group6_bwldcase

Investment Thesis

Although BWLD missed their guidance figures, there is still considerable growth in revenue that may have trickled down to help strengthen their EPS. BWLD missed their Q1 guidance figure for revenue as well as their net income, but still managed to increase their revenues by 19.7% when compared to prior year’s Q1 figures. This increase in revenues is directly attributable to their increase in their bottom line, which in Q1 2014 EPS and Q1 2015 EPS were $1.49 and $1.52 respectively.

Chicken prices are having an adverse effect on BWLD’s bottom line. Chicken prices have been steadily increasing since 2014 Q3 price of $1.50 per pound to 2015 Q1’s price of $2.08 per pound. This increase of $0.58 has been fueled by the increase in demand for chicken, as an alternative source of protein. This price increase has drastically effected BWLD’s restaurant gross profit margin, which in 2014 Q3 and 2015 Q1 were 72.7% and 71.5% respectively. Despite this increase in chicken prices, BWLD’s has still managed to increase their EPS. Although, the management team’s outlook remains at 18% year of year growth in their bottom line, we believe that 14% is a more realistic number if chicken prices were to remain constant.

BWLD’s continues to show that they are a proven growth story, which is apparent in today’s stock. Over the past 12 months, BWLD has seen a sharp 37.71% increase in their stock price. Many positive factors have allowed BWLD to realize such stock price growth. These factors, of which are taken into account by the market, include strong revenue growth, brand recognit ion, proven business model, continued EPS improvement, and with little to no debt.

Buffalo Wild Wings, Inc. (BWLD) Price Target: $195.33 Rating: BUY

Group 6 5/4/15 Zach Amrein (913)530-5515 [email protected]

Madison Myers (785)217-3152 [email protected]

Sam Plank (314)775-9232 [email protected]

Endong Wang (785)979-2608 [email protected]

Company Overview

Buffalo Wild Wings is an American Bar and Grill that was founded in 1982 in Columbus, Ohio. They currently have 1,094 restaurants in the United States and have plans to expand outside of the United States. They have already moved to Canada, Mexico, and a few other places around the world and they believe that there is still plenty of room to grow in the United States. There are a variety of different ways that they have found to differentiate their business by utilizing a management team that is very diverse.

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BWLD 5 Year Cumulative Return

We used IWM (Russell 2000 Index) and PSCD (SmallCap Consumer Discretionary Portfolio) to compare with BWLD (Buffalo Wild Wings Inc.) over the past 5 year Cumulative Total Return. As the graph shows, we can clearly figure out for every 100 dollars invested in May 4th 2011, BWLD would outperform with $251.21 at May 1st 2015, which has 20% compounded annual return rate, while IWM and PSCD have 12.67% and 8.87%, respectively. Thus, the premium value created by BWLD over 5 years is much more than the premium value of IWM or PSCD. The historical data reveals that BWLD is a successful restaurant with large operation growth and business expansion. Also, we have confidence that in the foreseeable future, although BWLD’s stock price dropped down huge due to lower-than-expectation earnings report, the 20% increasing revenue does verifies that BWLD is still a strong growing casual restaurant with delicious food and an atmosphere centered around sports that will continue to see substantial growth.

Revenue Growth

Recently, on April 28, 2015, BWLD has come under fire for missing their Q1 2015 earnings guidance on both the top line and bottom line figures. This deviation from the guidance has investors worried about their ability to recover from Q1 and hit their annual guidance numbers for fiscal year 2015. This worrisome that has created a cloud of uncertainty around BWLD’s stock is responsible for the recent decline in BWLD’s stock price over the past week. On April 28, 2015 BWLD’s stock price was at $183.70, on the following day April 29, 2015, BWLD’s stock price had dropped $160.25. BWLD’s miss on their guidance earnings frightened the market. Despite missing their guidance, BWLD’s revenues have increased by 19.7% in Q1 2015 from the prior year’s revenues. Revenue growth of 19.7% is a noteworthy achievement, it may not be what they or any analyst had predicted but the company is still growing, and growing at a considerable pace. Management has kept its 2015 guidance for 18% increase in net income by the end of the fiscal year. We believe that the decrease in the stock price has created a timely opportunity to invest in a stock that is trading below its market value. Management upholding their 2015 guidance for net income, coupled with BWLD's continued revenue growth and bottom line improvements of their EPS, we believe now is the time to invest in BLWD’s stock in order to take advantage of the market’s reaction to BWLD’s earnings report.

