--------------------------------------------------------------------------------
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
----------------
FORM 10-Q
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QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
For the fiscal quarter ended June 25, 2006
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 (IRS Employer
Incorporation or Organization) Identification No.)
1600 Utica Avenue South, Suite 700, Minneapolis, MN 55416
(Address of Principal Executive Offices)
Registrant's telephone number (952) 593-9943
----------------
Indicate by check mark whether the registrant (1) filed all reports
required to be filed by Section 13 or 15(d) of the 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 |_|
Indicate by check mark whether the registrant is a large accelerated
filer, an accelerated filer, or a non-accelerated filer. See definition of
"accelerated filer and large accelerated filer" in Rule 12b-2 of the Exchange
Act. (Check one):
Large accelerated filer |_| Accelerated filer |X| Non-accelerated filer |_|
Indicate by check mark whether the registrant is a shell company (as
defined in Exchange Act Rule 12b-2 of the Exchange Act).
YES |_| NO |X|
The number of shares outstanding of the registrant's common stock as of
July 28, 2006: 8,578,095 shares.
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TABLE OF CONTENTS
PART I Page
------
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
Item 1. Legal Proceedings 19
Item 4. Submission of Matters to a Vote of Security Holders 19
Item 6. Exhibits 19
Signatures 20
Exhibit Index 21
2
PART I - FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
BUFFALO WILD WINGS, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(Dollar amounts in thousands, except share data)
(unaudited)
December 25, June 25,
2005 2006
---------- ----------
Assets
Current assets:
Cash and cash equivalents $ 3,986 6,523
Marketable securities 48,418 49,170
Accounts receivable--franchisees, net of allowance of $25 731 765
Accounts receivable--other 3,700 4,184
Inventory 1,502 1,544
Income taxes receivable -- 97
Prepaid expenses 1,972 587
Deferred income taxes 770 1,472
---------- ----------
Total current assets 61,079 64,342
Property and equipment, net 68,693 74,057
Restricted cash 2,115 5,235
Other assets 867 903
Goodwill 369 369
---------- ----------
Total assets $133,123 144,906
========== ==========
Liabilities and Stockholders' Equity
Current liabilities:
Unearned franchise fees $ 2,194 2,152
Accounts payable 6,628 8,620
Accrued income tax payable 102 --
Accrued compensation and benefits 6,775 6,737
Accrued expenses 3,900 3,566
Current portion of deferred lease credits 604 687
---------- ----------
Total current liabilities 20,203 21,762
Long-term liabilities:
Marketing fund payables 2,115 5,235
Deferred income taxes 4,755 3,715
Deferred lease credits, net of current portion 9,202 9,297
---------- ----------
Total liabilities 36,275 40,009
---------- ----------
Commitments and contingencies
Stockholders' equity:
Undesignated stock, 5,600,000 shares authorized -- --
Common stock, no par value. Authorized 15,600,000 shares; issued and
outstanding 8,616,222 and 8,740,572, respectively 74,503 74,036
Deferred compensation (2,568) --
Retained earnings 24,913 30,861
---------- ----------
Total stockholders' equity 96,848 104,897
---------- ----------
Total liabilities and stockholders' equity $133,123 144,906
========== ==========
3
BUFFALO WILD WINGS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF EARNINGS
(Dollar amounts in thousands except share and per share data)
(unaudited
Three months ended Six months ended
----------------------- -----------------------
June 26, June 25, June 26, June 25,
2005 2006 2005 2006
---------- ----------- ----------- -----------
Revenue:
Restaurant sales $ 42,570 55,036 87,643 112,128
Franchise royalties and fees 5,653 7,224 11,373 14,393
---------- ----------- ----------- -----------
Total revenue 48,223 62,260 99,016 126,521
---------- ----------- ----------- -----------
Costs and expenses:
Restaurant operating costs:
Cost of sales 13,291 17,028 28,522 35,033
Labor 12,976 16,562 26,193 33,157
Operating 6,666 9,236 13,523 18,679
Occupancy 3,395 4,269 6,551 8,358
Depreciation 2,832 3,433 5,507 6,763
General and administrative (1) 5,634 7,441 11,260 14,519
Preopening 600 1,034 913 1,521
Loss on equipment disposal 4 44 22 254
---------- ----------- ----------- -----------
Total costs and expenses 45,398 59,047 92,491 118,284
---------- ----------- ----------- -----------
Income from operations 2,825 3,213 6,525 8,237
Interest income 337 500 609 970
---------- ----------- ----------- -----------
Earnings before income taxes 3,162 3,713 7,134 9,207
Income tax expense 1,226 1,281 2,747 3,259
---------- ----------- ----------- -----------
Net earnings $ 1,936 2,432 4,387 5,948
========== =========== =========== ===========
Earnings per common share - basic $ 0.23 0.28 0.52 0.70
Earnings per common share - diluted 0.22 0.28 0.51 0.68
Weighted average shares outstanding - basic 8,448,459 8,555,589 8,407,764 8,543,691
Weighted average shares outstanding - diluted 8,674,507 8,754,895 8,671,148 8,746,233
-------------------------------------
(1) Contains stock-based compensation of $330, $683, $854, and $1,539, respectively
4
BUFFALO WILD WINGS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Dollar amounts in thousands)
(unaudited)
Six months ended
--------------------
June 26, June 25,
2005 2006
--------- ----------
Cash flows from operating activities:
Net earnings $ 4,387 5,948
Adjustments to reconcile net earnings to cash provided by operations:
Depreciation 5,507 6,763
Amortization (20) (101)
