In the first quarter, Buffalo Wild Wings [stckqut]BWLD[/stckqut] reported a 19.8% increase in sales. Both new store and existing stores sales were quite strong. Same-store-sales at company-owned restaurants were up 7% while franchised restaurants grew by 6%.
While sales were up nearly 20% however, earnings were only up 2.6%. Operating margins were down by 170 basis points to 9.9%. Labor costs rose by 100 basis points to 29.6% of total sales. Cost of sales meanwhile rose by 200 basis points points to 28.5% sales, driven by a 40% increase in chicken wing prices following strong demand. Wing prices for the company were $1.92/lb versus $1.36/lb a year ago.
However, there is reason to believe that margins will return. Management reaffirmed its EPS growth guidance for the year of 18%. One could argue that management had already accounted for the impact of chicken prices given their previous estimates typically targeted around 24% growth.
Additionally, BWLD struggled to manage its labor costs as they staffed all locations with Guest Experience Captains. If this proves to improve sales enough to warrant the cost, the company can reasonably expect to keep it. If it is still a cost drag, it wouldn’t be too difficult to scale back down to historical levels.
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While margin pressures are a primary factory to the current weak share price, these headwinds look temporary, or at least fixable. Now trading at a valuation not seen for some time, investors would be wise to consider BWLD for their portfolio.