Higher wing costs put bite on margins, and a lowered forecast hammers shares after hours.
Buffalo Wild Wings Inc. on Tuesday missed Wall Street's second-quarter profit estimates and lowered its earnings forecast as it grapples with soaring chicken wing prices.
The Golden Valley-based firm's stock was hammered in after-hours trading; it was at $66.65, down $12.25, or almost 16 percent.
The fast-growing chain featuring chicken wings and a sports bar motif has been one of the hotter U.S. restaurant stocks in recent years, though it's fallen from its $90-plus peak in March. At nearly $79 when the market closed Tuesday, it was still 18 percent higher than a year ago.
After the market closed Tuesday, Buffalo Wild Wings reported a 9.3 percent increase in earnings over a year ago to $11.7 million, or 62 cents per share. But analysts polled by Thomson Reuters were expecting 68 cents per share. Reported sales of $238.7 million also fell short of forecasts of $240.2 million, but grew 30 percent from a year ago.
CEO Sally Smith told analysts in a conference call that net earnings growth this year is expected to be between 15 percent and 20 percent. But that forecast has fallen from three months earlier, when it was 20 percent -- with wing costs to blame.
"The business isn't bad at all," said Larry Miller, a stock analyst with RBC Capital Markets. "From a top-line story, they are strong. Sales are growing nicely.... The question is costs. When are costs going to abate?"
Chicken wing costs have been gnawing at the company this year, and they directly ate into second-quarter profits.
Prices for traditional wings were $1.90 per pound in the second quarter, up from $1.02 during the same time a year ago, Mary Twinem, the company's chief financial officer, told analysts in a conference call. Wing costs are at their highest since 2003.
High wing prices have continued into the third quarter. "It's hard to know if wing prices are going to go up from where they are now, or if they are going to fall back," Twinem said.
To make matters worse, chicken suppliers are breeding larger birds, which reduces Buffalo Wild Wings' "wing per pound yield." In other words, the company buys wings in pounds and sells them in pieces. So, it's effectively getting fewer pieces per pound because each individual wing is bigger.
Buffalo Wild Wings says it's responding by increasing menu prices and implementing marketing strategies aimed at easing the bottom-line impact of higher wing prices. Price increases were instituted with a new menu this month; another price increase is on tap for September.
Buffalo Wild Wings' same-store sales, a key gauge that adjusts for recently opened restaurants, were up 5.3 percent over a year ago for company-owned restaurants and 5.5 percent for franchised outlets. Growth rates continue to outpace the casual dining industry generally, the company says.
Sales picked up in the third quarter. For the first four weeks of the quarter, same-store sales rose 6.8 percent at company locations and 7.3 percent at franchised outlets.
The company also talked Tuesday about the new Buffalo Wild Wings Bowl in Tempe, Ariz., which it announced Monday in conjunction with the Valley of the Sun Bowl Foundation.
That foundation's college football bowl game on Dec. 29 has been rechristened from the Insight.com Bowl. The game will pit the third selection from the Big 12 against the fourth pick from the Big Ten, after Bowl Championship Series selections. "It will provide widespread brand exposure," Smith told analysts.
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