Is Buffalo Wild Wings Making Progress?
Buffalo Wild Wings’ stock has taken a wild ride in the past year. The chicken-wing chain’s shares were trading at $174.90 in early December 2016. They were $96.45 September 7 and about $107 on Monday. Much of this rollercoaster can be credited to two key areas: boardroom battles and, most notably, high costs. On Wednesday afternoon, when the company reports its third-quarter results, this latter note is expected to make another prime showing.
With wing prices being what they are—management said they averaged $2.13 per pound in the first two months of the quarter, or a 24 percent increase versus the same period in 2016—it's likely to be a substantial issue. Zacks Equity Research reported that the third-quarter review is expected to reflect a decline in profitability, and that cost of sales is predicted to be roughly 31.5 percent of total revenue. Additionally, Zacks believes costs related to other sales-boosting initiatives, such as labor costs and unit growth, will also hurt profits. Zacks is calling for third-quarter earnings per share to come in below $1 at 79 cents, which would represent a sizable decline of 35.4 percent year-over-year.
While external factors, such as wing prices and a highly competitive labor market continue to press the chain, Buffalo Wild Wings is actively pursuing cost-saving initiatives, menu innovations, increased off-premises avenues, and other changes to remedy some of this downturn. But will those moves show up Wednesday? At least enough to quell investor unrest to some degree?
Buffalo Wild Wings’ same-store sales have tracked downward in recent reviews. In the second quarter, comps fell 1.2 percent at company stores and 2.1 percent at franchised locations. They gained 0.5 percent in the first quarter.
Zacks Consensus Estimate is calling for comps to drop 2.2 percent in the third quarter at company-owned units and 2.3 percent at franchised stores.
It will likely take more than a single quarter for some of Buffalo Wild Wings’ initiatives to show up in earnest. Perhaps the biggest one will be the change in its popular Half-Price Wing Tuesdays, which drove traffic but pressured the bottom line thanks to the inflation of bone-in wings. After the second quarter, Buffalo Wild Wings announced it was replacing the deal with a Boneless BOGO offering. In September, at the company’s investor presentation, Buffalo Wild Wings anticipated the move would decrease costs of sales from 32.1 percent in the second quarter to 31.5 percent in the third. While traditional wings comprise 31 percent of Buffalo Wild Wings’ cost of sales, boneless wings are only about 13 percent. The company said during the presentation that the same-store sales impact from the BOGO offer would be better than expected, and that average check was improving. The mix shift to boneless wings was sequentially improving cost of goods sold from Q2, offsetting Q3 year-over-year increases in traditional wing prices, the company said.
As of September 19, all company locations onboarded the new offer, as well as 39 franchised units. That shows a great deal of positive runway considering the brand had 611 franchised locations as of June 25 (there were 626 company-owned stores).
“Buffalo Wild Wings’ efforts to revive comps growth via menu innovation, promotional offerings, augmented focus on take-out and delivery services, investing in guest experience, better food presentation and operational efficiency bodes well. Still, the menu price increases made by the company and a choppy sales environment in the U.S. restaurant space are likely to affect traffic trends in the third quarter as well, thereby weighing on comps,” Zacks said.
Buffalo Wild Wings also reported lost sales of about $3 million, as well as a $2.2 million EBITDA impact, and a 10-cent reduction to its estimated earnings per share due to hurricanes Harvey and Irma. Buffalo Wild Wings said during the presentation that it has identified $40–$50 million in net cost saving as well, primarily due to labor, and achieved $5 million net savings in Q2. It expects $7 million in Q3, followed by $8 million in Q4, and about $25 million in 2018.
Buffalo Wild Wings is being very proactive. The company’s Blazin’ Rewards program is among the largest in the casual dining sector with more than 3 million guests enrolled. At the end of the second quarter, Buffalo Wild Wings also offered delivery at 230 company-owned locations and was generating $4.1 million in sales. Takeout and delivery comprised 17.6 percent of company-owned restaurant revenues in the quarter, up from 15.7 percent the year before. The company also estimated that third-party delivery was more than 90 percent incremental to dine-in and takeout sales. In other terms, there is plenty of room to grow here as well.
Delivery is on the books for Buffalo Wild Wings’ mobile app, including beer delivery in Ohio and Wisconsin to start. Fast Break Lunch remains a strong driver for the company as well, and can help penetrate a daypart that represented just 10 percent of sales before the promotion was unveiled in July 2016. Buffalo Wild Wings said Fast Brunch Lunch was “exceeding what we expected at the beginning of the year.”
Buffalo Wild Wings is also investing in waste reduction, labor usage planning, home officer and field operations support, marketing promotion, media spend optimization, and other heart-of-the-house initiatives. Additionally, the company is in the process of rolling out smaller-format locations built at 2,000–2,5000 square feet. Buffalo Wild Wings said it could expand these units to more than 200 spots across the U.S.
Zacks does expect some top-line growth. “Nevertheless, the company’s aggressive unit expansion strategy is expected to add to its top-line. Increased investments in technology-driven initiatives including the revamp of its mobile app are likely to further boost sales. Markedly, the Zacks Consensus Estimate for third-quarter revenues is pegged at nearly $501 million, reflecting an increase of 1.4 percent year over year,” Zacks said in the article.
There are some other notable happenings taking place at Buffalo Wild Wings lately. One was its October 17 announcement it was partnering with Team Dignitas on its first esports team partnership. On Monday, the chain also announced it was joining forces with Call of Duty: WWII. The partnership with video game publisher Activision ahead of the game’s November 3 release will allow Blazin’ Rewards members to obtain and redeem codes for double multiplayer experience points.
“We’re excited to give our Blazin’ Rewards loyalty members a virtual boost as they play Call of Duty: WWII this November,” said Bob Ruhland, vice president of marketing for Buffalo Wild Wings, in a statement. “Our international partnership with Activision reinforces our commitment to rewarding our loyal and passionate Fans with more opportunities to enhance their everyday experiences.”
There also remains a good deal of uncertainty about the direction of the company moving forward. Buffalo Wild Wings’ June shareholders meeting signaled the beginning of the end of a 21-year era, as longtime CEO Sally Smith’s impending retirement was compounded by the addition of Mercato Capital Management LP nominees Scott Bergren, the CEO of Pizza Hut, CIT Foods CEO Sam Rovit, and Mick McGuire to the board. McGuire, Marcato’s founder and managing partner, has long called for a plan for more than 500 company-owned units to be sold by 2020. The franchising shift, Buffalo Wild Wings executives have said, would be similar to the push DineEquity sent Applebee’s in—a process that took five years and refranchised close to 500 stores. Applebee’s struggles have been well documented in recent years.
Buffalo Wild Wings did announce in June that it was offering 83 company-owned restaurants in Canada, Central and Eastern Pennsylvania, Northeast U.S., South Texas, and Washington, D.C., for sale. The Cypress Group, a restaurant and franchise investment banking firm that has worked with Wendy’s and TGI Fridays in the past, is managing the initiative. Buffalo Wild Wings revealed during its first-quarter earnings release that it planned to refranchise 13 percent of stores. Whether that number will balloon as Marcato turns up the pressure remains to be seen.