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Buffalo Wild Wings Announces Refranchising of 83 Outlets

Zacks Equity Research

Buffalo Wild Wings, Inc. BWLD launched its refranchising program via which it is ready to sell about 83 of its company-owned restaurants to potential franchisees.

The company has selected outlets across Canada, Central and Eastern Pennsylvania, Northeast U.S., South Texas and Washington, D.C. as part of this “on-going portfolio optimization process” through which it plans to sell 13% of company-owned restaurants. To assist in managing the initiative, the company has hired The Cypress Group, a leading restaurant and franchise investment banking firm.

Refranchising is a key strategy of activist investor Marcato Capital Management, which holds about a 9.9% stake in the company and is becoming increasingly powerful within it. The firm has pushed Buffalo Wild Wings to franchise about 90% of its locations by 2020, in a bid to save costs.

The firm had also 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, Marcato acquired three seats on the nine-member strong board of directors of Buffalo Wild Wings, last month.

Notably, at the end of the last reported quarter, Buffalo Wild Wings managed about 623 company-operated Buffalo Wild Wings locations around the globe and franchised about 607 brand outlets.

Evidently, the company has a somewhat similar mix of franchised and company-owned restaurants, at present. While franchised restaurants reduce capital needs to a large extent and provide revenues in the form of royalty, company-owned restaurants allow it to have full control over operations as well as keep the profits.

As the company shifts more toward franchising, this optimization initiative coupled with the savings as a result of efficiency improvement is likely to aid it in offsetting slowing consumer traffic, greater promotional activity, higher wing costs, and labor headwinds.

Many restaurateurs like McDonald’s Corporation MCD, Domino’s Pizza, Inc. DPZ, The Wendy’s Company WEN also rely on franchising to boost earnings. Meanwhile, restaurant operators including Brinker International, Inc. EAT are focused on a fully company-owned model.

We note that shares of Buffalo Wild Wings have declined nearly 11% year to date against the Zacks categorized Retail-Restaurants industry’s gain of 12.5%. Estimates for the current quarter and current year have also moved down 19.6% and 5.4%, respectively, over the past two months. Now, it remains to be seen if the company’s efforts to improve efficiency and safeguard earnings through refranchising will aid in boosting returns to shareholders.

Currently, the company carries a Zacks Rank #3 (Hold). You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.

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