In this Market Foolery segment, host Mac Greer, David Kretzmann of Supernova and Rule Breakers, and Matt Argersinger of Million Dollar Portfolio consider the unappetizing numbers from Buffalo Wild Wings' (NASDAQ: BWLD) latest earnings report. Comp sales were lower than expected, operating expenses were higher, and even the pending exit of CEO Sally Smith -- pushed out by activist investors -- has not been cheering up investors. So why is the former market darling in such trouble, and where will it go from here?
A full transcript follows the video.
This video was recorded on July 27, 2017.
Mac Greer: Not a good week or a good day for Buffalo Wild Wings. Shares down on Thursday, after the company reported a decline in second-quarter profits. David, CEO Sally Smith pointed to higher wing costs, lower-than-expected same-store sales, and higher operating expenses.
David Kretzmann: Check, check, check.
Greer: That doesn't sound great. Now she is leaving the company. What exactly is she leaving?
Kretzmann: Not Buffalo Wild Wings at its best, that's for sure. This quarter just confirmed the downfall of the company over the past year and a half. Going back to early June, we had that big proxy battle with Buffalo Wild Wings and Marcato Capital, the activist investor group. They wanted to replace the leadership -- in this case, Sally Smith. They nominated several people to join the board. Since they won that proxy vote on June 2, shares are down 23%. So chalk one up for the great world of activist investors. Thank you, guys!
As a shareholder, it's been a painful journey for Buffalo Wild Wings over the past couple of years. They've really struggled with this restaurant slowdown. Going back to the start of 2016, almost every quarter, they've missed their guidance, missed their expectations, and lowered their guidance for the coming quarters and the coming year. So they did more of the same this quarter. And a lot of it does have to do with record-high chicken wing prices, which make up about a third of the cost of restaurant sales. So when chicken wing prices are low, their margins are great, investors are happy, you're not going to have activist investors. But when you have high chicken wing costs on top of a restaurant slowdown that's been persisting for a couple of years now, then you really get a recipe for poor results like this.
Greer: You mention that it's been a rough couple of years. But this has been a great long-term performer. When you widen the lens and look at the last five or 10 years, it's been a great stock. How about going forward? Someone looking at Buffalo Wild Wings from this point going forward, does it beat the market?
Kretzmann: I think there's still potential for it to beat the market. I'm a shareholder. I'll be holding my shares. Right now, the board is looking for a new CEO. Sally Smith will be stepping down in the middle of August, so just within a few weeks. I think you want to see who they bring on board as CEO, what vision they have. Marcato Capital has really been pushing Buffalo Wild Wings to franchise the majority of their stores. Right now, it's closer to a 50-50 split. I think if the restaurants are performing well, it makes more sense to keep those in house as company-operated restaurants.
But a couple things that they are doing that I do like -- they rolled out a loyalty program nationwide that has 2 million members. I think that makes a lot of sense for retailers and restaurants to do. If you don't have a loyalty program, there's no good excuse to not have one at this point. They're also testing out moving more toward lower-cost boneless wings. For a while, they've had a half-priced wings Tuesday promotion. When the cost of your main item, chicken wings, is going up, you don't really want to be selling them for half price.
Greer: Not a great business.
Kretzmann: Not a great combination. But boneless wings have a lower cost, so they're trying to shift their promotion more toward those, and it seems like there's some progress there. They're also doing a lot with takeout and delivery, online ordering, things like that. So I think there is reason to be optimistic, if they can bring in the right management change in the coming months.