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An Activist Can Do A Lot With Buffalo Wild Wings | $BWLD

Editor's Note: Shares of Buffalo Wild Wings were up 5.8% yesterday after it was announced that activist Marcato Capital Management had acquired a 5.1% stake in the company. In the institutional research note below, originally published on 6/13, Hedgeye Restaurants analysts Howard Penney and Shayne Laidlaw wrote that BWLD was "vulnerable to activism" and lay out the problems that have long plagued the company.

 

An Activist Can Do A Lot With Buffalo Wild Wings | $BWLD - bwld2

THE UPSHOT

For the past two years, BWLD has underperformed the S&P 500 by 11% and is down 8% year-to-date.  There is a very strong possibility that FY2016 is going to be a disaster for BWLD when the company posts negative SSS for the first time in 9 years and the second year of disappointing earnings growth.  Although we remain very bearish on the Casual Dining industry overall, BWLD has a unique position within the industry to capitalize on their live TV offering, being a great place for people to gather and watch a game for three to four hours.

 

The recent decision for CFO, Mary Twinem to retire after a disastrous acquisition in 2015 suggests that the company has other issues to deal with.  From an outsiders perspective, this move could be a sign that the business may have been financially mismanaged over the past few years.  We highlight certain capital allocation concerns that could be improved to create significant shareholder value.  More recently, the company’s track record when it comes to projecting their performance has come into question. BWLD has missed SSS for 4 of the last 5 quarters; and missed EPS for the past 6 quarters.

 

We are confident that the BWLD brand is not dead, but the company has had some missteps that have led to underperformance in the business.  There is a lot an activist can do with a business like BWLD and in a slowing sales environment the chances of someone taking action could increase. 

 

An Activist Can Do A Lot With Buffalo Wild Wings | $BWLD - bwld

 

An Activist Can Do A Lot With Buffalo Wild Wings | $BWLD - CHART 2

WHAT HAS GONE WRONG?

Strategic missteps

  • Acquiring franchise stores increases business risk – BWLD went from 39.3% company-owned restaurants in 1Q12 to 50.7% company-owned in 1Q16.  Why in a slowing sales; lower return environment would the parent company want even greater exposure to the volatility in the business?

An Activist Can Do A Lot With Buffalo Wild Wings | $BWLD - CHARt 3

 

  • BWLD has used price aggressively to drive same-store sales for years, but was increasingly aggressive in FY2015. Closing out 2015 with +4% price is likely to have an impact on performance, and will continue to have an impact throughout 2016. 

An Activist Can Do A Lot With Buffalo Wild Wings | $BWLD - CHART 4

 

Distracted management

  • Management has diversified away from the core Buffalo Wild Wings brand, adding in R Taco and PizzaRev.
  • They have a minority interest in Pie Squared Holdings which is the operator and franchisor of PizzaRev a California based fast-casual pizza restaurant. In addition they own and operate PizzaRev restaurants in Minnesota.
  • In addition, BWLD has majority interest in Rusty Taco, Inc. the operator and franchisor of R Taco.
  • They currently franchise two (2) PizzaRev restaurants and four (4) R Taco, with six (6) franchised R Taco’s.
  • With the total number of Buffalo Wild Wings units standing at 1,190, these peripheral concepts merely serve as a pipe dream for growth, and more likely distract management from their core concept, which has plenty of issues in its own right.

 

Poor capital allocation

  • Excessive new unit growth - new unit returns (new unit productivity) are slowing as they increase their unit count into a slowing restaurant environment.
  • The company announced its first ever share repurchase authorization in November 2015. 
  • The company currently does not pay a dividend 
  • BWLD’s net debt / LTM EBITDA currently stands at 0.15x which is far below the industry norm, leaving them plenty of room to increase leverage and return some to shareholders.

WHAT CAN BE DONE TO CREATE SHAREHOLDER VALUE

The activist game plan for BWLD is clear cut and can create meaningful long term value for shareholders:

  • Focus On The Core

    • Remove the distraction of non-core brands.
    • Slow new unit growth 
    • Operations must be 100% focused on improving the performance of the Buffalo Wild Wings concept
  • Return Cash To Shareholders

    • BWLD can drive better shareholder returns through share repurchases and paying dividend.
    • With BWLD’s net debt / LTM EBITDA currently at 0.15x, they have ample room on the balance sheet to increase leverage and return cash to shareholders 
  • Refranchise Restaurants/Cut G&A

    • There is significant value from an operational perspective that can be gained by refranchising underperforming stores, especially from trimming corporate G&A
    • Asset sales will lead to incremental share repurchases
    • Improve the quality of the revenue stream to drive the multiple higher
  • This Board is Ripe For a Change

    • There are three people on the Board that have been there for 17+
    • The average age of the board is 63
    • Given the increasing role of technology in the industry and the company, nobody on the board has the relevant experience

Short Tokyo?

Takeaway: We still don't see signs of a rising sun anytime soon.

