Buffalo Wild Wings is a Rough Diamond for Investors

One of my favorite foods is Buffalo wings (T.G.I. Friday’s makes some of the very best, in my never humble opinion; its largest franchisee is the Main Street Restaurant Group, Inc. (MAIN) and should be checked out by anyone in an investing state of mind). So one can imagine that I was delighted to discover a growing Buffalo wing specialist.

Buffalo Wild Wings, Inc. (BUFFALO WLD WING) of Minneapolis, Minnesota, owns and franchises the Buffalo Wild Wings Grill and Bar restaurants. The company boasts 13 signature wing-sauces and over 300 restaurants (and counting) operating in 30 states. On June 17th, 2004, the company announced that it is awarding restricted stock units (RSUs) in lieu of stock options as incentives to greater performance for about 50 of its management-level employees. This is not at all a typical thing within this industry. President and CEO Sally Smith told the press, “the Board of Directors and management believe that they are an effective tool in aligning compensation with the long-term financial performance of the Company, which is in the best interest of the stockholders.”

It was this action that caught my investing eyes. I said, “Eureka!” and ran naked out of the shower.

RSU grants and awards, if you don’t already know, are agreements to issue underlying stock at the time of vest. No shares are delivered until the employee satisfies the vesting schedule. What’s so good about them? The advantages gained by companies include: eliminating 83(b) elections and the administrative & communications burdens associated with them; facilitating the payment of taxes at vesting with an automatic withholding of shares; and postponing shareholder dilution until vest. Such a money-making giant as Microsoft (MSFT) has used them to its advantage.

I feel that knowing this makes it fairly easy to see that the bottom line effect (assuming that the recipients are not idiots) of RSU awards is to drive the company toward greater and more sustained productivity while reducing internal red tape and its associated costs. Translation: make the company more profitable. Investors would be wise to consider this aspect of the company’s management and organization, especially when seeking something to add to their long-term growth portfolios.

Buffalo Wild Wings is now one of the ten fastest growing restaurant chains in the U.S. Recently it signed a deal with New York-based investment company Four M Capital, Inc., for the opening of another 36 units, including 11 in Florida which represents the company’s doubling of its position there. The first new opening is slated for the winter of 2005 (I was very pleased to see that there will be one in Bergen County, NJ; I must try this place!).

To quote Sally Smith again, “This represents a very important step for our company and the Buffalo Wild Wings brandâÂ?¦It is particularly gratifying that after having had tremendous success investing in other industries, Four M Capital viewed Buffalo Wild Wings as the best investment opportunity when it decided to enter the restaurant business.”

When the restaurant chain released its numbers for the first quarter of 2005, it showed: total revenue increased 26.4% to $50.8 million; company-owned restaurant sales grew 25.5% to $45.1 million; first quarter same store sales increased 6.1% at company-owned restaurants and 3.2% at franchised restaurants; and, earnings per diluted share increased 3.7% to $0.28.

However, these numbers did not come without disappointing some.

When Buffalo Wild Wings first made its impression on me, in August of 2004, it was trading above $31 per share. As of July 1, 2005, it trades at $30.37 per share (its 52-week high is $41.70). In addition, that $45.1million in sales fell short of the company’s own prognostications of $51-52 million; and even worse, the same stores sales increases, especially for the franchises, were a downer. The company has made promises of 20-25% annual same store sales growth.

Buffalo Wild Wings does admit that it has “experienced some inefficiencies” recently, particularly in relation to the cost of labor and marketing expenses. But, this is the kind of thing that is to be expected during expansion, and is at once the kind of thing that can hit the restaurant industry particularly hard. One thing that the company is doing to remedy these “inefficiencies” is studying which of the three formats that it now uses for its restaurant arrangement and architecture to see which one yields the best results in attracting patrons. In addition, the company has developed a new product called Naked Tenders to go along with a just-released new Honey BBQ Sauce.

Remember: this is a stock for long-term growth, nor for income investing and not for crazy day-traders. Buffalo Wild Wings shall take off, says me. What it is doing right now is testing out the aerodynamics of its wings. The market responds by putting the company’s stock on sale. What should one do when a quality stock is on sale? Come buy.

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