Wednesday, July 30, 2008

Buy Buffalo Wild Wings

Restaurants come in two flavors: They either lose a fortune or make a mint. It's hard to tell which outcome is most likely just by eating the food. Bennigan's, for instance, was decent pub fare but a lousy investment, at least if you believe the Chapter 7 filing. Great places to eat can be lousy, cash-bleeding businesses, while eateries you might not trust to pour you a glass of sink water stack up fat profits.

Even a popular restaurant can go from one extreme to the other almost overnight, and this makes restaurants a fickle (Read: "volatile") sector. The risk for many is that their earnings will stall before they have repaid the cost of their fast growth. The risk for some others is that they can manage growth but can't manage operations. After all, it's easy to please Wall Street with ever more revenue as long as you're opening stores. Take Starbucks. And even a great restaurant that's well run can find itself in dire straits if customer tastes change and its food falls out of favor.

Yet despite the massive capital needs, commodity risk and the vagaries of catering to the public's ever-changing taste, restaurants are a gigantic business. The National Restaurant Association pegs total sales at $558 billion. Nearly a million U.S. eateries serve 70 billion meals in a year and rack up 4% of the nation's gross national product. Growth is expected at 4.4% in 2008, far more than the estimated 1.5% growth in the broader economy.

The Bureau of Labor Statistics has determined the average American spends a little less than 11 percent of after-tax income on food. In recent years, the amount of cash spent on dining out has been increasing at a faster pace than total food expenditures.

Average spending on food has more than doubled from $1,320 in 1984 to nearly $2,700 today, a rate of increase faster than the overall rise in consumer prices during that time. Spending has accelerated at a particularly rapid pace since the mid-1990s. In fact, growth has accelerated from an annualized pace of about 2.6% from 1984 through 1994 to about 3.9% annualized since.

Even better, the restaurant business is relatively defensive during economic downturns: Dining out is one of the last areas consumers cut back on. If things are tight, you might not splurge on a new flat-screen, but you might take the family out to dinner as a treat instead. During the last U.S. economic slowdown, from 2001-2003, consumer spending on food away from home only dropped for a year, then quickly hit a new high in 2004 as Americans started to feel more flush.

With absolutely none of this in mind, I recently ventured out to 50-cent wing night at a Buffalo Wild Wings restaurant that had just opened. The price was right, so I left the office at five with my usual dinner companion, the Wall Street Journal. My perfect dinner party is two -- me and an attentive waiter.

I had been to a Buffalo Wild Wings store before, and the new restaurant was a carbon copy. It was a relatively large, stand-alone building. The parking lot, which had looked oversized while the building was being built, was full. There was a wait for a table -- this on a Tuesday night during the school year -- so I opted to sit at the bar, where there was no wait. I scanned the menu. The bartender asked me for my order, and I told him I wanted to start with eight "Blazin' " boneless wings -- their hottest -- and I opened my paper and started to read.

"I can't do that," he told me.

"I beg your pardon?" I said, looking up.

"I can't bring you eight Blazin' wings, sir. That'll put you in the hospital." He looked grave.

"Oh, c'mon." It was the best argument I could manage.

"No way," the kid said. "One, maybe. But I've never seen anyone who could handle eight."

"Don't worry about it, junior. Eight Blazin' wings."

"Well, I better bring you something to drink, then. You want a beer?"

It was either a test of my manhood or this young hustler was trying to upsell me a little high-profit draft beer with my low-margin wings. I wasn't about to cave on the wings, nor do anything to impede a $4 dinner like spring for a beer. Besides, I eat lunch once a week at a Thai joint that serves absolutely fabulous but thermonuclear food, so my taste buds are acclimated to levels of spiciness that would outright kill the average diner.

"Nah," I said. "I'm OK." He departed with my order. He'll be pushing timeshares in a few years, I thought. Well, good for him.

Presently the wings arrived, and the fumes from steaming, tangy hot sauce hit me like pepper spray at a World Trade Organization protest. I momentarily worried I might be in a bad fix: The kid was watching from a few feet away -- I was surprised he hadn't thought to grab a fire extinguisher. I stabbed a wing with my fork and casually popped it into my mouth. It was spicy, though far from debilitating. I ate the eight wings without breaking a sweat -- and without touching the villainous glass of water that had materialized while I was ensconced behind the WSJ. The bartender, who seemed a little defeated, thank you very much, sheepishly asked if I wanted anything else.

"I dunno," I said triumphantly. "You got anything hot?"

The kid, who had obviously been raised right by his folks and trained well by his managers, said nothing.

"Tell you what," I said, a little conciliatorily. "How about four of those Caribbean Jerk boneless wings? And a Diet Coke, please."

He nodded and said yessir. The wings showed up minutes later.

I am here to tell you the Jerk wings knocked my socks off. Those little firecrackers packed a wallop. I thoroughly enjoyed them, left the up-and-coming waiter a nice tip and headed home.