Loss on equipment disposal 22 254
Deferred lease credits 643 220
Deferred income taxes (892) (1,742)
Stock-based compensation 854 1,539
Excess tax benefit from the exercise of stock options -- (181)
Change in operating assets and liabilities:
Accounts receivable (752) (560)
Inventory 85 (42)
Prepaid expenses 712 1,385
Other assets (18) (36)
Unearned franchise fees (295) (42)
Accounts payable (360) 1,992
Income taxes 982 (18)
Accrued expenses (972) 206
--------- ----------
Net cash provided by operating activities 9,883 15,585
--------- ----------
Cash flows from investing activities:
Acquisition of property and equipment (8,322) (12,381)
Purchase of marketable securities (47,079) (54,759)
Proceeds of marketable securities 37,071 54,108
--------- ----------
Net cash used in investing activities (18,330) (13,032)
--------- ----------
Cash flows from financing activities:
Issuance of common stock 717 490
Tax payments for restricted stock (326) (687)
Excess tax benefit from the exercise of stock options -- 181
--------- ----------
Net cash provided by (used in) financing activities 391 (16)
--------- ----------
Net increase (decrease) in cash and cash equivalents (8,056) 2,537
Cash and cash equivalents at beginning of period 12,557 3,986
--------- ----------
Cash and cash equivalents at end of period $ 4,501 6,523
========= ==========
5
BUFFALO WILD WINGS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE THREE AND SIX MONTHS ENDED JUNE 26, 2005 AND JUNE 25, 2006
(Dollar amounts in thousands except share and per share data)
(1) Basis of Financial Statement Presentation
The consolidated financial statements as of December 25, 2005 and June 25,
2006, and for the three-month and six-month periods ended June 26, 2005
and June 25, 2006, have been prepared by Buffalo Wild Wings, Inc. pursuant
to the rules and regulations of the Securities and Exchange Commission
(the "SEC"). The financial information for the three-month and six-month
periods ended June 26, 2005 and June 25, 2006, 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,"
"company," "we," "us" and "our" refer to the business of Buffalo Wild
Wings, Inc. and our subsidiaries.
The financial information as of December 25, 2005, is derived from our
audited consolidated financial statements and notes thereto for the fiscal
year ended December 25, 2005, included in item 8 in the Fiscal 2005 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 period ended
June 25, 2006, are not necessarily indicative of the results of operations
that may be achieved for the entire year ending December 31, 2006. Fiscal
2006 is a 53 week year.
(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.
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 fresh chicken wings.
Fresh chicken wings are purchased by us based on current market
conditions and are subject to fluctuation. Material increases in
fresh chicken wing costs may adversely affect our operating results.
For the three-month periods ended June 26, 2005 and June 25, 2006,
fresh chicken wings were 26.5% and 22.5%, respectively, of
restaurant cost of sales. For the six-month periods ended June 26,
2005 and June 25, 2006, fresh chicken wings were 29.0% and 23.2%,
respectively, of restaurant cost of sales.
(b) Stock-Based Compensation
We maintain a stock equity incentive plan under which we may grant
non-qualified stock options, incentive stock options, and restricted
stock units to employees, non-employee directors and consultants. We
also have an employee stock purchase plan ("ESPP").
Prior to the December 26, 2005 adoption of the Financial Accounting
Standards Board ("FASB") Statement No. 123R, "Shared-Based Payment"
("SFAS 123R"), we accounted for stock-based compensation using the
intrinsic value method prescribed in Accounting Principles Board
("APB") Opinion No. 25, "Accounting for Stock Issued to Employees,"
and related interpretations. Accordingly, because the stock option
grant price equaled the market price on the date of grant, and any
purchase discounts under our stock purchase plans were within
statutory limits, no compensation expense was recognized by us for
stock-based compensation related to stock options or ESPP shares.
Restricted stock units vesting upon the achievement of certain
performance targets were expensed under the requirements of APB 25.
Stock-based compensation recognized for restricted stock in the
three-month and six-month periods ended June 26, 2005 were $330 and
$854, respectively. As permitted by SFAS No. 123, "Accounting for
Stock-Based Compensation" ("SFAS 123"), stock-based compensation was
included as a pro forma disclosure in the notes to the consolidated
financial statements.
6
Effective December 26, 2005, we adopted the fair value recognition
provisions of SFAS 123R, using the modified-prospective transition
method. Under this transition method, stock-based compensation
expense is recognized in the consolidated financial statements for
granted, modified, or settled stock options and for expense related
to the ESPP, since the related purchase discounts exceeded the
amount allowed under SFAS 123R for non-compensatory treatment.
Compensation expense recognized includes the estimated expense for
the portion of stock options vesting in the period for options
granted prior to, but not vested as of December 26, 2005, based on
the grant date fair value estimated in accordance with the original
provisions of SFAS 123. There were no new stock option grants in
2006. Restricted stock units vesting upon the achievement of certain
performance targets are expensed based on the fair value on the date
of grant. Results for prior periods have not been restated, as
provided for under the modified-prospective transition method.
