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UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, DC 20549

 

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FORM 10-Q

 

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QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF

THE SECURITIES EXCHANGE ACT OF 1934

 

For the quarterly period ended June 29, 2014

 

Commission File No. 000-24743

 

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BUFFALO WILD WINGS, INC.

(Exact name of registrant as specified in its charter)

 

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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)

 

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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  ☒    NO  ☐

 

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  ☒    NO  ☐ 

 

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  ☒    Accelerated filer  ☐    Non-accelerated filer  ☐    Smaller reporting company  ☐

 

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

 

 The number of shares outstanding of the registrant’s common stock as of July 31, 2014: 18,920,578 shares.

 

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TABLE OF CONTENTS

 

		Page
PART I – FINANCIAL INFORMATION
Item 1.	Financial Statements	3
Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	11
Item 3.	Quantitative and Qualitative Disclosures About Market Risk	18
Item 4.	Controls and Procedures	19
PART II – OTHER INFORMATION
Item 1.	Legal Proceedings	19
Item 6.	Exhibits	19
Signatures		20
Exhibit Index		21

 

 

PART I. FINANCIAL INFORMATION

 

ITEM 1. FINANCIAL STATEMENTS

 

BUFFALO WILD WINGS, INC. AND SUBSIDIARIES

 

CONSOLIDATED BALANCE SHEETS

 

(Dollar amounts in thousands)

(unaudited)

 

		June 29, 2014				December 29, 2013
Assets
Current assets:
Cash and cash equivalents		$	80,902				57,502
Marketable securities			20,149				7,584
Accounts receivable, net of allowance of $125 and $25, respectively			22,560				21,845
Inventory			10,100				9,492
Prepaid expenses			11,134				4,509
Refundable income taxes			—				4,329
Deferred income taxes			10,749				9,287
Restricted assets			43,401				68,208
Total current assets			198,995				182,756
Property and equipment, net			449,149				440,538
Reacquired franchise rights, net			31,137				33,403
Other assets			19,499				16,498
Goodwill			32,533				32,533
Total assets		$	731,313				705,728
Liabilities and Stockholders’ Equity
Current liabilities:
Unearned franchise fees		$	1,760				1,818
Accounts payable			32,031				31,806
Accrued compensation and benefits			44,884				52,049
Accrued expenses			12,798				13,784
Income tax payable			1,438				—
Current portion of deferred lease credits			429				—
System-wide payables			43,037				67,017
Total current liabilities			136,377				166,474
Long-term liabilities:
Other liabilities			3,863				1,913
Deferred income taxes			28,638				37,822
Deferred lease credits, net of current portion			35,470				33,711
Total liabilities			204,348				239,920
Commitments and contingencies (note 10)
Stockholders’ equity:
Undesignated stock, 1,000,000 shares authorized			—				—
Common stock, no par value. Authorized 44,000,000 shares; issued and outstanding 18,920,578 and 18,803,663, respectively			142,377				133,203
Retained earnings			385,620				333,601
Accumulated other comprehensive loss			(1,032	)			(996	)
Total stockholders’ equity			526,965				465,808
Total liabilities and stockholders’ equity		$	731,313				705,728

 

See accompanying notes to consolidated financial statements.

 

 

BUFFALO WILD WINGS, INC. AND SUBSIDIARIES

 

CONSOLIDATED STATEMENTS OF EARNINGS

 

(Amounts in thousands except per share data)

 

(unaudited)

 

		Three months ended								Six months ended
		June 29, 2014				June 30, 2013				June 29, 2014				June 30, 2013
Revenue:
Restaurant sales		$	343,141				285,403				688,086				569,828
Franchise royalties and fees			22,853				19,604				45,763				39,543
Total revenue			365,994				305,007				733,849				609,371
Costs and expenses:
Restaurant operating costs:
Cost of sales			96,837				86,630				194,324				179,721
Labor			107,432				88,929				212,766				174,760
Operating			50,017				41,212				99,055				82,317
Occupancy			19,283				16,865				38,252				32,991
Depreciation and amortization			23,746				21,084				46,578				41,227
General and administrative			30,223				23,601				58,379				44,898
Preopening			2,197				2,420				4,775				6,691
Loss on asset disposals and impairment			1,211				229				1,998				800
Total costs and expenses			330,946				280,970				656,127				563,405
Income from operations			35,048				24,037				77,722				45,966
Other income (loss)			235				(84	)			108				261
Earnings before income taxes			35,283				23,953				77,830				46,227
Income tax expense			11,580				7,464				25,811				13,359
Net earnings		$	23,703				16,489				52,019				32,868
Earnings per common share – basic		$	1.25				0.88				2.75				1.75
Earnings per common share – diluted		$	1.25				0.88				2.74				1.75
Weighted average shares outstanding – basic			18,904				18,768				18,888				18,758
Weighted average shares outstanding – diluted			18,981				18,827				18,967				18,815

 

 

CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME

 

Net earnings		$	23,703				16,489				52,019				32,868
Other comprehensive income
Foreign currency translation adjustments			458				85				(36	)			(372	)
Other comprehensive income (loss), net of tax			458				85				(36	)			(372	)
Comprehensive income		$	24,161				16,574				51,983				32,496

 

See accompanying notes to consolidated financial statements.

