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Table of Contents

 

 

 

UNITED STATES
SECURITIES AND EXCHANGE COMMISSION

Washington, DC 20549

 


 

FORM 10-Q

 


 

QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934

 

For the quarterly period ended September 26, 2010

 

Commission File No. 000-24743

 


 

BUFFALO WILD WINGS, INC.

(Exact name of registrant as specified in its charter)

 


 

Minnesota

 

No. 31-1455915

(State or Other Jurisdiction of
Incorporation or Organization)

 

(IRS Employer
Identification No.)

 

5500 Wayzata Boulevard, Suite 1600, Minneapolis, MN 55416

(Address of Principal Executive Offices) (Zip Code)

 

(952) 593-9943

(Registrant’s Telephone Number, Including Area Code)

 


 

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.  YES  x  NO  o

 

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).  YES  o  NO  o

 

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer”, “accelerated filer”, and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check one):

 

Large accelerated filer  o

 

Accelerated filer  x

 

 

 

Non-accelerated filer  o

 

Smaller reporting company  o

 

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). YES o  NO x

 

The number of shares outstanding of the registrant’s common stock as of October 29, 2010:  18,190,161 shares.

 

 

 




Table of Contents

 

PART I. FINANCIAL INFORMATION

 

ITEM 1. FINANCIAL STATEMENTS

 

BUFFALO WILD WINGS, INC. AND SUBSIDIARIES

 

CONSOLIDATED BALANCE SHEETS

 

(Dollar amounts in thousands)

 

(unaudited)

 

 

 

September 26,
2010

 

December 27,
2009

 

Assets

 

 

 

 

 

Current assets:

 

 

 

 

 

Cash and cash equivalents

 

$

7,288

 

9,580

 

Marketable securities

 

63,838

 

43,632

 

Accounts receivable – franchisees, net of allowance of $25

 

1,160

 

2,118

 

Accounts receivable – other

 

9,907

 

7,383

 

Inventory

 

3,631

 

3,644

 

Prepaid expenses

 

3,925

 

2,972

 

Refundable income taxes

 

5,597

 

1,872

 

Deferred income taxes

 

1,954

 

2,938

 

Restricted assets

 

32,120

 

24,384

 

Total current assets

 

129,420

 

98,523

 

 

 

 

 

 

 

Property and equipment, net

 

211,466

 

189,639

 

Other assets

 

9,859

 

9,665

 

Goodwill

 

11,246

 

11,246

 

Total assets

 

$

361,991

 

309,073

 

 

 

 

 

 

 

Liabilities and Stockholders’ Equity

 

 

 

 

 

Current liabilities:

 

 

 

 

 

Unearned franchise fees

 

$

2,265

 

2,706

 

Accounts payable

 

22,521

 

13,436

 

Accrued compensation and benefits

 

19,566

 

19,554

 

Accrued expenses

 

6,449

 

6,540

 

Current portion of deferred lease credits

 

1

 

84

 

System-wide payables

 

32,120

 

24,384

 

Total current liabilities

 

82,922

 

66,704

 

 

 

 

 

 

 

Long-term liabilities:

 

 

 

 

 

Other liabilities

 

1,541

 

1,422

 

Deferred income taxes

 

16,284

 

14,940

 

Deferred lease credits, net of current portion

 

17,859

 

16,174

 

Total liabilities

 

118,606

 

99,240

 

 

 

 

 

 

 

Commitments and contingencies (note 11)

 

 

 

 

 

Stockholders’ equity:

 

 

 

 

 

Undesignated stock, 1,000,000 shares authorized; none issued

 

 

 

Common stock, no par value. Authorized 44,000,000 shares; issued and outstanding 18,190,046 and 18,054,375 respectively

 

99,208

 

93,887

 

Retained earnings

 

144,177

 

115,946

 

Total stockholders’ equity

 

243,385

 

209,833

 

Total liabilities and stockholders’ equity

 

$

361,991

 

309,073

 

 

See accompanying notes to consolidated financial statements

 

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Table of Contents

 

BUFFALO WILD WINGS, INC. AND SUBSIDIARIES

 

CONSOLIDATED STATEMENTS OF EARNINGS

 

(Dollar and share amounts in thousands except per share data)

 

(unaudited)

 

 

 

Three months ended

 

Nine months ended

 

 

 

September 26,
2010

 

September 27,
2009

 

September 26,
2010

 

September 27,
2009

 

Revenue:

 

 

 

 

 

 

 

 

 

Restaurant sales

 

$

136,953

 

120,290

 

406,446

 

357,477

 

Franchise royalties and fees

 

14,395

 

12,451

 

42,874

 

36,441

 

Total revenue

 

151,348

 

132,741

 

449,320

 

393,918

 

 

 

 

 

 

 

 

 

 

 

Costs and expenses:

 

 

 

 

 

 

 

 

 

Restaurant operating costs:

 

 

 

 

 

 

 

 

 

Cost of sales

 

38,232

 

35,809

 

118,057

 

107,939

 

Labor

 

41,995

 

36,369

 

122,769

 

107,974

 

Operating

 

22,835

 

19,416

 

65,463

 

55,369

 

Occupancy

 

9,131

 

8,256

 

26,848

 

23,774

 

Depreciation and amortization

 

9,766

 

8,267

 

28,772

 

23,650

 

General and administrative (1)

 

14,003

 

12,943

 

38,958

 

36,136

 

Preopening

 

2,789

 

1,149

 

5,101

 

5,231

 

Loss on asset disposals and store closures

 

682

 

842

 

1,619

 

1,289

 

Total costs and expenses

 

139,433

 

123,051

 

407,587

 

361,362

 

Income from operations

 

11,915

 

9,690

 

41,733

 

32,556

 

Investment income

 

305

 

379

 

334

 

868

 

Earnings before income taxes

 

12,220

 

10,069

 

42,067

 

33,424

 

Income tax expense

 

3,716

 

3,197

 

13,836

 

11,091

 

Net earnings

 

$

8,504

 

6,872

 

28,231

 

22,333

 

Earnings per common share — basic

 

$

0.47

 

0.38

 

1.55

 

1.24

 

Earnings per common share — diluted

 

0.47

 

0.38

 

1.55

 

1.24

 

Weighted average shares outstanding — basic

 

18,187

 

18,024

 

18,167

 

18,001

 

Weighted average shares outstanding — diluted

 

18,253

 

18,098

 

18,238

 

18,068

 

 


(1) Includes stock-based compensation of $ 2,041, $1,788, $4,579, and $4,278, respectively

 

See accompanying notes to consolidated financial statements

 

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Table of Contents

 

BUFFALO WILD WINGS, INC. AND SUBSIDIARIES

 

CONSOLIDATED STATEMENTS OF CASH FLOWS

 

(Dollar amounts in thousands)

 

(unaudited)

 

 

 

Nine months ended

 

 

 

September 26,
2010

 

September 27,
2009

 

 

 

 

 

 

 

Cash flows from operating activities:

 

 

 

 

 

Net earnings

 

$

28,231

 

22,333

 

Adjustments to reconcile net earnings to cash provided by operations:

 

 

 

 

 

Depreciation

 

28,312

 

23,191

 

Amortization

 

460

 

459

 

Loss on asset disposals and store closures

 

1,425

 

1,289

 

Deferred lease credits

 

1,468

 

1,705

 

Deferred income taxes

 

2,328

 

2,999

 

Stock-based compensation

 

