Restaurant stocks have been a hit-or-miss commodity for investors. Many of the restaurants are seeing declining same-store sales as more people prepare food at home. But a wave of acquisitions in the sector along with activist investors taking stakes had made restaurant stocks hot again. Investors would be wise to add some exposure to the sector to their portfolio.
According to QSR Magazine, around 14% of restaurants with a market capitalization greater than $100 million have attracted activist investors. This figure has quadrupled over the last 10 years as activist investors are singling out restaurant stocks that they previously wouldn’t have looked at.
These investors take on restaurant stocks for a number of reasons. Typically their targets are poorly run or mismanaged, need a new direction, could spin off existing brands or could move to a franchise model. These changes have already happened to some major chains thanks to activist investors.
Today, I highlight three restaurant stocks that all have activist investors with major stakes in the company. These three stocks vary in size but have battles for spots on the Board of Directors and plans laid out to increase the share prices for investors.
Restaurant Stocks Facing Activist Investors: Buffalo Wild Wings (BWLD)
Perhaps the biggest activist battle going on in the restaurant sector right now is with Buffalo Wild Wings (NASDAQ:BWLD). It’s the $2.7 billion cap size of BWLD and also the very public battle between activist investor Marcato Capital Management and CEO Sally Smith of Buffalo Wild Wings.
I think an investment in BWLD shares is a win-win right now, as the company is at least making minor changes in the face of an activist movement. If Marcato can get its way on things, then investors should be in for a great ride.
The main point of Marcato’s presentation centers on Buffalo Wild Wings franchising its company-owned restaurants and creating a royalty-streamed company that will rely less on same-store sales and commodity pricing and more on expansion.
Marcato’s plan has four parts to it and is laid out at a website created by the company. The main points are franchising strategy to get to a 90% mix by 2020 and accelerate international stores, reinvigorate the core business by getting away from new concepts, establishing explicit capital allocation strategies and realigning management incentives to be tied to return on capital and per-share metrics.
In Marcato’s presentation, examples of other restaurant groups franchising their company-owned stores prove strong track records. Companies like Jack in the Box Inc. (NASDAQ:JACK), Dominos Pizza, Inc. (NYSE:DPZ), and Burger King all had success by turning to a franchise model. Marcato also believes Buffalo Wild Wings should expand rapidly internationally through a franchise model. A target of 400 international stores by the year 2021 is cited in the presentation.
BWLD shareholders will be happy to see the math done by Marcato Capital in the presentation. The international expansion is believed to add between $49.90 and $83.17 to the share price. The franchise initiative is seen creating earnings per share of $16.06 by the year 2021 if 90% of stores are franchised by BWLD. This math comes up with a range of $218 to $458 depending on multiples and what is done by the company. Marcato Capital comes up with an implied share price of $401.91 by the year 2021.
Buffalo Wild Wings hasn’t been impressed with Marcato Capital and has publicly fought off the on-going battle. The company has to agree with the ideas brought forth in some capacity as a plan is already underway to sell off around 10% of current company-owned stores. BWLD shareholders appear to be in a good spot as the company is taking note of potential value creation through re-franchising. If Marcato can take partial control of the board, expect plans to ramp up and shares to quickly escalate.
Restaurant Stocks Facing Activist Investors: Fiesta Restaurant Group (FRGI)
Fiesta Restaurant Group Inc. (NASDAQ:FRGI) has seen its shares drop 24% in 2017 as its two restaurant brands post declining sales. Activist JCP Investment Management has taken a 9% stake in the company and believes it can make changes to reward FRGI shareholders.
JCP accuses FRGI of having poor corporate governing practices, weak operating performances and no strategic plan for its Taco Cabana brand. JCP is calling for the replacement of two board members and believes it can make immediate changes.
Fiesta posted a bad first quarter, which strengthened JCP’s argument. Fiesta posted a same-store sales decline of 6.7% and announced it is closing 30 Pollo Tropical restaurants. Fiesta ended the quarter with 180 company-owned Pollo Tropical, 34 franchised Pollo Tropical, 167 company-owned Taco Cabana, and seven franchised Taco Cabana restaurants.
JCP has a proven track record and lays out a nice case for the company to boost its shares. Fiesta Restaurant Group planned to spin off the Taco Cabana brand in 2016 before changing its mind. In 2011, this brand had 158 stores, which hasn’t grown much since then. JCP believes it can grow this brand and focus on expanding the brand in proven states. This should help the company grow revenue to over $797.9 million by 2021, grow the store count to 353 company owned and 108 franchised, and boost the share price to $52.24.
Through its various stakes in companies it has pursued changes in, JCP has seen an average return of 96% with an average holding period of 16 months. Many of the increases are in the triple digits and come through recognizing changes that needed to take place and making them once it had Board of Director positions.
Fiesta’s annual meeting takes place June 7. Expect to hear more on the company’s plan to turn things around without an activist. Also tune in to see if JCP gains any spots on the Board of Directors.
This is a fun battle to watch and JCP doesn’t look like it will be leaving anytime soon, as it has a history of sticking with investments for multiple years until it gets its way on changes. Investors should win along the way while holding FRGI shares.
Restaurant Stocks Facing Activist Investors: Bravo Brio Restaurant Group (BBRG)
Bravo Brio Restaurant Group, Inc. (NASDAQ:BBRG) is on the small side for publicly traded restaurants with a market capitalization of $68 million. That hasn’t stopped activist investor TAC Capital from noticing that shares of this fine dining operator are down more than 75% from their IPO. BBRG is now being called out by TAC Capital to add new Board of Directors members and make changes to improve returns for shareholders.
The numbers aren’t pretty for BBRG right now. First-quarter results saw revenue down 1.9% to $106.7 million and earnings per share also fall to 13 cents, from 15 cents in the year-ago period. Same-store sales fell 2.3% in the quarter. The operator of Bravo! Cucina Italiana and Brio Tuscan Grille restaurants also plans on closing additional restaurants, which has led to full year guidance already being revised.
BBRG expects to close three restaurants in the second quarter and an additional three restaurants by the end of the year. As of March 26, the company operated 51 Bravo and 65 Brio restaurants in 33 states. Full-year guidance now calls for revenue in a range of $405 to $415 million and same-store sales to decline 2.5% to flat.
In the last fiscal year, the company reported revenue of $410.3 million, a decline of 3.2%. The company suffered a 5.2% decline in same-store sales, including a drop of 7% at Bravo locations. While this doesn’t exactly look like a screaming buy for investors, there is some good news for the company.
TAC Capital hasn’t been met with a very warm welcome and has even seen BBRG change their annual meeting date to December instead of the annual May time frame. This means no big changes to the Board of Directors can happen until then. TAC Capital owns about 15% of BBRG shares. While TAC Capital has not outlined its entire plan for changes, it has pointed out many flaws the company has, including its disappointing return for shareholders since its IPO.
BBRG has been investing in adding revenue from additional opportunities. This includes adding catering, banquet dining, to-go orders and delivery. I believe the most promising is the banquet serving, as the company is utilizing a small section of square footage from restaurants to increase the overall sales, which could provide a necessary boost to same-store sales.
Bravo Brio shares could be ready to run if TAC Capital can get ahold of a couple spots on the Board of Directors. Look for the company to continue to close underperforming stores and add additional revenue sources to the stores that are operating well enough to stay open.
As of this writing, Chris Katje did not hold a position in any of the aforementioned securities.