 

 

BUFFALO WILD WINGS, INC. AND SUBSIDIARIES

 

CONSOLIDATED STATEMENTS OF CASH FLOWS

 

(Dollar amounts in thousands)

 

(unaudited)

 

		Six months ended
		June 29, 2014				June 30, 2013
Cash flows from operating activities:
Net earnings		$	52,019				32,868
Adjustments to reconcile net earnings to net cash provided by operations:
Depreciation			44,312				38,704
Amortization			2,266				2,524
Loss on asset disposals and impairment			1,998				800
Deferred lease credits			2,998				2,105
Deferred income taxes			(10,623	)			(1,542	)
Stock-based compensation			7,665				4,014
Excess tax benefit from stock issuance			(118	)			(147	)
Change in operating assets and liabilities, net of effect of acquisitions:
Trading securities			(569	)			(348	)
Accounts receivable			(347	)			3,478
Inventory			(608	)			(678	)
Prepaid expenses			(6,618	)			1,653
Other assets			(2	)			(852	)
Unearned franchise fees			(58	)			410
Accounts payable			69				(8,135	)
Income taxes			5,885				2,133
Accrued expenses			1,019				(221	)
Net cash provided by operating activities			99,288				76,766
Cash flows from investing activities:
Acquisition of property and equipment			(54,864	)			(63,910	)
Acquisition of businesses/investments in affiliates			(3,000	)			(10,288	)
Purchase of marketable securities			(11,996	)			—
Proceeds from marketable securities			—				3,282
Net cash used in investing activities			(69,860	)			(70,916	)
Cash flows from financing activities:
Proceeds from line of credit			—				5,000
Repayments of line of credit			—				(5,000	)
Issuance of common stock			1,665				1,152
Excess tax benefit from stock issuance			118				147
Tax payments for restricted stock units			(7,474	)			(4,813	)
Net cash used in financing activities			(5,691	)			(3,514	)
Effect of exchange rate changes on cash and cash equivalents			(337	)			(177	)
Net increase in cash and cash equivalents			23,400				2,159
Cash and cash equivalents at beginning of period			57,502				21,340
Cash and cash equivalents at end of period		$	80,902				23,499

 

See accompanying notes to consolidated financial statements.

 

 

BUFFALO WILD WINGS, INC. AND SUBSIDIARIES

 

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

 

FOR THE THREE MONTHS AND SIX MONTHS ENDED JUNE 29, 2014 AND JUNE 30, 2013

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

(unaudited)

 

 

(1)	Basis of Financial Statement Presentation

  

The consolidated financial statements as of June 29, 2014 and December 29, 2013, and for the three-month and six-month periods ended June 29, 2014 and June 30, 2013 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 June 29, 2014 and for the three-month and six-month periods ended June 29, 2014 and June 30, 2013 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 “company,” “we,” “us” and “our” refer to the business of Buffalo Wild Wings, Inc. and our subsidiaries.

 

The financial information as of December 29, 2013 is derived from our audited consolidated financial statements and notes thereto for the fiscal year ended December 29, 2013, which is included in Item 8 in the Fiscal 2013 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 six-month periods ended June 29, 2014 are not necessarily indicative of the results of operations that may be achieved for the entire year ending December 28, 2014.

 

(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 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. One of the primary food products used by our restaurants and our franchised restaurants is chicken wings. Current month chicken wing prices are determined based on the average of the previous month’s wing market plus mark-up for processing and distribution. For the three-month periods ended June 29, 2014 and June 30, 2013, chicken wings were 21.4% and 23.5%, respectively, of restaurant cost of sales. For the six-month periods ended June 29, 2014 and June 30, 2013, chicken wings were 20.9% and 26.2%, of restaurant cost of sales, respectively.

 

(b)

New Accounting Pronouncements

 

In May 2014, the Financial Accounting Standards Board (FASB) issued Accounting Standards Update (ASU) 2014-09 “Revenue with Contracts from Customers.” ASU 2014-09 supersedes the current revenue recognition guidance, including industry-specific guidance. The guidance introduces a five-step model to achieve its core principal of the entity recognizing revenue to depict the transfer of goods or services to customers at an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services. The updated guidance is effective for interim and annual periods beginning after December 15, 2016 and early adoption is not permitted. We are currently evaluating the impact of the updated guidance but we do not believe the adoption of ASU 2014-09 will have a significant impact on our consolidated financial statements.

 

We reviewed all other significant newly-issued accounting pronouncements and concluded that they either are not applicable to our operations or that no material effect is expected on our consolidated financial statements as a result of future adoption.

 

 

 

 

 

(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 June 29, 2014:

 

		Fair Value Measurements
		Level 1				Level 2				Level 3				Total
Assets
Cash Equivalents		$	62,595				3,000				—				65,595
Marketable Securities			8,155				11,994				—				20,149
Restricted Assets			1,181				1,845				—				3,026

 

The following table summarizes the financial instruments measured at fair value in our consolidated balance sheet as of December 29, 2013:

 

		Fair Value Measurements
		Level 1				Level 2				Level 3				Total
Assets
Cash Equivalents		$	33,587				—				—				33,587
Marketable Securities			7,584				—				—				7,584
Restricted Assets			5,823				—				—				5,823

 

Our cash equivalents are comprised of money market funds and commercial paper which are valued using the Level 1 and Level 2 approach, respectively. Our marketable securities were classified as trading securities and available-for-sale securities. Our trading securities are comprised of investments held for future needs of our non-qualified deferred compensation plan and were reported at fair market value, using the “market approach” valuation technique. The “market approach” valuation method uses prices and other relevant information observable in market transactions involving identical or comparable assets and is a Level 1 approach. Our available-for-sale securities are comprised of certificates of deposit, commercial paper, and other highly liquid assets and are valued using a Level 2 approach. Our restricted assets include money market mutual funds and variable rate demand obligations and are valued using the Level 1 and Level 2 approach, respectively.

