Joshua Thomas of Midsummer Capital: Short Buffalo Wild Wings

Updated on

Joshua Thomas of Midsummer Capital, InvestPitch presentation produced by sumzero and Institutional Investor on the short case for Buffalo Wild Wings (NASDAQ:BWLD).

Also see: Steven Wood of GreenWood Investors: Long Contango Oil & Gas

Investment Thesis: Short Buffalo Wild Wings

Trading at nearly 40X EPS, the Market is extrapolating Buffalo Wild Wings (NASDAQ:BWLD)’s  historical growth rates far into the future. We believe the company’s growth algorithm is fundamentally broken and the stock is poised for multiple compression as EPS growth decelerates.

Growth Model Is Broken

  • Store base is set to transition from consistent double-digit unit growth to decelerating, single-digit unit growth (i.e., “Middle Age”)
  • As the concept reaches Middle Age, it will be unable to support historical rates of company EPS growth of +20%
  • The Street believes, even if the core concept decelerates, lost growth can be replaced through the incubation of new concepts
  • Due to aggressive and impetuous capital allocation decisions, we believe prior rates of EPS growth cannot be replicated going forward

Mortgaging The Future

  • Buffalo Wild Wings (NASDAQ:BWLD) stores generate mediocre returns on capital; in order to manufacture high rates of EPS growth, management consistently reinvested >200% of earnings into growth CapEx
  • Accelerated reinvestment was made possible by maintenance CapEx levels (per store) that were considerably below depreciation, given the youth of the store base
  • In essence, the company mortgaged its existing asset/store base to fund elevated levels of growth CapEx, creating an off-balance sheet liability
  • The last meaningful re-model cycle was in 2008 and we believe older stores will require fresh capital injections, lest traffic and same-store-sales suffer at the expense of new concept/unit growth (i.e. “The CapEx Wall”; see Brinker Int’l)
  • We believe the company will inevitably be faced with choosing one of two options, neither of which is attractive for the stock
Growth to date has been the result of over investment of earnings and a long runway for unit growth, neither of which is sustainable at this juncture. As EPS growth decelerates, we believe the depth of stock’s decline will be determined by how the slow down is managed and which alternative is chosen.

H/T Curry Goat

Joshua Thomas of Midsummer Capital: Short Buffalo Wild Wings

Leave a Comment