| Illustration by Dan Page |
It’s not often that you see a company simultaneously beat analysts’ estimates and become an activist target, but that’s exactly what has happened with Buffalo Wild Wings. Just after the casual-dining company released second-quarter earnings at the end of July that beat expectations by two cents a share, Richard (Mick) McGuire III’s Marcato Capital Management, an activist hedge fund firm run by a protégé of Pershing Square Capital Management’s William Ackman, announced it had taken a 5.2 percent stake. The move makes Marcato one of the largest shareholders of B-Dubs, as the company is known.
It’s easy to understand the company’s appeal to an activist investor. B-Dubs’ stock was down 13 percent over the past year through August 23, when it closed at $162.40 per share. McGuire typically targets mid-cap companies like B-Dubs and wants to see changes in how the company manages its capital structure. And while revenue numbers have been positive for the company, same-store sales have declined for two straight quarters. Sales at company-owned stores fell 2.1 percent during the quarter, and franchisee sales fell 2.6 percent.
Recently, B-Dubs has opened more company-owned stores, which have lower overhead than those run by franchisees. B-Dubs may have a preference for company-owned stores because the dining experience is more consistent and the declines in same-store sales have been lower at company-owned stores. It appears Marcato would rather see the company opt for lowering costs until sales even out. In an August 17 letter to Buffalo Wild Wings chairman James Damian, accompanied by a 52-slide presentation deck, McGuire said the company has a tendency to favor ideas based on “gut feel” instead of research.
“Efforts to drive ‘growth’ primarily through new unit openings and franchisee acquisitions currently take unwarranted precedence over maximizing same-store sales and restaurant-level margin opportunities at core Buffalo Wild Wings,” McGuire wrote. He also wants to see changes in management and food service. McGuire pushed for similar things after his 2012 investment in DineEquity, which owns a pair of fast-casual restaurant chains in the same tier as B-Dubs: IHOP and Applebees. In the slide deck McGuire calls refranchising a “high margin royalty stream that grows without capital.” He also wants the company to commit to a “disciplined capital allocation plan” that includes changes to executive compensation, total shareholder return and the use of leverage.
Other hedge fund firms holding B-Dubs include Balyasny Asset Management and Highbridge Capital Management. Steve Cohen’s family office, Point72 Asset Management, also has a position. But Marcato is the likely leader in efforts to drive change from the investor side, as none of the other investors has an activist streak.
Even if Marcato is only successful at making limited changes, analysts suggest there is upside left in B-Dubs. Paul Westra, an analyst with Stifel Financial Corp., thinks the company will be able to grow sales through the expansion of its takeout business with mobile and online ordering, and by enhancing its 15-minute express lunch option with a bigger menu. Major sporting events, including the start of the NFL season, are likely to attract customers who want to watch the games on the restaurant’s famous big screens. McGuire, for his part, is skeptical of these improvements and contends that they will result in limited overall value for shareholders.
For its part, B-Dubs seems to be staying resolute in its approach. The company said in a statement that it had reviewed Marcato’s presentation and would “carefully consider” the letter but that it will also “consider the input of other shareholders” before deciding on a change in strategy.