 

There were no significant transfers between Level 1 and Level 2 of the fair value hierarchy during the six-month periods ended June 29, 2014 or June 30, 2013.

 

(4)	Marketable Securities

 

Marketable securities consisted of the following:

 

		June 29, 2014				December 29, 2013
Available-for-sale		$	11,994				—
Trading			8,155				7,584
Total		$	20,149				7,584

 

 

Purchases of available-for-sale securities totaled $11,996 for the six-month period ended June 29, 2014. Sales of available for-sale securities totaled $512 and there were no purchases for the six-month period ended June 30 2013.

 

(5)	Property and Equipment

  

Property and equipment consisted of the following:

 

		June 29, 2014				December 29, 2013
Construction in process		$	20,326				18,792
Buildings			75,716				72,939
Furniture, fixtures, and equipment			270,635				254,484
Leasehold improvements			405,211				380,155
Property and equipment, gross			771,888				726,370
Less accumulated depreciation			(322,739	)			(285,832	)
Property and equipment, net		$	449,149				440,538

 

(6)	Revolving Credit Facility

 

We have a $100,000 unsecured revolving credit facility. Loans under the facility bear interest at a rate per annum equal to, at our election, either (i) LIBOR for an interest period of one month, reset daily, plus 0.875%, if our consolidated total leverage ratio is less than or equal to 0.50, or plus 1.125% if our total leverage ratio is greater than or equal to .51, or (ii) LIBOR for an interest period of one, two, three, six or twelve months, reset at the end of the selected interest period, plus 0.875%, if our consolidated total leverage ratio is less than or equal to 0.50, or plus 1.125% if our consolidated total leverage ratio is greater than or equal to .51. As of June 29, 2014, we had no outstanding balance under the facility.

 

There is a commitment fee on the average unused portion of the facility at a rate per annum equal to 0.15%, if our consolidated total leverage ratio is less than or equal to 0.50, or 0.20% if our consolidated total leverage ratio is greater than or equal to 0.51.

 

The Credit Agreement requires us to maintain (a) consolidated coverage ratio as of the end of each fiscal quarter at no less than 2.50 to 1.00, (b) consolidated total leverage ratio as of the end of each fiscal quarter at no more than 2.00 to 1.00 and (c) minimum EBITDA during any consecutive four-quarter period at no less than $100,000. The Credit Agreement also contains other customary affirmative and negative covenants, including covenants that restrict the right of the Company and its subsidiaries to merge, to lease, sell or otherwise dispose of assets, to make investments and to grant liens on their assets. As of June 29, 2014, we were in compliance with all of these covenants.

 

In May 2014, we extended the maturity date of the facility to February 7, 2017.

 

(7)	Stockholder’s Equity

  

(a)

Stock Options

 

We have 5.4 million shares of common stock reserved for issuance under our Equity Incentive Plan (Plan) for our employees, officers, and directors. The exercise price for stock options 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 a four-year vesting period and have a contractual life of seven years. Incentive stock options may be granted under this Plan until March 12, 2022. We issue new shares of common stock upon exercise of stock options. Option activity is summarized for the six months ended June 29, 2014 as follows:

 

 

		Number of shares				Weighted average exercise price				Average remaining contractual life (years)				Aggregate intrinsic value
Outstanding, December 29, 2013			163,609			$	60.67				3.9			$	13,974
Granted			25,035				147.52
Exercised			(20,415	)			33.81
Cancelled			(1,800	)			74.32
Outstanding, June 29, 2014			166,429			$	76.88				4.1			$	14,521
Exercisable, June 29, 2014			93,109				54.10				3.0				10,245

 

The aggregate intrinsic value in the table above is before applicable income taxes, based on our closing stock price of $164.13 as of the last business day of the three-month period ended June 29, 2014, which would have been received by the optionees had all options been exercised on that date. As of June 29, 2014, total unrecognized stock-based compensation expense related to nonvested stock options was approximately $2,274, which is expected to be recognized over a weighted average period of approximately 2.6 years. During the six-month periods ended June 29, 2014 and June 30, 2013, the total intrinsic value of stock options exercised was $2,172 and $684, respectively. During the six-month periods ended June 29, 2014 and June 30, 2013, the weighted average grant date fair value of options granted was $50.23 and $37.09, respectively. No shares vested during the six-month periods ended June 29, 2014 or June 30, 2013.

 

The Plan had 1,166,669 shares available for grant as of June 29, 2014.

 

(b)

Restricted Stock Units

 

Restricted stock units are granted annually under the Plan at the discretion of the Compensation Committee of our Board of Directors.