Total stock-based compensation expense recognized in the
consolidated statement of earnings for the three months ended June
25, 2006 was $683 before income taxes and consisted of restricted
stock, stock options, and ESPP expense of $630, $19 and $34
respectively. Stock-based compensation recognized for the six months
ended June 25, 2006 was $1,539 before income taxes and consisted of
restricted stock, stock options and ESPP expense of $1,429, $43, and
$67, respectively. The related total tax benefit was $237 and $545
for the three months and six months ended June 25, 2006,
respectively. All stock-based compensation is recognized as general
and administrative expense.
Prior to the adoption of SFAS 123R, we presented all tax benefits
resulting from the exercise of stock options as operating cash
inflows in the consolidated statements of cash flows, in accordance
with the provisions of the Emerging Issues Task Force ("EITF") Issue
No 00-15, "Classification in the Statement of Cash Flows of the
Income Tax Benefit Received by a Company upon Exercise of a
Nonqualified Employee Stock Option." SFAS 123R requires the benefits
of tax deductions in excess of the compensation cost recognized for
those options to be classified as financing cash inflows rather than
operating cash inflows, on a prospective basis. This amount is shown
as "Excess tax benefit from exercise of stock options" on the 2006
consolidated statement of cash flows.
The following table shows the effect on net earnings and earnings
per share had compensation cost been recognized based upon the
estimated fair value on the grant date of stock options and ESPP, in
accordance with SFAS 123, as amended by SFAS No. 148 "Accounting for
Stock-Based Compensation - Transition and Disclosure." The impact of
calculating compensation cost for stock options under SFAS No. 123
is reflected over the options' vesting period, typically four years.
Three Six
months months
ended ended
June 26, June 26,
2005 2005
----------- ---------
Net earnings, as reported $1,936 4,387
Add:
Total stock-based employee compensation expense included in reported
earnings, net of related tax effects 203 525
Deduct:
Total stock-based employee compensation expense determined under fair
value-based method for stock option, restricted stock, and ESPP, net
of related tax effects (261) (633)
----------- ---------
Pro forma net earnings $1,878 4,279
=========== =========
Net earnings per common share:
As reported (basic) $ 0.23 0.52
Pro forma (basic) 0.22 0.51
As reported (diluted) 0.22 0.51
Pro forma (diluted) 0.22 0.49
Pro forma disclosures for the three-month and six-month periods
ended June 25, 2006 are not presented because the amounts are
recognized in the consolidated financial statements.
7
The fair value for stock awards was estimated at the date of grant
using the Black-Scholes-Merton ("BSM") option valuation model with
the following weighted average assumptions for the three months
ended June 25, 2006 and June 26, 2005:
Stock options ESPP
--------------------------------------- --------------------------------------
June 26, June 25, June 26, June 25,
2005* 2006* 2005 2006
------------------ ----------------- ----------------- -----------------
Expected term (in years) N/A N/A 0.5 0.5
Expected stock price volatility N/A N/A 38.0% - 41.8% 39.2% - 40.9%
Risk-free interest rate N/A N/A 3.1% - 3.4% 4.3% - 5.0%
Expected dividend yield N/A N/A 0.0% 0.0%
The fair value for stock awards was estimated at the date of
grant using the BSM option valuation model with the following
weighted average assumptions for the six months ended June 25, 2006
and June 26, 2005:
Stock options ESPP
--------------------------------------- --------------------------------------
June 26, June 25, June 26, June 25,
2005 2006* 2005 2006
------------------ ----------------- ----------------- -----------------
Expected term (in years) 5.0 N/A 0.5 0.5
Expected stock price volatility 40.1% N/A 38.0% - 41.8% 39.2% - 40.9%
Risk-free interest rate 3.5% N/A 3.1% - 3.4% 4.3% - 5.0%
Expected dividend yield 0.0% N/A 0.0% 0.0%
* No stock options were granted during this time period.
The expected term of the options represents the estimated period of
time until exercise and is based on historical experience of similar
awards, giving consideration to the contractual terms, vesting
schedules and expectations of future employee behavior. Expected
stock price volatility is based on historical volatility of our
stock. The risk-free interest rate is based on the implied yield
available on U.S. Treasury zero-coupon issues with an equivalent
remaining term. We have not paid dividends in the past and do not
plan to pay any dividends in the near future.
(3) Marketable Securities
Marketable securities were comprised as follows:
As of
-------------------
December 25, June 25,
2005 2006
------- -------
Held-to-maturity:
Municipal securities $14,887 18,107
------- -------
14,887 18,107
------- -------
Available-for-sale:
Municipal securities 33,531 31,063
------- -------
Total $48,418 49,170
======= =======
All held-to-maturity debt securities are due within one year and had
aggregate fair values of $14.9 million and $18.1 million as of December
25, 2005 and June 25, 2006, respectively.
