On the Margin
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Chipotle, Buffalo Wild Wings: Former darlings feel activist heat

This post is part of the On the Margin blog.

One bad year can take a restaurant company from Wall Street darling to activist target.

Buffalo Wild Wings Inc. and Chipotle Mexican Grill Inc. are both facing activist investors this year, not all that long after both chains were leaders in their respective segments, both on Wall Street and in the minds of consumers.

The chains’ challenges are different. And strong arguments can be made that both could use some activism. Yet their experiences demonstrate that even the strongest chains have to be mindful of potential activist ire because, frankly, they’re only a couple of bad quarters from coming under the gun.

Eighteen months ago, investors and customers couldn’t seem to get enough of Chipotle. The company went public in 2006 and, by August of 2015, its stock was worth more than $750 per share. If you bought $1,000 stock at its IPO it would have been worth nearly $38,000 at that point.

Entrepreneurs kept developing concepts they hoped would be the “next Chipotle.” Customers lined up at the chain’s stores, giving Chipotle routinely strong same-store sales. Analysts speculated that the chain’s stock could hit $1,000 per share.

And then those food safety issues hammered the chain, its same-store sales plunged, and its stock price was largely cut in half. This year, the company has struggled to get customers back, even after giving away burritos for months. Same-store sales on a two-year stack basis have fallen 19.3 percent in each of the past three quarters. That’s bad.

Investors actually had a good chance to add new blood to Chipotle’s board and send the company a message. Various pension funds pushed for new shareholders and a proxy advisory firm recommended against the re-election of two board members, but shareholders ultimately affirmed the company’s full board. 

That didn’t stop Bill Ackman from taking a position in Chipotle to push even harder. This week — with sales still not improving more than a year after the food safety issues took hold — the company acknowledged it would soon be adding board members, and one of them might be Ackman. There are even rumors the chain’s co-CEO, Monty Moran, could be on his way out. 

It’s not entirely clear that Chipotle could return to the “Chipotle of old,” at least anytime soon, given its challenges and the overall competitiveness of the restaurant market. That makes it an uncertain investment for Ackman.

Yet pushing a company that has had such problems and can’t seem to reverse its sales trends is hardly a bad thing from an investor’s standpoint.

The issues afflicting Buffalo Wild Wings are more traditional. The chicken wing chain had spent most of its life generating positive same-store sales and adding units, becoming one of the most admired companies on Wall Street and a leader among casual dining concepts.

While it didn’t quite have Chipotle’s stock valuation, it did have an almost uninterrupted increase since 2006. At one point last year, its stock reached $203 per share.

But the company’s same-store sales started declining. Since its 2003 IPO, the company has had only four negative same-store sales quarters, and three of them have come this year. At one point this year, its stock fell more than 30 percent since hitting that $200 mark.

Critics say the company has raised prices too aggressively in recent years, and so the same-store sales growth even before the recent decline hid weak traffic. And the chain has been buying franchisees — it bought 41-unit Alamowing Development LLC for $160 million, a price of nearly $4 million per location.

And so Marcato Capital Management bought 5.2 percent of the company’s stock and is now making a hard push for changes. By all indications, that seems likely to lead to a proxy fight

Still, while Buffalo Wild Wings appears to be going its own way, Marcato’s presence is clearly forcing the company to make changes — it recently added new board members and is looking at making moves in a bid to increase its stock price.

Investors like activists, which tend to generate stock price increases once they get involved in a company. And activists like the restaurant industry. Numerous companies, including giants McDonald’s Corp., Yum Brands Inc., Darden Restaurants and others, have faced activists at one time or another. In Darden’s case, activists won every single one of the company’s board seats.

The fact is, activists target chains where stock prices are weak, and where theoretically some changes could quickly reverse those trends. In the cases of Buffalo Wild Wings and Chipotle, the chains still have potential and thus activists see the chance to make some money off of the recent decline.

Jonathan Maze, Nation’s Restaurant News senior financial editor, does not directly own stock or interest in a restaurant company.

Contact Jonathan Maze at [email protected]
Follow him on Twitter at @jonathanmaze

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