Why Did Wedbush Downgrade B-Dubs?

Referring to the upcoming Buffalo Wild Wings (NASDAQ: BWLD) proxy vote as "irrelevant," Wedbush analyst Nick Setyan downgraded the stock to Underperform, and lowered his price target to $115.

According to Setyan, as the company continues to search for viable value-add strategies, neither of the alternatives in the vote are going to be able to offer a potential solution.

Setyan Does Not Believe In Management's Current Strategy

He noted that any competitor upside will have to be driven by discounts and promotions, which will only deleverage its margins and prevent Buffalo Wild Wings from meeting its expectations.

While transactions did increase in the first quarter of 2017, this was caused by promotions like "half-priced wing Tuesday" and "fast break lunch," which hurts margins. Setyan said, “The emphasis on driving more, less profitable transactions is a major culprit of unit-level margin deleverage well ahead of recent expectations.”

Additionally, the expected seasonal decline of wing costs is not occurring this year, and this could negatively impact management's current EPS guidance. Setyan also stated that he does "not believe BWLD has the pricing power to offset wing inflation given several years of outsized increases.”

Refranchising Is Not A Proper Solution

Setyan said, “Refranchising makes less sense given recent fundamental deterioration. With lower AUVs, margins, and multiples now vs. our initial expectation, we no longer arrive at share prices significantly above current prices.”

He sees huge risks ahead as management looks to refranchise and cut costs. This causes him to believe, “increasing leverage and buying back shares at current prices will not benefit long term shareholders.”

Buffalo Wild Wings has its upcoming Annual shareholders meeting on June 2. The stock was trading at $151 in the pre-market on Tuesday.

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