| A Buffalo Wild Wings restaurant in San Ramon, California (Photo Credit: David Paul Morris/Bloomberg). |
Here’s another reminder to be careful of what you wish for.
Back in early June, Mick McGuire III’s Marcato Capital Management won three of four seats — including one for McGuire — that it was seeking on the board of Buffalo Wild Wings, the bar and restaurant chain. But since then the stock has been slumping, and on Wednesday the shares were dealt another blow when the company reported disappointing earnings.
Wall Street analysts — several of whom were giving the company the benefit of the doubt earlier in the month — scrambled to cut their price targets. As a result, the stock sank Thursday by about 11 percent to close at $109.05. This is about 25 percent below the average price Marcato paid for the common shares back in June 2016, when it first announced its activist stake.
Marcato declined to comment.
Buffalo Wild Wings is one among several recent setbacks suffered by activists. Shares of Chipotle Mexican Grill — whose largest shareholder at the end of the first quarter was Bill Ackman’s Pershing Square Capital Management — were down Thursday about 30 percent from this year’s May high amid reports of a new norovirus outbreak and disappointing earnings. And last month, shareholders of General Motors rebuffed the proposal by Greenlight Capital’s David Einhorn to break into two stocks.
After the stock market closed Wednesday, Buffalo Wild Wings reported second-quarter earnings per share of $0.66, well short of the $1.05 consensus. Same store sales were down in the low single-digits, worse than expected. The company also sharply cut 2017 earnings and same store sales guidance.
Buffalo Wild Wings’ woes underscore the reality of activist investing. They are essentially long-only investors of underperforming companies, and the restaurant chain is a good example.
In response to the latest earnings report, UBS Group on Thursday cut its price target to $155 from $175, but maintained its “buy” rating on the stock, noting second-quarter results “were challenged as expected given a difficult casual dining environment and rising wing and other costs.”
Even so, it left open some hope for the stock, justifying its “buy” rating. “We continue to view the appointment of a new CEO and turnaround plans as the next catalysts,” UBS told clients. Around the same time that Marcato won the three seats, CEO Sally Smith said she would retire at year-end.
Earlier this month UBS gave the stock a vote of confidence when it maintained its “buy” recommendation and $175 target price. In a note to clients, the investment bank said the casual dining chain remains positioned for continued mid-single digit unit growth, which is slightly above the consensus.
“Brand relevancy, above average growth potential, and upcoming catalysts support a favorable risk/reward,” the firm said at the time.
Barclays on Thursday cut its price target to $144, from $165, the second time it has reduced the target this month alone. “While resetting the near-term bar is a good thing, visibility on the new direction/leadership for the business is limited,” the firm wrote in a new note. Barclays points to the CEO retiring by year-end and the chief operating officer retiring in August. It also reminds clients the chief financial officer has been on the job less than one year. “We believe the levers for value creation are large over time, led by a return to fundamental strength,” the firm added.
Credit Suisse, however, is less hopeful about the near-term future. On Thursday, it cut its price target to $120 from $150, and maintained its “neutral” rating on the stock while saying it’s “still waiting for a game plan.”
“Overall, we struggle to get to the low end of new guidance given wing cost pressure, neg(ative) SSS (same store sales), limited pricing power, and rising labor costs,” the bank told clients in a note.
Meanwhile, heading into July Marcato was in pretty good shape. Its main fund, Marcato International was up 7.7 percent. However, given the collapse in the shares of Buffalo Wild Wings, the results may not look nearly as good when Marcato updates performance to investors.