4,579

 

4,278

 

Excess tax benefit from the exercise of stock options

 

(172

)

(418

)

Change in operating assets and liabilities:

 

 

 

 

 

Trading securities

 

(1,072

)

(1,731

)

Accounts receivable

 

(1,432

)

(1,979

)

Inventory

 

13

 

(123

)

Prepaid expenses

 

(953

)

(218

)

Other assets

 

(654

)

(52

)

Unearned franchise fees

 

(441

)

255

 

Accounts payable

 

3,165

 

2,792

 

Refundable income taxes

 

(3,553

)

519

 

Accrued expenses

 

1,342

 

2,662

 

Net cash provided by operating activities

 

63,046

 

57,961

 

 

 

 

 

 

 

Cash flows from investing activities:

 

 

 

 

 

Acquisition of property and equipment

 

(45,546

)

(51,309

)

Purchase of marketable securities

 

(84,398

)

(39,115

)

Proceeds of marketable securities

 

65,264

 

36,720

 

Net cash used in investing activities

 

(64,680

)

(53,704

)

 

 

 

 

 

 

Cash flows from financing activities:

 

 

 

 

 

Issuance of common stock

 

795

 

574

 

Tax payments for restricted stock units

 

(1,625

)

(1,513

)

Excess tax benefit from the exercise of stock options

 

172

 

418

 

Net cash used in financing activities

 

(658

)

(521

)

Net increase (decrease) in cash and cash equivalents

 

(2,292

)

3,736

 

Cash and cash equivalents at beginning of period

 

9,580

 

8,347

 

Cash and cash equivalents at end of period

 

$

7,288

 

12,083

 

 

See accompanying notes to consolidated financial statements

 

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Table of Contents

 

BUFFALO WILD WINGS, INC. AND SUBSIDIARIES

 

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

 

FOR THE THREE MONTHS AND NINE MONTHS ENDED SEPTEMBER 26, 2010 AND SEPTEMBER 27, 2009

(Dollar amounts in thousands except share and per share data)

 

(1)                  Basis of Financial Statement Presentation

 

The consolidated financial statements as of September 26, 2010 and December 27, 2009, and for the three-month and nine-month periods ended September 26, 2010 and September 27, 2009 have been prepared by Buffalo Wild Wings, Inc. pursuant to the rules and regulations of the Securities and Exchange Commission (SEC). The financial information as of September 26, 2010 and December 27, 2009 and for the three-month and nine-month periods ended September 26, 2010 and September 27, 2009 is unaudited, but, in the opinion of management, reflects all adjustments and accruals necessary for a fair presentation of the financial position, results of operations, and cash flows for the interim periods.

 

References in the remainder of this document to “Buffalo Wild Wings,” “we,” “us” and “our” refer to the business of Buffalo Wild Wings, Inc. and our subsidiaries.

 

The financial information as of December 27, 2009 is derived from our audited consolidated financial statements and notes thereto for the fiscal year ended December 27, 2009, which is included in Item 8 in the Fiscal 2009 Annual Report on Form 10-K and should be read in conjunction with such financial statements.

 

The results of operations for the three-month and nine-month periods ended September 26, 2010 are not necessarily indicative of the results of operations that may be achieved for the entire year ending December 26, 2010.

 

(2)                  Summary of Significant Accounting Policies

 

(a)                 Inventories

 

Inventories are stated at the lower of cost or market. Cost is determined by the first-in, first-out (FIFO) method. Cash flows related to inventory sales are classified in net cash provided by operating activities in the Consolidated Statements of Cash Flows.

 

We purchase our products from a number of suppliers and believe there are alternative suppliers. We have minimum purchase commitments from some of our vendors, but the terms of the contracts and nature of the products are such that our purchase requirements do not create a market risk. The primary food product used by our restaurants and our franchised restaurants is chicken wings. Chicken wings are purchased by us at market prices. Material increases in chicken wing costs may adversely affect our operating results. For the three-month periods ended September 26, 2010 and September 27, 2009, chicken wings were 22.4% and 25.4%, respectively, of restaurant cost of sales. For the nine-month periods ended September 26, 2010 and September 27, 2009, chicken wings were 24.8%, respectively, of restaurant cost of sales.

 

(b)                 New Accounting Pronouncement

 

In January 2010, the Financial Accounting Standards Board (FASB) issued Accounting Standards Update (ASU) 2010-06 “Fair Value Measurements and Disclosures (Topic 820): Improving Disclosures about Fair Value Measurements.” ASU 2010-06 amends ASC 820 Fair Value Measurements and Disclosures to require new disclosures related to transfers into and out of Levels 1 and 2 of the fair value hierarchy and additional disclosure requirements related to Level 3 measurements. The guidance also clarifies existing fair value measurement disclosures about the level of disaggregation and about inputs and valuation techniques used to measure fair value. The additional disclosure requirements are effective for the first reporting period beginning after December 15, 2009, except for the additional disclosure requirements related to Level 3 measurements which are effective for fiscal years beginning after December 15, 2010. The additional disclosure requirements did not have any financial impact on our consolidated financial statements.

 

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(3)                  Fair Value Measurements

 

The guidance for fair value measurements establishes the authoritative definition of fair value, sets out a framework for measuring fair value, and outlines the required disclosures regarding fair value measurements. Fair value is the price that would be received to sell an asset or paid to transfer a liability (an exit price) in the principal or most advantageous market for the asset or liability in an orderly transaction between market participants at the measurement date. We use a three-tier fair value hierarchy based upon observable and non-observable inputs as follows:

 

·                  Level 1 — Observable inputs such as quoted prices in active markets;

·                  Level 2 — Inputs, other than the quoted prices in active markets, that are observable either directly or indirectly; and

·                  Level 3 — Unobservable inputs in which there is little or no market data, which require the reporting entity to develop its own assumptions.

 

The following table summarizes the financial instruments measured at fair value in our consolidated balance sheet as of September 26, 2010:

 

 

 

Fair Value Measurements

 

 

 

Level 1

 

Level 2

 

Level 3

 

Total

 

Assets

 

 

 

 

 

 

 

 

 

Marketable Securities

 

$

4,691

 

28,883

 

 

33,574

 

Liabilities

 

 

 

 

 

 

 

 

 

Derivatives

 

136

 

 

 

136

 

 

We classified a portion of our marketable securities as available-for-sale and trading securities which were reported at fair market value, using the “market approach” valuation technique. The “market approach” valuation method used prices and other relevant information observable in market transactions involving identical or comparable assets. Our trading securities are valued using the Level 1 approach. Our derivatives consist of natural gas commodity futures contracts which are valued with a Level 1 approach using quoted prices in an active market for identical derivative liabilities that are traded on exchanges. Our available-for-sale marketable securities are valued using a Level 2 approach using observable direct and indirect inputs for municipal bonds.

 

There were no transfers between Level 1 and Level 2 of the fair value hierarchy during the nine-month period ended September 26, 2010.

 

(4)                  Marketable Securities

 

Marketable securities were comprised of the following:

 

 

 

As of

 

 

 

September 26,
2010

 

December 27,
2009

 

Held-to-maturity

 

 

 

 

 

Municipal securities

 

$

30,264

 

15,707

 

Available-for-sale

 

 

 

 

 

Municipal securities

 

28,883

 

24,307

 

Trading

 

 

 

 

 

Mutual funds

 

4,691

 

3,618

 

Total

 

$

63,838

 

43,632

 

 

All held-to-maturity debt securities mature within one year and had aggregate fair values of $30,261 and $15,712 as of September 26, 2010 and December 27, 2009, respectively. Trading securities represent investments held for future needs of a non-qualified deferred compensation plan.

