Wing, labor prices weigh on Buffalo Wild Wings earnings

by Erica Shaffer
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 BWW
Executives announces plan to cut up to $50 million in costs.
 
MINNEAPOLIS – Buffalo Wild Wings Inc. is facing headwinds beyond an activist investor agitating for leadership and structural change at the company. In a call with analysts, CEO Sally Smith cited rising labor costs and chicken wing price inflation as significant headwinds that impacted BWW during the first quarter.

 

Net income for the quarter ended March 26, 2017, was $21.5 million compared with $32.8 million in the first quarter of 2016. Adjusted earnings per diluted share were $1.44, compared to adjusted earnings per diluted share of $1.78 in the year-ago period.

Total revenue increased $26.5 million to $534.8 million, compared to $508.3 million in the first quarter last year. Operating income was $33.8 million, or 6.3 percent of total revenue, compared to $46.6 million and 9.2 percent in the prior year.

The company’s Half-Price Wing Tuesday promotion, which was created to capitalize on consumer demand for value, was challenged by higher prices for chicken wings coupled with lower yields as poultry producers are growing bigger, and fewer birds.

“The successful promotion of Half-Price Wing Tuesdays put pressure on our cost of sales as wing prices remained stubbornly high, and we’re experiencing a lower yield on wings as well,” Smith explained. “The increase in promotional mix, wing prices and yield had a $0.37 impact on EPS [earnings per share] from increased cost of sales.

“When Half-Price Wing Tuesdays was developed last summer, wings were $1.70, and external commodity experts were anticipating a 10 percent decline in wing prices in 2017. Today, wing prices remain elevated and we’re increasing our wing price forecast to include an 8 percent to 10 percent increase over 2016. As such, we’re aggressively evaluating other offers for Half-Price Wing Tuesdays that still offer a value to our fans that help protect our margin.”

Smith highlighted several initiatives underway at Buffalo Wild Wings that executives believe will help the company adapt market conditions that have challenged much of the restaurant industry.

“Delivery is an addressable opportunity for Buffalo Wild Wings as more consumers are eating at home,” Smith told analysts during an investor conference call April 27. “We are rapidly deploying third-party delivery in company-owned restaurants, growing where our partners offer delivery.

“We’re under development for two company-owned, small-format Buffalo Wild Wings, launching our pilot of a small-format restaurant designed to address the growing consumer need for speed and convenience. Both locations are expected to open in our third quarter.”

COO James Schmidt said takeout and delivery accounted for 18.2 percent of first-quarter revenues at company owned restaurants compared to 16.6 percent in the prior year. This translated to $2.7 million of company owned sales in the quarter.

“Delivery is incremental to the business as we've seen our takeout continue to grow in restaurants that offer delivery,” Schmidt told analysts. “By the end of the year, we anticipate having delivery available in 250 company-owned restaurants and could accelerate as our delivery partners expand their coverage areas.”

The company also is seeing results from investments in digital ordering capabilities made in 2016. “Digital ordering accounts for 22 percent of takeout sales over $20 million compared to 13 percent in first quarter 2016,” Schmidt noted. “The conversion rate on transactions in the digital platform is up 34 percent year-over-year. Enhancements we made enabled company and franchise restaurants to take digital orders on Super Bowl Sunday, resulting in our highest revenue day online of $1.5 million. We also streamlined the checkout process, adding up-selling capability and released an updated version of the app.”

Smith added that BWW will sell approximately 13 percent of company owned stores, an increase from the initial 10 percent the company previously announced earlier this year.

Company-owned restaurant sales for the first quarter advanced 5.2 percent to $509.2 million on the addition of 31 additional company-owned restaurants and a 0.5 percent increase in same-store sales at company-owned restaurants.

Fiscal fitness

Buffalo Wild Wings used a consulting firm to identify opportunities for cost savings and ways to improve restaurant-level margin and income from operations, and this review led BWW to undertake several initiatives.

“This month, we eliminated the guest experience captain position in 90 percent of our restaurants and shifted their core responsibilities to other team members in store,” said Alexander Ware, CFO, executive vice president and treasurer. “We are currently rolling out process and productivity improvements in daily restaurant opening activities as well as portioning procedures with a corresponding reduction in labor hours. Beginning in the second half of this year, a streamlined managerial structure and lower volume units and food waste improvements in items, including sides and condiments, will be rolled out.”

Next year, the company plans to introduce improvements to procurement and “value engineering” in food, beverage, restaurant maintenance and utilities in addition to new labor management tools and improved sales forecasting “…to tailor hours more tightly to demand on game and off,” Ware said.

Labor costs in the first quarter were 31.6 percent of restaurant sales, 80 basis points higher compared to the first quarter a year ago, he noted, due to higher health care and anticipated compensation increases.

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