8
(4) Property and Equipment
Property and equipment consists of the following:
As of
---------------------
December 25, June 25,
2005 2006
-------- --------
Construction in-process $ 956 3,786
Leasehold improvements 64,535 69,805
Furniture, fixtures, and equipment 45,279 48,543
-------- --------
110,770 122,134
Less accumulated depreciation and amortization (42,077) (48,077)
-------- --------
$ 68,693 74,057
======== ========
(5) Stockholders' Equity
(a) Stock Options
We have 1.5 million shares of common stock reserved for issuance under a
stock-based compensation plan for employees, officers, and directors. The option
price for shares issued under this plan is to be not less than the fair market
value on the date of grant with respect to incentive stock options, or 85% of
fair market value for nonqualified stock options. Incentive stock options become
exercisable in four equal installments from the date of the grant and have a
contractual life of 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 ten years. We issue new shares of common stock upon exercise
of stock options and disbursement of restricted stock units. Option activity is
summarized for the six months ended June 25, 2006:
Weighted
Average
Weighted Remaining Aggregate
Number average Contractual Intrinsic
of shares exercise price Life Value
-------------- ------------ ------------ ------------
Outstanding, December 25, 2005 302,296 $8.08
Granted -- --
Exercised (33,674) 7.53
Cancelled (1,709) 19.74
-------------- ------------ ------------ ------------
Outstanding, June 25, 2006 266,913 $8.08 4.2 $8,128
Exercisable, June 25, 2006 248,107 7.20 4.0 7,773
The aggregate intrinsic value in the table above is before applicable income
taxes, based on our closing stock price of $38.53 as of June 25, 2006, which
would have been received by the optionees had all options been exercised on that
date. As of June 25, 2006, total unrecognized stock-based compensation expense
related to nonvested stock options was approximately $104, which is expected to
be recognized over a weighted average period of approximately nine months.
During the six months ended June 25, 2006, the total intrinsic value of stock
options exercised was $1.1 million. During the six months ended June 25, 2006,
the total fair value of options vested was $375.
The following table summarizes our stock options outstanding at June 25,
2006:
Options outstanding Options exercisable
---------------------------------------------- ------------------------------
Average Weighted Weighted
remaining average average
contractual exercise exercise
Range Shares life (years) price Shares price
--------------- -------------- ---------------- -------------- -------------- ---------------
$2.50 - 3.90 70,002 3.20 $3.61 70,002 $3.61
4.15 - 7.50 113,250 3.13 5.72 113,250 5.72
11.25 - 18.15 71,587 6.23 13.14 61,119 12.90
18.65 - 34.81 12,074 7.79 26.09 3,736 26.22
-------------- -------------
2.50 - 34.81 266,913 4.19 8.08 248,107 7.20
============== =============
The plan has 415,024 shares available for grant as of June 25, 2006.
9
(b) Restricted Stock
We adopted a stock performance plan in June 2004, under which restricted stock
units are granted annually at the discretion of the Board. These units are
subject to annual vesting upon achieving performance targets established by the
Board of Directors. We record compensation expense for the restricted stock
units if vesting, based on the achievement of performance targets, is probable.
The restricted stock units may vest one-third annually over a ten-year period as
determined by meeting performance targets. However, the second third of the
restricted stock units is not subject to vesting until the first one-third has
vested and the final one-third is not subject to vesting until the first
two-thirds of the award has vested. Restricted stock activity is summarized for
the six months ended June 25, 2006:
Weighted
average
Number grant date
of shares fair value
------------- -------------
Outstanding, December 25, 2005 75,964 $32.56
Granted 101,223 33.44
Vested (6,472) 33.80
Cancelled (4,452) 32.45
------------- -------------
Outstanding, June 25, 2006 166,263 33.02
As of June 25, 2006, the total stock-based compensation expense related to
nonvested awards not yet recognized was $4,080, which is expected to be
recognized over a weighted average period of 1.2 years. During the six months
ended June 25, 2006, the total fair value of shares vested was $219.
(c) Employee Stock Purchase Plan
We have reserved 300,000 shares of common stock for issuance under the Plan.
This plan is available to substantially all employees subject to employment
eligibility requirements. The Plan became effective upon the effective date of
our initial public offering (IPO). 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 2006
and 2005, we issued 10,976 and 10,527, respectively, shares of common stock
under the plan. As of June 25, 2006, we have 239,144 available for future
issuance.
(6) Earnings Per Share
The following is a reconciliation of basic and fully diluted earnings per
share for the three-month and six-month periods ended June 26, 2005 and
June 25, 2006:
Three months ended June 26, 2005
----------------------------------------
Earnings Shares Per-share
(numerator) (denominator) amount
------------ -------------- ------------
Net earnings available to common shareholders $1,936
------------
Earnings per common share--basic 1,936 8,448,459 $0.23
Effect of dilutive securities
Stock options -- 226,048
------------ --------------
Earnings per common share--diluted $1,936 8,674,507 0.22
============ ==============
Three months ended June 25, 2006
----------------------------------------
Earnings Shares Per-share
(numerator) (denominator) amount
------------ -------------- ------------
Net earnings available to common shareholders $2,432
------------
Earnings per common share--basic 2,432 8,555,589 $0.28
Effect of dilutive securities
Stock options -- 199,306
------------ --------------
Earnings per common share--diluted $2,432 8,754,895 0.28
============ ==============
10
Six months ended June 26, 2005
----------------------------------------
Earnings Shares Per-share
(numerator) (denominator) amount
------------- -------------- -----------
Net earnings available to common shareholders $4,387
-------------
Earnings per common share--basic 4,387 8,407,764 $0.52
Effect of dilutive securities
Stock options -- 263,384
------------- --------------
Earnings per common share--diluted $4,387 8,671,148 0.51
============ ==============
Six months ended June 25, 2006
----------------------------------------
Earnings Shares Per-share
(numerator) (denominator) amount
------------- -------------- -----------
Net earnings available to common shareholders $5,948
-------------
Earnings per common share--basic 5,948 8,543,691 $0.70
Effect of dilutive securities
Stock options -- 202,542
------------- --------------
Earnings per common share--diluted $5,948 8,746,233 0.68
============ ==============
132,405 shares and 167,797 shares for the three-month periods ended June 26,
2005 and June 25, 2006, respectively, and 130,255 shares and 167,860 shares for
the six-month periods ended June 26, 2005 and June 25, 2006, respectively, have
been excluded from the fully diluted calculation because the effect on net
earnings per share would not have been dilutive.
