Raymond James on Buffalo Wild Wings

8/12/2019 Raymond James on Buffalo Wild Wings

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U.S. ResearchPublished by Raymond James & Associates

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Buffalo Wild Wings, Inc. July 30, 2014

(BWLD-NASDAQ) Company CommentBryan C. Elliott, CFA, (404) 442-5856, [email protected]

Brian M. Vaccaro, CFA, (404) 442-5866, [email protected]

Restaurants _________________________________________________________

Solid 2Q, But Stock -10% After Hours on Weak Guidance; Lowering EPS; MP3

Recommendation: BWLD shares were down 10% in after-hours trading last night as

disappointing 2H guidance (margins due to unexpected labor and G&A cost pressure) more

than offset solid 2Q comp and EPS results. We reiterate our Market Performrating as we

expect the stock to remain range-bound as investors digest a more muted earnings growth

outlook and as the company laps more difficult sales comparisons in the quarters ahead. We

also believe the stock is fairly valued at current levels and reflects the companys continued

solid comp outperformance.

Event: 2Q EPS of $1.25 vs. $0.88 a year ago was ahead of our $1.21 estimate and the

$1.19 Street consensus. The beat was driven by better than expected comps and lower

food costs, partially offset by less than expected sales leverage and higher G&A costs.

Analysis: Total revenue of $366.0 million (+20%) was $6.7 million ahead of our model,

reflecting comp gains of 7.7% (vs. +6% RJ est.) and 6.5% (vs. +4.5% RJ est.) at company

and franchise units, respectively. Management estimates that the World Cup benefited

comps by ~100 bp, which was partially offset by the Easter calendar shift into 2Q (40 bp

headwind). Store level margin increased 210 bp y/y to 20.3% (vs. 19.8% RJ est.) primarily

due to lower food costs (210 bp) and occupancy leverage, partially offset by slight sales

de-leverage at the labor and other operating cost lines. G&A of $30.2 million was $1.3

million above our model, resulting in EBITDA of $64.1 million (vs. $62.7 million RJ est.).

Quarter-to-date comps in July were strong at +8.2%, but included a 330 bp benefit from

the World Cup, thus the underlying trend of +5% is solid but less robust than 1H trends as

the company begins to lap tougher comparisons. Managementsraised 2014 EPS growth

guidance (will exceed 25%, could reach 30%) implies a material growth slowdown to~10% in 2H14 (vs. 1H14 +57%). Said guidance assumes meaningful labor cost de-leverage

in 2H14 (guest captains, state minimum wage increases) and higher than expected G&A

costs (infrastructure investments, incentive comp accruals).

Estimates: We are lowering our 2014 EPS estimate by $0.25 to $5.00 and our 2015

estimate by a like amount to $5.90. Our new estimates reflect more conservative labor

and G&A cost assumptions, while our sales assumptions remain largely unchanged.

Valuation: Based on our new 2015 estimates and an after-hours price of $150, BWLD trades

at a P/E of 25.4x and an EV/EBITDA multiple of 9.4x. Both metrics are in line with stocks three

year historical averages.

GAAP Q1 Q2 Q3 Q4 Full Revenues

EPS Mar Jun Sep Dec Year (mil.)

2013A $0.87 $0.88 $0.95 $1.10 $3.79 $1,267Old 2014E 1.49A 1.21 1.18 1.37 5.25 1,486

New 2014E 1.49A 1.25A 1.06 1.20 5.00 1,505

Old 2015E 1.69 1.39 1.41 1.66 6.15 1,684

New 2015E 1.63 1.51 1.31 1.45 5.90 1,707

Rows may not add due to rounding.