 

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(5)                  Property and Equipment

 

Property and equipment consisted of the following:

 

 

 

As of

 

 

 

September 26,
2010

 

December 27,
2009

 

Construction in-process

 

$

14,274

 

6,443

 

Buildings

 

21,080

 

18,338

 

Furniture, fixtures, and equipment

 

131,808

 

121,166

 

Leasehold improvements

 

168,867

 

152,108

 

 

 

336,029

 

298,055

 

Less accumulated depreciation

 

(124,563

)

(108,416

)

 

 

$

211,466

 

189,639

 

 

(6)                  Derivative Instruments

 

We use commodity derivatives to manage our exposure to price fluctuations. We enter into options and future contracts to reduce our risk of natural gas price fluctuations. These derivatives do not qualify for hedge accounting and changes in fair value are included in current net income. These changes are classified as a component of restaurant operating expenses. All changes in the fair value of these contracts are recorded in earnings in the period in which they occur. Net losses of $192 and $365 were recognized in the first nine months of 2010 and 2009, respectively. The fair value of our derivative instruments as of September 26, 2010 and December 27, 2009 was $136 and $11, respectively, and is a liability included in accrued expenses in the accompanying consolidated balance sheets. As of September 26, 2010, the maximum length of time over which we are hedging our exposure to the variability in future cash flows related to the purchase of natural gas is six months. As of September 26, 2010 and December 27, 2009, we were party to natural gas swap contracts with notional values of $469 and $525, respectively.

 

(7)                  Income Taxes

 

The total unrecognized tax benefits reflected on our consolidated balance sheet as of September 26, 2010 and December 27, 2009 were $671 and $566, respectively. The increase between the periods was due to accruals for tax positions taken in the current year. We recognize potential accrued interest and penalties related to unrecognized tax benefits in income tax expense. Interest and penalties related to unrecognized tax benefits totaled $132 and $89 at September 26, 2010 and December 27, 2009, respectively. Included in the balance at September 26, 2010 and December 27, 2009, were unrecognized tax benefits of $436 and $368, respectively, which if recognized, would affect the annual effective tax rate. We do not anticipate any significant change to the total unrecognized tax benefits prior to September 26, 2011.

 

The Internal Revenue Service has completed the audit of our 2008 U.S. Income Tax Return. With few exceptions, we are no longer subject to state income tax examinations for years before 2005.

 

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(8)                  Stockholders’ Equity

 

(a)                 Stock Options

 

We have 3.9 million shares of common stock reserved for issuance under the Equity Incentive Plan (Plan) for employees, officers, and directors. The option price for shares issued under the Plan is to be not less than the fair market value on the date of grant with respect to incentive and nonqualified stock options. Incentive stock options become exercisable in four equal installments from the date of the grant and have a contractual life of seven to ten years. Nonqualified stock options issued pursuant to the Plan have varying vesting periods from immediately to four years and have a contractual life of seven to ten years. Incentive stock options may be granted under this Plan until May 15, 2018. We issue new shares of common stock upon exercise of stock options. Option activity is summarized for the nine-month period ended September 26, 2010 as follows:

 

 

 

Number
of shares

 

Weighted
average
exercise price

 

Average remaining
contractual Life
(years)

 

Aggregate intrinsic
value

 

Outstanding, December 27, 2009

 

179,134

 

$

19.00

 

4.3

 

$

4,285

 

 

 

 

 

 

 

 

 

 

 

Granted

 

35,984

 

48.41

 

 

 

 

 

Exercised

 

(19,356

)

9.51

 

 

 

 

 

Cancelled

 

(1,833

)

27.94

 

 

 

 

 

Outstanding, September 26, 2010

 

193,929

 

$

25.32

 

4.2

 

$

4,397

 

Exercisable, September 26, 2010

 

95,932

 

14.60

 

2.9

 

3,194

 

 

The aggregate intrinsic value in the table above is before applicable income taxes, based on our closing stock price of $47.90 as of the last business day of the quarter ended September 26, 2010, which would have been received by the optionees had all options been exercised on that date. As of September 26, 2010, total unrecognized stock-based compensation expense related to nonvested stock options was approximately $1,252, which is expected to be recognized over a weighted average period of approximately 2.5 years. During the nine-month periods ended September 26, 2010 and September 27, 2009, the total intrinsic value of stock options exercised was $658 and $79, respectively. During the nine-month period ended September 27, 2009, the total fair value of options vested was $7. No options vested during the nine-month period ended September 26, 2010. During the nine-month periods ended September 26, 2010 and September 27, 2009, the weighted average grant date fair value of options granted was $23.82 and $15.96, respectively.

 

The Plan has 488,300 shares available for grant as of September 26, 2010.

 

(b)                 Restricted Stock Units

 

We have a stock-based performance plan under which restricted stock units are granted annually at the discretion of the Board of Directors. In 2008, we granted restricted stock units subject to cumulative one-year, two-year, and three-year net earnings targets. The number of units that vest each year is based on performance against those cumulative targets. These restricted stock units are subject to forfeiture if they have not vested at the end of the three-year period. Stock-based compensation is recognized for the expected number of units vesting at the end of each annual period. Restricted stock units expected to vest at the end of the first year are fully expensed in the first year. Restricted stock units expected to vest at the end of the second year are expensed during the first and second years. Restricted stock units expected to vest at the end of the third year are expensed over all three years.

 

In 2009 and 2010, we granted restricted stock units subject to three-year cliff vesting and a cumulative three-year earnings target. The number of units which vest at the end of the three-year period is based on performance against the target. These restricted stock units are subject to forfeiture if they have not vested at the end of the three-year period. Stock-based compensation is recognized for the expected number of units vesting at the end of the period and is expensed over the three-year period.

 

For each grant, restricted stock units meeting the performance criteria will vest as of the end of our fiscal year. The distribution of vested restricted stock units as common stock typically occurs in March of the following year. The common stock is issued to participants net of the number of shares needed for the required minimum employee withholding taxes. We issue new shares of common stock upon the disbursement of restricted stock

 

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units. Restricted stock units are contingently issuable shares, and the activity for the first nine months of fiscal 2010 was as follows:

 

 

 

Number
of shares

 

Weighted
average
grant date
fair value

 

Outstanding, December 27, 2009

 

450,869

 

$

28.43

 

 

 

 

 

 

 

Granted

 

214,157

 

40.80

 

Vested

 

(9,408

)

38.25

 

Cancelled

 

(9,853

)

31.42

 

Outstanding, September 26, 2010

 

645,765

 

$

32.34

 

 

As of September 26, 2010, the total stock-based compensation expense related to nonvested awards not yet recognized was $3,791, which is expected to be recognized over a weighted average period of 1.0 years. The weighted average grant date fair value of restricted stock units granted during the nine months ended September 27, 2009 was $33.30. During the nine-month period ended September 26, 2010, we recognized $3,653 of stock-based compensation expense related to restricted stock units.

 

(c)                  Employee Stock Purchase Plan

 

We have reserved 600,000 shares of common stock for issuance under the Employee Stock Purchase Plan (ESPP). The ESPP is available to substantially all employees subject to employment eligibility requirements. Participants may purchase our common stock at 85% of the beginning or ending closing price, whichever is lower, for each nine-month period ending in May and November. During the first nine months of 2010 and 2009, we issued 18,634 and 29,269 shares of common stock under the plan. As of September 26, 2010, we have 322,204 shares available for future issuance under the ESPP.