(7) Supplemental Disclosures of Cash Flow Information
Six months ended
---------- ----------
June 26, June 25,
2005 2006
---------- ----------
Cash paid during the period for:
Income taxes $2,658 5,130
Noncash financing and investing transactions:
Capitalization of preopening rent expense 139 --
Adjustment of restricted stock units to fair value 2,466 --
Adjustment of restricted stock units to fair value on grant date -- 2,568
(8) 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, and 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 notes thereto 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 25, 2005. This discussion and analysis contains certain statements that
are not historical facts, including, among others, those relating to our
anticipated financial performance for 2006 and our expected store openings. Such
statements are forward-looking and involve risks and uncertainties including but
not limited to those discussed in Item 1 of the 10-K under "Risk
Factors/Forward-Looking Statements." 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 information is an important measure of our performance and is
useful in assessing consumer acceptance of the Buffalo Wild Wings (R) Grill &
Bar concept and the overall strength of the concept. Franchise information also
provides an understanding of our revenue as franchise royalties and fees are
based on the opening of franchised units and their sales. However, franchised
sales and same-store sales information does not show sales in accordance with
U.S. Generally Accepted Accounting Principles (GAAP), should not be considered
11
in isolation or as a substitute for other measures of performance prepared in
accordance with GAAP and may not be comparable to similar financial information
as defined or used by other companies.
Critical Accounting Policies
Our most critical accounting policies, which are those that require significant
judgment, include: valuation of long-lived assets and store closing reserves,
vendor allowances, revenue recognition from franchise operations, and
self-insurance liability. An in-depth description of these can be found in our
Annual Report on Form 10-K for the fiscal year ended December 25, 2005. There
have been no changes to those policies during this period.
Overview
As of June 25, 2006, we owned and operated 129 and franchised an additional 270
Buffalo Wild Wings (R) Grill & Bar restaurants in 36 states. Of the 399
system-wide restaurants, 80 are located in Ohio. The restaurants have elements
of both the quick casual and casual dining styles, both of which are part of a
growing industry. The grill and bar segment is generally considered to be the
largest and a growing sub-segment of the casual dining industry. Our long-term
focus is to grow to a national chain of over 1,000 locations, with 20% annual
unit growth in the next several years, 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 our cost of goods sold. The cost of goods sold is
difficult to predict, as it ranged between 30.7% to 33.8% quarter to quarter in
2005 and 2006, mostly due to the price fluctuation in chicken wings. We are
working to counteract the effect of the volatility of chicken wings with the
introduction of new menu items, such as our new ribs and Combo platters,
effective marketing promotions and menu price increases. We will continue to
monitor the cost of fresh chicken wing prices, as it can significantly change
our cost of sales and cash flow from company-owned restaurants. We also 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 fresh chicken wings represent in terms of total
restaurant sales.
A second factor is our success in new markets. There are inherent risks in
opening new restaurants, especially in new markets, for various reasons,
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 2006, 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 implementation of revised new restaurant opening procedures,
will help mitigate the overall risk associated with opening restaurants.
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, as evidenced by the implementation of our new flexible service
style in our company and franchised restaurants.
Our revenue is generated by:
o Sales at our company-owned restaurants. These were 88% of total
revenue in the second quarter of 2006. Food and nonalcoholic
beverages accounted for 73% of restaurant sales. The remaining 27% of
restaurant sales was from alcoholic beverages. The menu item with the
highest sales volume is chicken wings at 23% of total restaurant
sales.
o Royalties and franchise fees received from our franchisees.
We generate cash from the operation of our company-owned restaurants and also
from franchise royalties and fees. We highlight the specific costs associated
with operating our company-owned restaurants in the 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 annually
based on the number of new locations opened and the amount spent on each
opening. Restaurant closures and impairment expense is related to company-owned
restaurants and includes the writedown of poor performing locations, the costs
associated with closures of locations and normal asset retirements. Certain
other expenses, such as general and administrative, relate to both company-owned
restaurant and franchising operations.
As a growing company, we review our trend in general and administrative
expenses, exclusive of stock-based compensation expense, and are focused on
reducing this expense as a percentage of revenue.
12
We operate on a 52 or 53-week fiscal year ending on the last Sunday in December.
