Today we will examine the competitive quick service restaurant "Chicken Sector". The year 2017 represents many challenges with proposed higher labor costs, industry traffic trends slowing, and oversaturated markets. Yet, a new administration hopes to boost consumer confidence through new policies to "Make America Great Again."
Whether it is football, basketball, baseball, soccer or any other special event Buffalo Wild Wings is the gathering place to view all special events. Marcato Capital Management LP, a stakeholder in BWLD, proposed a few points to make the company more competitive. First, change their business model so that Buffalo Wild Wings becomes a franchisor of stores instead of having the company own the stores. Currently, BWLD is 50/50 (stores owned/franchises). Second, open up exclusive territories giving the growth potential sites to existing franchisees that were previously available to corporate. Lastly, refurbish stores, improve the menu service, and also update to more advanced technology. That is the secret sauce that can hurdle B-Dubs over the rest of the pack. In 2016, BWLD roughly returned (-3%) in stock value.
Popeye’s Louisiana Kitchen Inc excels in its balance sheet due to a business model which features a heavily weighted franchise portfolio with low capital requirements. PLKI leadership is extremely diverse in their broad managerial and operational experience. Popeye’s has been opportunistic in buying back shares and promoting tremendous value in their stock. Popeye’s customer base is extremely loyal to the brand. PLKI registered a 3% return in 2016.
Wingstop operates and franchises 949 restaurants across the United States, Mexico, Singapore, the Philippines, Indonesia, and the United Arab Emirates. Wingstop has demonstrated success by increasing its domestic same store sales for 12 consecutive years. The company has been recognized as a “Top 100 Fastest Growing Restaurant Chain, Top 40 Fast Casual Chain, and Best Franchise Deal in North America” over the past two years. Wingstop has captured the attention of many industry players and Wall Street. Dedication to people, process, and product has moved the company to the forefront. Wingstop has all the right ingredients for success as it generated a 30% gain in stock price in 2016.
Chicken or the Egg
Not all people are interested in investing in brick and mortar stores, so I wanted to provide readers with an alternative way to view this sector. Tyson Foods and Sanderson Farms are two companies that fit the criteria.
Tyson brings the most to the table:
1) Product diversification
2) Strong balance sheet
3) Strong free cash flows
Challenges lurk as the industry may be navigating difficult pastures in regards to grain prices. If grain prices are high, profits are low. Currently grain prices are low, thus everyone is benefitting while profits and stock prices approach 52 week highs. Conversely, the strong head winds could quickly change and would be reflected in poor future earnings reports.
In terms of scale, Tyson Foods is the industry leader as they employ 114,000 people. On the flip side, a smaller nimbler Sanderson Farms employs only 1,673.
A downside to this investment is Tyson and Sanderson Farms are alleged to have shared data and colluded on production to keep prices high. Stay tuned in this "Game of Chicken."