Buffalo Wild Wings Inc. is trying just about everything to improve weakening sales. Including beer delivery.
But high chicken wing costs are costing the company one of its best promotions, as the Minneapolis-based chain plans to eliminate its popular Half-Price Wing Tuesday in favor of a buy-one, get-one boneless promotion.
The strategies, discussed during Buffalo Wild Wings’ second quarter earnings call on Wednesday, illustrate the chain’s competing challenges, with sales weakening as chicken wing costs spike.
Buffalo Wild Wings’ sales, once almost a birthright for the chain since its 2003 initial public offering, turned south in 2016. The brand recovered modestly in the first quarter of this year, but then declined by 1.2 percent at company locations in the period ended June 25.
The company is having trouble holding on to its traditional customers.
Cowen and Company Analyst Andrew Charles wrote in a note Thursday that same-store sales actually fell 3.5 percent when factoring out sales from Wing Tuesday and delivery.
But chicken wing costs have suddenly spiked again. “Historically high wing costs” hurt restaurant-level margins by 140 basis points in the quarter, CEO Sally Smith said on the earnings call.
The lower margins and weak sales hammered earnings, which fell by 63 percent to $8.8 million.
All of that bad news sent the stock down 8 percent early on Thursday. The stock is now below levels not seen since 2013.
“Same-store sales of negative 1.2 percent at company-owned locations and our bottom line performance were disappointing,” Smith said.
Buffalo Wild Wings is in the midst of major change at both the management and board level. Investors in June put three nominees from activist shareholder Marcato Capital Management on the board. Smith announced her retirement, and chief operating officer James Schmidt this month said he, too, would retire.
But that’s not keeping Buffalo Wild Wings from working on strategies to generate more sales. The company has delivery in 230 locations and accounted for $4.1 million in sales during the second quarter. The company estimates that 90 percent of delivery is incremental, and the chain plans to add delivery to its mobile app.
Delivery is one of the biggest trends in the restaurant business, with just about every major publicly traded chain working on some form of delivery service.
For casual-dining chains, however, delivery is a double-edged sword. While delivery provides the companies opportunities to reach guests in search of convenience, such customers don’t order the higher margin beverages. That’s tough for a chain like Buffalo Wild Wings that has built its business in large part on alcohol sales.
That’s why the chain is considering beer delivery. The company said it is in the “early exploration stages” of planning a beer delivery program in states where such a program could be legal.
Buffalo Wild Wings is also beginning to test beer takeout. “We do think there is an opportunity for additional beer sales with both takeout and delivery to the extent it’s available,” Schmidt said on the call.
The company is also looking at a new format amid the shift of consumers toward more takeout and delivery. This month, the company opened its first small format “B-Dubs Express” location in Minneapolis. The location has seats for 50, a streamlined menu and is focus on takeout and delivery.
Buffalo Wild Wings hopes the new format will help “penetrate higher density markets where the millennial population is moving,” Smith said.
But wing costs remain a challenge for a chain that relies heavily on a product limited to only two per chicken. Wing costs were $2.05 per pound in the second quarter, or 6 percent higher than last year. That’s high for this time of year, CFO Alexander Ware said on the earnings call.
The prices are even higher this quarter, with costs $2.13 per pound, or 24 percent higher, “emphasizing the importance of an alternative Tuesday strategy.”
That new strategy is a boneless chicken buy-one-get-one free offer at company locations by mid-September.
Boneless wings outsold traditional wings last year, but they are not as price volatile as traditional wings.
Still, the promotion has not been as well tested as the company’s traditional offers.
“Under normal circumstances, we would have a meaningful level of testing and learning on this shift to boneless,” Ware said. While he said “very early learnings” from two Tuesdays with those offers in 50 locations have been “encouraging,” the company is “creating a wider-than-normal range of outcomes in our guidance for the next six months.”
BTIG Analyst Peter Saleh wrote in a note Thursday that he is “confounded by the magnitude” of earnings pressure on the company.
“We are hopeful that the change in promotional strategy and eventual refranchising will provide more stable fundamentals,” he wrote, “however we believe this could take several quarters.”
Contact Jonathan Maze at [email protected]
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Update, July 27, 2017: This story has been changed after Buffalo Wild Wings retracted statements made on the call regarding beer delivery.