Both of the second quarters of 2005 and 2006 consisted of thirteen weeks. Both
of the six-month periods of 2005 and 2006 consisted of twenty-six weeks. We have
a 53-week fiscal year in 2006, with the fourth quarter having fourteen 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 quarter 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 fresh chicken wing 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 26, June 25, June 26, June 25,
2005 2006 2005 2006
---------- ---------- -------- --------
Revenue:
Restaurant sales 88.3% 88.4% 88.5% 88.6%
Franchising royalties and fees 11.7 11.6 11.5 11.4
---------- ---------- -------- --------
Total revenue 100.0 100.0 100.0 100.0
---------- ---------- -------- --------
Costs and expenses:
Restaurant operating costs:
Cost of sales 31.2 30.9 32.5 31.2
Labor 30.5 30.1 29.9 29.6
Operating 15.7 16.8 15.4 16.7
Occupancy 8.0 7.8 7.5 7.5
Depreciation 5.9 5.5 5.6 5.3
General and administrative 11.7 12.0 11.4 11.5
Preopening 1.2 1.7 0.9 1.2
Loss on equipment disposal 0.0 0.1 0.0 0.2
---------- ---------- -------- --------
Total costs and expenses 94.1 94.8 93.4 93.5
---------- ---------- -------- --------
Income from operations 5.9 5.2 6.6 6.5
Interest income 0.7 0.8 0.6 0.8
---------- ---------- -------- --------
Earnings before income taxes 6.6 6.0 7.2 7.3
Income tax expense 2.5 2.1 2.8 2.6
---------- ---------- -------- --------
Net earnings 4.0 3.9 4.4 4.7
========== ========== ======== ========
The number of company-owned and franchised restaurants open are as follows:
As of
--------------------------
June 26, June 25,
2005 2006
------------ -------------
Company-owned restaurants 110 129
Franchised restaurants 224 270
13
The restaurant sales for company-owned and franchised restaurants are as follows
(amounts in thousands):
Three months ended Six months ended
------------------ -----------------
June 26, June 25, June 26, June 25,
2005 2006 2005 2006
-------- --------- ------- ---------
Company-owned restaurant sales $ 42,570 55,036 87,643 112,128
Franchised restaurant sales 111,868 145,001 222,118 289,755
Increases in comparable same-store sales are as follows (based on restaurants
operating at least fifteen months):
Three months ended Six months ended
-------------------- -----------------
June 26, June 25, June 26, June 25,
2005 2006 2005 2006
--------- ---------- -------- --------
Company-owned same-store sales 2.7% 8.2% 4.4% 8.0%
Franchised same-store sales 1.8 4.7 2.5 5.7
The quarterly average prices paid per pound for fresh chicken wings are as
follows:
Three months ended Six months ended
--------------------- ---------------------
June 26, June 25, June 26, June 25,
2005 2006 2005 2006
---------- ---------- ---------- ----------
Average price per pound........... $1.14 1.10 1.29 1.16
Results of Operations for the Three Months Ended June 25, 2006 and June 26, 2005
Restaurant sales increased by $12.5 million, or 29.3%, to $55.0 million in 2006
from $42.6 million in 2005. The increase in restaurant sales was due to a $9.1
million increase associated with the opening of seven new company-owned
restaurants in the first six months of 2006 and the 20 company-owned restaurants
opened before 2006 that did not meet the criteria for same-store sales and $3.4
million related to an 8.2% increase in same-store sales.
Franchise royalties and fees increased by $1.6 million, or 27.8%, to $7.2
million in 2006 from $5.7 million in 2005. The increase was due primarily to
additional royalties collected from the 23 new franchised restaurants that
opened in 2006 and the 24 franchised restaurants that opened in the last six
months of 2005. Same-store sales for franchised restaurants increased 4.7% in
2006.
Cost of sales increased by $3.7 million, or 28.1%, to $17.0 million in 2006 from
$13.3 million in 2005 due primarily to more restaurants in operation in 2006.
Cost of sales as a percentage of restaurant sales decreased to 30.9% in 2006
from 31.2% in 2005. The decrease in cost of sales as a percentage of restaurant
sales was primarily due to lower fresh chicken wing costs. We are susceptible to
wing price fluctuations. For the second quarter of 2006, wing prices averaged
$1.10 per pound, which was a 3.5% decrease from 2005. Also, boneless wing sales
have increased as a part of our menu mix, providing better margins and a
corresponding lower cost of goods percentage than last year.
Labor expenses increased by $3.6 million, or 27.6%, to $16.6 million in 2006
from $13.0 million in 2005 due primarily to more restaurants in operation in
2006. Labor expenses as a percentage of restaurant sales decreased to 30.1% in
2006 from 30.5% in 2005. The decrease in labor expenses as a percentage of
restaurant sales was primarily due to lower health insurance and workers'
compensation costs partially offset by higher hourly labor.
Operating expenses increased by $2.6 million, or 38.6%, to $9.2 million in 2006
from $6.7 million in 2005 due primarily to more restaurants in operation in
2006. Operating expenses as a percentage of restaurant sales increased to 16.8%
in 2006 from 15.7% in 2005. The increase in operating expenses as a percentage
of restaurant sales was primarily due to the .5% increase in contributions to
the advertising fund, greater local store marketing efforts, increased credit
card use by our guests, higher insurance costs, and higher repair and
maintenance costs.
