The long fight between activist investor Marcato Capital and Buffalo Wild Wings (NASDAQ:BWLD) over future business strategy is over. The victors: the activists, who were pushing for increased franchising to put more restaurants into the hands of individual owners, leaving the company with less risk. Marcato won seats on the board, the company has selected the first 83 restaurants to be refranchised, and now a wait-and-see game on the restaurant chain's new direction will have to be played.

An epic battle concludes

Marcato Capital's battle with B-Dubs yielded it three seats on the nine-member board of directors: Sam Rovit, who was actually nominated by B-Dubs as well; Scott Bergren; and Marcato Capital founder and CEO Mick McGuire III. 

Marcato had been railing against B-Dubs CEO Sally Smith for months leading up to the June 2 vote, blaming the company's recent lackluster performance on her. On June 2, before vote tallies were announced, Buffalo Wild Wings put out a press release saying Smith would be retiring by the end of this year and had withdrawn her candidacy for the board. 

In the days before the vote on board members, Buffalo Wild Wings announced it had retained The Cypress Group, a restaurant and franchising investment bank, to help it market roughly 10% of the company's company-owned restaurants. This will help with the refranchising efforts that Marcato has proposed, which would transition the company to being 90% franchised locations.

Of the 1,230 B-Dubs at the end of the first quarter, 607 were franchises. That means 500 of the 623 corporate-owned locations need to get sold to franchisees to get to 90% franchised. The announced 83 up for sale is a solid start in moving toward that goal.

A basket of Buffalo Wild Wings chicken wings.

Image source: Buffalo Wild Wings.

Post-battle cleanup

B-Dubs announced on June 19 that it is putting 83 of its company-owned locations up for sale to franchisees. Locations selected are in Canada, central and eastern Pennsylvania, the Northeast U.S., South Texas, and Washington, D.C. In moving to a primarily franchised business model, the hope is that risk associated with operating restaurants will be shifted to franchisees and profitability will be boosted. You can read my earlier take on Marcato's proposal here.

In mid-June, Buffalo Wild Wings also announced that it's testing two small-format (about 2,500 square feet) locations in Minneapolis this summer. The company has been experimenting with takeout and delivery, and the new stores will be geared toward counter service pick-up or delivery to customers' homes. Seating will be limited to about 30 to 50, with TVs to keep guests updated on the latest sports event.

Whether it's through refranchising or new store experiments, the chicken and sports bar chain has its work cut out for it. Overall, restaurant industry comparable sales -- which combine foot traffic and ticket size to measure performance at established locations -- have been falling for over a year now. Buffalo Wild Wings has followed that trend downward, so there's pressure on the new board to come up with a solution. Here is what comparable sales at U.S. restaurants have looked like for the last six quarters. 

Restaurant industry comparable sales have been in decline for over a year, but the most recent quarter showed some improvement, down only 1.6%.

U.S. restaurant comparable sales have been in decline for nearly a year-and-a-half. Data source: TDn2K. Chart by author.

For your consideration

Since the vote early in June, Buffalo Wild Wings' share price has fallen as doubt over the new business strategy takes hold. The good news is that while B-Dubs is being looked to as a large-scale experiment of sorts in the restaurant world, this isn't uncharted territory. Two other casual diners rely heavily on franchising: IHOP and Applebee's parent company, Dine Equity, and Denny's.

Franchising out so many locations has historically been the work of fast-food giants like McDonald's. Franchising in of itself isn't necessarily a huge risk -- in fact it reduces risk for B-Dubs as it shifts the responsibility of operating restaurants to franchisees. However, long-term success of the brand isn't necessarily helped by franchising either. While it bears mentioning that Dine Equity and Denny's both operate very different restaurant concepts than B-Dubs, their stock performance during the recent "restaurant recession" is mixed.

DIN Chart

Data by YCharts.

There is certainly a great deal of uncertainty as to how all of this will play out for Buffalo Wild Wings, like how much a Buffalo Wild Wings location will fetch from franchisees and what corporate will do with the proceeds from the sales. The good news is that after the declines in share value, the stock's price-to-free-cash-flow ratio -- one of my personal favorite metrics for finding undervalued stocks -- indicates the company might be approaching bargain territory.

BWLD Free Cash Flow (TTM) Chart

Data by YCharts.

In spite of the risks, shareholders thought Marcato had some good ideas, or they wouldn't have voted for the new board nominees. I'm willing to hang on to my shares, even if for nothing more than to be able to say I was along for the ride. I think refranchising has the possibility of providing a short-term boost to B-Dubs' bottom line, but longer-term the company's success ultimately hinges on the experience delivered to guests. Over the last couple decades, that experience has been a winning strategy. Until that changes I still like the company. 

Nicholas Rossolillo owns shares of Buffalo Wild Wings. The Motley Fool owns shares of and recommends Buffalo Wild Wings. The Motley Fool has a disclosure policy.