 

(9)                  Earnings Per Share

 

The following is a reconciliation of basic and fully diluted earnings per common share for the three-month and nine-month periods ended September 26, 2010 and September 27, 2009:

 

 

 

Three months ended September 26, 2010

 

 

 

Earnings
(numerator)

 

Shares
(denominator)

 

Per-share
amount

 

Net earnings

 

$

8,504

 

 

 

 

 

Earnings per common share

 

8,504

 

18,186,957

 

$

0.47

 

Effect of dilutive securities — stock options

 

 

66,407

 

 

 

Earnings per common share — assuming dilution

 

$

8,504

 

18,253,364

 

0.47

 

 

 

 

Three months ended September 27, 2009

 

 

 

Earnings
(numerator)

 

Shares
(denominator)

 

Per-share
amount

 

Net earnings

 

$

6,872

 

 

 

 

 

Earnings per common share

 

6,872

 

18,024,346

 

$

0.38

 

Effect of dilutive securities — stock options

 

 

73,856

 

 

 

Earnings per common share — assuming dilution

 

$

6,872

 

18,098,202

 

0.38

 

 

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Nine months ended September 26, 2010

 

 

 

Earnings
(numerator)

 

Shares
(denominator)

 

Per-share
amount

 

Net earnings

 

$

28,231

 

 

 

 

 

Earnings per common share

 

28,231

 

18,167,195

 

$

1.55

 

Effect of dilutive securities — stock options

 

 

70,690

 

 

 

Earnings per common share — assuming dilution

 

$

28,231

 

18,237,885

 

1.55

 

 

 

 

Nine months ended September 27, 2009

 

 

 

Earnings
(numerator)

 

Shares
(denominator)

 

Per-share
amount

 

Net earnings

 

$

22,333

 

 

 

 

 

Earnings per common share

 

22,333

 

18,001,176

 

$

1.24

 

Effect of dilutive securities — stock options

 

 

66,643

 

 

 

Earnings per common share — assuming dilution

 

$

22,333

 

18,067,819

 

1.24

 

 

The following is a summary of those securities outstanding at the end of the respective periods, which have been excluded from the fully diluted calculations because the effect on net earnings per common share would have been antidilutive or were performance-contingent shares for which the performance criteria had not yet been met:

 

 

 

Three months ended

 

Nine months ended

 

 

 

September 26,
2010

 

September 27,
2009

 

September 26,
2010

 

September 27,
2009

 

Stock options

 

21,376

 

54,970

 

19,993

 

43,022

 

Restricted stock units

 

645,765

 

577,260

 

645,765

 

577,620

 

 

(10)           Supplemental Disclosures of Cash Flow Information

 

 

 

Nine months ended

 

 

 

September 26,
2010

 

September 27,
2009

 

Cash paid during the period for:

 

 

 

 

 

Income taxes

 

$

15,141

 

7,692

 

Noncash financing and investing transactions:

 

 

 

 

 

Property and equipment not yet paid for

 

5,920

 

199

 

Goodwill adjustment

 

 

274

 

 

(11)           Contingencies

 

We are involved in various legal actions arising in the ordinary course of business. In the opinion of management, the ultimate disposition of these matters will not have a material adverse effect on our consolidated financial position, results of operations, or cash flows.

 

ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

 

The following discussion and analysis of our financial condition and results of operations should be read in conjunction with our consolidated financial statements and related notes included in Item 1 of Part 1 of this Quarterly Report and the audited consolidated financial statements and related notes and Management’s Discussion and Analysis of Financial Condition and Results of Operations contained in our Annual Report on Form 10-K for the fiscal year ended December 27, 2009. This discussion and analysis contains certain statements that are not historical facts, including, among others, those relating to our anticipated financial performance for 2010, cash requirements, and our expected store openings and preopening costs. Such statements are forward-looking and speak only as of the date on which they are made. There are risks and uncertainties including, but not limited to, those discussed in this Form 10-Q under Item 2 of Part I as well as in Item 1A of Part I of the fiscal 2009 Form 10-K. Information included in this discussion and analysis includes commentary on company-owned and franchised restaurant units, restaurant sales, same-store sales, and average weekly sales volumes. Management believes such

 

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sales information is an important measure of our performance, and is useful in assessing consumer acceptance of the Buffalo Wild Wings® Grill & Bar concept and the overall health of the concept. Franchise information also provides an understanding of our revenues because franchise royalties and fees are based on the opening of franchised units and their sales. However, franchise sales and same-store sales information does not represent sales in accordance with U. S. generally accepted accounting principles (GAAP), should not be considered in isolation or as a substitute for other measures of performance prepared in accordance with GAAP and may not be comparable to financial information as defined or used by other companies.

 

Critical Accounting Policies and Use of Estimates

 

Our most critical accounting policies, which are those that require significant judgment, include: valuation of long-lived assets and store closing reserves, goodwill, vendor allowances, revenue recognition from franchise operations, self-insurance liability, and stock-based compensation. An in-depth description of these can be found in our Annual Report on Form 10-K for the fiscal year ended December 27, 2009. There have been no changes to those policies during this period.

 

Overview

 

As of September 26, 2010, we owned and operated 244 company-owned restaurants and franchised an additional 457 Buffalo Wild Wings® Grill & Bar restaurants in 43 states. Our long-term focus is to grow to a national chain of over 1,000 locations in the United States, continuing the strategy of developing both company-owned and franchised restaurants.

 

Our growth and success depend on several factors and trends. First, we continue to monitor and react to changes in our cost of goods sold. The cost of goods sold is difficult to predict, as it has ranged from 27.9% to 30.6% of restaurant sales per quarter in our 2009 fiscal year and year-to-date in 2010. We are working to counteract the volatility of chicken wing prices with the introduction of popular new menu items, effective marketing promotions, focused efforts on food costs and waste, and menu price increases. We will continue to monitor the cost of chicken wings, as it can significantly change our cost of sales and cash flow from company-owned restaurants. We are exploring purchasing strategies to lessen the severity of cost increases and fluctuations, and are reviewing menu additions and other strategies that may decrease the percentage that chicken wings represent in terms of total restaurant sales. We are currently purchasing chicken wings at market prices. If a satisfactory long-term price agreement for chicken wings were to arise, we would consider locking in prices to reduce our price volatility.

 

A second factor is our success in developing new markets, both domestic and international. There are inherent risks in opening new restaurants, especially in new markets, including the lack of experience, logistical support, and brand awareness in a new market. These factors may result in lower than anticipated sales and cash flow for new restaurants in new markets. In 2010, we plan to develop company-owned restaurants primarily in markets where we currently have either company-owned or franchised restaurants. We believe this development focus, together with our focus on our new restaurant opening procedures, will help to mitigate the overall risk associated with opening restaurants in new markets.

 

Third, we will continue our focus on trends in company-owned and franchised same-store sales as an indicator of the continued acceptance of our concept by consumers. We also review the overall trend in average weekly sales as an indicator of our ability to increase the sales volume and, therefore, cash flow per location. We remain committed to high quality operations and guest hospitality.