Diverse Management

One thing that really sticks out when looking at the overall structure of BWLD is the composition of their management. Out of the eight executives on the management team there are five women. This is something we don’t see very often when looking at large American corporations. For example, when looking at CEO’s of Fortune 500 Companies, not even 4% are female. This provides them with a great balance when looking at potential business decisions. The only thing that sticks out to us as a negative about the management team is that they only hold about 1.1% of total shares, but we don’t look at this as being too big of an issue. Everything else seems to show that the management team has set BWLD up for consistent growth throughout the future and we believe that this diversity gives them a leg up. The target market for BWLD is sports fans that are for the most part men. The majority of management not fit these criteria, however that doesn’t mean they don’t know what that audience likes. The men on the board can put forward ideas that they think the target market might like, but the women can bring another prospective to the table. Over time, this management team has tried so many different ways to grow their brand and it seems that they have finally found what works best for them. They know what they are good at and they are finally able to grow it at a scale that doesn’t appear to have a ceiling by focusing on 3 simple things: beer, food, and sports.


Buffalo Wild Wings Meal Segments

Currently, B-Dubs revenue stems mainly from Dinner, which is 49% of where sales generate. Lunch is 19%, Happy Hour is 16%, and Late-Night is 16% as well. On April 20, Buffalo Wild Wings announced a new Fast Break Lunch Menu in order to capture more of the lunch crowd that is looking for something on the quicker side. Buffalo Wild Wings research showed that most people only have 30 to 40 minutes from the time they arrive to the time they leave a restaurant during their lunch hour, which is what prompted them to create a quicker alternative for lunch in the casual dining segment. With the Fast Break Lunch Menu, Customers have the ability to “pick 2” options that provide a speedier and lighter meal than the traditional Buffalo Wild Wings dinner one would think of. With options such as Salads and BLTs, this new menu can cater to every spectrum of working man and women that don’t have a lot of time to spare on their lunch hour. This new initiative will help Buffalo Wild Wings capture more of the lunch market which will ultimately lead to a boost in revenues as lunch is dwarfed by dinners percentage of the revenue stream. Although this new menu is going to be helpful, efficiency and speed are their biggest challenges as this is what will be the driver of if this new lunch time initiative will be successful. Also, taking into consideration the staffing and overall capacity of the restaurants will be another concern. If the staffing and capacity can support the speedier lunch, being able to manage the popularity of the new menu will become difficult as they will have to be able to support a full buffalo wild wings restaurant while getting everyone in and out in under 40 minutes.

Chicken Wing Price Volatility

For a growing and popular restaurant, Buffalo Wild Wings, periodically monitoring and reacting to the change in cost of sales is the most significant thing to maintain its profit growth. As chicken wings is the most well-known and core serviced goods by Buffalo Wild Wings, including traditional wings and boneless wings, the sales of wings occupies 42% of company-owned restaurants sales revenue. Hence, the fluctuation of chicken wings price has significantly impact on the cost of sales and cash flow from company-owned restaurants. It is necessary to pay close attention to continually monitor the cost of chicken wings price. Based on the 10-K statistics, the 2012, 2013 and 2014 annual price per pound for chicken wings were 1.97, 1.76 and 1.55, respectively. The lowered cost of chicken wings did a lot of contribution to the decreasing of cost of sales as a percentage of restaurant sales to 29.1% in 2014 from 30.7% in 2013. However, since the fourth quarter, the cost of chicken wings increases rapidly as the graph shows. Due to demand, the price per pound for traditional chicken wings drastically increased 41% versus the prior year’s unusually low price. The increasing cost of chicken wings is the potential risk for Buffalo Wild Wings, which is with high probability to shrink the gross profit margin. Also, the other problem for the supply volume of chicken wings is the number of wings is always limited to the number of chickens, besides the fact that farmers can raise bigger chicken to yield more breast or thigh meat. the good news is Buffalo Wild Wings has already got into a modified pricing arrangement for two-thirds of its wing supply, which narrows the cost of the wing prices it will pay. The arrangement can also stabilize its gross profit margin and reduce the potential risk of cost of goods sold.