 

We grant 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 number of units expected to vest at the end of the period and is expensed beginning on the grant date through the end of the performance period.

 

For each grant, restricted stock units meeting the performance criteria will vest as of the end of the third fiscal year in the performance period, subject to a Plan specified maximum number of shares that may be issued to any individual in any year in settlement of restricted stock units. 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 units. Restricted stock units are contingently issuable shares, and the activity for the six months ended June 29, 2014 is as follows:

 

		Number of shares				Weighted average grant date fair value
Outstanding, December 29, 2013			279,120			$	88.57
Granted			104,148				147.23
Vested			(3,576	)			142.85
Cancelled			(10,477	)			94.05
Outstanding, June 29, 2014			369,215			$	104.44

 

As of June 29, 2014, the total stock-based compensation expense related to nonvested awards not yet recognized was $21,430, which is expected to be recognized over a weighted average period of 2.0 years. The weighted average grant date fair value of restricted stock units granted during the six-month periods ended June 29, 2014 and June 30, 2013 was $147.23 and $87.52, respectively. During the six-month periods ended June 29, 2014 and June 30, 2013, we recognized $6,876 and $3,282, respectively, 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 our 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 six-month period ending in May and November. During the first six months of 2014 and 2013, we issued 8,037 and 14,505 shares of common stock, respectively, under the ESPP. As of June 29, 2014, we had 213,271 shares available for future issuance under the ESPP.

 

(8)	Earnings Per Common Share

  

The following is a reconciliation of basic and fully diluted earnings per common share for the three-month and six-month periods ended June 29, 2014 and June 30, 2013:

 

		Three months ended June 29, 2014
		Earnings (numerator)				Shares (denominator)				Per-share amount
Net earnings		$	23,703
Earnings per common share			23,703				18,904,341			$	1.25
Effect of dilutive securities – stock options			—				76,353
Earnings per common share – assuming dilution		$	23,703				18,980,694			$	1.25

 

		Three months ended June 30, 2013
		Earnings (numerator)				Shares (denominator)				Per-share amount
Net earnings		$	16,489
Earnings per common share			16,489				18,767,713			$	0.88
Effect of dilutive securities – stock options			—				59,128
Earnings per common share – assuming dilution		$	16,489				18,826,841			$	0.88

 

		Six months ended June 29, 2014
		Earnings (numerator)				Shares (denominator)				Per-share amount
Net earnings		$	52,019
Earnings per common share			52,019				18,888,360			$	2.75
Effect of dilutive securities – stock options			—				78,534
Earnings per common share – assuming dilution		$	52,019				18,966,894			$	2.74

 

		Six months ended June 30, 2013
		Earnings (numerator)				Shares (denominator)				Per-share amount
Net earnings		$	32,868
Earnings per common share			32,868				18,757,714			$	1.75
Effect of dilutive securities – stock options			—				57,680
Earnings per common share – assuming dilution		$	32,868				18,815,394			$	1.75

 

 

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-granted shares for which the performance criteria had not yet been met:

 

		Three months ended								Six months ended
		June 29, 2014				June 30, 2013				June 29, 2014				June 30, 2013
Stock options			25,035				65,789				25,035				46,040
Restricted stock units			369,215				425,774				369,215				425,774

 

(9)	Supplemental Disclosures of Cash Flow Information

 

		Six months ended
		June 29, 2014				June 30, 2013
Cash paid during the period for:
Income taxes		$	30,706				12,875
Noncash financing and investing transactions:
Property and equipment not yet paid for			149				(5,220	)

 

(10)	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 29, 2013. This discussion and analysis contains certain statements that are not historical facts, including, among others, those relating to our anticipated financial performance for 2014, 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. Actual results are subject to various 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 2013 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 sales information is an important measure of our performance, and is useful in assessing consumer acceptance of the Buffalo Wild Wings^® 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 Estimates

 

Our most critical accounting estimates, which are those that require significant judgment, include: valuation of long-lived assets and store closing reserves, goodwill, vendor allowances, self-insurance liabilities, 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 29, 2013. There have been no changes to those policies during this period.

 

We are currently monitoring several restaurants in regards to the valuation of long-lived assets. Based on our current estimates of the future operating results of these restaurants, we believe that the assets at these restaurants are not impaired. As we periodically refine our estimated future operating results, changes in our estimates and assumptions may cause us to realize impairment charges in the future. We believe that any future impairment charges related to the assets at these restaurants, in the aggregate, would not be material to our financial statements.

 

Overview

 

As of June 29, 2014, we owned and operated 449 company-owned restaurants, including 448 Buffalo Wild Wings^® restaurants and 1 PizzaRev^® restaurant in North America (United States and Canada). We also franchised an additional 579 Buffalo Wild Wings restaurants, including 576 North America and 3 International (outside of the United States and Canada) restaurants. We are building for long-term future earnings growth by investing in Buffalo Wild Wings in the United States and Canada, international franchising, and emerging brands. These investments will allow us to achieve our vision of being a company of 3,000 restaurants worldwide.

 

 

We believe we will open 45 company-owned Buffalo Wild Wings and 2 PizzaRev restaurants and between 47 and 49 franchised Buffalo Wild Wings restaurants in 2014. Based on our second quarter results, second quarter trends in same-store sales, and anticipated food costs and labor expense, we believe net earnings growth will exceed 25% for 2014, and could reach 30%. Our growth and success depend on several factors and trends. First, 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 experience.