 

Our revenue is generated by:

 

·                  Sales at our company-owned restaurants, which were 91% of total revenue in the third quarter of 2010. Food and nonalcoholic beverages accounted for 78% of restaurant sales. The remaining 22% of restaurant sales was from alcoholic beverages. The menu items with the highest sales volume are traditional and boneless wings at 21% and 19%, respectively, of total restaurant sales.

 

·                  Royalties and franchise fees received from our franchisees.

 

We generate cash from the operation of company-owned restaurants and from franchise royalties and fees. We highlight the specific costs associated with the on-going operation of our company-owned restaurants in the consolidated statement of earnings under “Restaurant operating costs.” Nearly all of our depreciation expense relates to assets used by our company-owned restaurants. Preopening costs are those costs associated with opening new company-owned restaurants and will vary quarterly based on the number of new locations opening and under construction. Loss on asset disposals and store closures is related to company-owned restaurants and includes the costs associated with closures of locations and normal asset

 

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retirements. Certain other expenses, such as general and administrative, relate to both company-owned restaurant and franchising operations.

 

We operate on a 52 or 53-week fiscal year ending on the last Sunday in December. Both of the third quarters of 2010 and 2009 consisted of thirteen weeks.

 

Quarterly Results of Operations

 

Our operating results for the periods indicated are expressed below as a percentage of total revenue, except for the components of restaurant operating costs, which are expressed as a percentage of restaurant sales. The information for each three-month and nine-month period is unaudited, and we have prepared it on the same basis as the audited financial statements. In the opinion of management, all necessary adjustments, consisting only of normal recurring adjustments, have been included to present fairly the unaudited quarterly results.

 

Quarterly and annual operating results may fluctuate significantly as a result of a variety of factors, including increases or decreases in same-store sales, changes in commodity prices, the timing and number of new restaurant openings and related expenses, asset impairment charges, store closing charges, general economic conditions, stock-based compensation, and seasonal fluctuations. As a result, our quarterly results of operations are not necessarily indicative of the results that may be achieved for any future period.

 

 

 

Three months ended

 

Nine months ended

 

 

 

September 26,
2010

 

September 27,
2009

 

September 26,
2010

 

September 27,
2009

 

Revenue:

 

 

 

 

 

 

 

 

 

Restaurant sales

 

90.5

%

90.6

%

90.5

%

90.7

%

Franchising royalties and fees

 

9.5

 

9.4

 

9.5

 

9.3

 

Total revenue

 

100.0

 

100.0

 

100.0

 

100.0

 

 

 

 

 

 

 

 

 

 

 

Costs and expenses:

 

 

 

 

 

 

 

 

 

Restaurant operating costs:

 

 

 

 

 

 

 

 

 

Cost of sales

 

27.9

 

29.8

 

29.0

 

30.2

 

Labor

 

30.7

 

30.2

 

30.2

 

30.2

 

Operating

 

16.7

 

16.1

 

16.1

 

15.5

 

Occupancy

 

6.7

 

6.9

 

6.6

 

6.7

 

Depreciation and amortization

 

6.5

 

6.2

 

6.4

 

6.0

 

General and administrative

 

9.3

 

9.8

 

8.7

 

9.2

 

Preopening

 

1.8

 

0.9

 

1.1

 

1.3

 

Loss on asset disposals and store closures

 

0.5

 

0.6

 

0.4

 

0.3

 

Total costs and expenses

 

92.1

 

92.7

 

90.7

 

91.7

 

Income from operations

 

7.9

 

7.3

 

9.3

 

8.3

 

Investment income

 

0.2

 

0.3

 

0.1

 

0.2

 

Earnings before income taxes

 

8.1

 

7.6

 

9.4

 

8.5

 

Income tax expense

 

2.5

 

2.4

 

3.1

 

2.8

 

Net earnings

 

5.6

 

5.2

 

6.3

 

5.7

 

 

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The number of company-owned and franchised restaurants open are as follows:

 

 

 

As of

 

 

 

September 26,
2010

 

September 27,
2009

 

Company-owned restaurants

 

244

 

220

 

Franchised restaurants

 

457

 

400

 

 

The restaurant sales for company-owned and franchised restaurants are as follows (amounts in thousands):

 

 

 

Three months ended

 

Nine months ended

 

 

 

September 26,
2010

 

September 27,
2009

 

September 26,
2010

 

September 27,
2009

 

Company-owned restaurant sales

 

$

136,953

 

$

120,290

 

$

406,446

 

$

357,477

 

Franchised restaurant sales

 

286,309

 

244,470

 

848,171

 

725,071

 

 

Increases in comparable same-store sales are as follows (based on restaurants operating at least fifteen months):

 

 

 

Three months ended

 

Nine months ended

 

 

 

September 26,
2010

 

September 27,
2009

 

September 26,
2010

 

September 27,
2009

 

Company-owned same-store sales

 

2.6

%

0.8

%

0.9

%

3.3

%

Franchised same-store sales

 

0.3

 

1.9

 

0.1

 

3.8

 

 

The average prices paid per pound for chicken wings are as follows:

 

 

 

Three months ended

 

Nine months ended

 

 

 

September 26,
2010

 

September 27,
2009

 

September 26,
2010

 

September 27,
2009

 

Average price per pound

 

$

1.42

 

1.67

 

1.62

 

1.66

 

 

Results of Operations for the Three Months Ended September 26, 2010 and September 27, 2009

 

Restaurant sales increased by $16.7 million, or 13.9%, to $137.0 million in 2010 from $120.3 million in 2009. The increase in restaurant sales was due to a $13.7 million increase associated with 20 new company-owned restaurants that opened in 2010 and 38 company-owned restaurants opened before 2010 that did not meet the criteria for same-store sales for all or part of the three-month period, and $2.9 million related to a 2.6% increase in same-store sales.

 

Franchise royalties and fees increased by $1.9 million, or 15.6%, to $14.4 million in 2010 from $12.5 million in 2009. The increase was primarily due to additional royalties collected from 43 new franchised restaurants that opened in 2010 and 20 franchised restaurants that opened in the last three months of 2009. Same-store sales for franchised restaurants increased 0.3% in the third quarter of 2010.

 

Cost of sales increased by $2.4 million, or 6.8%, to $38.2 million in 2010 from $35.8 million in 2009 due primarily to more restaurants being operated in 2010. Cost of sales as a percentage of restaurant sales decreased to 27.9% in 2010 from 29.8% in 2009 primarily due to lower chicken wing prices. For the third quarter of 2010, the cost of chicken wings averaged $1.42 per pound which was a 15.0% decrease over the same period in 2009. Traditional wing sales decreased to 20.8% of our restaurant sales in 2010 from 20.9% in 2009.  However, boneless wings, which are a better margin item than traditional wings, increased to 19.2% of our restaurant sales in 2010 from 19.0% in 2009.

 

Labor expenses increased by $5.6 million, or 15.5%, to $42.0 million in 2010 from $36.4 million in 2009 due primarily to more restaurants being operated in 2010. Labor expenses as a percentage of restaurant sales increased to 30.7% in 2010 from 30.2% in 2009. The increase in labor expenses as a percentage of restaurant sales was primarily due to higher workers compensation costs and management bonuses partially offset by lower medical costs.

 

Operating expenses increased by $3.4 million, or 17.6%, to $22.8 million in 2010 from $19.4 million in 2009 due primarily to more restaurants being operated in 2010. Operating expenses as a percentage of restaurant sales increased to 16.7% in 2010 from 16.1% in 2009. The increase in operating expenses as a percentage of restaurant sales is primarily due to increased utility and natural gas expenses.

