist-investor-acquires-stake

 

"These discussions may review options for enhancing shareholder value through various strategic alternatives or operational or management initiatives including, but not limited to, improving returns on invested capital, determining appropriate capital structure and capital allocation methodology, optimizing mix of franchised vs. company-operated units, aligning incentive compensation with disciplined capital allocation practices, and general corporate strategies to enhance unit-level and franchisee profitability."

[bci23]

Marcato's presentation on BWLD. I think they hit the nail on the head. The problem is that the current mgmt team and board doesn't even know what ROIC is or means so its going to be difficult for Marcato to make easy progress here. BWLD board and mgmt probably paying some consultant $10k/hour right now to educate them on what this presentation is saying.

 

https://www.sec.gov/Archives/edgar/data/1062449/000091412116001415/ma20160815-sc13da1.htm

 

 

[no_free_lunch]

Stock continues to stay at depressed levels.  Looks like around 11-12x fcf.  Same stores sales are negative and their is this fight between marcato and the management team.  Anyone still following? 

[rkbabang]

I don't own BWLD and haven't looked at them, but I did just hear them mentioned in the Middleby (MIDD) conference call.  Middleby's CEO said something about meeting with BWLD to try to convince them to up-scale their food quality a little bit.  He said right now their kitchen is pretty much just a bunch of microwaves.  I've never eaten there, but that doesn't sound very appetizing.  I can get frozen pre-cooked wings at the grocery store, microwave them, and dip them in sauce at home.  Do they depend on their beverage sales more than their microwaved wings?

 

[johnny]

Alcohol is 20%

[merkhet]

I don't own BWLD and haven't looked at them, but I did just hear them mentioned in the Middleby (MIDD) conference call.  Middleby's CEO said something about meeting with BWLD to try to convince them to up-scale their food quality a little bit.  He said right now their kitchen is pretty much just a bunch of microwaves.  I've never eaten there, but that doesn't sound very appetizing.  I can get frozen pre-cooked wings at the grocery store, microwave them, and dip them in sauce at home.  Do they depend on their beverage sales more than their microwaved wings?

 

The wings aren't that bad. Used to watch football there when I lived above one a few years back. They're not Plucker's (Austin/Texas based chain) but they're not bad.

[atbed]

I don't own BWLD and haven't looked at them, but I did just hear them mentioned in the Middleby (MIDD) conference call.  Middleby's CEO said something about meeting with BWLD to try to convince them to up-scale their food quality a little bit.  He said right now their kitchen is pretty much just a bunch of microwaves.  I've never eaten there, but that doesn't sound very appetizing.  I can get frozen pre-cooked wings at the grocery store, microwave them, and dip them in sauce at home.  Do they depend on their beverage sales more than their microwaved wings?

 

Wow, Selim A. Bassoul is really off base with the following comments...

 

"So, the Buffalo Wild Wings figured out how to do that, okay. Now, the problem is that chain, that CEO was fired early this year. That's my feeling is finally now that chain is having new leadership and they are working with us to figure out a way to get the kitchen and the food better, which for years they have used microwave, mostly microwave, to rethermalize pre-cooked food that they got from their supplies, and that chain kept on, it's a large chain, kept on shrinking."

 

per:

https://seekingalpha.com/article/4073000-middlebys-midd-ceo-selim-bassoul-q1-2017-results-earnings-call-transcript?part=single

 

Firstly, Sally Smith has not been fired. Marcato is pushing for her to resign, and we'll see if that happens eventually. My guess is no. The franchisees like her. She also has a good long-term track record at BWLD, so guys like ISS support her. 

http://ir.buffalowildwings.com/releasedetail.cfm?ReleaseID=1027765

 

Secondly, they have a grill and many fryers. They fry their wings. This video is a bit dated, but it shows their kitchen:

 

Shrinking? Seriously...? Bassoul needs to pop open a BWLD press release, before making anymore comments. 

 

I'm surprised Bassoul is bad mouthing potential clients in public. He's got serious balls or MIDD has a real competitive advantage...

[atbed]

Stock continues to stay at depressed levels.  Looks like around 11-12x fcf.  Same stores sales are negative and their is this fight between marcato and the management team.  Anyone still following?

