Shares of Minneapolis-based restaurant chain, Buffalo Wild Wings Inc. , have declined 20.9% year to date against the Zacks categorized Retail–Restaurants industry’s gain of 10.7%.
Moreover, the Zacks Consensus Estimate for Buffalo Wild Wings’ current quarter earnings has moved down 5.4%, reflecting three downward revisions versus none upward, over the last 60 days. Also, current year earnings estimates have decline 2%, on the back of four downward revisions versus no upward revision. This testifies the flinching confidence that analysts have in the company. In fact, this bearish trend is why the stock has a Zacks Rank #4 (Sell) and why we fear that the company might continue to disappoint in the near term.
Let’s take an in-depth look at the factors that have hampered the stock’s momentum and are behind the slump:
Challenging Macro Environment
Over the last few quarters, the U.S. restaurant space has not been too enticing for investors. Despite economic growth, somewhat lower energy prices and higher income, consumers increased their spending only modestly on dining out, which resulted in low consumption.
Thus, same-store sales growth has been dull in a difficult sales environment. Traffic too has been weak. In fact, the first quarter of 2017 marked the fifth consecutive quarter of negative comp sales for the restaurant industry as a whole, thereby continuing the somber mood. Consequently, Buffalo Wild Wings’ sales have also come under pressure.
In fact, the company’s revenues have been lagging the consensus estimate for the past nine quarters. Though the company posted positive comps last quarter, it mostly struggled with comps growth all through 2016. Notably, the menu price increases made by the company, along with the prevailing challenging restaurant environment might affect traffic trends in the near term, thereby weighing on the comps.
Of late, there has been substantial fluctuation in the traditional chicken wing price – a key ingredient for the company – which has put Buffalo Wild Wings’ margins under pressure. In fact, the company expects traditional chicken wing prices to rise in the range of 8% to 10% in 2017, which is likely to dampen profits.
Additionally, the company’s promotion of Half-Price Wing Tuesdays puts further pressure on its cost of sales as the high priced wings items are offered at lower prices. In fact, in the first quarter of 2017, the increase in this promotion mix had an adverse impact of 37 cents on the company’s earnings per share (EPS). Thus, the company is aggressively evaluating other offers in place of this promotion in a bid to protect its margins. Nevertheless, it remains to be seen if other promotions could boost traffic the way Half-Price Wing Tuesdays did for the company.
Meanwhile, costs related to company’s other sales boosting initiatives, like unit expansion and higher labor costs owing to the competitive labor market are estimated to continue to hurt profits in the near term.
In fact, Buffalo Wild Wings’ earnings have missed the Zacks Consensus Estimate in eight of the last ten quarters due to higher costs.
Pressure From Activist Investor
Activist investor, Marcato Capital Management, which holds about a 9.9% stake in the company, is becoming increasingly powerful within it. In fact, the firm has been pushing the company to bring about changes at the board and management levels, and also improve food quality and service.
Particularly, the firm had been agitating for Buffalo Wild Wings CEO, Sally Smith’s removal, who has finally announced her retirement from the position before the end of 2017. Moreover, in May 2017, Marcato acquired three seats on the nine-member strong board of directors of Buffalo Wild Wings. It is to be noted that the firm has also pushed Buffalo Wild Wings to franchise about 90% of its locations by 2020, in a bid to save costs.
This continual pressure from Macrato has thus further compounded the woes for this restaurant company.
Is There a Ray of Hope?
However, we laud the company’s various innovative initiatives like menu innovation, promotional offerings, roll-out of loyalty program and delivery, enhancement of digital capabilities, along with international expansion that should aid in driving sales.
Additionally, Buffalo Wild Wings has decided to give something new a shot this summer and test small-format stores in the Minneapolis metro area. Given consumers increasing drift toward to-go and in-home dining experiences, the company is experimenting with these small, fast food style stores. It is thus set to open two pilot restaurants, named B-Dubs Express, which will be an order and pick up at the counter concept, serving the chain’s chicken wing-filled menu while sports play on TV.
Meanwhile, the company has undergone a thorough review of its cost structure in a bid to improve efficiencies in labor, organizational structure as well as third-party expend. Based on the review, it has come up with a strategic plan to realize savings worth $40 to $50 million in restaurant level expenses and G&A by the end of 2018, which will result in improved margins.
While Buffalo Wild Wings’ growth initiatives and the new business ventures seem to be encouraging, only time will tell that how successful they turn out to be.
At the moment, the shake up on top amid continued stock volatility, sales declines and negative estimate revisions, suggests that there may be more trouble down the road.
Stocks to Consider
Better-ranked stocks in this sector include Dave & Buster's Entertainment, Inc. (PLAY - Free Report) , Red Robin Gourmet Burgers, Inc. (RRGB - Free Report) and McDonald's Corporation (MCD - Free Report) . While Dave & Buster's and Red Robin sport a Zacks Rank #1 (Strong Buy), McDonald's carries a Zacks Rank #2 (Buy). You can see the complete list of today’s Zacks #1 Rank stocks here.
Dave & Buster's earnings surpassed the Zacks Consensus Estimate in the trailing four quarters, with an average beat of 30.50%. Meanwhile, for fiscal 2017, EPS is projected to witness a rise of 23.2%.
The Zacks Consensus Estimate for Red Robin’s 2017 earnings climbed 7%, over the past 60 days. Moreover, the company’s trailing four-quarter average earnings surprise is a positive 17.27%.
The Zacks Consensus Estimate for McDonald's 2017 earnings moved up 0.6%, over the past 60 days. Moreover, for 2017, EPS is expected to improve 12.3%.
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