 

Occupancy expenses increased by $875,000, or 10.6%, to $9.1 million in 2010 from $8.3 million in 2009 due primarily to more restaurants being operated in 2010. Occupancy expenses as a percentage of restaurant sales decreased to 6.7% in 2010 from 6.9% in 2009.

 

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Depreciation and amortization increased by $1.5 million, or 18.1%, to $9.8 million in 2010 from $8.3 million in 2009. The increase was primarily due to the additional depreciation on 20 new restaurants opened in 2010 and the 12 new restaurants that opened in the last three months of 2009.

 

General and administrative expenses increased by $1.1 million, or 8.2%, to $14.0 million in 2010 from $12.9 million in 2009 primarily due to additional headcount. General and administrative expenses as a percentage of total revenue decreased to 9.3% in 2010 from 9.8% in 2009. Exclusive of stock-based compensation, our general and administrative expenses as a percentage of revenue decreased to 7.9% from 8.4% due primarily to leverage of our wage-related expenses against higher revenue and lower cash incentive expense, partially offset by higher professional fees.

 

Preopening costs increased by $1.6 million, to $2.8 million in 2010 from $1.1 million in 2009. In 2010, we incurred costs of $2.0 million for 11 new company-owned restaurants opened in the third quarter of 2010 and costs of $797,000 for restaurants that will open in the fourth quarter of 2010 or later. In 2009, we incurred costs of $811,000 million for five new company-owned restaurants opened in the third quarter of 2009, and incurred $320,000 for restaurants that opened in the fourth quarter of 2009 or later. In 2010, we expect average preopening costs per restaurant to be approximately $230,000.

 

Loss on asset disposals and store closures decreased by $160,000 to $682,000 in 2010 from $842,000 in 2009. In 2010, the loss was related to store closing costs related to one store closure of $8,000 and the write-off of miscellaneous equipment and disposals due to remodels. In 2009, the loss was due to the write-off of miscellaneous equipment and disposals due to remodels.

 

Investment income decreased by $74,000 to $305,000 in 2010 from $379,000 in 2009. The decrease was primarily due to a reduction of earnings on investments held for a deferred compensation plan. Cash and marketable securities balances at the end of the third quarter totaled $71.1 million in 2010 compared to $52.4 million at the end of the third quarter of 2009.

 

Provision for income taxes increased $519,000 to $3.7 million in 2010 from $3.2 million in 2009. The effective tax rate as a percentage of income before taxes decreased to 30.4% in 2010 from 31.8% in 2009. For 2010, we believe our effective annual tax rate will be between 33.0-33.5%.

 

Results of Operations for the Nine Months Ended September 26, 2010 and September 27, 2009

 

Restaurant sales increased by $49.0 million, or 13.7%, to $406.4 million in 2010 from $357.5 million in 2009. The increase in restaurant sales was due to a $46.0 million increase associated with 20 new company-owned restaurants that opened in 2010 and 64 company-owned restaurants opened before 2010 that did not meet the criteria for same-store sales for all or part of the nine-month period, and $3.0 related to a 0.9% increase in same-store sales.

 

Franchise royalties and fees increased by $6.4 million, or 17.7%, to $42.9 million in 2010 from $36.4 million in 2009. The increase was primarily due to additional royalties collected from 43 new franchised restaurants that opened in 2010 and 20 franchised restaurants that opened in the last three months of 2009. Same-store sales for franchised restaurants increased 0.1% in 2010.

 

Cost of sales increased by $10.1 million, or 9.4%, to $118.1 million in 2010 from $107.9 million in 2009 due primarily to more restaurants being operated in 2010. Cost of sales as a percentage of restaurant sales decreased to 29.0% in 2010 from 30.2% in 2009. Cost of sales as a percentage of restaurant sales decreased primarily due to the leverage of food and alcohol costs as a result of menu price increases and lower chicken wing prices. For the first nine months of 2010, the cost of chicken wings averaged $1.62 per pound which was a 2.4% decrease over the same period in 2009. Traditional wing sales increased to 20.3% of our restaurant sales in 2010 from 20.2% in 2009.  Boneless wings also increased to 19.0% of our restaurant sales in 2010 from 18.4% in 2009.

 

Labor expenses increased by $14.8 million, or 13.7%, to $122.8 million in 2010 from $108.0 million in 2009 due primarily to more restaurants being operated in 2010. Labor expenses as a percentage of restaurant sales remained consistent at 30.2% in 2010 and 2009. Labor expenses as a percentage of restaurant sales was affected by an increase in workers compensation costs offset by lower medical costs.

 

Operating expenses increased by $10.1 million, or 18.2%, to $65.5 million in 2010 from $55.4 million in 2009 due primarily to more restaurants being operated in 2010. Operating expenses as a percentage of restaurant sales increased to 16.1% in 2010 from 15.5% in 2009. The increase in operating expenses as a percentage of restaurant sales is primarily due to additional costs related to pay-per-view sporting events and higher self-insurance costs.

 

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Occupancy expenses increased by $3.1 million, or 12.9%, to $26.8 million in 2010 from $23.8 million in 2009 due primarily to more restaurants being operated in 2010. Occupancy expenses as a percentage of restaurant sales decreased to 6.6% in 2010 from 6.7% in 2009.

 

Depreciation and amortization increased by $5.1 million, or 21.7%, to $28.8 million in 2010 from $23.7 million in 2009. The increase was primarily due to the additional depreciation on 20 new restaurants opened in 2010 and the 12 new restaurants that opened in the last three months of 2009.

 

General and administrative expenses increased by $2.8 million, or 7.8%, to $39.0 million in 2010 from $36.1 million in 2009 primarily due to additional headcount and higher professional fees. General and administrative expenses as a percentage of total revenue decreased to 8.7% in 2010 from 9.2% in 2009. Exclusive of stock-based compensation, we reduced our general and administrative expenses as a percentage of revenue to 7.7% from 8.1% due to leverage of our wage-related expenses against higher revenue and lower cash incentive plan expenses, partially offset by higher professional fees.

 

Preopening costs decreased by $130,000, to $5.1 million in 2010 from $5.2 million in 2009. In 2010, we incurred costs of $4.3 million for 20 new company-owned restaurants opened in the first nine months of 2010 and costs of $818,000 for restaurants that will open in the fourth quarter of 2010 or later. In 2009, we incurred costs of $4.8 million for 24 new company-owned restaurants opened in the first nine months of 2009, and incurred costs of $345,000 for restaurants that opened in the fourth quarter of 2009 or later.

 

Loss on asset disposals and store closures increased by $330,000 to $1.6 million in 2010 from $1.3 million in 2009. In 2010, the loss was related to store closing costs related to eight store closures of $294,000 and the write-off of miscellaneous equipment and disposals due to remodels. In 2009, the loss was due to the write-off of miscellaneous equipment and disposals due to remodels.

 

Investment income decreased by $534,000 to $334,000 in 2010 from $868,000 in 2009. The decrease was primarily due to reduction of earnings on investments held for a deferred compensation plan. Cash and marketable securities balances at the end of the third quarter totaled $71.1 million in 2010 compared to $52.4 million at the end of the third quarter of 2009.

 

Provision for income taxes increased $2.7 million to $13.8 million in 2010 from $11.1 million in 2009. The effective tax rate as a percentage of income before taxes decreased to 32.9% in 2010 from 33.2% in 2009. The decrease in the effective tax rate was due to higher employment tax credits partially offset by the effects of increased stock-based compensation expenses.

