How Buffalo Wild Wings is at The Mercy of McDonald's

NEW YORK (TheStreet) - Consumers love chicken wings. Add in beer and watching football, basketball or any sporting event, and it's a combination that Buffalo Wild Wings (BWLD) has created its restaurant concept on.

As the restaurant sector begins to polarize -- fast-casual and fine dining eateries are winning, while quick-service and full-service casual eateries struggle, Buffalo Wild Wings seems to be bucking the trend. Last night, the Minneapolis-based company reported above-consensus earnings of $1.10 a share for the fourth quarter. The company also surpassed expectations for same-store sales growth for both its company-owned and franchised locations. Still the 1000-location casual eatery fell short of expectations for overall revenue.

Shares were plunging 9.7% to $127.07 on Wednesday on concerns that perhaps growth is slowing at the wing chain, particularly in new units. Recently surpassing its one thousandth location, B-Dubs, as its known, reaffirmed its earnings growth expectations of 20% for 2014.

"We remain Neutral rated on BWLD shares, as we see several current positives, but limited visibility towards future growth," Goldman Sachs analyst Michael Kelter wrote in a note to clients. "To the upside: (1) SSS remain firmly in the mid-single digits despite the impact of weather. (2) The installation of tabletop tablets in 2H14 could provide a boost to future sales. (3) Wing costs are down significantly and may aid restaurant margins by 150-200bp. All told, we are solidly above BWLD's guidance and consensus forecasting 33% EPS growth in 2014.

"This said, BWLD is at 1,000 units, and guidance of a 1,700 total opportunity suggests it will be 80% to full maturity in just 3-5 years," he penned. "It is unclear if second concepts or international expansion can ramp quickly enough to offset the impending P&L impacts of this dynamic. As is, BWLD's new unit productivity, while robust, is already starting to decelerate. We generally see this as a cautionary sign with respect to growth concepts."

Miller Tabak analyst Stephen Anderson also rates the company at "hold" but has a slightly more optimistic view of the company.

"By nearly all measures, it was a solid quarter from an earnings perspective, though the company did not deliver a blockbuster sales quarter that high-growth peer Chipotle Mexican Grill (CMG, $540.59, Hold) delivered last week. BWLD reiterated its 2014 goal for EPS growth, but we think the combination of mid-single-digit comp growth, still-solid unit growth (about 10% y/y), sharply lower average wing costs, and reduced operating costs as a percentage of sales will result in EPS growth above guidance for 2014," Anderson wrote.

"Moreover, we think as new unit development shifts increasingly toward franchise development, we model an increasing stream of franchise fees will support consistently positive free cash flow -- and potentially share buybacks -- beginning in 2014. Given the near doubling in the share price in 2013, as well as expectations for another strong year in 2014, however, we see limited upside for BWLD shares, and thus would await a pullback," he wrote.

TheStreet spoke with CEO Sally Smith on Tuesday evening. An edited version of the transcript is below.

Buffalo Wild Wings CEO Sally Smith

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