A contentious and often ugly battle between Buffalo Wild Wings and activist investor Marcato Capital Management reached a boiling point. Marcato founder Mick McGuire is calling for CEO Sally Smith’s removal, saying that the board has “blindly stood by management,” according to an SEC filing and a letter sent to shareholders.
The brand’s stock jumped more than 4 percent in the wake of the news. “[U]nder current management, shares of Buffalo Wild Wings' common stock have underperformed virtually every relevant benchmark on a 1-year, 3-year, and 5-year basis," McGuire wrote. “Despite declining same-store sales, lackluster margins, a deteriorating guest experience and poor capital deployment decisions, management continues to fight tooth-and-nail to maintain the status quo."
Smith has been the brand’s CEO since 1996 when the 1,220-unit chain had less than 100 locations.
Buffalo Wild Wings is fighting back, however. On Monday, the chain wrote a letter to shareholders defending its board and management team.
“We believe that Marcato's plans for the business—involving a massive refranchising of our company-owned stores, among other things—will not create sustainable shareholder value but will create substantial risk,” Buffalo Wild Wings said in the letter.
The letter also said: "After generating industry-leading total shareholder returns for our shareholders since our IPO in 2003—indeed, $10,000 invested in our stock at the IPO was worth more than $175,000 on March 31, 2017—our Board and management team are under attack from a short-term-focused hedge fund, Marcato Capital Management, that seeks to upend our winning formula and business strategy.”
Buffalo Wild Wings also asked shareholders to vote for its purposed board of directors ahead of the June 2 shareholders meeting.
Buffalo Wild Wings turned down Marcato’s offer to withdraw its board nominees if Smith was replaced. Marcato filed a definitive proxy statement with the Securities and Exchange Commission for the election of four nominated board members at the next annual shareholder meeting.
Buffalo Wild Wings also told Investor’s Business Daily that it has generated 1,697 percent in returns for shareholders since its 2003 IPO.
Marcato, which says is owns a 6.1 percent stake in the chain, has hounded Buffalo Wild Wings to enact major changes since last July, basing the argument on the company’s lack of franchised units and its board’s thin experience level in the industry.
This conversation took a turn in February when Marcato nominated McGuire and three others to the board. Buffalo Wild Wings accepted just one—Kraft Food veteran Sam Rovit—and turned down the rest. Instead nominating a former McDonald’s leader in Janice Fields, who was once vice president and COO of the fast food giant. Smith, as well as Cynthia L. Davis, Andre J. Fernandez, Harry A. Lawton, J. Oliver Maggard, Jerry R. Rose, Harmit J. Singh, will stand for reelection.
“Buffalo Wild Wings' desperate actions only confirm that there is substantial deficiency at the Board level and lack of a cohesive plan to create long-term shareholder value,” Marcato’s statement read at the time. “It is deeply troubling that the company would take these steps without consulting us or other major shareholders, as we have continuously endeavored to engage in constructive dialogue with the Board and management on the strategic, operational and financial issues that we believe are plaguing the company. Unfortunately, every attempt we've made has been stymied.”
Marcato also said the “changes do not go far enough.” That was a similar sentiment Marcato expressed in response to Buffalo Wild Wing’s March announcement that it hired investment-banking firm The Cypress Group. The company, which worked with Wendy’s and TGI Fridays, was tasked with “marketing roughly 10 percent of Buffalo Wild Wings company-owned restaurants. This initial sale process represents the first phase of the Company’s ongoing portfolio optimization process,” Buffalo Wild Wings said in a statement.”
Again that wasn’t enough in Marcato’s view, which has called for 90 percent franchised units by 2020. “It is ironic that, despite spending the last nine months resisting all of Marcato's suggestions for financial and operational improvements, Buffalo Wild Wings has now chosen to engage the Cypress Group on its so-called 'portfolio optimization' process. Notably, Marcato retained the Cypress Group last year to study the feasibility of refranchising at Buffalo Wild Wings,” Marcato said in a statement.
Shares were up 4.5 percent to 161.45 in Thursday’s stock market.