 

Liquidity and Capital Resources

 

Our primary liquidity and capital requirements have been for new restaurant construction, remodeling and maintaining our existing company-owned restaurants, working capital, acquisitions, and other general business needs. We fund these expenses, except for acquisitions, primarily with cash from operations. Depending on the size of the transaction, acquisitions would generally be funded from cash and marketable securities balances. The cash and marketable securities balance at September 26, 2010 was $71.1 million. We invest our cash balances in debt securities with the focus on protection of principal, adequate liquidity, and return on investment based on risk. As of September 26, 2010, nearly all excess cash was invested in high quality municipal securities.

 

For the nine months ended September 26, 2010, net cash provided by operating activities was $63.0 million. Net cash provided by operating activities consisted primarily of net earnings adjusted for non-cash expenses, an increase in accounts payable, partially offset by an increase in accounts receivable and refundable income taxes. The increase in accounts payable was due to an increase in the number of restaurants and the timing of payments. The increase in accounts receivable was due to higher credit card balances.  The increase in refundable income taxes was due to the timing of income tax payments.

 

For the nine months ended September 27, 2009, net cash provided by operating activities was $58.0 million. Net cash provided by operating activities consisted primarily of net earnings adjusted for non-cash expenses and increases in accounts payable and accrued expenses, partially offset by an increase in accounts receivable. The increase in accounts payable was due to an increase in the number of restaurants and the timing of payments. The increase in accrued expenses was due to higher deferred compensation costs and higher wage-related costs. The increase in accounts receivable was due to higher credit card balances.

 

For the nine months ended September 26, 2010 and September 27, 2009, net cash used in investing activities was $64.7 million and $53.7 million, respectively. Investing activities included purchases of property and equipment related to the opening of new company-owned restaurants and restaurants under construction in both periods. During the first nine months of 2010 and 2009, we opened 20 and 24 restaurants, respectively. For the full year of 2010, we expect capital expenditures for approximately 35 new company-owned restaurants to cost approximately $1.8 million per location and expenditures to be

 

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approximately $20 million for the maintenance and remodel of existing restaurants. In the first nine months of 2010, we purchased $84.4 million of marketable securities and received proceeds of $65.3 million as these investments matured or were sold. In the first nine months of 2009, we purchased $39.1 million of marketable securities and received proceeds of $36.7 million as these investments matured or were sold.

 

For the nine months ended September 26, 2010 and September 27, 2009, net cash used in financing activities was $658,000 and $521,000, respectively. Net cash used in financing activities for 2010 resulted primarily from tax payments for restricted stock units of $1.6 million, partially offset by proceeds from the exercise of stock options of $795,000 and the excess tax benefit from stock issuance of $172,000. Net cash used in financing activities for 2009 resulted primarily from tax payments for restricted stock units of $1.5 million, partially offset by proceeds from the exercise of stock options of $574,000 and the excess tax benefit from stock issuance of $418,000. No additional funding from the issuance of common stock (other than from the exercise of options and purchase of stock under the employee stock purchase plan) is anticipated for the remainder of 2010.

 

Our liquidity is impacted by minimum cash payment commitments resulting from operating lease obligations for our restaurants and our corporate offices. Lease terms are generally 10 to 15 years with renewal options and generally require us to pay a proportionate share of real estate taxes, insurance, common area maintenance, and other operating costs. Some restaurant leases provide for contingent rental payments based on sales thresholds. We own the buildings in which 36 of our restaurants operate and therefore have limited ability to enter into sale-leaseback transactions as a potential source of cash.

 

The following table presents a summary of our contractual operating lease obligations and commitments as of September 26, 2010:

 

 

 

 

 

Payments Due By Period (in thousands)

 

 

 

Total

 

Less than
One year

 

1-3 years

 

3-5 years

 

After 5
years

 

Operating lease obligations

 

$

254,381

 

30,696

 

58,092

 

52,681

 

112,912

 

Lease commitments for restaurants under development

 

61,764

 

2,843

 

8,094

 

8,187

 

42,640

 

Total

 

$

316,145

 

33,539

 

66,186

 

60,868

 

155,552

 

 

We believe the cash flows from our operating activities and our balance of cash and marketable securities will be sufficient to fund our operations and building commitments and meet our obligations for the foreseeable future. Our future cash outflows related to income tax uncertainties amounted to $671,000 as of September 26, 2010. These amounts are excluded from the contractual obligations table due to the high degree of uncertainty regarding the timing of these liabilities.

 

Off-Balance Sheet Arrangements

 

As of September 26, 2010, we had no off-balance sheet arrangements or transactions.

 

Risk Factors/Forward-Looking Statements

 

The foregoing discussion and other statements in this report contain various “forward-looking statements” within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended. Forward-looking statements are based on current expectations or beliefs concerning future events. Such statements can be identified by the use of terminology such as “anticipate,” “believe,” “continue,” “could,” “estimate,” “expect,” “intend,” “may,” “plan,” “potential,” “should,” “will,” “project,” “will,” “forecast” or the negative of these terms or other comparable terminology. Our forward-looking statements generally relate our future financial and store performance measures and growth goals for 2010 and beyond, including but not limited to projected annual unit and net earnings growth rates; beliefs regarding future sales performance; benefits of menu price increases; the effect of key initiatives, promotional activities, and advertising and marketing campaigns; the number and timing of projected store openings and the nature of our expansion activities; expected 2010 tax rates; adequacy of capital resources and other future events. Although it is not possible to foresee all of the factors that may cause actual results to differ from our forward-looking statements, such factors include, among others, the following risk factors (each of which is discussed in greater detail in our Annual Report on Form 10-K for the fiscal year ended December 27, 2009):

 

·                  Fluctuations in chicken wing prices could impact our operating income.

 

·                  If we are unable to successfully open new restaurants, our revenue growth rate and profits may be reduced.

 

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·                  We must identify and obtain a sufficient number of suitable new restaurant sites for us to sustain our revenue growth rate.

 

·                  Shortages or interruptions in the availability and delivery of food and other supplies may increase costs or reduce revenues.

 

·                  We may experience higher-than-anticipated costs associated with the opening of new restaurants or with the closing, relocating, and remodeling of existing restaurants, which may adversely affect our results of operations.

 

·                  Our restaurants may not achieve market acceptance in the new domestic and international geographic regions we enter.

 

·                  New restaurants added to our existing markets may take sales from existing restaurants.

 

·                  An impairment in the carrying value of our goodwill or other intangible assets could adversely affect our financial condition and consolidated results of operations.

 

·                  Failure of our internal controls over financial reporting could harm our business and financial results.

 

·                  Economic conditions could have a material adverse impact on our landlords or other tenants in retail centers in which we or our franchisees are located, which in turn could negatively affect our financial results.

 

·                  We are dependent on franchisees and their success.

 

·                  Franchisees may take actions that could harm our business.

 

·                  We could face liability from our franchisees.

 

·                  We may be unable to compete effectively in the restaurant industry.

 

·                  Our success depends substantially on the value of our brands and our reputation for offering guests an unparalleled total experience.

 

·                  Our inability to successfully and sufficiently raise menu prices could result in a decline in profitability.

 

·                  A reduction in vendor allowances currently received could affect our costs of goods sold.

