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Buffalo Wild Wings fight pits recent troubles against long-term success

Shareholders will soon decide the future of the company and its management

Should Buffalo Wild Wings Inc. management and its board of directors get credit for the chain’s long-term success, or do recent problems warrant major changes?

That’s the question facing investors of the Minneapolis-based chicken wing chain, who will decide on June 2 whether to give board seats to an activist shareholder, Marcato Capital Management.

The results could be significant. Marcato wants longtime Buffalo Wild Wings CEO Sally Smith to resign. The activist has also said that the vast majority of the chain’s more than 600 company-owned restaurants should be refranchised.

The changes would dramatically shift course at Buffalo Wild Wings, which until late 2015 was among the strongest-performing restaurant companies on Wall Street. But the chain has recently struggled, frustrating investors and fueling Marcato’s dissident campaign. 

There is little question that 1,200-unit Buffalo Wild Wings helped change the face of casual dining as it grew into a national phenomenon that helped make chicken wings a sporting-event staple.

The company grew sales at an impressively consistent rate between 2003 and 2015, helping it to become the third-largest casual-dining chain in the country, surpassing older, more established concepts like Chili’s Grill & Bar and Outback Steakhouse.

Buffalo Wild Wings’ stock price quadrupled between 2007 and 2015, and the company was routinely mentioned alongside Chipotle Mexican Grill Inc. and Panera Bread Co. as the strongest performers among publicly traded restaurant companies.

For Buffalo Wild Wings, its strong performance has earned it the benefit of the doubt.

“Buffalo Wild Wings’ financial results and stock performance have led the casual-dining sector over nearly all periods since its IPO in November 2003,” the company said in a statement this week. “We believe that a couple of challenging quarters is not a good justification to ignore 50 strong quarters since 2003.”

Indeed, those challenging quarters have all been recent. Same-store sales declined each quarter in 2016 — even though Buffalo Wild Wings increased spending on labor in a bid to improve customer service.

The company’s once unstoppable stock, which hit a high of nearly $206 per share in September 2015, fell by 32 percent by July 22, 2016. Then Marcato filed documents indicating it had taken an activist position in Buffalo Wild Wings.

“Buffalo Wild Wings must make substantial changes to its business practices if it hopes to reach its full potential both as a company and in terms of shareholder value,” Marcato founder Mick McGuire wrote in a letter to the company last year.

Buffalo Wild Wings has made numerous changes in response to Marcato. The company added three new independent directors last year, and nominated another new director, Janice Fields, in April. It also endorsed Sam Rovit, president and CEO of CTI Foods. If Buffalo Wild Wings were to win the proxy, the majority of board members would still be brand new. 

Buffalo Wild Wings has also vowed to refranchise more locations. Additionally, the company has worked to improve operations and is passing more cash to shareholders through buybacks of company shares.

The proxy advisory firm Glass Lewis endorsed Buffalo Wild Wings’ board nominees on Friday. In a report, it said the company has taken significant action related to strategy, operations and leadership over the past 18 months.

“In our view, these actions suggest a newfound focus and commitment on the board of the board and management to address the underlying business and financial challenges confronting [BWW] and to re-establish the company as a top performer in the industry,” Glass Lewis said. 

But Institutional Shareholder Services, or ISS, the largest of the advisory firms that review board votes and make recommendations, endorsed three of Marcato’s four nominees. And on Friday, a third advisory firm, Egan-Jones, endorsed all four nominees, saying they would “make significant contributions to the company.”

Marcato argued that Buffalo Wild Wings has done a poor job of operating restaurants and overpaid in making some acquisitions, particularly a $160 million purchase of 41 restaurants in 2015.

The activist said Buffalo Wild Wings should quickly refranchise most of its 634 company-owned restaurants, saying the chain could reach 90-percent franchisee ownership within two years.

Speaking on CNBC this week, McGuire said refranchising would improve margins and Buffalo Wild Wings’ returns.

“This is not risky,” he said. “It’s very feasible. There’s an enormous appetite for these restaurants, both from existing franchisees in the system and operators outside the system.” 

But Buffalo Wild Wings countered that such a dramatic refranchising of a casual-dining chain, half of whose locations are company operated, is a largely unproven strategy. Even ISS questioned the proposal as it endorsed most of Marcato’s nominees. 

“Except for Applebee’s, no other casual-dining restaurant chain with similar operational complexity has over 90 percent of its units franchised,” ISS wrote. “DineEquity’s experience with Applebee’s does not appear reassuring to Buffalo Wild Wings’ shareholders.” 

The other question is the future of Smith, who has led the chain since the mid-1990s and is among the longest-tenured chief executives in the restaurant industry.  

McGuire told CNBC: “The issues the company faces would probably benefit from leadership expertise both in turning around and improving operations of restaurant businesses, but also one that has more experience growing and building a more highly franchised system.”

But Buffalo Wild Wings countered that Smith has been good for shareholders and has generated strong returns. 

“Over the past decade, Buffalo Wild Wings’ performance has consistently led the casual-dining industry, delivering superior results to our shareholders while providing a differentiated guest experience to our customers,” the company said in April. “The company has continued to innovate and pursue cost-savings initiatives amid difficult market conditions for the sector, and remains focused on creating sustainable value for our shareholders.” 

Contact Jonathan Maze at [email protected]

Follow him on Twitter: @jonathanmaze

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