“Like Buying Starbucks in 1992”

By Travis Johnson, Stock Gumshoe, April 10, 2007

This one was recently forwarded by a reader, with a tip as to the company he thought it was (he was right, too). And this is actually a company I owned a few years ago around their IPO, so this is also a nice bitter reminder that I shouldn’t have sold it.

The ad is for the Hidden Gems newsletter over at the Motley Fool, run by Tom Gardner (the email came from Paul Elliott, another Fool guy). The special report he’s asking you to sign up for — by taking a free trial to Hidden Gems for a month before your subscription begins — is entititled, “The ONE Stock You Can’t Afford to Miss This Year!”

The sell for this company is based on it possibly being the “next Starbucks” — so we”re treated to a big long spiel about what it was like to be a Starbucks owner in the early years, and how stinking rich you would have gotten had you had that kind of foresight.

I’ve said it before, but no one puts out email ads that are anywhere near as long as the Motley Fool’s — this thing would have been 18 pages if I printed it out. So there are a couple of pages talking about how brilliant Tom Gardner is … a few pages of Starbucks history … and precious few real hints about the company they want to recommend if only you’ll sample their subscription.

So what do we learn about the company, aside from the fact that it’s some kind of retail experience with huge growth potential? There are a few specific hints:

They intimate that the strategy is to grow a local type of business into a global brand.

It has “435 jam-packed locations… plans to ramp up to a thousand”

$65 million in cash and no debt.

In July 2004, you could have bought these shares for $25 … now they’re more than twice that much.

Tom recently spoke at the company’s annual meeting. (And “Suffice it to say that everything Tom learned on that trip affirmed his belief that the stock could easily double or triple again.”)

The author claims they’re more or less recession-proof because, although “the company doesn’t sell coffee, … it does sell something every bit as essential — great food… good times… and BEER.”

Well, sign me up for that.

So here are a few more quotes to get you excited:

“But what really sets this company apart is that management steadfastly refuses to take on crippling debt in order to fund its ambitious expansion plans. I can’t overstress how rare that is in the restaurant business.

“Especially for a juggernaut that is expanding bottom line earnings at a rate in excess of 25-30% per year — with firmly entrenched plans to keep up the breakneck, money-making pace.”

So who are they teasing us about here?

Sign up for your Hidden Gems free trial if you like — but thanks to the Stock Gumshoe’s mighty thinkatationizer and the input of my valuable readers, I can tell you that this company is …

Buffalo Wild Wings (BWLD).

As I mentioned, I used to own this stock … and I’m a little bitter. If memory serves, I did have some nice 20-30% gains around the time they IPOd and got a lot of attention about three years ago, but I lost faith in the concept and sold out. They have since done very well, the IPO price was in the low $20s and the shares are now at about $65. So good for me!

The company does have 435 locations, a mix of franchise and company-owned stores. They’ve used franchises to avoid piling on debt with store openings, but they’ve also raised a lot of money through equity financing to open their own stores. It’s actually a pretty old company — 20 or 25 years, I think, with a historical base in the midwest.

I still have doubts about whether a sports bar can become a national brand, and the only one of these I’ve ever been inside was apparently a poor example (it’s since closed). There are a lot of enthusiastic fans of the place, certainly, so I could easily be wrong.

The shares are priced for growth, but not to the same degree as a Chipotle in a similar business, for example — the forward PE is about 25. If you like the restaurants or the stock, let us know by commenting here. From the numbers, it looks like management is doing a great job — I think the decision about this company will rest on whether you think they can profitably double their store base.

I still like to believe there are some parts of American life, including the noble sports bar, that won’t be homogenized into a row of Applebee’s and Buffalo Wild Wings and TGI Fridays encircling every mall, but perhaps that’s just the curmudgeon in me. If you head out for some market research, have a dozen wings and a beer for me.

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5 Comments on "“Like Buying Starbucks in 1992”"

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mrjetskey
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mrjetskey
April 11, 2007 8:59 pm

I hate to say it,but the wings really are not even as good as hooters(ok,hooters gets away with a lot because of the cold beer and hot babes)but really why would you want to eat at wings ?I have eaten at two of them ,both awful!!AT least chilpotle is good food even if it belongs to BIG M. Have a great day but dont bet the farm on bad food.I know gardner has had more than a few winners(few losers also)JMHO>Marvin

Stock
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Stock
April 12, 2007 5:14 pm

Thanks Marvin — I agree with you based on my one restaurant sample, but I know lots of folks who love BWLD, I guess it takes all kinds. I too would be much more tempted to buy stock in (or eat at) Chipotle, though that ain’t cheap either.

Anonymous
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Anonymous
May 19, 2007 4:16 pm

I’ve known (BW3) for years – in Ohio their flagship stores were rock solid hot prospects. IMHO however, they need to pay closer attention to how the concept plays out in their franchises, because the one in Jax, FL SUCKED. It was nothing like the originals. Food quality aside – if the place looks and smells like a college frathouse, I’m not eating OR drinking there. Next Starbucks, or next gas station coffee stop? Still, great concept if they can control the variables.

Phil
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Phil
July 15, 2007 12:57 am

The scoresheet shows it going down, but the stock has split, so it has actually gone up. So at about $43 now, that would be like $86 before the split. There is a BWLD near me, and it always seems to be busy. Plus, they seem to have big expansion plans, so I’m keeping my shares for now. I don’t really like ANYONE’s wings – not enough meat, and too messy! Give me a drumstick or breast!

One Guy
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One Guy
July 15, 2007 1:27 am

Oops — thanks for the catch. I’ll fix that next time I update the spreadsheet. Yes, BWLD has been quite a winner for Tom Gardner … maybe we all just need to focus more on buying restaurants that sell a LOT of beer. This one also gets hyped a bit every time there’s a big sporting event — NBA Finals, March Madness, Super Bowl, so we’ll see it around plenty more I’m sure.

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