Nothing seems to be going right at Buffalo Wild Wings (NASDAQ: BWLD), the chicken-wings-and-beer-joint that turned sports bars into an art form. But that doesn't mean there aren't a few reasons to still be hopeful.
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Despite comparable sales falling again last quarter and profits plunging more than 60%, Buffalo Wild Wing's dismal earnings report released last month still offers investors some reasons to believe that the company can engineer a turnaround. Let's count the reasons why.
1. New management is coming on board
CEO Sally Smith is retiring, and though she has led the company for 15 years, largely without a misstep, the past two years have been less than inspiring and the buck stops in the C-suite.
Certainly there are large, macroeconomic forces working against Buffalo Wild Wings, just as with the restaurant industry in general, such as grocery store price deflation causing more consumers to make food at home instead of going out, but management needs to take the changed landscape into account. Smith seemed reluctant to make many of the changes B-Dubs needed until pressed by hedge fund Marcato Capital Management.
But a lot still depends upon who they bring in to replace her. When Starboard Capital led a coup against the board of Darden Restaurants (NYSE: DRI) several years ago, people questioned whether or not their plan for Olive Garden would work. Today, Darden has mostly bucked the trend in the casual dining segment and continues to improve. Buffalo Wild Wings will need someone who can similarly navigate the new landscape.
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2. Activist investors on the board have a plan
While Marcato Capital didn't upend the entire B-Dubs board, it does hold three of the chain's nine director seats, giving it a substantial say in how things will go in the future. Among the plans it has for the sports bar is for BWW to sell more company stores to franchisees. Right now the split is about 50-50, and refranchising will more closely align it with the trend underway in the rest of the industry.
Refranchising, however, is not a panacea for what affects a restaurant, and Nation's Restaurant News says it's actually a much less common strategy in casual dining than in other segments. There are pros and cons to selling more restaurants to franchisees, but in the case of Buffalo Wild Wings, which needs to cut costs, it could be a winning one.
It's already cut so-called guest experience captain positions and says it needs to more efficiently schedule employee hours while reducing waste in sides and condiments, but transferring those day-to-day responsibilities to franchisee-owners would allow it to focus more on the bigger picture.
3. Rethinking its restaurants
While B-Dubs made its mark as a sports bar and created an immersive experience with its stadia design, today the trend is going in the opposite direction. Buffalo Wild Wings is following that movement by redesigning new restaurants to make them smaller with more limited menus. Its B-Dubs Express concept is more of a fast-casual chain that focuses on take-out and delivery, favoring quick foods to-go or eating at home.
The Netflix phenomenon of consumers staying in and watching a movie or a game on TV is having a profound impact on the restaurant industry. Earlier this year, location-intelligence company Foursquare identified the trend after seeing increasing numbers of people checking in to liquor stores and grocery stores with fewer checking into sports bars. It suggested people were preparing for stay-at-home, bring-your-own social events.
Buffalo Wild Wings' small-footprint restaurants should be cheaper for it to open and operate, catering to the preference consumers are signaling, while passing off the responsibility for delivery to Door Dash.
4. Changing chicken promotions
Part of B-Dubs woes this past quarter had to do with persistently high traditional chicken wing prices -- even as it continued to run wing promotions. Paying more for your main product but charging your customers half price is a prescription for disaster. The restaurant isn't running away from being promotional, as that's what's helping to still drive customers through the doors, but it is swapping out traditional wings in favor of boneless, which are cheaper.
The risk, of course, is customers might not like getting a different kind of wing than what they're used to getting. However, this is a necessary development for the chain.
5. Improving the nuts and bolts of its operations.
Buffalo Wild Wings redesigned its website, rolled out its 2 million member customer loyalty program nationally, and improved its mobile ordering app. While moves like this alone won't jack up sales, taken together with its new take-out restaurants, it will enhance the customer experience and could be a winning combination.
6. Focusing on complementary concepts that work
While I'm not fond of restaurants running ancillary businesses, preferring instead they focus on doing one thing and doing it well, Buffalo Wild Wings is at least recognizing that some of its ideas have fallen short. There's a big shakeout coming in the fast-casual pizza world, something that always seemed more fad than trend, and B-Dub's decision to shut down its PizzaRev chain makes sense.
However, fast-casual Mexican food still has legs, and Buffalo Wild Wings R Taco chain looks like it is performing well -- it saw seven new restaurants opened in the quarter, including six new franchise locations, and it closed none.
The National Restaurant Association says 50% of people recently surveyed ate Mexican food at least once a month with 63% of households with children eating it frequently. That's probably more reason for Buffalo Wild Wings to keep its R Taco chain going than for its better-for-you pizza shop, a segment that is starting to see a few strong chains develop and the rest begin to fall away. Putting its money on what's working is just smart for B-Dubs.
Pain before gain
There's no use expecting Buffalo Wild Wings to go through this phase without experiencing some more pain, and its lower outlook for the year indicates management is well aware of that. Still, there is good reason to believe the chicken wings and beer joint still has a fighting chance to turn itself around. Finally, its discounted valuation that has it trading at a fraction of its sales and less than 14 times the free cash flow it produces makes it a tasty stock to consider.
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