Where wings are hot -- and the stock's hotter

CEO Sally Smith has turned Buffalo Wild Wings from a small dowdy chain to a Wall Street sizzle. And she's done it as rivals sputter. Fortune's Matthew Boyle reports.

By Matthew Boyle, Fortune writer

(Fortune Magazine) -- Were it not for Sally Smith, the hottest restaurant chain in America might not even exist today.

When Smith, a former accountant with zero experience in the food service business, joined Buffalo Wild Wings in 1994 as a senior executive, her plan was to work part-time so she could take care of her two children. But by the mid-1990's, the dowdy sports bar chain - founded in Ohio in 1982 by two New York transplants who couldn't find decent Buffalo-style chicken wings - needed Smith's full attention.

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Under Sally Smith's direction, revenues at Buffalo Wild Wings should top $300 million this year -- double their level three years ago.

The company "was a mess," Smith recalls. Behind on its taxes, with no franchising requirements or coherent financial statements to speak of (bills were paid using Quicken), the chain, with about 35 restaurants, was near ruin.

What it did have was a fanatical customer base, which intrigued Smith enough to stick around and get the firm's finances in decent enough shape to raise some capital for expansion.

Smith, who became CEO in 1996 after the board's original choice got cold feet, faced an uphill climb. "All I heard when I met with investment bankers was, 'You know nothing about the restaurant business.'" Smith says. But Smith knew a thing or two about how to build a franchise brand, having worked at a nationwide operator of hearing aid centers.

Smith closed poorly run locations, brightened and modernized the interior of others, updated the menu, and changed the chain's name and logo. (It had been called Buffalo Wild Wings and Weck, after a beef sandwich roll popular in upstate New York.)

Franchisees grumbled. "I made a lot of unpopular decisions," Smith says. But owners came around quickly when sales at new company-owned locations in Michigan and Indiana vastly outperformed those at existing restaurants.

An IPO in 2003 provided much-needed capital, and Smith, 49, hasn't looked back since. Today, Buffalo Wild Wings (Charts) has over 443 restaurants in 37 states, and revenues are on track to exceed $300 million this year, which is double what the chain generated just three years ago.

The company has surpassed Wall Street's earnings estimates in 12 out of the last 13 quarters, according to Sacks Investment Research. Its stock, which drifted in 2005 and for much of 2006, has taken off of late and is up over 60%, to $89 a share, this year alone. (A two-for-one split will occur later this month.)

Smith and her team have wisely spread the chain's appeal beyond beer-swilling college football fans to include church groups, high school students, moms with young kids, and even corporate clients. (Nike's massive headquarters, for instance, is near the chain's new Hillsboro, Oregon location.)

In doing so, Smith has so far sidestepped the problems currently bedeviling her peers in the casual dining sector. Rising gas prices, a slumping housing market, and surging commodity costs have many restaurant operators in a bind. Applebee's (Charts), for instance, is exploring a possible sale, while OSI Restaurant Partners (Charts), operators of struggling Outback Steakhouse, is being taken private.

Meanwhile, Buffalo Wild Wings continues to impress, with same-store sales at its 141 company-owned units rising 14% in April, and 240 new locations in the pipeline. (The goal is to have 1,000 by 2012, and startup costs run about $1.1 million per unit.) New expansion targets include Las Vegas, South Carolina, Virginia Beach, and the Pacific Northwest.

Wray Hutchinson, a franchisee who's developing ten Buffalo Wild Wings locations between Vancouver and Salem, Oregon, argues that the company's unique appeal makes it more than a restaurant.

"Why do you go Applebee's?" Hutchinson says. "You go to eat. But there is a reason to go here other than just the food. We're an experience. Everyone says that, but we really are."

That experience includes over 20 beers on tap and about 40 high-definition plasma TV sets, ensuring that fans of any game can watch what they want (there are even two plasmas in the bathroom.) Large parties are accommodated, not shunned, and customers have the choice of ordering their food from the counter or with the wait staff.

"We make it very easy for customers to use us," says Smith, a North Dakota native with an easygoing manner that belies her bean counter past.

To attract folks who aren't sports nuts, an online trivia network allows customers to test their wits against their friends or people thousands of miles away, and some locations offer half-price wings on Tuesday nights.

Oh, yes, the wings -- the company dishes up eight million a week, which doesn't even include boneless wings, added to the menu a few years ago. (Traditional bone-in wings make up 24% of sales, while alcohol constitutes 29%.)

And while some wing joints don't venture beyond mild, medium, and hot, Buffalo Wild Wings has 14 sauces, including Asian Zing. (Smith's favorite is the Southwest Ranch.) Although chicken wing prices are currently on the high end at $1.58 per pound, Smith has locked in a price of $1.22 for company-owned restaurants for the rest of the year.

All in all, not bad for a gal with no restaurant experience. "She's smart," says Hutchinson, who previously spent 13 years with McDonald's (Charts, Fortune 500). "Can she redesign a kitchen? No, but that's not her role. She understands this brand - she owns it."

But can she keep it going?

Analyst Larry Miller of RBC Capital Markets says that tough comparisons with last year could cause the company's same-store sales growth to decelerate in 2007. But he still believes the company will outperform its casual dining peers "for an extended period of time."

So while short-term investors may have missed out on the stock's surge, over the long haul, this company has the legs - er, wings - to grow profitably.  Top of page