Buffalo Wild Wings is fighting back. The casual dining chain, which has been under consistent fire from an activist investor in recent months, sent a letter to shareholders Thursday defending its company’s performance and strategic plans for growth. Most notably, Buffalo Wild Wings said its vitals are being incorrectly measured and presented by Marcato Capital Management, the hedge fund at the center of this ongoing feud.
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“Marcato Capital Management, L.P. continues to make misleading claims regarding Buffalo Wild Wings’ performance based on flawed analysis, in particular that the company has not generated superior returns for shareholders. To do so, Marcato compares Buffalo Wild Wings’ shareholder returns to those of much larger companies in the S&P 500, to broad market indices like the Nasdaq Composite Index, and to retailers and restaurants that are meaningfully different than Buffalo Wild Wings. These companies operate in very different macro environments,” the company wrote.
The S&P 600 Restaurant Index has been a major point of contention for the two parties. Buffalo Wild Wings said in April that its company shares outperformed industry marks over a five-year period. Marcato, on the other hand, said shares underperformed the index by more than 60 percent.
Buffalo Wild Wings used Research Data Group, a third-party firm, to run the data. Who is right? Each company continues to undermine the other as the June 2 annual shareholders meeting fast approaches.
The chain asked shareholders to vote the yellow proxy card before the meeting. For each of Buffalo Wild Wings’ nine nominees: Cynthia L. Davis, Andre J. Fernandez, Janice L. Fields, Harry A. Lawton, J. Oliver Maggard, Jerry R. Rose, Sam B. Rovit, Harmit J. Singh, and CEO Sally J. Smith.
“Buffalo Wild Wings should instead be compared to its casual dining peers— companies that are similar in service delivery and business model and that compete for similar consumers,” Buffalo Wild Wings added in the letter. “The casual dining peer group utilized by Buffalo Wild Wings properly excludes companies that are quick-serve, fast-food or delivery restaurants as well as companies outside the restaurant industry. Buffalo Wild Wings believes the right peers for this purpose include BJ’s Restaurants, Inc., Bloomin’ Brands, Inc., Bravo Brio Restaurant Group, Brinker International, Inc., Cheesecake Factory, Inc., Chuy’s Holdings Inc., Cracker Barrel Old Country Store, Inc., Darden Restaurants, Inc., Denny’s Corporation, DineEquity, Inc., Ignite Restaurant Group, Inc., Red Robin Gourmet Burgers, Inc., Ruby Tuesday, Inc. and Texas Roadhouse, Inc.”
“Compared with the median returns generated by this set of our casual dining peers, Buffalo Wild Wings has generated significantly better returns for its shareholders, as shown above. Buffalo Wild Wings also notes that it has generated compounded annual returns of more than 24 percent per year since its IPO.”
One thing that’s not helping Buffalo Wild Wings is its lower-than-expected first quarter earnings. The adjusted earnings of $1.44 a share fell 19.1 percent year-over-year and missed Wall Street estimates by 24 cents. Same-store sales did climb back into the positive, but just to 0.5 percent at company-owned stores and 0.6 percent at franchised locations. Total revenue grew 5.2 percent to $534.8 million, which also fell short of the predicated $535.9 million from Zacks.
This resulted in a reduced full-year guidance of same-store sales growth of 1 percent down from 1—2 percent.
Marcato responded with a letter that restated what it has been saying for months: That Buffalo Wild Wings is in line for a leadership change. Earlier in April, Marcato founder Mick McGuire called for the removal of Smith, the company’s leader since 1996. She has grown the chain from less than 100 locations to more than 1,200 in that time.
Marcato also wanted to shakeup Buffalo Wild Wings board with four new directors, including McGuire. But Buffalo Wild Wings decided to nominate just one—Kraft Food veteran Sam Rovit—and turn down the rest, calling the purposed changes “risky.”
Marcato has long pushed for Buffalo Wild Wings to refranchise more units, possibly up to 90 percent. The chain said it is now looking to refranchise 13 percent of stores through The Cypress Group.
“The Buffalo Wild Wings Board and management team continue to take action and are committed to generating superior long-term shareholder value in the future through the company’s innovative approach to casual dining,” Buffalo Wild Wings concluded in its letter.