Thursday, April 20, 2017

A current AIM Fund holding: Buffalo Wild Wings (BWLD) by Brooke Porath. “Will Fast Break Lunch Lead Wild Wings Forward?”

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 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 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

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