I was back at Buffalo Wild Wings every Tuesday for the next six weeks, and I came in a few times in between. Their marketing ploy had gotten me in the door and gotten me to come back. I wasn't alone. The SRO crowds abated a little after folks in town had tried the food for the first time, but even 60 days after the restaurant was open, it was tough to just walk in and get a table right way during the lunch or dinner rush, especially if a popular sporting event was being shown on the countless TVs.

BWLD serves other dishes besides wings, which bring in about 36% of sales. Booze is roughly 30% of the top line, and "other," which encompasses a good kids menu, is 35%. BWLD breaks down revenue by time of day, too: Dinner accounts for 39% of revenue; late-night for 26%, and lunch is a fifth of the business. Its average weekly sales at franchise stores are $46.439 -- $2.4 million a year -- which is a 32% rise from 2003, the year it went public. Panera Bread, a popular gourmet sandwich shop that makes its own artisan loaves, is scrambling to boost sales to $40,000 a week.

Buffalo Wild Wings sells food that tastes good in a family-friendly setting with attractive prices at a restaurant that's clean, comfortable and conveniently located. This is a recipe for success in a very competitive business. There are only about 500 of these stores; the company thinks the domestic market can support 1,000 -- or one for every 13 McDonald's. Growth has been more methodical than explosive, and the franchise model reduces the company's per-store investment, so BWLD has very little debt and lots of cash. This is good management. (My favorite fact about the company: Its executives and suppliers have to sign iron-clad confidentiality agreements to protect their sauce recipes.) They've recently -- and wisely -- taken steps to hedge their chicken prices -- previously they just instructed waiters to push higher-margin menu items when chicken prices were high.

Investors have rewarded Buffalo Wild Wings for all of this. A dollar invested in its shares after its November 2003 IPO has grown into $2.88; a buck dropped into the S&P during that time would be worth only $1.31 today. BLWD shares have appreciated 186.7% while the broader market has advanced just 31%.

This puts Buffalo Wild Wings at the head of the pack -- and by a wide margin -- since its shares went on the block. If they could make wings as hot as these returns, I'd be in heaven.

Restaurant Performance Since Buffalo Wild Wings' IPO
Buffalo Wild Wings 186.69%
McDonald's 147.04%
Yum Brands 144.85%
Jack in the Box 127.72%
Darden Restaurants 72.81%
Wendy's 62.56%
Panera 33.35%
S&P 500 Index 30.95%
Starbucks 14.52%
Calif. Pizza Kitchen 12.00%
Brinker (Chili's, etc.) 4.30%
Bob Evans Farms 1.64%
CBRL Group -24.68%
Cheesecake Factory -31.61%
Landry's Restaurants -31.61%
Triarc (Arby's) -34.68%
PF Chang's -50.34%

Prices are from late May.

Tuesday, July 29, 2008

And now, friends, a brief look at what's coming up next in Russia.

But first, a quick review:

Alexander Litinenko, a former KGB colonel and outspoken critic of then-Russian President Vladimir Putin, was minding his own business in London when he fell ill. From what quickly became his deathbed, he accused Putin of sending operatives to zap him with polonium-210, a radioactive isotope. Scotland Yard investigated. Her Majesty's security officials are convinced Russian operatives were involved. Relations between London and Moscow have since markedly cooled.

Mikhail Khodorkovsky was the boss of oil giant Yukos before he got crossways with the Kremlin and was arrested on charges of tax evasion and fraud. He was summarily tossed into a gulag, lost most of his fortune and saw his company evaporate. A series of minor and by most accounts trumped up prison-conduct violations have made him ineligible for parole. Khordorksky -- who bought Yukos at a state auction in 1995 for $350 million, was a generous contributor to political campaigns. He had gained control of a prestigious newspaper and hired a serious investigative reporter -- then he was arrested.

Robert Dudley, chief of TNK BP, left Russia last week amid a host of official harassment and worries that his visa would not be renewed. BP is a 50 percent shareholder in the oil venture. Mikhail Fridman, German Khan and Viktor Vekselberg -- Russians worth a combined $45.9 billion -- own the rest and have demanded BP pick a new CEO. What they really want is to be bought off with fat payouts rather than to follow Dudley's plan to invest the cash in developing production. TNK BP is worth about $45 billion and accounts for 13 percent of BP's earnings. Dudley escaped with his freedom and his life, but BP isn't saying where he'll be working from. Wise move.

Now comes word that Putin is at it again. He went after Mechel, a Russian coal and steel concern, earlier this week, alleging it fixed prices. Shares lost more than 30 percent -- which is no surprise given what usually happens when Putin takes aim at a company or an executive.

The wingtips on the ground in Russia don't think that the government will try to give Mechel the Yukos treatment. The Kremlin merely wants the company to hold down steel prices instead of charging what the market will bear and, you know, make money. Russian leaders want to control inflation -- currently at about 13.5 percent -- and this is how they're going about it.

Imagine Ben Bernanke telling Wal-Mart to cut prices or he'd send Henry Paulson over with some heavy hitters to fuck up the place, then throwing CEO Lee Scott in the hoosegow.

