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Buffalo Wild Wings' Boneless Chicken Tuesday Bails Out Q3 2017

Shares of Buffalo Wild Wings (NASDAQ: BWLD) are up double digits as of this writing on third quarter results that exceeded low analyst expectations. It's a positive sign for the beleaguered restaurant, but the company isn't out of the woods yet.

Q3 by the numbers

The second quarter of the year wasn't great, with company owned same-store sales and earnings down 1.2% and 57% year-over-year, respectively. The stock tanked as investors digested the dismal numbers and uncertainty created over annual meeting voting results (more on that later).

Data by YCharts.

While same-store sales were down 2.3% at company-owned locations and 3.2% at franchised ones, bottom line results in the latest quarter were better than expected.

Metric

Amount

Year-Over-Year Increase (Decrease)

Revenue

$496.7 million

0.5%

Earnings per share

$1.17

(4.9%)

Chart by author. Data source: Buffalo Wild Wings quarterly results.

Management also upgraded full-year expectations reflecting its renewed optimism. Earnings per share are now expected to be between $4.30 and $4.60, compared with previous guidance of $4.00 to $4.50. It's an upgrade, but still down from last year's $5.12 per share.

Refranchising isn't the solution ... yet

During the summer's annual meeting, investors voted two new members to the board of directors nominated by activist investor Marcato Capital. Long-time CEO Sally Smith announced her retirement by the end of the year, and the company said it was looking to franchise out 83 company-owned locations, in line with Marcato's attempts to unlock shareholder value.

Investors still need to wait and see how that plan will play out. This quarter was more about B-Dub's cost-cutting initiatives and promotional activity. The Blazin' Rewards loyalty program was rolled out nationwide over the summer to try and lure back diners; a new small format store is being tested; and the Tuesday wing special was switched from bone-in wings to boneless (read white chicken breast) "wings".

Buffalo Wild Wings switched its buy one get one Tuesday promotion from bone-in to boneless wings during the quarter. Image source: Buffalo Wild Wings.

That last point was an especially good move to salvage the bottom line. Company-owned stores made the Tuesday switch, because bone-in wing prices are up 25.6% over the same period last year, worsening a trend that started almost a decade ago when chicken wing prices surpassed boneless wings in price. The promo on expensive bone-in wings was eating away at margins, while the stable price on boneless helped maintain a healthy bottom line.

Paired with other initiatives from B-Dub's "financial fitness plan," the restaurant chain has saved a total of $15.3 million year to date, helping offset the declines from falling same-store sales.

Food for thought

Buffalo Wild Wings is exiting a period of strong growth, increasing its number of stores by nearly 50% to over 1,240 in the last five years. That momentum is now gone, with management projecting only 14 company-owned, 15 franchised, and 20 international franchised locations opening during full-year 2017.

With that slowdown, focus is starting to shift to cost savings and the refranchising plan to increase profitability. A new fast-casual chain in R Taco is just beginning to ramp up -- two new company-owned and 10 franchised locations are expected by year-end -- but those will not meaningfully contribute to the company's results for a long time.

Buffalo Wild Wings investors who have come to expect explosive sales growth from the chain should temper their expectations going forward. This is a transition period for the company, and more hiccups are likely.

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Nicholas Rossolillo owns shares of Buffalo Wild Wings. The Motley Fool owns shares of and recommends Buffalo Wild Wings. The Motley Fool has a disclosure policy.