 

Our revenue is generated by:

 

•

Sales at our company-owned restaurants, which represented 94% of total revenue in the second quarter of 2014. Food and nonalcoholic beverages accounted for 80% of restaurant sales. The remaining 20% of restaurant sales was from alcoholic beverages. The menu items with the highest sales volume are traditional and boneless wings, at 21% and 20%, respectively, of total restaurant sales.

 

•

Royalties and franchise fees received from our franchisees.

 

A second factor is our success in developing restaurants, including international locations. There are inherent risks in opening new restaurants, especially in new markets or countries, including the lack of experience, logistical support, and brand awareness. These factors may result in lower-than-anticipated sales and cash flow for restaurants in new markets, along with higher preopening costs. We believe our focus on new restaurant opening procedures, along with our expanding North American and international presence, will help to mitigate the overall risk associated with opening restaurants in new markets.

 

Third, we continue to monitor and react to changes in our cost of sales. The cost of sales is difficult to predict, as it has ranged from 28.2% to 32.7% of restaurant sales per quarter in our 2013 fiscal year and year-to-date in 2014, mostly due to the price and yield fluctuations in chicken wings. We are focused on minimizing the impact of rising costs per wing, which includes both price increases and yield fluctuations. Our efforts include selling wings by portion, new purchasing strategies, menu price increases, and reduced food waste, as well as marketing promotions, menu additions, and menu changes that affect the percent that chicken wings represent in terms of total restaurant sales. 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. Current month chicken wing prices are determined based on the average of the previous month’s wing market plus mark-up for processing and distribution.

 

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.” Our depreciation and amortization expense consists primarily of depreciation related to assets used by our company-owned restaurants and amortization of reacquired franchise rights. 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 impairment expense is related to company-owned restaurants and includes the costs associated with closures of locations and normal asset retirements. General and administrative expenses are related to home office and field support provided 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 second quarters of 2014 and 2013 consisted of 13 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 six-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								Six months ended
		June 29, 2014				June 30, 2013				June 29, 2014				June 30, 2013
Revenue:
Restaurant sales			93.8	%			93.6				93.8				93.5
Franchising royalties and fees			6.2				6.4				6.2				6.5
Total revenue			100.0				100.0				100.0				100.0
Costs and expenses:
Restaurant operating costs:
Cost of sales			28.2				30.4				28.2				31.5
Labor			31.3				31.2				30.9				30.7
Operating			14.6				14.4				14.4				14.4
Occupancy			5.6				5.9				5.6				5.8
Depreciation and amortization			6.5				6.9				6.3				6.8
General and administrative			8.3				7.7				8.0				7.4
Preopening			0.6				0.8				0.7				1.1
Loss on asset disposals and impairment			0.3				0.1				0.3				0.1
Total costs and expenses			90.4				92.1				89.4				92.5
Income from operations			9.6				7.9				10.6				7.5
Other income (loss)			0.1				(0.0	)			0.0				0.0
Earnings before income taxes			9.6				7.9				10.6				7.6
Income tax expense			3.2				2.4				3.5				2.2
Net earnings			6.5	%			5.4				7.1				5.4

 

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

 

		As of
		June 29, 2014				June 30, 2013
Buffalo Wild Wings® North America			448				407
PizzaRev® North America			1				—
Total Company-owned restaurants			449				407
Buffalo Wild Wings North America			576				525
Buffalo Wild Wings International			3				—
Total Franchised restaurants			579				525

 

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

 

		Three months ended								Six months ended
		June 29, 2014				June 30, 2013				June 29, 2014				June 30, 2013
Company-owned restaurant sales		$	343,141				285,403				688,086				569,828
Franchised restaurant sales			460,234				390,154				919,607				787,706

 

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

 

		Three months ended								Six months ended
		June 29, 2014				June 30, 2013				June 29, 2014				June 30, 2013
Company-owned same-store sales			7.7	%			3.8				7.2				2.6
Franchised same-store sales			6.5				4.1				5.7				3.1

 

 

The average prices paid per pound for chicken wings for company-owned restaurants are as follows:

 

		Three months ended								Six months ended
		June 29, 2014				June 30, 2013				June 29, 2014				June 30, 2013
Average price per pound		$	1.42				1.61				1.39				1.86

 

Results of Operations for the Three Months Ended June 29, 2014 and June 30, 2013

 

Restaurant sales increased by $57.7 million, or 20.2%, to $343.1 million in 2014 from $285.4 million in 2013. The increase in restaurant sales was due to a $37.7 million increase associated with 16 company-owned restaurants that opened in 2014 and the company-owned restaurants that opened or were acquired before 2014 that did not meet the criteria for same-store sales for all or part of the three-month period, and $20.0 million related to a 7.7% increase in same-store sales.

 

Franchise royalties and fees increased by $3.2 million, or 16.6%, to $22.9 million in 2014 from $19.6 million in 2013. The increase was primarily due to royalties related to additional sales at 54 more franchised restaurants in operation at the end of the period compared to the same period in 2013. Same-store sales for franchised restaurants increased 6.5% in the second quarter of 2014.

