How Buffalo Wild Wings Took Off Again

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In this segment from the Market Foolery podcast, host Chris Hill and David Kretzmann of Motley Fool Rule Breakers and SuperNova cheer on the impressive earnings report from Buffalo Wild Wings (NASDAQ: BWLD) that pushed its shares up by double-digit percentages.

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Better cost controls and some strategic shifts helped it tack into the dual headwinds of higher chicken wing prices and the falling same-store sales that still plague many casual restaurant chains. Is all this what activist investor Marcato Capital Management has been waiting for?

A full transcript follows the video.

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This video was recorded on Oct. 26, 2017.

Chris Hill: Buffalo Wild Wings' third-quarter earnings came in so much higher than anyone was expecting, possibly even them. The stock is up 20% today. They're doing a great job of cutting costs. I don't think Sally Smith is rethinking her decision to leave as CEO, which she announced on June 2. I don't know if this is her last full quarter in the corner office, but if it is, this is a hell of a swan song.

David Kretzmann: At least a higher note to go out on rather than getting essentially booted out by Marcato Capital, the geniuses who have since driven the stock down 20%.

Hill: They didn't boot her out. They got seats on the board and she said, "I see where this is going, and I feel good about my resume, so I'm going to exit stage left."

Kretzmann: Right. I don't blame her. I think Marcato came in with a very short-sighted strategy. They essentially want to go to an almost 90% franchising model, which I think they tried to do with Applebee's a few years back, and they basically ran that into the ground. Didn't go all that well. So it's like, OK, your track record with restaurants is not all that great.

I think Buffalo Wild Wings here, similar to Twitter, is benefiting from low expectations. The stock was down well over 25% since June, when Marcato did gain those board seats and essentially gained more control over the future direction of the company. Buffalo Wild Wings is still seeing declines in same-store sales, seeing a lot of the headwinds that many casual diners in the U.S. are facing. Buffalo Wild Wings has an extra headwind in the form of traditional chicken wing prices, which makes up almost 30% of their total cost of sales.

Hill: Those are going up.

Kretzmann: Yeah, those are going up. Over the past year, up 26%. So when essentially your main cost item is going off at that pace, it's going to be hard to put up any decent numbers. So I think part of the issues that Buffalo Wild Wings has experienced, and part of the reason why Marcato targeted them, you can probably attribute some of those problems just to facing such high chicken wing prices. Because as soon as those prices go down, you're going to see an instant improvement in margins just about overnight.

But in the meantime, they are transitioning from a focus on traditional wings to boneless wings, which have a lower price point. Their Tuesday wing promotions are now focusing on boneless wings almost entirely, at least in their company-owned stores, and they're rolling that out to the franchisees soon. So they're trying to find different ways to keep customers coming back into the stores, but going toward some higher-margin products.

And they're also seeing strong improvements with takeout and delivery, that now makes up 19% of total sales. They have a Blazin' Rewards loyalty program, which has 3.5 million members. They're trying to push out more personalized offerings to those members. I do like how they are positioning themselves for when that time comes that chicken wing prices fall back to Earth and the restaurant sector in general actually has some tailwinds, rather than the constant headwinds of the past couple of years.

Hill: Where are you on the spiciness scale? I think, if I'm remembering correctly, on the menu at Buffalo Wild Wings, they have 21, I think it's 21, different sauces? And they range in how hot they are. Where are you? How spicy? If you're digging into wings -- well, you're not a chicken wing guy.

Kretzmann: I'm not. But I enjoy some spice.

Hill: When it comes to your palate in general, where are you, on a scale of 1 to 21?

Kretzmann: I feel like I always overestimate how spicy I like things. Realistically, I'm probably 10 or 11, but I would probably try a 15 and regret it instantly.

Hill: [laughs] Regret it instantly. Reach for the water and the bread and then dial it back.

Kretzmann: Yes. How about you?

Hill: I'm probably somewhere in the low teens. But I've certainly had experiences in my life where I have done that move, where it's like, yeah, I'll try that, and then instant regret kicks in.

Chris Hill has no position in any of the stocks mentioned. David Kretzmann owns shares of Buffalo Wild Wings and Twitter. The Motley Fool owns shares of and recommends Buffalo Wild Wings and Twitter. The Motley Fool has a disclosure policy.