Occupancy expenses increased by $874,000, or 25.7%, to $4.3 million in 2006 from
$3.4 million in 2005 due primarily to more restaurants in operation in 2005.
Occupancy expenses as a percentage of restaurant sales reduced slightly to 7.8%
in 2006 from 8.0% in 2005.
Depreciation increased by $601,000, or 21.2%, to $3.4 million in 2006 from $2.8
million in 2005. The increase was primarily due to the additional depreciation
on seven new restaurants opened in 2006 and the 12 new restaurants that opened
in the last six months of 2005.
14
General and administrative expenses increased by $1.8 million, or 32.1%, to $7.4
million in 2006 from $5.6 million in 2005 due to higher corporate headcount,
accrued incentive, and stock-based compensation. General and administrative
expenses as a percentage of total revenue increased to 12.0% in 2006 from 11.7%
in 2005. We adopted the fair value recognition provisions of SFAS 123R, using
the modified-prospective transition method. Under this transition method, we
recognized $683,000 of stock-based compensation in the second quarter of 2006.
In the second quarter of 2005, we recognized $330,000 of stock-based
compensation under APB 25 and other related pronouncements. Exclusive of
stock-based compensation, we reduced our general and administrative expenses as
a percentage of total revenue from 11.0% to 10.9% with better leverage of our
overhead expenses.
Preopening costs increased by $434,000, to $1 million in 2006 from $600,000 in
2005. We opened five new company-owned restaurants in the second quarter of
2006, incurred no costs for openings before the second quarter of 2006, and
incurred $353,000 for restaurants that will open in the third quarter of 2006 or
later. In the second quarter 2005, we opened four new company-owned restaurants,
incurred costs of $50,000 for restaurants that opened before the second quarter
of 2005, and incurred costs of $157,000 for restaurants that opened in the third
quarter of 2005 or later.
Loss on equipment disposal increased by $40,000 to $44,000 in 2006 from $4,000
in 2005. The amount expensed in 2005 and 2006 represents miscellaneous asset
impairments and retirements.
Interest income increased by $163,000 to $500,000 in 2006 from $337,000 in 2005.
The increase was primarily due to higher interest rates. Cash and marketable
securities balances at the end of the quarter were $55.7 million in 2006
compared to $51.0 million for the second quarter of 2005.
Provision for income taxes increased $55,000 to $1.3 million in 2006 from $1.2
million in 2005. The effective tax rate as a percentage of income before taxes
decreased to 34.5% in 2006 from 38.8% in 2005. This brings our overall rate for
the year to 35.4%. Our effective tax rate reflects the full federal and state
statutory rates on taxable income. For 2006, we believe our effective tax rate
will be between 35% and 36%.
Results of Operations for the Six Months Ended June 25, 2006 and June 26, 2005
Restaurant sales increased by $24.5 million, or 27.9%, to $112.1 million in 2006
from $87.6 million in 2005. The increase in restaurant sales was due to a $17.8
million increase associated with the opening of seven new company-owned
restaurants in the first six months of 2006 and the 28 company-owned restaurants
opened before 2006 that did not meet the criteria for same-store sales and $6.7
million related to an 8.0% increase in same-store sales.
Franchise royalties and fees increased by $3.0 million, or 26.6%, to $14.4
million in 2006 from $11.4 million in 2005. The increase was due primarily to
additional royalties collected from the 23 new franchised restaurants that
opened in 2006 and the 24 franchised restaurants that opened in the last six
months of 2005. Same-store sales for franchised restaurants increased 5.7% in
2006.
Cost of sales increased by $6.5 million, or 22.8%, to $35.0 million in 2006 from
$28.5 million in 2005 due primarily to more restaurants in operation in 2006.
Cost of sales as a percentage of restaurant sales decreased to 31.2% in 2006
from 32.5% in 2005. The decrease in cost of sales as a percentage of restaurant
sales was primarily due to lower fresh chicken wing costs and increased sales of
better margined boneless wings.
Labor expenses increased by $7.0 million, or 26.6%, to $33.2 million in 2006
from $26.2 million in 2005 due primarily to more restaurants in operation in
2006. Labor expenses as a percentage of restaurant sales decreased to 29.6% in
2006 from 29.9% in 2005. The decrease in labor expenses as a percentage of
restaurant sales was primarily due to lower health insurance and workers'
compensation costs partially offset by higher hourly labor.
Operating expenses increased by $5.2 million, or 38.1%, to $18.7 million in 2006
from $13.5 million in 2005 due primarily to more restaurants in operation in
2006. Operating expenses as a percentage of restaurant sales increased to 16.7%
in 2006 from 15.4% in 2005. The increase in operating expenses as a percentage
of restaurant sales was primarily due to the .5% increase in contributions to
the advertising fund, increased credit card use by our guests, higher insurance
costs, and higher repair and maintenance costs.
Occupancy expenses increased by $1.8 million, or 27.6%, to $8.4 million in 2006
from $6.6 million in 2005 due primarily to more restaurants in operation in
2006. Occupancy expenses as a percentage of restaurant sales remained consistent
at 7.5% in 2006 and 2005.
