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By: Cameron Karlen 09/24/2015 All info as of 04/22/2015
Buffalo Wild Wings (BWLD)
¨ Recommendation: BUY
¨ Price Target: $220
¨ Current Price: $175.05 2
• Well positioned for strong global growth
• Clean balance sheet • Stable margins
BUY
• Company uses several methods to nullify the volatility
• Margins have stayed stable
Volatility in Chicken Prices
• 14.1% CAGR since 2001 • Expecting 400 international stores
by 2024
Growth Strategy
• Rose between 2013 and 2014 • Forming strategic partnerships to
increase customer traffic
Same-Store Sales
• Undervalued based on DCF analysis and comparables Valuation
• Lack of growth • Extreme volatility in price of chicken
wings • Decrease in pricing power
Risk
2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014
Growth 2013 2014 2015E 2016E Sales $1,266,719 $1,516,223 $1,824,016 $2,230,772
Growth 21.74% 19.70% 20.30% 22.30% EPS $3.81 $4.98 $6.18 $7.36
Growth 23.70% 30.71% 24.10% 19.09% Ra2o ROE 16.9% 18.1% 18.4% 18.0% ROIC 14.6% 16.1% 16.7% 16.6% FCFF/Share $0.86 $1.23 $1.33 $2.00 Debt/Assets $-‐ $-‐ $-‐ $-‐ Op asset/Op liability 1.05 1.25 1.29 1.36 Net Profit Margin 5.6% 6.2% 6.4% 6.3%
Business Overview
¨ Casual sit down restaurant featuring chicken wings, 16 signature sauces and 5 seasonings ¤ State-of-the-art sports viewing complex, with over 30 flat screen TV’s and every game
package to give fans the ultimate game day experience
¤ Two revenue streams: ¤ Company owned stores (491)*
¤ Royalties from franchised stores (591)**
¤ 5 international restaurants ¤ More to come in 2015
¤ Invests in two other concepts besides Buffalo Wild Wings: ¤ Fast/Casual pizza restaurant, PizzaRev
¤ Fast/casual taco restaurant, Rusty Taco, Inc.
¤ Market Cap of $3.823 B
3
Business Driver 1 Driver 2 Driver 3 Financials Comps Relative
Valuation DCF Risks Summary
*Includes 2 PizzaRevs and 2 Rusty Tacos ** Includes 7 Rusty Tacos
Figure 1: Makeup of Sales
93%
7%
Restaurant Sales Franchise Royalties and Fees Source: Company Reports, Karlen
Business Driver 1 Driver 2 Driver 3 Financials Comps Relative
Valuation DCF Risks Summary
Driver 1: Volatility in Price of Chicken 4
¨ Unstable wholesale chicken prices ¤ Price of wings = 0.8053 correlation
coefficient ¤ Serve wings by weight instead of
quantity ¤ 3% price increase in November of
2014
Figure 2: Avg. Quarterly Wholesale Price of Chicken Wings
Figure 1: Correlation Between Costs and Price of Wings
Source: Company Reports, Karlen
Source: Bloomberg
Source: Company Reports, Karlen
0
0.5
1
1.5
2
2.5
Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 ($
/lbs
)
. 2010 2011 2013 2014 2012
Year Op. Costs as a Percent of Sales
Annual Avg. Wholesale Price
of Wings 2010 73.91% $1.58 2011 72.99% $1.21 2012 75.77% $1.97 2013 76.32% $1.76 2014 75.62% $1.55
R=0.8053
Driver 2: Store Growth
¨ Ultimate goal of opening 3,000 stores globally
5
¤ Went public in 2003 with 245 total stores
¤ Has since grown to 1,082 total stores
¤ 5 of these are international ¤ Expecting to open a total of 400
international stores by 2024
¤ Management believes they can operate 1,700 stores domestically and 1,300 stores internationally before being saturated
¤ Management has never paid a dividend
¤ All profits are reinvested to fund growth
Source: Company reports, Karlen
158 199
245 306
370 429
493 560
652
732 817
891
993
1082
0
200
400
600
800
1000
1200
2001 '02 '03 '04 '05 '06 '07 '08 '09 '10 '11 '12 '13 '14
Num
ber
of S
tore
s
Franchise Company Owned
Figure 3: Store Growth from 2001-2014
Business Driver 1 Driver 2 Driver 3 Financials Comps Relative
Valuation DCF Risks Summary
Driver 3: Same-Store Sales
¨ Increased Same-Store Sales in 2014 ¨ Important to look at when
the company is growing this quickly ¨ “Krispy Kreme” approach
¨ Creating strategic partnerships to increase customer traffic ¨ NCAA
¨ PepsiCo ¨ Existing partnerships with NFL
and MLB
¨ Craft Brew Alliance
¨ Boys and Girls Club
6
Figure 4: Company-owned Restaurants Same-Store Sales
Source: Company Reports
Company-‐owned
Restaurants: Q1 Q2 Q3 Q4 Year Yearly % Change
2014 60,966 59,403 59,643 62,119 60,470 7.23% 2013 56,953 54,759 55,592 58,204 56,392 4.85% 2012 55,131 51,524 52,561 55,595 53,783 8.37% 2011 48,845 47,970 49,461 51,983 49,627 11.27% 2010 45,327 43,021 44,394 45,595 44,601 -‐
Business Driver 1 Driver 2 Driver 3 Financials Comps Relative
