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Buffalo Wild Wings Gains on Buyout Offer From Roark Capital

Zacks

Per a recent Wall Street Journal report, Buffalo Wild Wings, Inc. BWLD recently received a takeover bid from private equity firm Roark Capital Group that has investments in chains such as Arby’s, Cinnabon, Carvel and Auntie Anne’s.

Roark Capital has reportedly offered more than $150 a share, which would value the buyout at more than $2.3 billion.

Following the news, shares of Buffalo Wild Wings rallied nearly 28% in after-hours trading on Nov 13.

Trouble at Buffalo Wild Wings


Over the last few quarters, Buffalo Wild Wings has been posting weak top and bottom-line performances. In fact, its earnings and revenues have been mostly missing the Zacks Consensus Estimate in the trailing 12 quarters.

Additionally, comps have been under pressure so far in 2017. Notably, the menu price increases made by the company along with a choppy sales environment in the U.S. restaurant space might continue to affect traffic in the near term, thereby weighing on comps.

Meanwhile, fluctuating price of chicken has been denting the company’s profits for some time. Notably, the company expects traditional chicken wing prices to rise in the range of 8% to 10% for the full year 2017, which is likely to hurt profits further. Costs related to company’s other sales-boosting initiatives like unit expansion and higher labor costs due to a competitive labor market are also expected to affect profits in the near term.

Nevertheless, the company has undertaken various cost-saving initiatives and raised its 2017 earnings forecast. Also, the company announced a change in its most popular “half-price wings on Tuesdays” promotion in July by switching its half-price traditional wings to boneless BOGOs, making them more profitable.

However, the company is facing pressure from activist investor, Marcato Capital Management, which holds about a 9.9% stake in the company and 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 insisting on 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, Marcato acquired three seats on the nine-member board of Buffalo Wild Wings. It is to be noted that the firm has also insisted Buffalo Wild Wings to franchise about 90% of its locations by 2020, in a bid to save costs.

The persistent pressure from Macrato has compounded the woes for this restaurant company.

Bottom Line

The deal, if realized, would be a big win for activist investor Marcato Capital. However, Buffalo Wild Wings might fare better by refining its mobile ordering capabilities and cutting down its operational costs under a private owner like Roark Capital, which already has a history of acquiring struggling casual dining chains and turning them around.

Thus, if Buffalo Wild Wings goes the private takeover route, it would be following the footsteps of a few of its peers like Ruby Tuesday, Inc. RT. Notably, Ruby Tuesday is about to be taken over by a private equity firm NRD Capital Management LLC, as announced last month. Jack in the Box Inc. JACK is also currently looking for alternatives for its Qdoba Restaurant Corp.

Currently, Buffalo Wild Wings carries a Zacks Rank #3 (Hold).

A better-ranked stock in the industry is Cracker Barrel Old Country Store, Inc. CBRL, carrying a Zacks Rank #2 (Buy). You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.

Cracker Barrel’s current-year earnings are expected to grow 4.8%.

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