Photographer: David Paul Morris/Bloomberg

Buffalo Wild Wings Draws Activist Investor After Hot Streak Ends

  • Chain boosts repurchase plan after drawing activist investor
  • Profit tops estimates last quarter, even as sales disappoint

Buffalo Wild Wings Inc., facing pressure from hedge fund Marcato Capital Management LP to shake up the business, is seeking to keep investors happy with cost cuts and increased stock buybacks.

The restaurant chain posted second-quarter earnings of $1.27 a share on Tuesday, beating the $1.25 estimated by analysts. The company credited disciplined budgeting for helping bolster profit at a time when same-store sales are declining. It also expects to buy back about $150 million in stock this year, rewarding shareholders.

“We controlled costs and expenses well in a challenging sales environment,” Chief Executive Officer Sally Smith said in the statement.

The results follow an announcement by Marcato on Monday that it had acquired a 5.1 percent stake in Buffalo Wild Wings and would push for changes at the beer-and-wings eatery. Buffalo Wild Wings faces a host of challenges -- fast-food discounting, higher chicken-wing costs and heavier competition for craft beer -- but the 34-year-old chain also is starting to show its age.

Its recent performance fits the pattern of casual-dining mainstays such as TGI Friday’s, Applebee’s and Chili’s Grill & Bar, which lost their novelty years ago. Also, with about 1,180 Buffalo Wild Wings locations, there’s not much room to grow.

“They’re becoming more of a mature brand,” said Peter Saleh, an analyst at BTIG LLC in New York. “They’re getting closer to saturation.”

Looking to bolster sales and give investors access to more growth, the company has invested in smaller fast-casual eateries, such as PizzaRev and R Taco. But with just about 14 locations total, those offshoots aren’t yet big enough to boost results.

Beer and Sports

The first Buffalo Wild Wings restaurant opened in 1982 in Columbus, Ohio. Since then, the chain has expanded to every U.S. state. With its focus on wings, beer and sports, the Minneapolis-based company plans to eventually have 1,700 locations in North America.

Historically, Buffalo Wild Wings has turned in impressive gains, with revenue rising more than 19 percent in each of the past five years. This year, however, the growth is projected to decelerate to about 14 percent. And when just measuring established locations, the sales are falling -- a sign that older restaurants aren’t finding new customers.

Same-store sales dropped 1.7 percent at company-owned locations in the first quarter and then declined an additional 2.1 percent in the most recent period. Analysts had predicted a drop of just 0.5 percent, according to Consensus Metrix.

‘Some Fatigue’

“There could be some fatigue with the concept,” said Bloomberg Intelligence analyst Michael Halen. “There’s nothing really new and exciting coming out of them in terms of food innovation and menu items. It’s just more of the same.”

Marcato, an activist investor, plans to boost shareholder value by seeking strategic alternatives or shaking up operations and management. That could include changing the business’s capital structure and its mix of franchised versus company-owned restaurants, the firm said. Much of the restaurant industry is pushing to sell more locations to independent owners, a move called refranchising. That lowers costs and risks for the parent company, though it also means giving up some control and revenue. About half of Buffalo Wild Wings’ restaurants are company-owned.

Mick McGuire founded San Francisco-based Marcato in 2010 with startup capital from Blackstone Group LP after he worked at Bill Ackman’s firm, Pershing Square Capital Management. Marcato primarily invests in small- and mid-size public companies and looks for ways to make them more valuable.

Stock Reaction

Buffalo Wild Wings shares rose 5.8 percent to $148.96 on Monday after Marcato disclosed its stake in the company. They retreated 1.3 percent on Tuesday, part of a broader pullback in restaurant stocks.

The stock climbed as much as 4.4 percent on Tuesday afternoon after the second-quarter results were released.

Among his recent campaigns, McGuire called for new leadership at Bank of New York Mellon Corp., joined the board at ATM maker NCR Corp. and successfully agitated for the sale of gym operator Life Time Fitness Inc. He also pushed for changes at auction house Sotheby’s, box maker Packaging Corp. of America., and real estate investment trust Vereit Inc. -- then known as American Realty Capital Properties Inc.

The investment firm declined to comment beyond the regulatory filing that announced the Buffalo Wild Wings stake.

Buffalo Wild Wings has already made some changes in a bid to reinvigorate its business. The company is touting faster lunch service that guarantees customers will get their food in 15 minutes or it’s free. And the chain is trying to spur sales with to-go orders and a new loyalty program. But competitors have made similar moves, and they’re winning away Buffalo Wild Wing customers with craft beers, fancy cocktails and happy-hour deals.

Beer Competition

TGI Friday’s advertises hand-crafted cocktails and craft brews such as Lagunitas IPA. Chili’s, owned by Brinker International Inc., is trying to lure millennials with better bar music, more taps pouring craft beer and a happy-hour menu with $3 to $5 appetizers. Applebee’s sells $6.99 burgers with unlimited fries every Monday night.

Fast-food competitors may be hurting the wing chain as well. McDonald’s Corp. has been advertising a two-items-for-$5 deal, while Wendy’s Co. has a meal for just $4.

“They’re kind of getting beat up a little bit here from all sides,” Saleh said. “There’s a lot of competition.”

Higher chicken costs have hurt profit at Buffalo Wild Wings too, causing them to raise prices more than others in the industry. While the benchmark wholesale price for chicken wings has dropped in recent months, costs surged to an eight-month high in February. Prices also spiked last year after a record-breaking outbreak of bird flu killed millions of chickens and turkeys.

In June, the company said it expects wing prices to be “slightly inflationary” this year.

Hilary Timpe, a 37-year-old mom of two, has been visiting her local Buffalo Wild Wings less often over the past year. She cites the price increases and a decline in service. Now, her family is hitting up local spots near her home in Countryside, Illinois, such as Cafe Salsa, Chuck’s Southern Comforts Cafe and Nicksons Eatery, which sells salads and flatbreads.

Buffalo Wild Wings has started to feel more like a big, national chain, she said.

“You can kind of tell, it’s kind of like an assembly line,” Timpe said. “There’s been a change.”

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