 

Cost of sales increased by $10.2 million, or 11.8%, to $96.8 million in 2014 from $86.6 million in 2013 due primarily to more restaurants being operated in 2014. Cost of sales as a percentage of restaurant sales decreased to 28.2% in 2014 from 30.4% in 2013, primarily due to lower chicken wing prices and our transition to serving wings by portion in July 2013. During the second quarter of 2014, the average cost per pound for traditional wings decreased by 11.8% over the same period in 2013.

 

Labor expenses increased by $18.5 million, or 20.8%, to $107.4 million in 2014 from $88.9 million in 2013 due primarily to more restaurants being operated in 2014. Labor expenses as a percentage of restaurant sales increased to 31.3% in 2014 from 31.2% in 2013. Cost of labor as a percentage of restaurant sales increased primarily due to higher hourly labor costs related to the implementation of our Guest Experience Business Model.

 

Operating expenses increased by $8.8 million, or 21.4%, to $50.0 million in 2014 from $41.2 million in 2013 due primarily to more restaurants being operated in 2014. Operating expenses as a percentage of restaurant sales increased to 14.6% in 2014 from 14.4% in 2013. The increase in operating expenses as a percentage of restaurant sales is primarily due to higher repair and maintenance expenses.

 

Occupancy expenses increased by $2.4 million, or 14.3%, to $19.3 million in 2014 from $16.9 million in 2013 due primarily to more restaurants being operated in 2014. Occupancy expenses as a percentage of restaurant sales decreased to 5.6% in 2014 from 5.9% in 2013 primarily due to leveraging rent costs with the higher same-store sales increase.

 

Depreciation and amortization increased by $2.7 million, or 12.6%, to $23.7 million in 2014 from $21.1 million in 2013. The increase was primarily due to the additional depreciation related to the 42 additional company-owned restaurants compared to the same period in 2013.

 

General and administrative expenses increased by $6.6 million, or 28.1%, to $30.2 million in 2014 from $23.6 million in 2013 primarily due to additional headcount. General and administrative expenses as a percentage of total revenue increased to 8.3% in 2014 from 7.7% in 2013 partially due to an increase in stock-based compensation expense. Exclusive of stock-based compensation expense, our general and administrative expenses as a percentage of revenue increased to 7.1% in 2014 from 6.7% in 2013 primarily due to an increase in travel expenses, including travel expenses for our manager-in-training program.

 

Preopening costs decreased by $0.2 million to $2.2 million in 2014 from $2.4 million in 2013. In 2014, we incurred costs of $1.4 million for seven new company-owned restaurants opened in the second quarter of 2014 and costs of $725,000 for restaurants that that will open in the third quarter of 2014 or later. In 2013, we incurred costs of $1.8 million for 10 new company-owned restaurants opened in the second quarter of 2013 and costs of $533,000 for restaurants that opened in the third quarter of 2013 or later. Preopening costs per new company-owned Buffalo Wild Wings^® restaurant averaged $269,000 in the second quarter of 2014, which was lower than our anticipated average of $290,000 for fiscal year 2014. Preopening costs per new restaurant averaged $347,000 in the second quarter of 2013.

 

Loss on asset disposals and impairment increased by $1.0 million to $1.2 million in 2014 from $0.2 million in 2013. The expense in 2014 represented the write-off of miscellaneous equipment and disposals due to remodels. The expense in 2013 represented the write-off of miscellaneous equipment and disposals due to remodels.

 

Other income was $235,000 in 2014 compared to other loss of $84,000 in 2013. The income in 2014 and the loss in 2013 were primarily related to investments held for our deferred compensation plan.

 

 

Provision for income taxes increased $4.1 million to $11.6 million in 2014 from $7.5 million in 2013. The effective tax rate as a percentage of income before taxes increased to 32.8% in 2014 from 31.2% in 2013.

 

Results of Operations for the Six Months Ended June 29, 2014 and June 30, 2013

 

Restaurant sales increased by $118.3 million, or 20.8%, to $688.1 million in 2014 from $569.8 million in 2013. The increase in restaurant sales was due to an $81.9 million increase associated with 16 new company-owned restaurants that opened in 2014 and the company-owned restaurants that opened or were acquired before 2014 that did not meet the criteria for same-store sales for all or part of the six-month period, and $36.4 million related to a 7.2% increase in same-store sales.

 

Franchise royalties and fees increased by $6.2 million, or 15.7%, to $45.8 million in 2014 from $39.5 million in 2013. The increase was primarily due to royalties related to additional sales at 54 more franchised restaurants in operation at the end of the period compared to the same period in 2013. Same-store sales for franchised restaurants increased 5.7% in the first six months of 2014.

 

Cost of sales increased by $14.6 million, or 8.1%, to $194.3 million in 2014 from $179.7 million in 2013 due primarily to more restaurants being operated in 2014. Cost of sales as a percentage of restaurant sales decreased to 28.2% in 2014 from 31.5% in 2013, primarily due to lower chicken wing prices and our transition to serving wings by portion in July 2013. During the first six months of 2014, the average cost per pound for traditional wings decreased by 25.3% over the same period in 2013.

