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Activist investor asks Buffalo Wild Wings CEO to resign

Marcato Capital Management says board should immediately start looking to replace Sally Smith

Saying that the company has “significant operational and financial deficiencies,” activist investor Marcato Capital Management on Thursday urged the resignation of Buffalo Wild Wings CEO Sally Smith.

The request came along with an extensive presentation, some of which included comments from current corporate employees and former executives that were highly critical of existing management at the Minneapolis-based chain.

“CEO Sally J. Smith should resign, so that the company can properly address these significant operational and financial deficiencies that have occurred under her watch,” Mick McGuire, managing partner wrote in a letter to shareholders.

In a statement, Buffalo Wild Wings defended Smith’s leadership.

“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,” a company spokeswoman said in an emailed statement.

“Under CEO Sally Smith’s leadership since its IPO in 2003, the company has generated total returns for shareholders of 1,697 percent. In fact, $10,000 invested in Buffalo Wild Wings’ stock at the IPO was worth more than $175,000 on March 31, 2017. 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.”

Marcato owns 6.1 percent of Buffalo Wild Wings stock and has nominated four people to the board — one of whom, Sam Rovit, the chain itself has endorsed. 

Thursday’s letter and presentation makes the proxy fight a referendum of Smith’s leadership.

Smith has been CEO since 1996 and has been widely credited with turning Buffalo Wild Wings from a little known sports bar into the largest chicken wing concepts in the country. 

Yet weakening sales and a high priced acquisition of a franchisee in 2015, has led to questions about the company and has weakened its stock price. Buffalo Wild Wings’ stock fell by more than 11 percent in 2015 and by more than 3 percent in 2016. 

“Buffalo Wild Wings’ stock price serves as proof of management’s inability to effectively operate the business at this critical moment in its history,” McGuire wrote.

Marcato’s presentation includes several comments from current and former insiders. It quotes one former executive saying that headquarters staff “is silently cheering” after reading one of Marcato’s presentations.

Marcato hired a consulting firm, who suggested the company could make changes to food costs, staffing and procurement, as well as general and administrative costs, that would improve margins by as much as 600 basis points.

Franchisees, for instance, consistently generate higher margins than the company does in operating restaurants. The company’s largest franchisee — Diversified Restaurant Holdings Inc. — generates 24.3 percent profit margins at its restaurants, compared with 17.7 percent for the company.

Diversified gets more business from alcohol sales and has lower labor costs.

Perhaps the biggest criticism was reserved for the company’s “guest experience captains,” or employees who roam the store working to ensure good customer service.

The captains generated higher labor costs, but Marcato argues they did little to help improve customer experience.

Marcato quotes one corporate employee with saying that the role “has shown negligible positive impact on store experience.” And it quotes the CEO of Diversified, who said in March that the company did not implement the program after testing it in a couple of stores.

The activist also cites Buffalo Wild Wings’ declining performance in Nation’s Restaurant News’ annual Consumer Picks survey. Buffalo Wild Wings had the lowest score of casual-dining restaurants in the survey last year.

The presentation also chides the company for a lack of operations experience inside the company.

“To improve the performance of BWW, I would clean house and get operators involved in the management,” the presentation quotes a former Buffalo Wild Wings franchisee as saying earlier this month. “Now you have bean counters and attorneys running the show with lip service about customer care.”

Marcato also repeats a criticism that takes executives to task for not buying the company stock on the open market.

“It is clear to us that despite rhetoric surrounding her optimism in the long-term value of the company, Ms. Smith lacks confidence in Buffalo Wild Wings’ future potential,” McGuire wrote.

“For far too long, we have seen an executive more concerned with saving her own skin versus having skin in the game and being an effective steward of shareholders’ capital. Accordingly, we urge the board to immediately commence a search for a new CEO.”

Contact Jonathan Maze at [email protected]

Follow him on Twitter at @jonathanmaze

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