Valuation DCF Risks Summary
Business Driver 1 Driver 2 Driver 3 Financials Comps Relative
Valuation DCF Risks Summary
Financials 7
¨ Success will continue throughout 2015 and 2016
¤ Constantly increasing EPS
¤ Growth without debt, minimal share issuance
¤ Increase in ROA and ROE
¤ Stable Margins
Figure 6: Selected Metrics
Figure 5: Net Income, Share Growth and EPS Growth
Source: Company 10K
Source: Company 10K
17.5% 16.3%
16.9% 18.1% 18.4% 18.0%
-
0.5
1.0
1.5
2.0
2.5
0.0%
2.0%
4.0%
6.0%
8.0%
10.0%
12.0%
14.0%
16.0%
18.0%
20.0%
2011 2012 2013 2014 2015 2016
ROE - L
ROA - L
Net margin - L
Asset turnover - R
Equity multiplier (Leverage) - R
10-‐Dec 11-‐Dec 12-‐Dec 13-‐Dec 14-‐Dec 15-‐Dec 16-‐Dec Net income $38,400 $50,426 $57,275 $71,554 $94,094 $117,250 $139,975 Growth -‐ 31% 14% 25% 32% 25% 19%
Basic Shares $18,175 $18,337 $18,582 $18,770 $18,908 $18,964 $19,030 Growth -‐ 0.89% 1.34% 1.01% 0.74% 0.30% 0.35% EPS $2.11 $2.75 $3.08 $3.81 $4.98 $6.18 $7.36
Growth -‐ 30% 12% 24% 31% 24% 19%
Comps 8
¨ Decent multiples compared to comps ¨ BWLD is cheaper than the average comp for P/B and P/S
¨ Above average sales
Figure 7: Comp Sheet
Source: FactSet
Business Driver 1 Driver 2 Driver 3 Financials Comps Relative
Valuation DCF Risks Summary
Company Name Price Market Value 2014 Sales TTM P/E TTM P/B P/S EV/EBIT P/CF Buffalo Wild Wings, Inc. $175.05 $3,453 $20,763 36.8 5.96 0.17 23.5 16.9 Jack In The Box, Inc $93.02 $3,541 $24,265 40.6 16.68 0.15 18.0 18.1 Ruby Tuesday, Inc. $7.27 $451 $5,736 -‐55.9 0.98 0.08 -‐70.0 5.7 BJ's Restaurants, Inc. $50.84 $1,335 $5,563 51.9 3.82 0.24 36.5 15.3 Ignite Restaurant Group, Inc. $3.90 $102 $1,259 -‐1.9 1.96 0.08 -‐43.5 8.0 DineEquity, Inc. $102.64 $1,962 $1,015 54.3 6.97 1.93 15.0 16.5 Brinker Intl, Inc. $59.48 $3,754 $1,610 25 760.71 2.33 16.5 11.7 Starbucks Corp. $48.14 $72,191 $20,878 29.2 12.51 3.46 20.4 25.0 Yum Brands, Inc. $79.60 $34,476 $4,695 34.8 22.33 7.34 17.9 17.3 Chipotle Mexican Grill, Inc. $677.60 $21,021 $2,174 48 10.45 9.67 29.0 Mcdonald's Corp $96.44 $92,690 $1,710 20 7.22 54.20 13.5 14.2 Average $8,152 26 8.89 2.54 7 15
Median $4,695 35 7 1.93 18 16
R² = 0.53301 y = 0.9582x + 0.0784
0.0 0.1 0.2 0.3 0.4 0.5 0.6 0.7 0.8 0.9 1.0
0.0 0.2 0.4 0.6 0.8 1.0
Val
uatio
n
Fundamental
Business Driver 1 Driver 2 Driver 3 Financials Comps Relative
Valuation DCF Risks Summary
Valuation 9
BWLD
¨ Undervalued vs. peers
¤ Using equal weights of: Long Term Earnings Growth, 2014 NPM and NTM Sales Growth against TTM P/E and P/CF
¤ Under valued by approximately 25% based on current fundamentals
Figure 9: Composite Relative Valuation Graph
Figure 8: Composite Relative Valuation (1 is most expensive)
Source: FactSet
Valuation 10
¨ Price target of $220 ¤ Three stage DCF
n Continued strong growth over the next 7 years
n Three terminal multiples
n Cost of equity of 9.6% as a result of a risk level less than the market
n Calculated Beta = 0.95
n Average from 3-stage DCF’s of: n P/S= $215.76
n P/B= $224.59
n P/E= $220.95
n CG= $225.69
¤ Terminal values derived from historical data and industry averages
Figure 10: DCF Assumptions
Figure 11: DCF’s Price Targets
Business Driver 1 Driver 2 Driver 3 Financials Comps Relative
Valuation DCF Risks Summary
Assump2ons
Terminal P/S 1.65
Terminal P/B 5.5
Terminal P/E 27
Second Stage Growth Rate 7.0%
Cost of Equity Risk free rate 1.96 Beta 0.95 Market Return 10.0%
Market risk premium 8.0%
Stock risk premium 7.6% Cost of Equity 9.598%
$215.76
$224.59
$220.95
$225.69
$210.00
$212.00
$214.00
$216.00
$218.00
$220.00
$222.00
$224.00
$226.00
$228.00
P/S P/B P/E CG
Pric
e Ta
rget
$220
Risks
¨ Lack of growth
¨ Chicken wing volatility ¤ Increased prices decrease pricing power
¨ Conflicts within professional sports ¤ Strikes/Holdouts
¤ Problems with TV contracts
¨ Competitive market place
¨ Loss of licenses and permits
¨ General economic conditions
11
Business Driver 1 Driver 2 Driver 3 Financials Comps Relative
Valuation DCF Risks Summary
Summary
¨ Growth opportunities domestically and internationally
¨ Clean balance sheet helps growth prospects
¨ Pricing wings by weight instead of quantity helps to keep margins stable
12
¨ BWLD undervalued on an absolute and relative basis
¨ BUY rating with price target of
$220
Business Driver 1 Driver 2 Driver 3 Financials Comps Relative
Valuation DCF Risks Summary