 

I'm starting to look again

[rkbabang]

I don't own BWLD and haven't looked at them, but I did just hear them mentioned in the Middleby (MIDD) conference call.  Middleby's CEO said something about meeting with BWLD to try to convince them to up-scale their food quality a little bit.  He said right now their kitchen is pretty much just a bunch of microwaves.  I've never eaten there, but that doesn't sound very appetizing.  I can get frozen pre-cooked wings at the grocery store, microwave them, and dip them in sauce at home.  Do they depend on their beverage sales more than their microwaved wings?

 

Wow, Selim A. Bassoul is really off base with the following comments...

 

"So, the Buffalo Wild Wings figured out how to do that, okay. Now, the problem is that chain, that CEO was fired early this year. That's my feeling is finally now that chain is having new leadership and they are working with us to figure out a way to get the kitchen and the food better, which for years they have used microwave, mostly microwave, to rethermalize pre-cooked food that they got from their supplies, and that chain kept on, it's a large chain, kept on shrinking."

 

per:

https://seekingalpha.com/article/4073000-middlebys-midd-ceo-selim-bassoul-q1-2017-results-earnings-call-transcript?part=single

 

Firstly, Sally Smith has not been fired. Marcato is pushing for her to resign, and we'll see if that happens eventually. My guess is no. The franchisees like her. She also has a good long-term track record at BWLD, so guys like ISS support her. 

http://ir.buffalowildwings.com/releasedetail.cfm?ReleaseID=1027765

 

Secondly, they have a grill and many fryers. They fry their wings. This video is a bit dated, but it shows their kitchen:

 

Shrinking? Seriously...? Bassoul needs to pop open a BWLD press release, before making anymore comments. 

 

I'm surprised Bassoul is bad mouthing potential clients in public. He's got serious balls or MIDD has a real competitive advantage...

 

I don't know much of anything about BWLD, but I was surprised that he was bad mouthing them on the call.  I've been listened to most of his quarterly calls over the last 10 years or so and I can't think of another time he's done this.  It stood out to me immediately.  Maybe he said it off the cuff and regrets it.  I don't know.  I do think MIDD has a competitive advantage, but not big enough to publicly go around talking trash about potential customers.

 

 

[NBL0303]

I don't own BWLD and haven't looked at them, but I did just hear them mentioned in the Middleby (MIDD) conference call.  Middleby's CEO said something about meeting with BWLD to try to convince them to up-scale their food quality a little bit.  He said right now their kitchen is pretty much just a bunch of microwaves.  I've never eaten there, but that doesn't sound very appetizing.  I can get frozen pre-cooked wings at the grocery store, microwave them, and dip them in sauce at home.  Do they depend on their beverage sales more than their microwaved wings?

 

Wow, Selim A. Bassoul is really off base with the following comments...

 

"So, the Buffalo Wild Wings figured out how to do that, okay. Now, the problem is that chain, that CEO was fired early this year. That's my feeling is finally now that chain is having new leadership and they are working with us to figure out a way to get the kitchen and the food better, which for years they have used microwave, mostly microwave, to rethermalize pre-cooked food that they got from their supplies, and that chain kept on, it's a large chain, kept on shrinking."

 

per:

https://seekingalpha.com/article/4073000-middlebys-midd-ceo-selim-bassoul-q1-2017-results-earnings-call-transcript?part=single

 

Firstly, Sally Smith has not been fired. Marcato is pushing for her to resign, and we'll see if that happens eventually. My guess is no. The franchisees like her. She also has a good long-term track record at BWLD, so guys like ISS support her. 

http://ir.buffalowildwings.com/releasedetail.cfm?ReleaseID=1027765

 

Secondly, they have a grill and many fryers. They fry their wings. This video is a bit dated, but it shows their kitchen:

 

Shrinking? Seriously...? Bassoul needs to pop open a BWLD press release, before making anymore comments. 

 

I'm surprised Bassoul is bad mouthing potential clients in public. He's got serious balls or MIDD has a real competitive advantage...

 

I'm incredibly surprised by this comment as well.  The problem with doing this isn't even mostly about BWLD as a customer - the problem with this sort of thing is that it other potential clients could also be slightly less inclined to work with a company who is willing to publicly badmouth its customers.