Heli-Ben IV ran out of fuel overnight – Yen ramped +1.5% to $104.23 and the Nikkei resumed its crash, closing down -1.4% to -21.6% from the Global Equity #Bubble high of 2015. Reiterating the short on Japanese Equities; fighting the BOJ continues to work as the #BeliefSystem continues to break-down.

 

Short Tokyo? - nikkei usdjpy

 

Editor's Note: The snippet above is from a note Hedgeye CEO Keith McCullough wrote for subscribers this morning. Click here to learn more.


Daily Market Data Dump: Tuesday

Takeaway: A closer look at global macro market developments.

Editor's Note: Below are complimentary charts highlighting global equity market developments, S&P 500 sector performance, volume on U.S. stock exchanges, rates and bond spreads, key currency crosses, and commodities. It's on the house. For more information on how Hedgeye can help you better understand the markets and economy (and stay ahead of consensus) check out our array of investing products

 

CLICK TO ENLARGE

 

Daily Market Data Dump: Tuesday - equity markets 7 26

 

Daily Market Data Dump: Tuesday - sector performance 7 26

 

Daily Market Data Dump: Tuesday - volume 7 26

 

Daily Market Data Dump: Tuesday - currencies 7 26

 

Daily Market Data Dump: Tuesday - rates and spreads 7 26

 

Daily Market Data Dump: Tuesday - commodities 7 26


Hedgeye Statistics

The total percentage of successful long and short trading signals since the inception of Real-Time Alerts in August of 2008.

  • LONG SIGNALS 80.46%
  • SHORT SIGNALS 78.35%

July 26, 2016

Want more from Daily Trading Ranges? CLICK HERE to submit up to 4 tickers you'd like to see on the list. 

 

  • Bullish Trend
  • Bearish Trend
  • Neutral

INDEX BUY TRADE SELL TRADE PREV. CLOSE
UST10Y
10-Year U.S. Treasury Yield
1.63 1.46 1.58
SPX
S&P 500
2,129 2,179 2,168
RUT
Russell 2000
1,179 1,215 1,207
COMPQ
NASDAQ Composite
4,951 5,120 5,097
NIKK
Nikkei 225 Index
15,909 16,970 16,620
DAX
German DAX Composite
9,903 10,258 10,198
VIX
Volatility Index
11.72 16.69 12.87
USD
U.S. Dollar Index
96.31 97.99 97.33
EURUSD
Euro
1.09 1.11 1.09
USDJPY
Japanese Yen
103.15 107.31 105.80
WTIC
Light Crude Oil Spot Price
42.28 45.13 43.13
NATGAS
Natural Gas Spot Price
2.60 2.83 2.71
GOLD
Gold Spot Price
1,311 1,354 1,327
COPPER
Copper Spot Price
2.11 2.26 2.21
AAPL
Apple Inc.
96.18 100.94 97.34
AMZN
Amazon.com Inc.
729 752 739
NFLX
Netflix Inc.
81.94 91.76 87.66
JPM
J.P. Morgan Chase & Co.
60.98 64.54 63.87
KMI
Kinder Morgan Inc.
19.25 22.23 20.86
GILD
Gilead Sciences
82.76 88.72 88.55



Hedgeye's Daily Trading Ranges are twenty immediate-term (TRADE) buy and sell levels, along with our intermediate-term (TREND) view.  Click HERE for a video from Hedgeye CEO Keith McCullough on how to use these risk ranges.


CHART OF THE DAY: Long 2010 Brunello Vs. Short $QQQ

Editor's Note: Below is a brief excerpt and chart from today's Early Look written by Hedgeye CEO Keith McCullough. Click here to learn more.

 

"... For those of us who have been investing in real estate, private companies, gold, platinum, wine, an NHL team, etc., that’s an easy question to answer. With Italian wines in particular, #EuropeImploding has provided for some fantastic buying opportunities this year.

 

If you want a primer on investing in IGW (Investment Grade Wines), the aforementioned quote comes from a great book that my wife Laura got me, titled Investing In Liquid Assets. As David Sokolin likes to say, “with wine, there’s no such thing as a losing investment”… if you’re underwater, you eventually win by drinking it! Long 2010 Brunello vs. Short QQQ."

 

CHART OF THE DAY: Long 2010 Brunello Vs. Short $QQQ - 07.26.16 chart


Liquidate Pleasurably

“Whenever you wish, you can liquidate pleasurably.”

-David Sokolin

 

Since I’ve been both generating and raising cash as of late (Hedgeye cash flows without helicopters and I’ve been booking some gains in my biggest position, the Long Bond), in investor meetings I keep getting asked (sometimes told) “if there’s any alternative to stocks?”

 

For those of us who have been investing in real estate, private companies, gold, platinum, wine, an NHL team, etc., that’s an easy question to answer. With Italian wines in particular, #EuropeImploding has provided for some fantastic buying opportunities this year.