Rating _________________________________

Market Perform 3

Current and Target Price __________________Current Price (Jul-29-14 6:00 p.m.) $167.15

Target Price: NM

52-Week Range $167.64 - $96.83

Suitability Aggressive Growth

Market Data ____________________________

Shares Out. (mil.) 19.0

Market Cap. (mil.) $3,176

Avg. Daily Vol. (10 day) 482,889

Dividend/Yield $0.00/0.0%

Book Value (Jun-14) $27.76

ROE 19%

LT Debt (mil.)/% Cap. $0/0%

Earnings & Valuation Metrics ______________

2013A 2014E 2015E

P/E Ratios (GAAP)

44.1x 33.4x 28.3x

Operating Margins

8.0% 9.5% 9.6%

EBITDA (mil.)

Old $201 $263 $300

New $201 $258 $293

Company Description ____________________Buffalo Wild Wings, Inc., headquartered in

Minneapolis, Minnesota, owns, operates, andfranchises the Buffalo Wild Wings sports bar concept

offering Buffalo-style chicken wings accompanied by a

variety of inventive sauces, as well as hamburgers,

sandwiches, salads, and other finger foods. About

two-thirds of sales are wings and beer. There are

currently just over 1,000 units on a system-wide basis,

with franchisees owning ~56% of the chain.


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Raymond James U.S. Research


International Headquarters: The Raymond James Financial Center | 880 Carillon Parkway | St. Petersburg, Florida 33716 | 800-248-8863 3

BWLD Condensed Cash Flow Statement ($000's) FY-2011 FY-2012 FY-2013 FY-2014 (E) FY-2015 (E)

Net Income From Operations 50,426$ 57,275$ 71,554$ 95,456$ 112,305$

Depreciation 49,003 64,154 79,881 92,271 104,773

Amortization (Fr. Rights) 910 3,308 5,097 4,516 4,100

Restaurant Closures and Impairment Costs 1,680 2,883 3,253 3,798 3,100

Stock-Based Compensation 11,383 8,119 11,496 15,115 17,382

Other 11,986 (664) (2,433) 3,750 3,750

Gross Cash Flow 125,388 135,075 168,848 214,905 245,410

Change in NWC 22,872 10,113 10,512 12,500 12,500

Operating Cash Flow 148,260 145,188 179,360 227,405 257,910

Capital Expenditures (130,127) (130,542) (138,735) (146,000) (145,000)

Free Cash Flow 18,133 14,646 40,625 81,405 112,910

Purchase of Marketable Securities (98,644) (132,140) - (11,996) -

Sale of Marketable Securities 115,833 163,509 3,282 - -

Other, Net (33,744) (43,580) (10,288) (8,000) -

Issuance of Common Stock 1,709 2,783 2,514 2,000 2,000

Tax Payment for Restricted Stock (2,481) (8,522) (4,946) (7,474) (3,500)

Excess Tax Benefit from Exercise of Stock Options 4,462 4,151 5,471 750 750

Net Change in Cash 5,268 847 36,658 56,685 112,160

Ending Cash 20,530 21,340 57,502 113,850 126,011

Ending ST Investments 39,956 9,579 7,584 20,149 20,149Ending Cash and ST Investments 60,486 30,919 65,086 133,999 146,160

Current Market Cap 2,847,150

Net Debt (101,051)

Current Enterprise Value 2,746,099

EBITDA 105,309 200,597 258,102 293,004

EV/EBITDA @ $150.00 13.7x 10.6x 9.4x

FY:2012 has an extra accounting week which will add an estimated $7.7 million to EBITDA

Source: Company Filings and Raymond James estimates


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BUFFALO WILD WINGS, INC. Bryan C. E ll iot t, CFA Br ian M. Vaccaro, CFA 7 /29/2014Earnings Model - ($ Thousands) (404) 442-5856 (404) 442-5866

Q1-13 Q2-13 Q3-13 Q4-13 Q1-14 Q2-14 Q3-14 (E) Q4-14 (E) Q1-15 (E) Q2-15 (E) Q3-15 (E) Q4-15 (E)

FY-2012 31-M ar -13 30-Jun- 13 29-Se p-13 29- De c-13 FY-2013 30-M ar- 14 29-Jun-14 28-Se p-14 28-De c-14 FY-2014 (E) 29-M ar -15 28- Jun-15 27-Se p-15 27-De c-15 FY- 2015 (E)

