Buffalo Wild Wings (BWLD, Financial), famous for its three-word slogan, “Wings, Beer, Sports,” is facing mounting questions about its future. Slipping sales, increasing costs and struggles over the company’s future have damaged the share price and expectations going forward.
Is the pain nearly over? Let's take a look at this erstwhile star of the fast casual market.
Slipping sales and out-of-control costs
Over the first half of 2017, Buffalo Wild Wings took a beating in the market, seeing its share price drop from well over $160 to a meager $95, the lowest it had been in almost three years. A series of missteps, transgressions against shareholders and lagging sales and margins resulted in a widespread sell-off. The stock has been punished accordingly.
Three years ago, Buffalo laid out its corporate strategy to take the casual dining world by storm. It presented an aggressive expansion plan which would take it across the nation and the world. They did just that. And shareholders prospered. The stock price more than doubled over the coming years. Buffalo Wild Wing’s sales were robust, they maintained relatively steady costs, and marketing and expansion plans were seen as a great success.
Then came the problems. Let’s first address the largest elephant in the room: sales and margins. Buffalo Wild Wings' main product is the chicken wing. It is important to distinguish between traditional wings and boneless wings, as the market for traditional wings is far more volatile and has substantial effect on Buffal Wild Wings’ performance. With increased cost of goods sold, Buffalo Wild Wings saw its margins falling precipitously, and with them several straight quarter of abysmally dragging earnings.
Signs of hope
While continued bearish sentiments are understandable, a bullish story might be taking shape.
The third quarter earnings report for Buffalo Wild Wings saw a continued downturn in earnings, but there were a few glimmers of hope. After the report was released, the bulls had a great day, seeing the stock price elevate 20% in one day. While some argue a bearish play, I argue a small bullish play, but, if and only if, Buffalo Wild Wings can pull off its proposed changes.
Some of these changes were presented at the beginning of the second quarter and some more recently, as potential transformation begins:
- Change in promotion. Buffalo Wild Wings recently introduced a half-price wing promotion. However, it began with selling traditional wings and the promotion was operating at a loss. In the third quarter, it changed the focus of the promotion to boneless wings, which resulted, as executives predicted, in profit growth. Restaurants saw their profitability spring from 13.8% to 16.6%.
- Back to basics. Executives at Buffalo Wild Wings presented a plan to return to growth by shifting its focus back to the basics, what made the company profitable to begin with. This most significantly includes a re-focusing on the restaurant and dining experience.
- Stronger earnings. Here, Buffalo Wild Wings continues to fail. Despite a positive outlook in March with the shifting up of its EPS expectations from second to third quarter, Buffalo Wild Wings missed earnings expectations once again. However, a surprise shift in guidance has its stock price soaring. Analysts across the Street have shifted their positions from Neutral to Buy. The surprise shift in guidance rides completely on a proposed transformation and turnaround yet to be seen or really flushed out in any quantitative proof.
Takeover? Possibly.
On Nov. 14, Roark Capital made a takeover offer priced at over $150 per share – $2.3 billion total. The stock soared in overnight trading, but has since drifted to sit below $140 today. Such a takeover would make for a solid short-term play and potentially transform the business for the better. Roark has a strong track record of similar turnarounds. The offer price is only 8-10% above current price levels, so it is far from overly generous, but it might still get a friendly reception. Roark’s offer might also put the company “in play” and trigger other, more generous buyout offers.
PE firm Marcato already holds a significant stake in Buffalo Wild Wings and it will play an influential part in takeover negotiations. Marcato may very well hold out for a higher price or rival bids to increase their profits from the deal.
Going in at the current price with the potential for a buyout in excess of $160 per share might be an attractive quick play.
Disclosure: I/We own none of the stocks mentioned in this article.