 

If you want a primer on investing in IGW (Investment Grade Wines), the aforementioned quote comes from a great book that my wife Laura got me, titled Investing In Liquid Assets. As David Sokolin likes to say, “with wine, there’s no such thing as a losing investment”… if you’re underwater, you eventually win by drinking it! Long 2010 Brunello vs. Short QQQ.

 

Liquidate Pleasurably - wine

 

Back to the Global Macro Grind

 

I guess the people who are in the business of marketing “stocks” for their long-term-compensation-run might say that you can #drink every time you’ve bought the all-time high in SPY for the last 17 years too. That’s cool, if you do it with other people’s money.

 

Otherwise, I think that big secular shifts in technology, transparency (bid/ask spreads in wine are readily available on LIVEX in London), and information have really opened up opportunities for people to truly invest for the long-run, across cycles, and asset classes.

 

Truly investing? Yes. To be able to buy low, sell high, and compound returns (without sucking up epic draw-downs), across asset classes… you need to pay for the truth. What you watch on CNBC is free for a reason.

 

As Ray Dalio would ask: “what is the truth” this morning, according to the people with no skin in the game (central planners)?

 

  1. BOJ (Bank of Japan) – is now backing off on the helicopter comments in exchange for the “double fiscal thrust” ones?
  2. BOE (Bank of England) – is now seeing most anti-money printing hawks, capitulate to CTRL+Print
  3. Italian Banks – are now seeing “bank rescue” moneys from Italian Pension Funds

 

Macro market reaction to that?

 

  1. JAPAN - Yen Up +1.5%, Nikkei Down -1.4% (and remains in #crash mode, -21.7% from the #BeliefSystem 2015 high)
  2. UK – Pound Down -0.3%, FTSE +0.1% as the FTSE now has an inverse correlation of -0.78 to GBP/USD (3-month duration)
  3. ITALY – EUR/USD flat, MIB Index Down -1.8% (and remains in #crash mode, -31.9% from 2015 Global Equity #Bubble high)

 

Yeah, for people who have “no alternative to stocks” as a mantra, hopefully they’re not lying to you and suggesting that “stocks” no longer include Global Equities. Not that it matters to them, but June 24 was the biggest 1-day loss in Global Equity Market Cap, ever.

 

And ever, in truthful terms, remains a long time.

 

For a very long time, as long as I have been in this profession really (17 years), brokers and academics have tried to sell me on trailing returns instead of the draw-down risks associated with buying the peaks in those returns.

 

When some people read that, they’ll immediately call me something nasty… like a “market timer”… or maybe a wussy who isn’t willing to book gains before losing 20-70% of my hard earned money, every 5-7 years.

 

Oh well, there’s a lot of bull in the political market of calling people names, I guess.

 

But in all seriousness, if you have no idea on the timing of economic, profit, and credit cycle risks (early-cycle, mid-cycle, late-cycle), Buy- And-Hold in something you really believe in makes a lot of sense. I don’t “trade” my Hedgeye Equity, for example.

 

If you don’t do any rate-of-change analysis, you’d never care about “buying opportunities”, right? As long as you had “flows” (other people’s money), you’d just buyem’, every day, month, and year, no matter what the price. And eventually, #drink heavily.

 

Don’t do that.

 

And I’m not telling you to chase charts and just “buy, buy, buy” in many of the things we’ve liked for the past year either:

 

  1. Long-term Government Bonds continue to signal immediate-term overbought
  2. Municipal Bonds (MUB) have had a heck of a move and aren’t where I’d buy more yet either
  3. Utilities (XLU) are signaling the same at +22% YTD

 

You see, I’m a little polarizing to the Old Wall because I go both ways. In its purest definition, I am a free-market liberal. I’m conservative and entrepreneurial. And I really don’t give a damn if I’m not nailing everything all of the time, at all-time highs.

 

When I look at my world of investing opportunities, I don’t think there’s ever been a time in my life when I’ve been so excited. Whether it’s investing in Malaysian Equities (EWM) or big cap, low-beta, Energy Stocks (OXY) with safe-yields, there’s so much to do on sales.

 

One of the most exciting things of all is watching bubbles balloon up into the skies of a #BeliefSystem that is starting to go bad. Looking back, there have been so many epic buying opportunities born out of bubbles imploding that I can hardly wait for the next one.

 

When they don’t wish, they will liquidate. As a long-term investor, I have plenty of patience to wait pleasurably for that!

 

Our immediate-term Global Macro Risk Ranges are now:

 

UST 10yr Yield 1.46-1.63%

SPX 2129-2179

Nikkei 150

VIX 11.72-16.69
USD 96.31-97.99
YEN 103.15-107.31
Oil (WTI) 42.28-45.13

Gold 1311-1354

 

Best of luck out there today,

KM

 

Keith R. McCullough
Chief Executive Officer

 

Liquidate Pleasurably - 07.26.16 chart


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