53 13 13 13 13 52 13 13 13 13 52 13 13 13 13 52

Company Restaurant Sales 963,963 284,425 285,403 295,693 319,830 1,185,351 344,945 343,141 349,431 373,190 1,410,707 396,881 389,351 392,813 421,741 1,600,787

Franchise Royalties and Fees 76,567 19,939 19,604 20,108 21,717 81,368 22,910 22,853 23,751 25,062 94,576 26,265 25,588 26,262 27,962 106,078

Total Revenues 1,040,530 304,364 305,007 315,801 341,547 1,266,719 367,855 365,994 373,182 398,253 1,505,283 423,147 414,940 419,075 449,703 1,706,865

Cost of Sales 303,653 93,091 86,630 88,689 95,345 363,755 97,487 96,837 99,565 107,520 401,410 113,157 109,878 111,927 121,508 456,470

Labor Expenses 289,167 85,831 88,929 89,740 95,802 360,302 105,334 107,432 110,941 117,383 441,090 124,170 122,873 124,714 132,655 504,412

Operating Expense (incl. advert.) 141,417 41,105 41,212 44,668 47,353 174,338 49,038 50,017 52,786 55,067 206,907 56,223 56,363 59,143 62,020 233,749

Occupancy Expense 54,147 16,126 16,865 17,276 18,127 68,394 18,969 19,283 19,892 20,778 78,922 21,825 21,880 22,361 23,481 89,547

Store Level Cash Flow 175,579 48,272 51,767 55,320 63,203 218,562 74,117 69,572 66,247 72,442 282,378 81,506 78,357 74,668 82,077 316,608

General & Admin (Incl. Options and Rest. Stock) 84,149 21,297 23,601 24,664 26,620 96,182 28,156 30,223 30,825 31,438 120,642 31,965 32,813 33,987 35,050 133,814

Total Stock Based Comp. (in G&A) 8,119 870 3,144 3,276 4,206 11,496 3,615 4,050 3,700 3,750 15,115 4,157 4,658 4,255 4,313 17,382

Cash G&A, excluding stock based comp. 76,030 20,427 20,457 21,388 22,414 84,686 24,541 26,173 27,125 27,688 105,527 27,808 28,155 29,732 30,737 116,432

Pre-Opening Costs 14,630 4,271 2,420 2,991 4,965 14,647 2,578 2,197 3,250 5,300 13,325 3,500 1,750 2,400 5,600 13,250

EBITDA (ex-all stock based comp.) 161,486 43,513 48,494 51,049 57,541 200,597 69,908 64,055 59,623 64,516 258,102 76,464 74,041 68,798 73,702 293,004

Restaurant Closures and Impairments 3,291 571 229 902 1,560 3,262 787 1,211 800 1,000 3,798 700 600 800 1,000 3,100

Depreciation and Amortization 67,462 20,143 21,084 21,587 22,164 84,978 22,832 23,746 24,763 25,446 96,787 26,052 26,714 27,599 28,508 108,873

Operating Income (Pre Non-Cash Stock Com p.) 90,733 22,799 27,181 28,560 33,817 112,357 46,289 39,098 34,060 38,070 157,518 49,711 46,726 40,399 44,194 181,031

Non-Cash Stock Based Comp. 8,119 870 3,144 3,276 4,206 11,496 3,615 4,050 3,700 3,750 15,115 4,157 4,658 4,255 4,313 17,382

Operating Income (Post Non-Cas h Stock Comp.) 82,614 21,929 24,037 25,284 29,611 100,861 42,674 35,048 30,360 34,320 142,403 45,554 42,069 36,144 39,882 163,649

Interest Expense - - - - - - - - - - - - - - - -

Interest and other Exp (Income) (754) (345) 84 (383) (30) (674) 127 (235) (75) (75) (258) (75) (75) (75) (75) (300)

