flickr: Mike Mozart

Buffalo Wild Wings has a long road ahead as it continues to adjust offerings to attract more guests.

Buffalo Wild Wings' Latest Earnings Add Fuel to Investor Battle

The chain missed some marks and hit on others.

If Buffalo Wild Wings was hoping to deal a strategic blow to its vocal opposition, Wednesday’s financial report likely didn’t do the trick. But there were some positives to build on.

The chain reported first-quarter adjusted earnings of $1.44 a share, a drop of 19.1 percent (compared to the same period a year ago), which came up short of Zacks Investment Research forecasts of $1.68 a share.

Same-store sales returned to the green, however, although they climbed just 0.5 percent at company-owned stores and 0.6 percent at franchised locations. Total revenue was up 5.2 percent to $534.8 million, also short of the $535.9 million estimate from 10 Zacks analysts. Company-owned restaurant sales increased 5.2 percent to $509.2 million.

READ MORE: Why the chicken wing might actually be Buffalo Wild Wings' greatest challenge.

Buffalo Wild Wings also reduced its full-year guidance, saying that it expects 2017 same-store sales growth of 1 percent. In its previous guidance, it called for 1 to 2 percent growth and $5.60—$6 per share. Now, the chain expects adjusted earnings per diluted share of $5.45—$5.90.

This was a chance for Buffalo Wild Wings to see the results of some of its 2016 initiatives, such has Half-Price Wing Tuesdays, Fast Break Lunch, delivery, and the Blazin’ Rewards loyalty program.

These moves met mixed results, especially Half-Price Wing Tuesdays.

“With value-driven occasions resonating with customers across the industry, our Half-Price Wing Tuesdays drove significant traffic in our restaurants during the first quarter,” CEO Sally Smith said in a conference call Tuesday. “The successful promotion of Half-Price Wing Tuesdays put pressure on our cost of sales as wing prices remained stubbornly high and we're experiencing a lower yield on wings as well.”

Smith said wing price and yield resulted in a 37-cent impact on EPS from increased cost of sales. “When Half-Price Wing Tuesdays was developed last summer, wings were $1.70 and external commodity experts were anticipating a 10 percent decline in wing prices in 2017. Today wing prices remain elevated and we're increasing our wing price forecast to include an 8 to 10 percent increase over 2016,” she said.

The look of the promotion could change in the future. “We're contemplating adjustments to the offering that we think will still be very attractive to our customer but at the same time improve our margins,” said James Schmidt, chief operating officer, in the call, “… from a sales- and traffic-driving perspective, it has been highly successful. Wing costs have escalated on us. And as a result of that, we have not seen the margin, the profit contribution we would've hoped to see from these strong sales. So what we are going to be doing then is looking at our offering and making adjustments to it.”

On the other hand, the Blazin’ Rewards loyalty program has been a huge hit, enrolling more than 1.6 million guests. Nearly 1,000 units are involved and more than 21 percent of sales are tied to loyalty member checks.

“Through the Blazin' Rewards program, Buffalo Wild Wings is positioned to utilize guest level data to retain and grow valuable guests, to motivate and reward repeat visits, and to optimize marketing and promotional spend,” Smith said.

Buffalo Wild Wings results have come a long way, however you look at it. In the fourth quarter of 2016, year-over-year, the chain reported net earnings declines of 38.2 percent and same-store sales drops of 4 percent at company-owned units (3.9 percent at franchised). Revenue crawled 0.9 percent to $494.2 million.

“In the first quarter, we are pleased same-store sales turned positive for both company-owned and franchised locations, outperforming both the negative restaurant industry and a negative casual dining segment,” Smith said in a statement. “This is due to the continued momentum of our strategic initiatives launched in 2016. The popularity of Half-Price Wing Tuesdays combined with higher wing prices increased our cost of sales. Labor and operating expenses were also higher compared to the prior year, resulting in lower restaurant-level and operating margins and negatively impacting EPS for the quarter."

Cost of sales was 31.4 percent, up from 29.7 percent this time last year. There was a 4.1 percent increase in the cost of traditional wings to $2.05 per pound.

Buffalo Wild Wings ended the quarter with 1,250 total units, including the fast casual R Taco, and company-owned PizzaRev stores. It also said it plans to open 15 new company-owned units in 2017 (three in the second quarter), as well as 15 franchised locations, 20 international franchised venues, and up to 17 R Tacos (two company owned).

But returning to the topic of opposition, these results almost surely won’t quench the firestorm of Marcato Capital. Founder Mick McGuire called for Smith’s removal earlier in the month, saying the chain’s board has “blindly stood by management,” and pointing to declining same-store sales, lackluster margins, and a deteriorating guest experience as a reason to shake up the organization. Marcato even conducted research that said Buffalo Wild Wings was last in overall guest experience in its segment, falling behind Olive Garden, LongHorn, and The Cheesecake Factory.

Marcato has long pushed for board changes as well as a move toward a 90-percent franchised model at the chain. Buffalo Wild Wings originally said it would sell around 10 percent of company-owned units with the Cypress Group leading the sale process. Smith revealed in the call that the company is now boosting the number to 13 percent. Those 80 or so restaurants in the portfolio optimization process have average unit volumes of $2.5 million with restaurant-level margins of 9.8 percent on a trailing 12-month basis. Smith also said Buffalo Wild Wings is reevaluating the way it operates.

“In mid-April, we implemented a new field management structure by consolidating layers to right-size the field organization, while at the same time enhancing our local field marketing, training, and talent management support,” she said. “While these changes are expected to drive cost savings, more importantly, this new structure brings field leaders closer to our restaurants to improve sales and restaurant-level margins and positions us to address the evolving needs of our fans and team members.”

The 2017 Annual Meeting of Shareholders on June 2 should be an interesting one. Smith addressed the upcoming event.

“The Buffalo Wild Wings board and management team continue to innovate and pursue cost-savings initiatives in the face of challenging market conditions in order to remain a distinct experience and stay ahead of the competition,” she said. “As always, we focus on improving the performance of our restaurants, executing best practices, raising returns, and growing sales maintains our record of industry leadership and creation of shareholder value. Further in line with the board's responsibility to act in the best interest of all of our shareholders, we have continued to enhance oversight, most notably through our proposed board of directors, which brings fresh perspectives, financial acumen, and great enthusiasm for our business and all of our shareholders.”

Like many casual dining chains, Buffalo Wild Wings is also eager to expand third-party delivery. The system added 80 restaurants to bring the total to 180 in the first quarter and plans to grow to 250 company-owned locations by the end of the year. Take-out and delivery accounted for 18.2 percent of company-owned sales—a boost of 16.6 percent from the previous quarter.

“Delivery is incremental to the business as we've seen our take-out continue to grow in restaurants that offer delivery,” Schmidt said. He also hinted at adding mobile ordering to the company’s website and app in the future.

“This will expand the number of options where fans can order delivery from and will reduce the commissions paid to third-party providers,” he said.

Digital ordering accounted for 22 percent of takeout sales—more than $20 million—compared to 13 percent in the first quarter 2016. The brand added upselling capability to the checkout process and updated the app.

“System wide sales at our company-owned and franchised restaurants were $1 billion for the quarter achieving a significant milestone,” he said.

Cost of labor rose 80 basis points year-over-year and was 31.6 percent of restaurant sales “due largely to higher healthcare and anticipated compensation increases,” said Alexander Ware, executive vice president and chief financial officer.