Buffalo Wild Wings Downgraded

We recently downgraded our rating on Buffalo Wild Wings Inc. (BWLD) from Outperform to Neutral.

The rating downgrade is based on challenging economic conditions, resulting in a slowdown in consumer spending and fierce competition among casual dining restaurants.

Buffalo Wild Wings, engaged in the ownership, operation and franchise of restaurants, reported second quarter earnings of 50 cents per share, which surpassed the Zacks Consensus Estimate of 42 cents and soared 28% from 39 cents posted in the prior-year quarter. Total revenue grew 12.4% year over year to $145.7 million and also out performed the Zacks Consensus Estimate of $142.0 million.

Sales at company-operated restaurants rose 11.7% to $131.5 million and Franchise royalties and fees grew 19.5% to $14.2 million. Restaurant operating margin perked up 120 basis points (bps) to 18.1%.

We remain encouraged by the company’s long track record of success, a viable business strategy and a debt-free balance sheet. The company is also on track to achieve 13% unit and 20% net earnings growth in fiscal 2010, based on the improvement in comparable-store sales and favorable wing costs. Moreover, it provides ample growth opportunities, given its targets to open 1,000 restaurants in the United States by 2013 and 50 in Canada by 2015.

However, we remain cautious on the stock as competition among casual dining restaurants remains fierce with respect to price, service, location and concept in order to drive traffic. High discount rates applied to menu prices in order to combat the difficult economic conditions are resulting in price wars among competitors. Additionally, due to a high unemployment rate, consumers remain reluctant to shell out more money, and prefer to dine at home or spend less per meal. Moreover, the company’s system-wide restaurants are largely concentrated in areas such as Ohio, Indiana and Kentucky that have been hit hard by the housing downturn and economic slowdown. We believe this may dampen the company’s growth in the coming quarters.

BUFFALO WLD WNG (BWLD): Free Stock Analysis Report

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