 

·                  Our quarterly operating results may fluctuate due to the timing of special events and other factors, including the recognition of impairment losses.

 

·                  We may not be able to attract and retain qualified team members to operate and manage our restaurants.

 

·                  The loss of key executives, or difficulties recruiting and retaining qualified team members, could jeopardize our ability to meet our financial targets.

 

·                  We may not be able to obtain and maintain licenses and permits necessary to operate our restaurants.

 

·                  The sale of alcoholic beverages at our restaurants subjects us to additional regulations and potential liability.

 

·                  Changes in employment laws or regulation could harm our performance.

 

·                  Changes in consumer preferences or discretionary consumer spending could harm our performance.

 

·                  Changes in public health concerns may impact our performance.

 

·                  A regional or global health pandemic could severely affect our business.

 

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·                  A decline in visitors to any of the business districts near the locations of our restaurants could negatively affect our restaurant sales.

 

·                  The acquisition of existing restaurants from our franchisees or other acquisitions may have unanticipated consequences that could harm our business and our financial condition.

 

·                  Unfavorable publicity could harm our business.

 

·                  There is volatility in our stock price.

 

·                  We may be subject to increased labor and insurance costs.

 

·                  Our current insurance may not provide adequate levels of coverage against claims.

 

·                  We are dependent on information technology and any material failure of that technology could impair our ability to efficiently operate our business.

 

·                  If we are unable to maintain our rights to use key technologies of third parties, our business may be harmed.

 

·                  We may not be able to protect our trademarks, service marks or trade secrets.

 

Investors are cautioned that all forward-looking statements involve risk and uncertainties and speak only as of the date on which they are made.

 

ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

 

We are exposed to market risk related to our cash and cash equivalents and marketable securities. We invest our excess cash in highly liquid short-term investments with maturities of less than one year. These investments are not held for trading or other speculative purposes. Changes in interest rates affect the investment income we earn on our cash and cash equivalents and marketable securities and, therefore, impact our cash flows and results of operations. We also have trading securities, which are held to generate returns that seek to offset changes in liabilities related to the equity market risk of our deferred compensation arrangements.

 

Financial Instruments

 

Financial instruments that potentially subject us to concentrations of credit risk consist principally of municipal securities. We do not believe there is a significant risk of non-performance by these municipalities because of our investment policy restrictions as to acceptable investment vehicles.

 

Inflation

 

The primary inflationary factors affecting our operations are food, labor, and restaurant operating costs. Substantial increases in these costs could impact operating results to the extent that such increases cannot be passed along through higher menu prices. A large number of our restaurant personnel are paid at rates based on the applicable federal and state minimum wages, and increases in the minimum wage rates and tip-credit wage rates could directly affect our labor costs. Many of our leases require us to pay taxes, maintenance, repairs, insurance, and utilities, all of which are generally subject to inflationary increases.

 

Commodity Price Risk

 

Many of the food products purchased by us are affected by weather, production, availability, and other factors outside our control. We believe that almost all of our food and supplies are available from several sources, which helps to control food product risks. We negotiate directly with independent suppliers for our supply of food and paper products. We use members of UniPro Food Services, Inc., a national cooperative of independent food distributors, to distribute these products from the suppliers to our restaurants. We have minimum purchase requirements with some of our vendors, but the terms of the contracts and nature of the products are such that our purchase requirements do not create a market risk. The primary food product used by company-owned and franchised restaurants is chicken wings. We work to counteract the effect of the volatility of chicken wing prices, which can significantly affect our cost of sales and cash flow, with the introduction of new menu items, effective marketing promotions, focused efforts on food costs and waste, and menu price increases. We also explore purchasing strategies to reduce the severity of cost increases and fluctuations. We currently purchase our chicken wings at market prices. If a satisfactory long-term price agreement for chicken wings were to arise, we would consider

 

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locking in prices to reduce our price volatility. If there is a significant rise in the price of chicken wings, and we are unable to successfully adjust menu prices or menu mix or otherwise make operational adjustments to account for the higher wing prices, our operating results could be adversely affected. Chicken wings accounted for approximately 22.4% and 25.4% of our cost of sales in the third quarters of 2010 and 2009, respectively, with a quarterly average price per pound of $1.42 and $1.67, respectively.

 

ITEM 4. CONTROLS AND PROCEDURES

 

Management’s Report on Internal Control Over Financial Reporting

 

As of the end of the period covered by this report, we conducted an evaluation, under the supervision and with the participation of our principal executive officer and principal financial officer, of our disclosure controls and procedures as defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934 (“the Exchange Act”). Based on this evaluation, the principal executive officer and principal financial officer concluded that our disclosure controls and procedures are effective to ensure that information required to be disclosed by us in the reports we file or submit under the Exchange Act is accumulated and communicated to our management, including our principal executive officer and principal financial officer, as appropriate to allow timely decisions regarding required disclosure and recorded, processed, summarized and reported within the time periods specified in Securities and Exchange Commission rules and forms.

 

Changes in Internal Control Over Financial Reporting

 

There were no changes in our internal controls over financial reporting during our most recently completed fiscal quarter that have materially affected, or are reasonably likely to materially affect, our internal controls over financial reporting.

 

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PART II — OTHER INFORMATION

 

ITEM 1. LEGAL PROCEEDINGS

 

Occasionally, we are a defendant in litigation arising in the ordinary course of our business, including claims arising from personal injuries, contract claims, franchise-related claims, dram shop claims, employment-related claims and claims from guests or employees alleging injury, illness or other food quality, health or operational concerns. To date, none of these types of litigation, most of which are typically covered by insurance, has had a material effect on us. We have insured and continue to insure against most of these types of claims. A judgment on any claim not covered by or in excess of our insurance coverage could adversely affect our financial condition or results of operations.

 

ITEM 6. EXHIBITS

 

See Exhibit Index following the signature page of this report.

 

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SIGNATURES

 

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.

 

Date: November 3, 2010

 

BUFFALO WILD WINGS, INC.

 

 

 

 

 

By:

/s/ Sally J. Smith

 

 

 

Sally J. Smith, President and Chief Executive Officer (principal executive officer)

 

 

 

 

 

 

By:

/s/ Mary J. Twinem

 

 

 

Mary J. Twinem, Executive Vice President, Chief
Financial Officer and Treasurer (principal financial and accounting officer)

 

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EXHIBIT INDEX

 

BUFFALO WILD WINGS, INC.

FORM 10-Q FOR QUARTER ENDED SEPTEMBER 26, 2010

 

Exhibit
Number

 

Description

3.1

 

 

Restated Articles of Incorporation, as amended (Incorporated by reference to Exhibit 3.1 to our Form 10-Q for the fiscal quarter ended June 29, 2008).

 

 

 

 

3.2

 

 

Amended and Restated Bylaws, as amended (Incorporated by reference to Exhibit 3.1 to our current report on Form 8-K filed May 27, 2009).

 

 

 

 

31.1

 

 

Certification of Chief Executive Officer Pursuant to Section 302 of the Sarbanes-Oxley Act

 

 

 

 

31.2

 

 

Certification of Chief Financial Officer Pursuant to Section 302 of the Sarbanes-Oxley Act

 

 

 

 

32.1

 

 

Certification of Chief Executive Officer Pursuant to Section 906 of the Sarbanes-Oxley Act

 

 

 

 

32.2

 

 

Certification of Chief Financial Officer Pursuant to Section 906 of the Sarbanes-Oxley Act

 

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