Buffalo
Wild Wings (BWLD, $150.75): “Wild Wings or the Wild West?”
By:
Brooke Porath, AIM Student at Marquette University
Disclosure:
The AIM Equity Fund currently holds this position. This article was written by
myself, and it expresses my own opinions. I am not receiving compensation for
it and I have no business relationship with any company whose stock is
mentioned in this article.
• Buffalo Wild Wings (NASDAQ:BWLD) operates 1,240 dining restaurants
and sports bar franchises in all 50 states and internationally. While they are
most notably known for their “wings, beer, and sports,” BWLD offers a diverse
menu and high-energy atmosphere centered upon a differentiated customer
experience.
• Activist hedge fund
manager, Mick McGuire, publicly criticized Buffalo Wild Wings after last year’s
annual investor meeting claiming management “overpromised and underdelivered.”
• McGuire sent two highly
critical presentations to shareholders and created a website called
WinningAtWildWings.com to urge change and pressure management.
• After unanswered
requests, Marcato Capital nominated four directors to serve on BWLD’s board,
one of which is McGuire, which officially initiated the proxy battle.
• Despite intra-year
volatility, BWLD’s share price is $150.75, almost unchanged from its price of
$151.00 last year.
Key
points: Mick McGuire, the CEO and founder of Marcato Capital,
has commonly been referred to as activist investor, Bill Ackman’s “protégé.” Here’s
why – McGuire has long pushed for Buffalo Wild Wings to convert more of their
company operated restaurants to franchises, which only account for ~5% of total
revenue. He suggests that nearly 90% of restaurants should be franchised due to
the considerably higher margins franchise royalties achieve. Furthermore, he
has urged the chain to reconsider management compensation, which he believes
should be aligned with per-share value as opposed to top-line growth. These
changes are essential to McGuire’s forecasts for BWLD’s share price, which he estimates
has the potential to increase three-fold.
After sending an
unanswered letter to James Damian, the chairman of Buffalo Wild Wing’s board of
directors, McGuire retaliated by condemning management in a harshly worded presentation
sent to shareholders. It quickly became public, along with the website he
created WinningAtWildWings.com. McGuire struck again by sending yet another
highly critical presentation to shareholders accusing the C-suite of
“overpromising and underdelivering.”
The presentation argued management was
uncommitted to the company. It presented multiple occasions where management
released optimistic outlooks while proceeding to sell more shares. In
aggregate, McGuire stated that top executives have unloaded 92% of shares since
Buffalo Wild Wings’ IPO in 2003. The only time they have purchased shares is at
a discounted price through an Employee Stock Purchase Plan (ESPP). McGuire
documented that the majority of these shares were later sold, sometimes in the
same day, providing additional compensation to the “uncommitted” C-suite.
After multiple attempts
to influence management, Marcato Capital nominated four directors to be
appointed to Buffalo Wild Wing’s board, one of which is McGuire himself. The
vote will take place at the upcoming shareholder meeting in May. Marcato Capital
believes that unlike the current board, which is unwilling to commit capital
alongside shareholders, their nominated directors hold a long-term vision for
Buffalo Wild Wings and are invested with current ownership of 6.1%.
What
has the stock done lately?
After Marcato Capital
announced their intention to nominate four directors to the board, Buffalo Wild
Wings’ stock jumped ~6.5% to $159.55 in mid-February. In March, Marcato
released the second abovementioned presentation to investors in which BWLD’s
shares fell to a three-month low of $143.30. Since, the company has rebounded
and the shares are now trading near $150.
Despite activist intervention,
Buffalo Wild Wings had strong Q1 earnings due in part to March Madness traffic.
In conjunction with marketing campaigns on a variety of platforms, the
nail-biting college games compliment the “beer, wings, and sports” mantra
Buffalo Wild Wings is centered upon.
Past
Year Performance: Despite intra-year volatility, Buffalo
Wild Wing’s share price has remained near $150. Their 52-week high/low was
$122.25-$175.10 representing changing forecasts affected by not only activist
outcry, but also by underlying fundamentals. Management has indicated that
overall industry demand was weaker in 2016, but has the potential to rebound in
2017. BWLD currently has a P/E of 29.40x which is slightly below the comparable
company average of 30.04x.
Source:
FactSet
My
Takeaway
Despite volatility, Marcato
Capital’s pressure will bode well for BWLD’s share price overall. Management is
highly motivated to perform as their track record and forward looking strategy
is under fire. Therefore, I believe the company will do well whether Marcato
Captial’s proposed directors are appointed or not. While long-term strategy is
dependent upon future board composition, a push to refranchise company operated
restaurants will help increase margins and earnings potential.
The company has
also introduced a new customer loyalty plan, Fast Break Lunch, which should
help increase weak same-store sales. Overall, Buffalo Wild Wings has developed
nationwide brand awareness that has driven growth and restaurant traffic. With
a 5-year sales CAGR of 23.6%, I believe BWLD share price still has significant
price appreciation.
Source:
FactSet
