Buffalo Wild Wings surprises investors by raising guidance despite drop in profits

It's not yet clear precisely when Buffalo Wild Wings will appoint a successor to Sally Smith, the chief executive who built it into one of the nation's biggest restaurant chains.

But the firm's latest results, announced Wednesday, show Smith is still hard at work and leaving on a high note.

The 20 percent drop in profit that Buffalo Wild Wings reported for the July-to-September period wasn't as bad as analysts were expecting. Even more surprising, company executives raised their guidance on results expected for the final quarter and overall 2017.

The Golden Valley-based company's shares, which have lost one-third of their value this year, were up 21 percent in after-hours trading following the news, which came after regular stock trading had ended.

When an activist investor won a proxy battle against Buffalo Wild Wings management at the company's annual meeting in June, Smith announced that she would retire by the end of the year. On Wednesday evening, she said goodbye to analysts and investors at the end of the latest quarterly conference call, her 56th as a top executive of Buffalo Wild Wings.

"For the last time, I am signing off," Smith said. "I want to thank you all."

Earlier in the call, Smith thanked the Buffalo Wild Wings employees she has led for 21 years. She spent little time discussing the near record-high prices the company is now paying for its key product — chicken wings — and more on the work employees have done to lower costs and test new promotions to draw customers into its restaurants more frequently.

In its company-owned stores — about half of the 1,200-unit chain — Buffalo Wild Wings in the latest quarter changed its Tuesday promotion to feature boneless wings instead of bone-in wings, which have a higher cost and deliver less profit to the company. The shift thinned out some of the crowd at those restaurants but delivered higher profits on those days, a trade-off executives said was acceptable.

"This is a traffic decline we expected and probably welcomed as we looked at our stores on Tuesday," Smith said. "The volume [and] the profitability certainly is nice."

She noted most franchisees haven't made the shift to the boneless wing promotion on Tuesdays and were waiting for more evidence of its success. Executives and franchisees are also discussing new promotion ideas for Thursdays, Smith said.

All year, Buffalo Wild Wings has been grappling with higher-than-usual costs of its main product. The company said it paid an average of $2.16 per pound for chicken wings during the quarter, up from $1.72 a year ago.

Buffalo Wild Wings said it earned $18.2 million, or $1.17 a share, down from $22.7 million, or $1.23 a share, a year ago. Adjusted for one-time costs and benefits, the company earned $1.36 a share. Analysts surveyed by Zack's Investment Research were expecting a profit of 79 cents a share.

Revenue rose a half-percent to $496.7 million.

Sales at restaurants open at least a year fell at a faster rate for franchisee-owned units than company-owned locations in the latest quarter, a change from the usual pattern at Buffalo Wild Wings in which franchisee operations tend to outpace company-run units. Chief Financial Officer Alex Ware attributed the development to the company-owned locations being further ahead of franchisees with delivery service and deployment of its Blazin' Rewards customer loyalty program.

Smith and Ware in July lowered their full-year adjusted earnings guidance to $4.50 to $5 a share from a previous range of $5.45 to $5.90. But with the stronger-than-expected results in the third quarter and expectation for similar results in final three months of the year, they raised the full-year adjusted profit range to $4.85 to $5.15 a share.

Asked by an analyst what she knew about the search for her successor, Smith said it is the No. 1 priority of the company's board of directors, that they have taken a broad approach to it and to watch for news by the end of the year.

"The board and I are committed to assuring a smooth succession," she said.

Evan Ramstad • 612-673-4241