Pre-Tax Income 83,368 22,274 23,953 25,667 29,641 101,535 42,547 35,283 30,435 34,395 142,661 45,629 42,144 36,219 39,957 163,949

Income Tax Expense 26,093 5,895 7,464 7,796 8,826 29,981 14,231 11,580 10,044 11,351 47,205 14,373 13,275 11,409 12,586 51,644

Net Income 57,275 16,379 16,489 17,871 20,815 71,554 28,316 23,703 20,392 23,045 95,456 31,256 28,869 24,810 27,370 112,305

Diluted Shares Outstanding 18,705 18,803 18,827 18,889 18,965 18,872 18,953 18,981 19,158 19,208 19,075 19,183 19,086 18,993 18,904 19,041

Earnings Per Share (Post-Option) 3.06$ 0.87$ 0.88$ 0.95$ 1.10$ 3.79$ 1.49$ 1.25$ 1.06$ 1.20$ 5.00$ 1.63$ 1.51$ 1.31$ 1.45$ 5.90$

Margin Analysis

Cost of Sales (as % of Rest. Sales) 31.5% 32.7% 30.4% 30.0% 29.8% 30.7% 28.3% 28.2% 28.5% 28.8% 28.5% 28.5% 28.2% 28.5% 28.8% 28.5%

Labor Expenses (as % of Rest. Sales) 30.0% 30.2% 31.2% 30.3% 30.0% 30.4% 30.5% 31.3% 31.7% 31.5% 31.3% 31.3% 31.6% 31.7% 31.5% 31.5%

Operating Expense (as % of Rest. Sales) 14.7% 14.5% 14.4% 15.1% 14.8% 14.7% 14.2% 14.6% 15.1% 14.8% 14.7% 14.2% 14.5% 15.1% 14.7% 14.6%

Occupancy Expense (as % of Rest. Sales) 5.6% 5.7% 5.9% 5.8% 5.7% 5.8% 5.5% 5.6% 5.7% 5.6% 5.6% 5.5% 5.6% 5.7% 5.6% 5.6%

Restaurant Cash Flow Margin 18.2% 17.0% 18.1% 18.7% 19.8% 18.4% 21.5% 20.3% 19.0% 19.4% 20.0% 20.5% 20.1% 19.0% 19.5% 19.8%

General & Admin (Incl. Options and Res t. Stock) 8.1% 7.0% 7.7% 7.8% 7.8% 7.6% 7.7% 8.3% 8.3% 7.9% 8.0% 7.6% 7.9% 8.1% 7.8% 7.8%

Pre-Opening Costs (% of Total Rev.) 1.4% 1.4% 0.8% 0.9% 1.5% 1.2% 0.7% 0.6% 0.9% 1.3% 0.9% 0.8% 0.4% 0.6% 1.2% 0.8%

EBITDA (ex-all stock based comp.) 15.5% 14.3% 15.9% 16.2% 16.8% 15.8% 19.0% 17.5% 16.0% 16.2% 17.1% 18.1% 17.8% 16.4% 16.4% 17.2%

Depreciation and Amortization (% of Total Rev.) 6.5% 6.6% 6.9% 6.8% 6.5% 6.7% 6.2% 6.5% 6.6% 6.4% 6.4% 6.2% 6.4% 6.6% 6.3% 6.4%

EBIT Margin (post-stock based comp.) 7.9% 7.2% 7.9% 8.0% 8.7% 8.0% 11.6% 9.6% 8.1% 8.6% 9.5% 10.8% 10.1% 8.6% 8.9% 9.6%

Pre-Tax Income 8.0% 7.3% 7.9% 8.1% 8.7% 8.0% 11.6% 9.6% 8.2% 8.6% 9.5% 10.8% 10.2% 8.6% 8.9% 9.6%

Effective Tax Rate 31.3% 26.5% 31.2% 30.4% 29.8% 29.5% 33.4% 32.8% 33.0% 33.0% 33.1% 31.5% 31.5% 31.5% 31.5% 31.5%

