Predications of a rough second-quarter review for Buffalo Wild Wings crashed into reality Wednesday afternoon, with the chicken-wing chain reporting “disappointing” results and negative same-store sales that brought yet even more questions bubbling to the surface.
CEO Sally Smith, who announced in June she would be stepping aside after 21 years, said in a statement that Buffalo Wild Wings was lowering its 2017 earnings outlook and making a major change to its Half-Price Wing Tuesdays promotion—a move that is sure to be met with mixed consumer sentiment. “As traditional chicken wing costs remain at historically high levels, we're adapting our value day on Tuesday to feature our boneless wings at company-owned restaurants. In addition, we continue to implement our cost savings plan to improve margins and profitability in areas we can control,” she said in a statement.
BOGO boneless wings at company-owned locations will be available by mid-September, Smith added in a conference call.
In the quarter, Buffalo Wild Wings’ same-store sales at company-owned restaurants decreased 1.2 percent. They fell 2.1 percent at franchised locations. Both badly missed Wall Street estimates of flat sales and a 0.2 percent increase, respectively.
The adjusted earnings per share of 66 cents was well below FactSet’s consensus of $1.04. Revenue came in at 500 million, up from $490.2 million (2 percent) last year but, again, well under FactSet’s predicated $513 million. Net income dropped 63 percent from a year ago to $8.8 million.
The culprit at play is a familiar one. In the first quarter, when Buffalo Wild Wings’ same-store sales gained 0.5 percent, the company credited popularity from its half-price deal and higher wing prices for increased cost of sales, which resulted in lower restaurant level and operating margins. Cost of sales for that quarter were 31.4 percent of restaurant sales compared to 29.7 percent in Q1 2016.
The math got even stickier in the second quarter. Cost of goods represented 32.1 percent of restaurants sales, compared to 29.7 percent in the quarter a year prior.
“Traditional wings were $2.05 per pound in the second quarter, representing an 11-cent increase, or 5.7 percent, higher than last year's second quarter average of $1.94. Traditional wings as a percent of cost of sales was 30.7 percent in the second quarter,” the company stated.
“During the second quarter, we continued to work on stabilizing the business in the challenging restaurant environment. Our profitability was pressured this quarter driven by historically high wing costs, a mix shift to our promotional days, lower than expected same-store sales, and higher operating expenses,” Smith said in the statement.
Smith added that Buffalo Wild Wings is optimistic the transition to boneless wings will “provide a more stable promotional platform for the future.”
But how will guests react? It appears Buffalo Wild Wings had no choice but to slide head first into this risk-reward equation.
Buffalo Wild Wings’ company-owned restaurant sales for the second quarter increased 1.9 percent year-over-year to $475.7 million thanks in part to 26 additional company-owned stores. Twenty-eight new franchised locations helped franchise royalties and fees grow 3.1 percent to $24.3 million for the quarter versus $23.6 million in 2016.
Buffalo Wild Wings lowered its same-store sales expectations to approximately negative 1—2 percent. It predicts adjusted EPS of $4.50—$5, down from $5.45—$5.90.
The result will be felt on the stock market Thursday as shares were originally halted in extended trading ahead of the earnings news when expectations missed by such wide margins. It eventually reopened to a 10 percent loss.
Buffalo Wild Wings also said it plans to develop 15 company-owned stores in 2017, including two in the third quarter; open 15 franchise locations (six in the quarter); 20 international restaurants (5 in the quarter); and two company owned and 10—13 R Taco restaurants.
In this, Buffalo Wild Wings sees traditional chicken wing inflation of 8—10 percent, which will put more pressure on the chain to develop alternative paths to revenue growth.
One of those could be the upcoming B-Dubs Express fast casual model that is piloting in Edina, Minnesota, and Hopkins, Minnesota. The smaller-format stores will feature wings as well as chicken tenders, a chicken sandwich, burger, salad, buffalo mac and cheese, and select sharables and sides, as well as draft and bottled beers and wine. Delivery will also be available through DoorDash.
In an effort to reach more customers, Smith also said in the call that Buffalo Wild Wings plans to test beer delivery in Ohio and Wisconsin later this year.
The future is undeniably cloudy moving forward as Buffalo Wild Wings continues to reshape its board and company direction.
The June shareholder meeting, which revealed Smith’s impending retirement by the end of the year, resulted in voters adding Marcato Capital Management LP nominees Scott Bergren, the CEO of Pizza Hut, CIT Foods CEO Sam Rovit, and Mick McGuire to the board. McGuire, Marcato’s founder and managing partner, has long pushed Buffalo Wild Wings to a franchisee-heavy system that calls for more than 500 company-owned units to be sold by 2020. Along with increased franchise units, Marcato also plans to accelerate international growth. Marcato says that international development targets have been repeatedly missed and extended by two to five years.
Buffalo Wild Wings announced during Wednesday's call that it plans to sell 83 company-owned restaurants.