Buffalo Wild Wings Is Not Likely to Take Flight

Forget the hot sauce. Buffalo Wild Wings (BWLD) is in hot water and unlikely to get out soon.

Shares of the restaurant chain had a poor run in 2015 and have declined 9% so far this year. Misses on several fronts, falling sales and an overconfident management led by CEO Sally Smith are to blame.

From a fundamental perspective, Buffalo Wild Wings is not in good shape. It lacks key differentiators and competitive advantages. Avoid this stock till it shows sustainable growth in comparable-store sales and margins. Buffalo Wild Wings shares dropped 1.4% in Friday trading. 

In the third quarter, Buffalo Wild Wings said that same-store sales declined 1.8% year over year. Average weekly sales at company-owned stores dropped 3.5%.

Clearly, the unfriendly business environment is hitting restaurants with low brand power such as Buffalo Wild Wings, Sonic, and Brinker International.

To be sure, its strategy to offer half-priced wings and become a bigger force in the fast-casual space is admirable. And it achieved impressive annual revenue growth from 2006 through 2015, from $278 million to $1.81 billion.

In addition, analysts continue to expect good things from Buffalo Wild Wings. They project it will average nearly 22% annual EPS growth for the next five years, which is a faster pace than the 17% average annual growth of the past five years. This is one of the highest earnings growth prospects around. Only such chains as Kona Grill, Habit Restaurants and fast-casual competitor Wingstop can match it in this regard.

But keep in mind that those are estimates, and they're a five-year period. A lot can change in that time.

Buffalo Wild Wings is losing luster, particularly as the NFL sees a decline in viewership.

Profitability is weak at the company. Free cash flow is sketchy and dividends, nonexistent. In other words, the margin of safety while investing in Buffalo Wild Wings stock is thin.

It is unsurprising that the company has become a target of investor activism or that it has shaken up its board with the appointment of three new independent directors. Marcato Capital Management has built a 5.1% position in the company and is pressuring Buffalo Wild Wings to make changes.

Marcato wants the company to focus on margins. To achieve a 20% restaurant-level margin by the end of 2018, Buffalo Wild Wings will have to cut operating expenses.

Perhaps the company will rebound.

Still, at least for the short term, Buffalo Wild Wings is "a trade" on cheap valuations. Other restaurant stories, including Panera Bread, Domino's, McDonald's and Starbucks, are better.

Avoid this stock!

Panera Bread and Starbucks are holdings in Jim Cramer's Action Alerts PLUS Charitable Trust Portfolio. See how Cramer rates the stocks here. Want to be alerted before Cramer buys or sells PNRA or SBUX? Learn more now.

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The author is an independent contributor who at the time of publication owned none of the stocks mentioned.

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