Net Income from Operations 5.5% 5.4% 5.4% 5.7% 6.1% 5.6% 7.7% 6.5% 5.5% 5.8% 6.3% 7.4% 7.0% 5.9% 6.1% 6.6%

Year/Year Margin Changes (in basis points)

Cost of Sales (as % of Rest. Sales) 316 167 (129) (120) (218) (81) (447) (213) (150) (100) (223) 25 0 0 0 -

Labor Expenses (as % of Rest. Sales) (6) 79 94 23 (28) 40 36 15 140 150 87 75 25 0 0 24

Operating Expense (incl. advert.) (as % of Res t. Sales) (61) 33 (23) (5) 7 4 (24) 14 0 (5) (4) (5) (10) (5) (5) (6)

Occupancy Expense (as % of Rest. Sales) (52) 16 (3) (5) 43 15 (17) (29) (15) (10) (18) 0 0 0 0 (0)Restaurant Cash Flow Margin (197) (296) 60 108 195 22 451 214 25 (35) 158 (95) (15) 5 5 (24)

General & Admin (Incl. Options and Res t. Stock) (118) (74) (105) (103) 57 (49) 66 52 45 10 42 (10) (35) (15) (10) (17)

bps due to stock based comp (67) (20) (9) 11 60 13 70 8 (5) (29) 10 (0) 2 2 2 1

Cash G&A, excluding stock based comp. (51) (53) (95) (114) (3) (62) (4) 44 50 39 32 (10) (37) (17) (12) (19)

Pre-Opening Costs (% of Total Rev.) (45) 37 15 (89) (51) (25) (70) (19) (8) (12) (27) 13 (18) (30) (9) (11)

EBITDA (ex-all stock based comp.) (182) (335) 39 213 187 32 471 160 (19) (65) 131 (93) 34 44 19 2

Depreciation and Amortization (% of Total Rev.) 12 43 17 2 23 23 (41) (42) (20) (10) (28) (5) (5) (5) (5) (5)

EBIT Margin (134) (348) 49 203 97 2 440 170 13 (5) 150 (84) 56 49 25 13

Pre-Tax Income (128) (353) 51 198 97 0 425 179 3 (4) 146 (78) 52 49 25 13

Net Income (92) (188) 52 132 61 14 232 107 (19) (31) 69 (31) 48 46 30 24

Growth Rates

Total Revenues 32.6% 21.2% 27.8% 27.9% 12.4% 21.7% 20.9% 20.0% 18.2% 16.6% 18.8% 15.0% 13.4% 12.3% 12.9% 13.4%

Store Level Cash Flow 21.3% 4.3% 33.9% 37.4% 25.6% 24.5% 53.5% 34.4% 19.8% 14.6% 29.2% 10.0% 12.6% 12.7% 13.3% 12.1%

EBITDA (ex-all stock based comp.) 18.7% -1.8% 31.0% 47.3% 26.5% 24.2% 60.7% 32.1% 16.8% 12.1% 28.7% 9.4% 15.6% 15.4% 14.2% 13.5%

Operating Income 7.8% -18.7% 33.7% 67.6% 33.7% 23.8% 103.0% 43.8% 19.3% 12.6% 40.2% 7.4% 19.5% 18.6% 16.1% 14.9%

Net Income 13.6% -10.2% 41.4% 66.9% 24.9% 24.9% 72.9% 43.8% 14.1% 10.7% 33.4% 10.4% 21.8% 21.7% 18.8% 17.7%

Store Count (End of Period)

Company Stores 381 397 407 415 434 434 443 449 459 476 476 487 492 499 517 517

Franchise Stores 510 514 525 535 559 559 569 579 591 604 604 613 623 633 649 649

Same-Store Sales

Company Stores 6.6% 1.4% 3.8% 4.8% 5.2% 3.9% 6.6% 7.7% 6.0% 5.0% 6.3% 4.0% 3.0% 3.0% 4.0% 3.5%

Franchise Stores 6.5% 2.2% 4.1% 3.9% 3.1% 3.3% 5.0% 6.5% 5.5% 5.0% 5.5% 4.0% 3.0% 3.0% 4.0% 3.5%


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and should be sold.

