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.

1 comment:

Anonymous said...

Andy, you are an original!

God bless you, Andy O!