Valuation Methods

DCF Terminal Growth: Valuing a growth stock such as B-Dubs, we used a terminal growth rate of 3% and a discount rate of 12%. We used a terminal growth rate of 3% as we see a lot more potential in the top and bottom lines of B-Dubs, with their total possible capacity of stores left to be captured, Sales per Location increasing, and lowering Restaurant Operating Costs through efficiencies in their stores which will help continue their high paced growth for the foreseeable future. A 12% discount rate was applied due to the volatility of the stock price and the risk associated with a fluctuating stock price. With these parameters, a price target of $197.39 was achieved, 25.4% higher than the current price.

DCF EV/EBITDA Multiple: An EV/EBITDA Multiple of 6x and a discount rate of 12% was used to determine the DCF EV/EBITDA valuation of B-Dubs. Currently, B-Dubs’ EV/EBITDA multiple is at 13.74x and we believe the long term multiple will be 6x due to the consistent growth in Total Revenue that we see continuing in the next 5 years and their ability to decrease costs/store in Operating Expenses for restaurants, Occupancy Expense, SG&A Expense, and Pre-Opening Costs as they grow and experience the effects of economies of scale. With these parameters, we reached a price target of $192.14, 22.1% Higher than the current price.

Valuation Methods

P/E Valuation: The Competitors that we used for B-Dubs were: Panera, Chipotle, Darden Restaurant Group, Bloomin’ Brands, Brinker International, DinEquity, and Texas Roadhouse. These competitors were used as most of these restaurants are alternatives to Buffalo Wild Wings in the casual dining segment of the restaurant industry, excluding Panera and Chipotle which are in the fast casual segment but are still alternatives. With these comparable companies, the average P/E was 30.79, were B-Dubs P/E is 31.79. Using a Bear, Base, and Bull case, we weighted these according to our predictions of which scenario is most likely to happen in the coming year for B-Dubs. For the base case, we used B-Dubs projected 2015 EPS of 5.60 and a P/E of 31.79 to get a price of $177.87. The Bear case utilized an EPS of 5.32 and a P/E 30.20, giving a price of $160.53. The Bull case used an EPS of 6.07 and a P/E of 34.97 to reach a price of $212.29. Weighing the Bear, Base, and Bull case at 10%, 45%, and 45%, we reached a P/E Price Target of $191.62. We weighted the cases more towards a positive outlook as B-Dubs believes they will have net earnings growth of 18% for 2015, where we projected only a 14% earnings growth for 2015 while still giving us a EPS that supports a price target of over $190.

EV/EBITDA Valuation: Using the same peers as the P/E Valuations, the average EV/EBITDA multiple was 13.57x, where B-Dubs is currently at 13.74x. With B-Dubs projected 2015 EBITDA of $275 million, an Implied Enterprise Value of $3.37 Billion was reached. B-Dubs has not had any Long term debt outstanding in the past 5 years and we have no reason to believe they will take on any debt because of their positive Free Cash Flows and Cash of $112 Millions, a Implied Market Cap of $3.8 Billion and 19.2 millions shares outstanding created a target price of $200.16. With the spike of the cost of chicken, EBITDA will likely suffer from the higher cost of sales associated with the higher cost of chicken, but still gives a price target of $200 even with the major hit in a large cost driver.

Price Target & Recommendation

With the four price target established through the various methods, we triangulated these 4 methods at an equal weight of 25% each. We weighted them equally as they are all relatively close to one another, and this will more accurately derive a Price Target that is seen as a combination of methods as opposed to biasing one method over another. A Price Target of $195.33 was derived using this method, which undervalues the current stock price by 24.1%, which reaffirms our recommendation of a BUY. With all of the growth potential and with the recent drop in the stock price, Buffalo Wild Wings is relatively cheap as of right now and is expected to go up in the next year, if our conservative projections hold true and chicken prices do not escalate much more.

Sources1. BWLD 2014 10K 2. BWLD 15Q1 Conference Call 3. Capital IQ BWLD Financials 4. BWLD 15Q1 Earning Release 5. BWLD Investor Presentation 6. The Street ‘BWLD Stock Gain on Higher Analyst Ratings’


Pro Forma Summary

Revenue Build including Total Restaurants and Revenues Per Location

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