 

Labor expenses increased by $38.0 million, or 21.7%, to $212.8 million in 2014 from $174.8 million in 2013 due primarily to more restaurants being operated in 2014. Labor expenses as a percentage of restaurant sales increased to 30.9% in 2014 from 30.7% in 2013. Cost of labor as a percentage of restaurant sales increased primarily due to higher hourly labor costs.

 

Operating expenses increased by $16.7 million, or 20.3%, to $99.1 million in 2014 from $82.3 million in 2013 due primarily to more restaurants being operated in 2014. Operating expenses as a percentage of restaurant sales remained consistent at 14.4% in 2014 and 2013.

 

Occupancy expenses increased by $5.3 million, or 15.9%, to $38.3 million in 2014 from $33.0 million in 2013 due primarily to more restaurants being operated in 2014. Occupancy expenses as a percentage of restaurant sales decreased to 5.6% in 2014 from 5.8% in 2013 due primarily to leveraging rent costs with the higher same-store sales increase.

 

Depreciation and amortization increased by $5.4 million, or 13.0%, to $46.6 million in 2014 from $41.2 million in 2013. The increase was primarily due to the additional depreciation related to the 42 additional company-owned restaurants compared to the same period in 2013.

 

General and administrative expenses increased by $13.5 million, or 30.0%, to $58.4 million in 2014 from $44.9 million in 2013 primarily due to additional headcount. General and administrative expenses as a percentage of total revenue increased to 8.0% in 2014 from 7.4% in 2013 due to an increase in stock-based compensation expense. Exclusive of stock-based compensation, our general and administrative expenses as a percentage of revenue increased to 6.9% in 2014 from 6.7% in 2013 primarily due to increased bonus expense.

 

Preopening costs decreased by $1.9 million to $4.8 million in 2014 from $6.7 million in 2013. In 2014, we incurred costs of $3.8 million for 16 new company-owned restaurants opened in the first six months of 2014 and costs of $833,000 million for restaurants that will open in the third quarter of 2014 or later. In 2013, we incurred costs of $6.1 million for 24 new company-owned restaurants opened in the first six months of 2013 and costs of $548,000 for restaurants that opened in the third quarter of 2013 or later.

 

Loss on asset disposals and impairment increased by $1.2 million to $2.0 million in 2014 from $0.8 million in 2013. The expense in 2014 represented asset impairment, the write-off of miscellaneous equipment and disposals due to remodels. The expense in 2013 represented the write-off of miscellaneous equipment and disposals due to remodels.

 

Other income was $108,000 and $261,000 in 2014 and 2013, respectively. The income in 2014 and 2013 was primarily related to investments held for our deferred compensation plan.

 

Provision for income taxes increased $12.5 million to $25.8 million in 2014 from $13.4 million in 2013. The effective tax rate as a percentage of income before taxes increased to 33.2% in 2014 from 28.9% in 2013. The increase in the effective tax rate was primarily due to the favorable impact of the American Taxpayer Relief Act of 2012, which was enacted in 2013, on the tax rate in 2013. For 2014, we estimate our effective tax rate will be about 33% based on current tax law, and would decrease to about 32% if Congress reinstates the employment credits.

 

 

Liquidity and Capital Resources

 

Our primary liquidity and capital requirements have been for constructing, remodeling and maintaining our new and existing company-owned restaurants; working capital; acquisitions; improving technology; and other general business needs. We fund these expenses, except for acquisitions and emerging brands, primarily with cash from operations. Depending on the size of the transaction, acquisitions or investments in emerging brands would generally be funded from cash and marketable securities balances or using our line of credit. The cash and marketable securities balance at June 29, 2014 was $101.1 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. Our marketable securities balance consists of mutual funds held for our deferred compensation plan and debt securities.

 

For the six months ended June 29, 2014, net cash provided by operating activities was $99.3 million. Net cash provided by operating activities consisted primarily of net earnings adjusted for non-cash expenses and a decrease in deferred tax liabilities, partially offset by an increase in prepaid expenses. The decrease in deferred tax liabilities was primarily due to unwinding bonus depreciation. The increase in prepaid expenses was due to the timing of rent payments.

 

For the six months ended June 30, 2013, net cash provided by operating activities was $76.8 million. Net cash provided by operating activities consisted primarily of net earnings adjusted for non-cash expenses, and a decrease in accounts receivable, partially offset by a decrease in accounts payable. The decrease in accounts receivable was primarily due to lower credit card receivables at the end of the quarter. The decrease in accounts payable was primarily due to seasonality resulting in lower purchasing volumes in the week prior to quarter-end compared to year-end.

 

For the six months ended June 29, 2014 and June 30, 2013, net cash used in investing activities was $69.9 million and $70.9 million, respectively. Investing activities included purchases of property and equipment related to the additional company-owned restaurants and restaurants under construction in both periods. During the first six months of 2014 and 2013, we opened or acquired 16 and 27 restaurants, respectively. In 2014, we expect capital expenditures of approximately $102.3 million for the cost of 45 new or relocated company-owned restaurants, $4.9 million for technology improvements on our restaurant and corporate systems, and $39.1 million for capital expenditures at our existing restaurants. In the first six months of 2014, we purchased $12.0 million of marketable securities. In the first six months of 2013, we received proceeds of $3.3 million as our marketable securities matured or were sold.

