Shares of Buffalo Wild Wings, Inc. have declined nearly 8% in after-hours trading on Jul 26, after the company reported lower-than-expected second-quarter 2017 results.

This bleak performance was mainly due to the increased costs of traditional chicken wings coupled with higher promotional activity, lower-than-expected same-store sales as well as greater labor and operating expenses.

In fact, due to the disappointing second-quarter performance and expectations of softening traffic, Buffalo Wild Wings lowered its 2017 earnings outlook.

Buffalo Wild Wings, Inc. Price, Consensus and EPS Surprise

Quarter Highlights

Adjusted earnings of 66 cents per share plunged 50.7% year over year and missed the Zacks Consensus Estimate of $1.01 by 34.7%.

Total revenue increased 2% to $500 million on the back of higher restaurant sales as well as franchise royalties and fees. However, revenues missed the consensus mark of $513 million by 2.5%.

Performance in Detail

During the quarter, company-owned restaurant sales increased 1.9% year over year to $475.7 million. The upside was driven by the opening of 26 additional Buffalo Wild Wings outlets.

Company-owned comps declined 1.2% comparing unfavorably with the comps decline of 0.5% in the last quarter. Notably, company-owned comps had declined 2.1% in the year-ago quarter.

Franchise royalties and fees increased 3.1% year over year to $24.3 million owing to 28 additional franchised restaurants. Comps declined 2.1% compared to the previous quarter’s growth of 0.6%. In the year-ago quarter Buffalo Wild Wings had registered comps decline of 2.6%.

Buffalo Wild Wings' cost of sales, as a percentage of restaurant sales, increased 240 basis points (bps) to 32.1%. This rise in cost was a result of a 5.7% year-over-year increase in traditional wing pricing coupled with a change in sales mix from promotional activity. Also, its cost of labor, as a percentage of restaurant sales, increased 40 bps to 32.4%.

Additionally, restaurant operating expenses, as a percentage of restaurant sales, were 15.7%. This reflects a 110 bps increase from the prior-year quarter owing to rise in repairs and maintenance costs, third-party delivery commissions and an increase in general liability expenses.

A Peek into the Third Quarter of 2017

Buffalo Wild Wings expects cost of sales to be approximately 31.5% of total revenue in third-quarter 2017, while G&A expenses are projected to be roughly $35 million. The company also anticipates cost savings to the tune of $7 million in the quarter as a result of reduced labor expenses.

Meanwhile, cost for traditional chicken wings for the first two months of third quarter remains elevated and is at an average of $2.13 per pound, reflecting an increase of 24% over the prior-year quarter.

Resultantly, management expects third-quarter EPS to be below $1.

Moreover, it plans to open two company-owned Buffalo Wild Wings restaurants in the quarter, along with 11 more franchised locations. Also, remodeling of 17 additional units is anticipated to be completed in the third quarter.

2017 View Lowered

For 2017, the company anticipates adjusted earnings per share to be in the range of $4.50 to $5.00 (lower than the previous expectation of $5.45 to $5.90). The Zacks Consensus Estimate for the year’s earnings is currently pegged at $5.25.

Furthermore, comps are projected to decline in the band of 1% to 2% (previously expected to grow 1%).

Going forward, Buffalo Wild Wings continues to foresee opening of approximately 15 company-owned Buffalo Wild Wings restaurants in the U.S., along with 15 franchised Buffalo Wild Wings locations in the same region. It aims to launch 20 franchised Buffalo Wild Wing locations internationally and two company-owned as well as 10 to 13 franchised R Taco restaurants, as well.

In the meantime, the company continues to expect traditional chicken wing prices to rise in the range of 8% to 10%. It also anticipates incurring capital expenditure of approximately $100 million during the year, in-line with the previous expectation.

Zacks Rank & Peer Releases

Buffalo Wild Wings carries a Zacks Rank #5 (Strong Sell).

You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.

Among other firms in the restaurant space, The Cheesecake Factory Incorporated (CAKE Quick QuoteCAKE - Free Report) and The Habit Restaurants, Inc. are expected to release their second-quarter numbers on Aug 2. The Zacks Consensus Estimate for the quarter’s earnings is pegged at 76 cents for Cheesecake Factory and 6 cents for Habit Restaurants.

El Pollo Loco Holdings, Inc. (LOCO Quick QuoteLOCO - Free Report) is scheduled to report its quarterly numbers on Aug 3. The Zacks Consensus Estimate for the quarter’s bottom line is pegged at 20 cents.

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