Buffalo Wild Wings Inc. executives said Tuesday they would sell a portion of its company-owned restaurants, a step sought by an activist investor, as part of a broader response to a leveling of growth.
The news came as the company reported that its fourth-quarter profit fell 38 percent, well below expectations, due to a decline in sales at comparable restaurants and a sharp jump in the cost of chicken wings, the main item on the chain’s menu.
In discussing the results with investors and analysts on a conference call, executives announced they are exploring the sale of about 10 percent of the chain’s 631 company-owned restaurants to franchisees.
They have identified another 10 percent for steps to improve their financial performance.
Activist investor Mick McGuire, principal at Marcato Capital Investment in San Francisco, since taking a stake in the firm last summer has pressured executives to sell most of its company-owned restaurants to franchisees.
Executives aren’t going as far as McGuire has urged, but they said they see the initial sale as an experiment that may be expanded.
“This is a dynamic process,” Sally Smith, the company’s chief executive, said on the call. She added executives still believe the company can reach a goal of a 20 percent operating margin by 2020, up from 15.6 percent on a restaurant level in the latest period, and that they need to arrest a decline in sales at comparable restaurants, or those open at least a year.
“If we don’t see same-store sales rebounding, and can’t effectively work toward the 20 percent margin, we will look at other alternatives,” Smith said.
The company said Tuesday it earned $15.6 million, or 87 cents a share, during the last three months of 2016. Analysts expected a profit of $1.27 a share. Revenue rose about 1 percent to $494.2 million. But comparable sales fell 4 percent in company-owned units and 3.9 percent in franchised units.
Costs of traditional chicken wings rose to $1.99 a pound in the quarter, up 10 percent from $1.81 a year ago. Executives said they expect that price inflation to slow in 2017 to around 3.5 percent to 4.5 percent.
They forecast comparable sales to rise 1 percent to 2 percent this year.
The Golden Valley-based company was one of the fastest-growing restaurant chains in the country over the last decade with an all-ages concept revolving around wings, sandwiches and sports. But that growth started to level off last year and, like other fast-casual chains, Buffalo Wild Wings felt pressure as takeout food and value pricing rose in appeal with consumers.
Then in July, McGuire took a sizable stake in the firm and he launched a series of statements urging the company to shift from its 50-50 split of company- and franchisee-owned units to a mix in which franchisees owned 90 percent of the restaurants. Such a move would substantially reduce the company’s real estate holdings and expenses, McGuire argued.
On Monday, McGuire proposed a slate of four new directors to join the company’s nine-person board, including himself.
In the call with analysts, Alexander Ware, the company’s chief financial officer, said executives and external advisers in recent weeks studied a variety of restaurant portfolio options, including the 90 percent franchisee model sought by McGuire.
For that option to create value, Ware said the company would, among other things, have to sell about 500 restaurants at higher multiples than were realistic, cut expenses below those of similarly-sized restaurant chains and buy back shares below fair value.
Instead, Ware said Buffalo Wild Wings will test the effect of selling off a portion of its company-owned units, chiefly those that are single units in markets. He called the move “pragmatic” and said it is “based on specific goals and initiatives that we control and yet supports an openness to exploring the market and determining how value may best be built over time.”
Even as it begins the sale of some of its company-owned locations, Buffalo Wild Wings will continue to expand its 1,200-unit chain this year.
Executives said they expect to start 15 new company-owned restaurants in the U.S., 15 franchised locations in the U.S., and 20 franchised locations outside the U.S.
The company also said it would expand its R Taco chain with two company-owned restaurants and 12 to 15 franchised locations this year.