[bci23]

I don't own BWLD and haven't looked at them, but I did just hear them mentioned in the Middleby (MIDD) conference call.  Middleby's CEO said something about meeting with BWLD to try to convince them to up-scale their food quality a little bit.  He said right now their kitchen is pretty much just a bunch of microwaves.  I've never eaten there, but that doesn't sound very appetizing.  I can get frozen pre-cooked wings at the grocery store, microwave them, and dip them in sauce at home.  Do they depend on their beverage sales more than their microwaved wings?

 

Wow, Selim A. Bassoul is really off base with the following comments...

 

"So, the Buffalo Wild Wings figured out how to do that, okay. Now, the problem is that chain, that CEO was fired early this year. That's my feeling is finally now that chain is having new leadership and they are working with us to figure out a way to get the kitchen and the food better, which for years they have used microwave, mostly microwave, to rethermalize pre-cooked food that they got from their supplies, and that chain kept on, it's a large chain, kept on shrinking."

 

per:

https://seekingalpha.com/article/4073000-middlebys-midd-ceo-selim-bassoul-q1-2017-results-earnings-call-transcript?part=single

 

Firstly, Sally Smith has not been fired. Marcato is pushing for her to resign, and we'll see if that happens eventually. My guess is no. The franchisees like her. She also has a good long-term track record at BWLD, so guys like ISS support her. 

http://ir.buffalowildwings.com/releasedetail.cfm?ReleaseID=1027765

 

Secondly, they have a grill and many fryers. They fry their wings. This video is a bit dated, but it shows their kitchen:

 

Shrinking? Seriously...? Bassoul needs to pop open a BWLD press release, before making anymore comments. 

 

I'm surprised Bassoul is bad mouthing potential clients in public. He's got serious balls or MIDD has a real competitive advantage...

 

His comments on BWLD were so off it seems like he must be mixing them up with a different company.

 

edit: now that i reread his statements, i think he was saying BWLD figured things out but "another large chain" is still mostly microwaves and they keep shrinking. Talking about Chillis or Applebees?

[atbed]

I don't own BWLD and haven't looked at them, but I did just hear them mentioned in the Middleby (MIDD) conference call.  Middleby's CEO said something about meeting with BWLD to try to convince them to up-scale their food quality a little bit.  He said right now their kitchen is pretty much just a bunch of microwaves.  I've never eaten there, but that doesn't sound very appetizing.  I can get frozen pre-cooked wings at the grocery store, microwave them, and dip them in sauce at home.  Do they depend on their beverage sales more than their microwaved wings?

 

Wow, Selim A. Bassoul is really off base with the following comments...

 

"So, the Buffalo Wild Wings figured out how to do that, okay. Now, the problem is that chain, that CEO was fired early this year. That's my feeling is finally now that chain is having new leadership and they are working with us to figure out a way to get the kitchen and the food better, which for years they have used microwave, mostly microwave, to rethermalize pre-cooked food that they got from their supplies, and that chain kept on, it's a large chain, kept on shrinking."

 

per:

https://seekingalpha.com/article/4073000-middlebys-midd-ceo-selim-bassoul-q1-2017-results-earnings-call-transcript?part=single

 

Firstly, Sally Smith has not been fired. Marcato is pushing for her to resign, and we'll see if that happens eventually. My guess is no. The franchisees like her. She also has a good long-term track record at BWLD, so guys like ISS support her. 

http://ir.buffalowildwings.com/releasedetail.cfm?ReleaseID=1027765

 

Secondly, they have a grill and many fryers. They fry their wings. This video is a bit dated, but it shows their kitchen:

 

Shrinking? Seriously...? Bassoul needs to pop open a BWLD press release, before making anymore comments. 

 

I'm surprised Bassoul is bad mouthing potential clients in public. He's got serious balls or MIDD has a real competitive advantage...

 

His comments on BWLD were so off it seems like he must be mixing them up with a different company.

 

edit: now that i reread his statements, i think he was saying BWLD figured things out but "another large chain" is still mostly microwaves and they keep shrinking. Talking about Chillis or Applebees?

 

I think you are right. Should have caught that. Good catch. I wonder if many of their clients listen to their call