 

For the six months ended June 29, 2014 and June 30, 2013, net cash used in financing activities was $5.7 million and $3.5 million, respectively. Net cash used in financing activities for 2014 resulted from tax payments for restricted stock units of $7.5 million, partially offset by the excess tax benefit from stock issuance of $1.7 million. Net cash used in financing activities for 2013 resulted primarily from proceeds the exercise of stock options of $1.2 million and the excess tax benefit from stock issuance of $147,000, offset by tax payments for restricted stock units of $4.8 million. 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 2014.

 

Our liquidity is impacted by minimum cash payment commitments resulting from operating lease obligations for our restaurants and our corporate office. 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 26% of our restaurants operate and therefore have a 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 June 29, 2014:

 

						Payments Due By Period (in thousands)
		Total				Less than One year				1-3 years				3-5 years				After 5 years
Operating lease obligations		$	556,499				61,030				117,707				102,715				275,047
Commitments for restaurants under development			65,990				3,268				9,893				9,957				42,872
Total		$	622,489				64,298				127,600				112,672				317,919

 

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. Depending on the size of the transaction, acquisitions or investments in emerging brands would generally be funded from cash balances or using our line of credit. Our future cash outflows related to income tax uncertainties amounted to $925,000 as of June 29, 2014. 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 June 29, 2014, 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 (“the Exchange Act”). 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,” “estimate,” “expect,” “intend,” “may,” “could,” “possible,” “plan,” “project,” “will,” “forecast” and similar words or expressions. Our forward-looking statements generally relate to our growth strategy, financial results, sales efforts, franchise expectations, restaurant openings and related expense, and cash requirements. Although we believe there is reasonable basis for the forward-looking statements, our actual results could be materially different. While 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 risk factors that follow (some of which are discussed in greater detail in Item 1A of Part I of our Annual Report on Form 10-K for the fiscal year ended December 29, 2013). Investors are cautioned that all forward-looking statements involve risks and uncertainties and speak only as of the date on which they are made, and we do not undertake any obligation to update any forward-looking statement.

 

●

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.

 

●

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

 

●

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.

 

●

A security failure in our information technology systems could expose us to potential liability, significant brand damage, and loss of revenues.

 

●

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.

 

●

Investments in new or emerging brands may not be successful.

 

●

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.

 

●

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

 

●

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 brand and our reputation for offering guests an unparalleled guest experience.

 

●

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

 

●

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 and key executives to operate and manage our business.

 

●

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

 

●

Unfavorable publicity could harm our business.

 

●

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

 

●

Changes in employment laws or regulations could harm our performance.

 

●

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

 

●

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

 

●

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

 

●

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.

 

 ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

 

We are exposed to international 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. We invest with a strategy focused on principal preservation. Changes in interest rates affect the investment income we earn on our cash and cash equivalents and marketable securities and the interest expense we pay on our line of credit 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 debt securities. We do not believe there is a significant risk of non-performance by the issuers of these securities 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 in any country that we operate in 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 and supply risks. We negotiate directly with independent suppliers for our supply of food and other products. Domestically, we have a distribution contract with McLane Company, Inc. that covers food, paper, and non-food products. We completed the transition to McLane during the second quarter of 2013. 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. One of the primary food products 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 change 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 lessen the severity of cost increases. Current month chicken wing prices are determined based on the average of the previous month’s wing market plus mark-up for processing and distribution. Chicken wings accounted for approximately 21.4% and 23.5% of our cost of sales in the second quarters of 2014 and 2013, respectively, with a quarterly average price per pound of $1.42 and $1.61, respectively.

 

ITEM 4. CONTROLS AND PROCEDURES

 

Evaluation of Disclosure Controls and Procedures

 

As of the end of the period covered by this report, we conducted an evaluation, under the supervision and with the participation of our chief executive officer and chief financial officer, of our disclosure controls and procedures as defined in Rules 13a-15(e) and 15d-15(e) under the Exchange Act. Based on that evaluation, the chief executive officer and chief financial officer concluded that our disclosure controls and procedures were effective as of the date of such evaluation to provide reasonable assurance that information required to be disclosed by the Company in the reports that it files or submits under the Exchange Act is recorded, processed, summarized and reported within the time periods specified by the SEC’s 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.

 

 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.

 

 

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: August 6, 2014	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)

 

 

EXHIBIT INDEX

 

BUFFALO WILD WINGS, INC.

FORM 10-Q FOR QUARTER ENDED June 29, 2014

 

Exhibit Number		Description
3.1		Restated Articles of Incorporation, as amended (Incorporated by reference to Exhibit 3.1 to our quarterly report on 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)
10.1		First Amendment to Credit Agreement dated as of May 5, 2014, with the Lenders from time to time party thereto and Wells Fargo Bank, National Association, as Administrative Agent and Issuing Lender (Incorporated by reference to Exhibit 10.1 to our quarterly report on Form 10-Q for the fiscal quarter ended March 30, 2014)
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
101		The following financial statements from the Company’s 10-Q for the fiscal quarter ended June 29, 2014, formatted in XBRL: (i) Consolidated Balance Sheet, (ii) Consolidated Statement of Earnings, (iii) Consolidated Statement of Comprehensive Income, (iv) Consolidated Statement of Cash Flows, and (v) Notes to Consolidated Financial Statements.

 

 

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