Well, that's what's going on here, isn't it? It happened to Khordorkovsky. It happened to Dudley. That's exactly the sort of "pressure" being applied to Mechel, and it's the same deplorable, dirty tactic the Red Thug Brigade recently exerted on food company Wimm Bill Dann, and for the same reason.

Mechel shouldn't have to do as it is told. Mechel should do whatever it jolly well wants for the benefit of its shareholders. Mechel should be able to tell Putin to take a hike. Only the market should be able to dictate prices, period, amen.

Sure, the Kremlin is under pressure to control costs. Well, hey, governing is a bitch. One UralSib analyst downplayed Putin's comments as merely "a firm slap on the wrist for a company that is taking advantage of the high prices to boost its bottom line." Analysts usually like that sort of thing to happen to the bottom line. Welcome to free markets, Vladimir. Why not use fiscal policy and monetary tools to manage your economy? Turns out is works OK here in the developed world.

Putin, doubtlessly in the voice my dad used to use when he would threaten to pull this car over -- has already told Russia's oligarchs what's what. He did it at the first so-called "oligarch meeting" in 2001. And he made the point again after Khodorkovsky was arrested, just to make things abundantly clear. The rule: Big Russian companies have to put national interests above their shareholders' interests, and their plans require a certain social element.

This is immensely ludicrous. No one in the Western world -- with the possible exception of long-haired Berkeley undergrads -- would support this sort of wacko commie horseshit. Cubans in Miami would still -- justifiably -- cut Castro's throat for "nationalizing" their homes and businesses. Zimbabwe's Robert Mugabe was vilified for redistributing white-owned farm land to blacks. This Robin Hood-style approach to economic policy isn't only morally wrong, it also doesn't work.

Anyway, Putin called for an investigation: "I'm asking the Federal Anti-Monopoly Service to pay special attention to the problem -- and maybe even the Investigative Committee of the Prosecutor General's Office," the Moscow Times reports Putin as saying. Whatever. Putin'll send in the hall monitors from Moscow High if he thinks it will get him what he wants.

Igor Zyuzin, Mechel's owner, called in sick. I admire the sheer ballsiness of this tactic.

Putin, for his part, obliquely threatened to put said balls on the block.

"The director has been invited, and he suddenly became ill,'' Putin said. "Of course, illness is illness, but I think he should get well as soon as possible. Otherwise, we will have to send him a doctor and clean up all the problems."

My guess is the doctor Putin has in mind is familiar with what constitutes a lethal dose of polonium-210.

My prediction: Igor will get the what-for, his company will get hosed and shareholders will have to eat the losses. And Putin will keep bullying the oligarchs instead of addressing the roots of the economic problems his country faces.

That's a shame. There are a lot of great companies in Russia. Just don't buy them until Putin is gone.

Incidentally, Mechel's first-quarter net earnings rose 162% from year-ago levels.

Monday, July 14, 2008

Designer Detergent: The Next Big Thing

My boss has encouraged me to be more forward-looking. He wants us to think about What's Next and figure out how to invest in it. What's the next Google? The next Starbucks? Who's making the next iPod, and where do we buy the shares?

I dunno.

But I do have an idea whose time has come.

Every department store in these United States has a couple of dozen Ralph Lauren fragrances.
You can also buy Ralph Lauren towels. But you can't buy anything to make your towels smell good. For that you have to use Tide.

Now, even though Tide is admittedly the Rolls-Royce of laundry detergents, it still strikes me as hugely downmarket. So is that damn Snuggle bear.

Surely Ralph Lauren can come up with a laundry detergent that smells perfect. My flannel sheets would afford me a better experience if Martha Stewart sold a detergent that made them smell like Christmas. Even the cleanest sheets would seem all the more fresh were one to toss them into the dryer with an Hermes D'Orange Verte dryer sheet.

I once dated a girl in New York who worked for International Flavors & Fragrances. I told her this idea and she said it would never work because fragrances are divided into consumer and industrial uses, or some such that basically struck me as, "No, that's not the way the industry does things."

Which is, of course, silly.

The thing is, Tide isn't any better than the stuff you can buy for a tenth the price at Sam's. It does exactly the same thing. I'll admit that Dreft makes a difference for babies, but other than that, all detergents are the exact same, other than the way they -- wait for it -- smell. Tide sure as hell knows that. Its manufacturer, Procter & Gamble, is banking, wisely, on the fact that consumers will pay a premium for the perceived safety and quality we associate with our mothers' brands.

I hate spending $17 on a box or bottle of Tide. I don't get anything for the money that I don't get with a cheaper brand. And I don't care what my Mom used, as I know that the real reason the sheets smelled good when I was a kid is because she hung them outside to dry. Still, I don't have a clothes line, and I might well spend twice the amount on the same quantity of a designer detergent if it smelled Just Right.

That is, of course, also very silly. But I'd do it and I'd feel good about it. When a company can get its consumers to say that, it won't be too long before the trucks carrying profits start dropping off piles of cash at the bank. Because you have just come up with The Next Big Thing.