An activist shareholder on Monday nominated four people to the Buffalo Wild Wings Inc., board, including a former development executive with the chicken wing chain and a former Pizza Hut CEO.
In making the nominations, Marcato Capital Management LP hopes to correct what it argues are “persistent failures that have plagued critical business areas” at the suburban Minneapolis-based chain.
“Buffalo Wild Wings enjoys a recognizable brand, distinctive consumer experience and substantial opportunity for continued system growth worldwide,” Marcato managing Partner Mick McGuire said in a statement. “Unfortunately, however, in recent years critical business areas have underperformed, resulting in an erosion of shareholder value.”
The investor’s nominations include Lee Sanders, who for five years was senior vice president of development and franchising for Buffalo Wild Wings, before he was named the CEO of Johnny Rockets. He is currently the managing general partner at Rocket Chicks LP, an area developer for the Golden Chick brand.
Marcato also nominated Scott Bergren, who retired as global CEO for the Yum! Brands-owned Pizza Hut.
The activist also nominated McGuire as well as Sam Rovit, president and CEO of the food manufacturer CTI Foods.
In a statement late on Monday, Buffalo Wild Wings said it would review the nomination.
But the company also said that its board and management engaged with Marcato “numerous times” since learning of the activist’s investment. It also defended its efforts to increase shareholder value, such as the expansion of its share repurchase program.
It also defended the board, noting that it added three independent members last October.
“With the addition of our newly appointed directors, the board comprises nine individuals, eight of whom are independent, that collectively bring meaningful leadership experience across multiple disciplines, including finance, restaurant industry, franchising, global supply chain management, hospitality, merchandising, media, marketing and consumer insights,” the company said. “We believe our board has the skills, qualities and perspectives to effectively address the evolving needs of the company.”
Marcato owns 5.2 percent of Buffalo Wild Wings stock, and its nominations represent an escalation of its effort to push for changes at the company.
The nominations promise a potentially difficult proxy fight in the coming months at Buffalo Wild Wings, which for years had been one of the strongest restaurant companies on Wall Street.
Yet a recent string of same-store sales declines, which until 2016 had been a rarity since the company’s 2003 initial-public offering, amped up pressure on the company to make changes. Same-store sales fell 1.8 percent at company units in the third quarter ended Sept. 25, for instance.
Buffalo Wild Wings’ stock had fallen by more than 30 percent between the fall of 2015 and last July, before Marcato got involved.
Marcato has pushed the company to make significant changes, most notably to refranchise its 617 company-owned locations.
The nominations on their own would represent a major change at the company, which recently named three new members to its board of directors. McGuire, however, said that the new members don’t go far enough.
“We believe our carefully selected, highly-qualified director nominees have the extensive restaurant industry operating, strategic and financial expertise that the incumbent directors sorely lack, and will bring fresh perspectives and robust oversight to Buffalo Wild Wings’ board,” he said. “The time for change at Buffalo Wild Wings is long overdue.”
Marcato has been critical of current management and many of its strategies, and continued that strategy on Monday. The investor said the company has struggled with declining traffic, eroding margins, “unchecked cost inflation for new units” and deteriorating returns on invested capital.
The activist also cited “bungled technology implementations,” as well as shortfalls to international expansion.
Two of the main themes of Marcato’s criticism, however, centers on Buffalo Wild Wings’ spending decisions. The activist cited the company’s decisions to buy franchisee units at “excessive valuations,” calling the decisions “wasteful.” In particular, investors have cited Buffalo Wild Wings’ 2015 decision to buy out the 41-unit Alamowing Development LLC for $160 million.
And the investor criticized the company for “misguided and distracting investments in speculative new brand concepts.” That refers to the company’s investments in growth chains R Taco and PizzaRev.
“Buffalo Wild Wings’ board appears to display an alarming lack of relevant experience in the areas of restaurant operations, foodservice and supply chain innovation, franchise system management, corporate finance and capital markets,” McGuire said.
McGuire said that Marcato has tried “for months” to engage with the company. “Unfortunately, the company has been unwilling to explore a serious dialogue in any of these areas, exposing an acute breakdown in good governance and shareholder alignment,” he said.
Contact Jonathan Maze at [email protected]
Follow him on Twitter at @jonathanmaze
