BUFFALO WILD WINGS, INC. (BWLD) – STOCK DOWN SINCE Q1 REPORT, – JUSTIFIABLE?
CONCLUSION: MARCATO CAPITAL’S MICK McGUIRE IS RIGHT ! THERE IS A LOT OF POTENTIAL HERE! But there is nothing he is suggesting that the Company is not doing. Whether he gets his board seats or not, we believe the result will be largely the same: better performance, for the Company and the stock, over time.
Relative to the Q1 earnings release, the Bloomberg headlines included:
BWLD 1Q EPS $1.25, est.$1.69, 1Q co-owned comp sales +0.5%, est. +0.1%
BWLD sees FY EPS $5.45-$5.90, est. $5.77
BWLD Q1 revenues $534.76 vs. $535.35 expected
BWLD sees yr. comps up about 1%, saw up 1%-2%
BWLD sees $15M-$17M in margin savings in 2nd half of ’17
Chicken wing prices to rise 8%-10% year over year
BWLD to review restaurant operations and spending
To sell about 13% of co. owned restaurants
CNBC: earnings miss could give Marcato the upper hand
ON THE EARNINGS CALL:
Management made some of the following points, in some cases elaborating on headlines above :
New initiatives are exceeding or meeting company goals, 2 smaller format stores in test, BWLD sees delivery in 250 company restaurants by end of year, see restaurant margin of 20% in long term, comp sales may be hurt by not promoting “Wing Tuesday” deal, BWLD to change Wing Tuesday promotion by end of current quarter.
AFTER THE CALL:
CNBC : BWLD CEO pleased that comps turned positive, in Minneapolis Star: BWLD to cut $40-50 million in costs, New York Post: Buffalo Wild Wings earnings dip as wing prices soar, BWLD cut to Neutral from Outperform at Baird, PT lowered to $160, Fox Business: BWLD weathers another tough quarter, Bloomberg: BWLD margins plunge as expenses soar, cut jobs amid rising labor and wing prices, Restaurant News: BWLD faces challenging chicken wing prices.
RESPONSE OF ANALYSTS, THE MEDIA, AND THE MARKET:
You can see from the headlines and the post earnings commentary that, notwithstanding the company’s less than convincing attempt to explain the shortfalls, the clear impression was that BWLD is “struggling”. The stock selling off by 4-5% provides a good summary of the reaction, short term though it may prove to be.
The tone of the conference call was unnecessarily defensive, though understandable in light of the current proxy fight.
IF THE CLASS IS LESS THAN HALF FULL
A cynic would interpret the situation like this: “We missed the first quarter because sales were still sluggish in a tough environment. Wing prices hurt us materially and we don’t know when they will improve so we are building in a 8-10% YOY increase this year and we are adjusting the Tuesday promotion which could hurt sales. Labor was up 80 basis points, and we are adjusting the labor content by eliminating the “team captain” position, which we thought was important a couple of years ago and we are maintaining in some high volume locations. We will be reducing expenses both at the store level and G&A ($40-50M over two years to offset the higher labor and expected food costs. We are reducing the year’s earnings guidance to $5.45 to $5.90 (adjusted), which will be helped by reduced shares outstanding on our buyback.”
To be fair, the company talked about the substantial stock repurchase, the success of their operating initiatives (mobile app, delivery, service improvement, small format store plans, international franchise success, franchise interest in purchasing company stores). Unfortunately, the Company allowed the call to get bogged down with discussion of wing prices, labor issues, and the ongoing industry traffic challenges. Obviously, from the post-call commentary of analysts, the media, and the stock performance, the impressions provided were not positive, on balance.
IF THE GLASS IS MORE THAN HALF FULL
I would have put it this way, and it’s a lot more lengthy because I (as CEO of the Company) believe there is a lot more going right than wrong (listen to Howard Shultz or Ron Shaich).
“Our systemwide sales and traffic were flat to up modestly in the first quarter, which is a clear improvement over the trends of the last couple of years. Our earnings were less than expected due to short term issues and expenses out of our control such as proxy expenses. The biggest factor in the shortfall was wing prices and the wing/pound yield, especially when combined with the success of our “Wing Tuesday” promotion. We are pleased that the promotion was so well received, especially in a very competitive promotional environment but will replace this promotion with something not quite so costly. Our reduction in earnings per share guidance this year assumes an 8-10% YOY price rise to $2.06-$2.10 per pound. It ran $2.05 in Q1 and is running $2.02 at the moment. Obviously it could go either way, but the nice thing about chicken prices is that high prices most often cure themselves over a matter of just a few months. Last year they went from $1.94 to $1.72 from Q2 to Q3, then back to $1.99 in Q4. Time will tell. While we continue to cope with labor costs (up 80 bp in Q1), this is an industry wide problem, and we did at least as well as most of our peers in this respect. From an overall corporate expense standpoint, we believe we have uncovered potential savings, at both store level and corporate, that can offset higher labor and food costs, and protect our corporate profit margin. (Forget the details, every restaurant company is doing this). We have increased the number of stores to be franchised, from 10% to 13% of our present company locations. We have seen substantial interest from existing franchisees, not only to buy stores but additional territory. We believe that our franchised new unit growth will accelerate once our franchises have more room to do so. As a vote of confidence in our long term success, we continue our aggressive stock repurchase program, amounting to $212M in just the first quarter. When our full authorization is completed, we will have retired 17-18% of our shares outstanding as of 12/31/16 in this year alone. This can obviously continue, and the Board will determine at the appropriate time what more should be done. Obviously, net debt of 1.5 times EBITDA is still relatively modest leverage, especially for an increasingly “asset light” franchisor. We have lowered our same store sales estimate slightly, from 2% to 1%, since the macro environment is still challenging and it is only sensible to be conservative in this regard. Every one of our current sales building initiatives is working, meeting, and in some cases, exceeding our expectations. Lastly, from a broad brush standpoint, the restaurant industry must provide a true “experience” to get the consumer off the coach and spend their hard earned money. We feel our venue is unique. In fact there is no other chain with 1200 units in the US that is better equipped to provide an experience to match our own. Lastly, and we will not take questions in this regard, we believe that Marcato Capital has made some worthwhile suggestions, and we feel we are in fact addressing virtually all of their concerns. Relating to our future opportunities and, in some part to the so called proxy fight, speaking for myself, Sally Smith, I am gratified that our franchise network has given me a strong vote of confidence. I have never been more charged up to improve our long term unique positioning and also put in place many of the improvements that are obvious and necessary. Our entire team here at BWLD has tremendous pride in our past accomplishments. Some years are better than others, and the last two years has not been our best, but we feel that we have put in place some crucial initiatives during this period, and sometimes it takes a while, in the real world, for the benefits to accrue. We feel we are just getting started in building out the Buffalo Wild Wings brand, both domestically and abroad. With that, we are happy to entertain questions. ?