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Suitability Categories (SR)

Total Return (TR) Lower risk equities possessing dividend yields above that of the S&P 500 and greater stability of principal.

Growth (G) Low to average risk equities with sound financials, more consistent earnings growth, at least a small dividend, and the potential

for long-term price appreciation.

Aggressive Growth (AG)Medium or higher risk equities of companies in fast growing and competitive industries, with less predictable earnings

and acceptable, but possibly more leveraged balance sheets.

High Risk (HR) Companies with less predictable earnings (or losses), rapidly changing market dynamics, financial and competitive issues,

higher price volatility (beta), and risk of principal.

Venture Risk (VR) Companies with a short or unprofitable operating history, limited or less predictable revenues, very high risk associated

with success, and a substantial risk of principal.


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Raymond James Relationship Disclosures

Raymond James expects to receive or intends to seek compensation for investment banking services from the subject companies in the

next three months.

Company Name Disclosure

Buffalo Wild Wings,

Inc.

Raymond James & Associates makes a market in shares of BWLD.

Stock Charts, Target Prices, and Valuation Methodologies

Valuation Methodology: The Raymond James methodology for assigning ratings and target prices includes a number of qualitative and

quantitative factors including an assessment of industry size, structure, business trends and overall attractiveness; management effectiveness;

competition; visibility; financial condition, and expected total return, among other factors. These factors are subject to change depending on

overall economic conditions or industry- or company-specific occurrences. Only stocks rated Strong Buy (SB1) or Outperform (MO2) have

target prices and thus valuation methodologies.

Target Prices:The information below indicates our target price and rating changes for BWLD stock over the past three years.

Risk Factors

General Risk Factors:Following are some general risk factors that pertain to the projected target prices included on Raymond James research:

(1) Industry fundamentals with respect to customer demand or product / service pricing could change and adversely impact expected

revenues and earnings; (2) Issues relating to major competitors or market shares or new product expectations could change investor attitudes

toward the sector or this stock; (3) Unforeseen developments with respect to the management, financial condition or accounting policies or

practices could alter the prospective valuation; or (4) External factors that affect the U.S. economy, interest rates, the U.S. dollar or major

segments of the economy could alter investor confidence and investment prospects. International investments involve additional risks such as

currency fluctuations, differing financial accounting standards, and possible political and economic instability.

Specific Investment Risks Related to the Industry or Issuer

Restaurant Industry Risk Factors

Risks include 1) a decline in the ability or propensity for consumers to purchase meals outside the home; 2) a jump in raw food prices or

energy prices; and 3) a drop in market P/E levels.

Additional Risk and Disclosure information, as well as more information on the Raymond James rating system and suitability

categories, is available atrjcapitalmarkets.com/Disclosures/index.Copies of research or Raymond James summary policies relating to

research analyst independence can be obtained by contacting any Raymond James & Associates or Raymond James Financial Services

office (please seeraymondjames.comfor office locations) or by calling 727-567-1000, toll free 800-237-5643 or sending a written

request to the Equity Research Library, Raymond James & Associates, Inc., Tower 3, 6th

Floor, 880 Carillon Parkway, St. Petersburg, FL

33716.
http://www.rjcapitalmarkets.com/Disclosures/indexhttp://www.rjcapitalmarkets.com/Disclosures/indexhttp://www.rjcapitalmarkets.com/Disclosures/indexhttp://www.raymondjames.com/http://www.raymondjames.com/http://www.raymondjames.com/http://www.raymondjames.com/http://www.rjcapitalmarkets.com/Disclosures/index


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Raymond James on Buffalo Wild Wings