Reports surfaced last week that Buffalo Wild Wings (BWLD) has received a buyout offer from private equity firm Roark Capital Group at an estimated $150 per share, a generous premium to the stock's recent trading level. In the following segment from the Industry Focus podcast, the team dissects what went wrong at the once red-hot fast casual chain.
A full transcript follows the video.
This video was recorded on Nov. 14, 2017.
Vincent Shen: While we're on the topic of M&A, another deal made headlines yesterday that I wanted to discuss as well, Asit, and that's with private equity firm Roark Capital, which has made a bid for Buffalo Wild Wings. Let's get some background for where Buffalo Wild Wings' business currently stands before we look at Roark and their buyout offer.
B-Dubs stock was down close to 25% year-to-date prior to the buyout news. Looking back two years to when the stock traded briefly above $200 per share, [it's] actually down over 40% in that time. The company has already had to navigate crossroads before this acquisition news came to light, because over the summer, the longtime CEO, Sally Smith, announced her retirement after activist investor Marcato Capital managed to wrangle more control of the company, winning a proxy battle, and they put three of their people on the board of directors. Asit, we know that the restaurant sector has been dealing with some pretty weak traffic and business conditions over the past two years. Buffalo Wild Wings, their comparable sales at restaurants have been in decline for six of the past seven quarters. Profit margins are hurting. What do you think was Marcato Capital's biggest criticism of the company before they won the board seats, and how do you think they're trying to turn the company around?
Asit Sharma: Marcato's biggest beef with Buffalo Wild Wings was probably the fact that BWLD wasn't using its capital appropriately. The company, in trying to boost earnings per share, was buying back restaurants. Now, traditionally, if you are a quick-service or fast-casual chain, you're moving in the opposite direction. Some listeners may remember, we actually talked about this a year ago. Most companies will start to franchise restaurants and go capital light as they become more successful. Think Wendy's and Dunkin' Donuts, which have both gone to near-100% franchise models, where the corporation doesn't own its own stores so much as collect those lucrative royalty fees.
Well, Buffalo Wild Wings was actually trying to boost its core earnings by going to franchisees and buying back restaurants at a high cost. And Marcato stepped in and took issue with this, and I sort of agreed with them. I thought, this isn't the way to boost earnings long-term. I think they suffered from that. At the same time, as you mentioned, Vince, concurrent to this, the trends inverted for the fast-casual industry. Whereas dining out had been increasing for the past few years, suddenly concessions by grocery stores, the availability of ordering out and UberEats, which has sprung up -- so many factors combined to take traffic away from fast-casual restaurants. One of those being, McDonald's is back, believe it or not, and it's getting a little bit of market share from traditional players. So, really bad point for Buffalo Wild Wings to be at. And one more thing is its costs are increasing due to rising chicken wings prices. So it's sort of a perfect storm of factors that made them vulnerable for this new capital group, Roark Capital Group, to come in with an offer of $150 per share.
Shen: Yeah. The traffic trends have been weak in fast-casual, casual dining, a lot of different sub-sectors within the restaurant industry. With Marcato Capital, now that they're in control, they're going to be pushing for the refranchising that a lot of the restaurant industry has been pushing toward. They've also made changes to the promotional strategy. You mentioned the rising cost of the chicken. For example, my brother and I used to be big fans of their Tuesday promotion, in terms of half off their traditional wings every week. They've swapped traditional wings for boneless ones since the traditional wings have steadily increased in cost over the years. They couldn't afford those prices, having those promotions, and the traffic just wasn't making up for the lost in profitability there. And the refranchising effort has really begun in earnest too. I think it was over 80 locations in Canada, Texas, Pennsylvania, nearby Washington D.C., restaurants there being selected as part of that process. Marcato wants to take the current 50% franchise portion for Buffalo Wild Wings, 1,200 locations total, push it closer to 90% to be in line with some of the competitors and other restaurant chains that you mentioned, Asit, also, Burger King and Domino's are at similar levels.