15
Depreciation increased by $1.3 million, or 22.8%, to $6.8 million in 2006 from
$5.5 million in 2005. The increase was primarily due to the additional
depreciation on seven new restaurants opened in 2006 and the 12 new restaurants
that opened in the last six months of 2005.
General and administrative expenses increased by $3.3 million, or 28.9%, to
$14.5 million in 2006 from $11.3 million in 2005 due to higher corporate
headcount, accrued incentive and stock-based compensation. General and
administrative expenses as a percentage of total revenue increased to 11.5% in
2006 from 11.4% in 2005. This increase was primarily due to an increase in
stock-based compensation of $685,000 to $1.5 million from $854,000 in the prior
year. We adopted the fair value recognition provisions of SFAS 123R, using the
modified-prospective transition method. Under this transition method, we
recognized $1.5 million of stock-based compensation in the first six months of
2006. In the first six months of 2005, we recognized $854,000 of stock-based
compensation under APB 25 and other related pronouncements. Exclusive of
stock-based compensation, we reduced our general and administrative expenses as
a percentage of sales from 10.5% to 10.3% with better leverage of our overhead
expenses.
Preopening costs increased by $608,000, to $1.5 million in 2006 from $913,000 in
2005. We opened seven new company-owned restaurants in the first half of 2006,
incurred costs of $295,000 for openings in 2005, and incurred $388,000 for
restaurants that will open in the third quarter of 2006 or later. In the first
half of 2005, we opened seven new company-owned restaurants, incurred costs of
$50,000 for restaurants that opened in 2004, and incurred costs of $157,000 for
restaurants that opened in the third quarter of 2005 or later.
Restaurant closures and asset impairment increased by $232,000 to $254,000 in
2006 from $22,000 in 2005. The expense in 2005 and 2006 represented
miscellaneous asset impairments and retirements.
Interest income increased by $361,000 to $970,000 in 2006 from $609,000 in 2005.
The increase was primarily due to higher interest rates. Cash and marketable
securities balances at the end of the quarter were $55.7 million in 2006
compared to $51.0 million for the second quarter of 2005.
Provision for income taxes increased $512,000 to $3.3 million in 2006 from $2.7
million in 2005. The effective tax rate as a percentage of income before taxes
decreased to 35.4% in 2006 from 38.5% in 2005. Our effective tax rate reflects
the full federal and state statutory rates on taxable income. For 2006, we
believe our effective tax rate will be between 35% and 36%.
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 and other general business needs. Our main sources of liquidity
and capital are cash flows from operations and proceeds from the issuance of
common stock through an initial public offering in November 2003. The cash and
marketable securities balance at June 25, 2006 was $55.7 million. We invest our
cash balances in short-term investment instruments with the focus on protection
of principal, adequate liquidity and maximization of after-tax returns. These
investments can include, but are not limited to, high quality money market
funds, commercial paper, US government-backed instruments, repurchase
agreements, municipal securities, and asset-backed securities.
For the six months ended June 25, 2006, net cash provided by operating
activities was $15.6 million. Net cash provided by operating activities
consisted primarily of net earnings adjusted for non-cash expenses, a decrease
in prepaid expenses, and an increase in accounts payable partially offset by an
increase in accounts receivable. The decrease in prepaid expenses is due to the
timing of insurance payments. The increase in accounts payable is due to the
timing of payments and increased level of construction activity. The increase in
accounts receivable was due to higher credit card and vendor related
receivables.
For the six months ended June 26, 2005, net cash provided by operating
activities was $9.9 million. Net cash provided by operating activities consisted
primarily of net earnings adjusted for non-cash expenses, a decrease in prepaid
expenses, partially offset by an increase in accounts receivable and a decrease
in accrued expenses. The decrease in prepaid expenses was due primarily to the
timing of insurance payments. The increase in accounts receivable was due to
higher credit card receivables. The decrease in accrued expenses was primarily
due to the redemption of gift cards and the payout of incentive compensation in
March.
For the six months ended June 25, 2006 and June 26, 2005, net cash used in
investing activities was $13.0 million and $18.3 million, respectively.
Investing activities consisted of purchases of property and equipment related to
the opening of new company-owned restaurants and restaurants under construction,
purchases of marketable securities, and sales or maturities of those securities.
During the first six months of 2006 and 2005, we opened seven restaurants during
both periods. We expect capital expenditures for the entire year of 2006 to
approximate $23 to 24 million for the addition of about 18-19 new company-owned
restaurants and the renovation and maintenance of existing restaurants. For the
first six months of 2006, we purchased $54.8 million of marketable securities
and received proceeds of $54.1 million as these investments matured or were
16
sold. For the first six months of 2005, we purchased $47.1 million of marketable
securities and received proceeds of $37.1 million as these investments matured
or were sold.
For the six months ended June 25, 2006 and June 26, 2005, net cash provided by
(used in) financing activities was ($16,000) and $391,000, respectively. Net
cash provided by financing activities for 2006 resulted from the issuance of
common stock from the exercise of stock options and the employee stock purchase
plan of $490,000. No additional funding from the issuance of common stock (other
than from the exercise of options and employee stock purchases) is anticipated
for the remainder of 2006. Net cash provided by financing activities for 2005
consisted of the issuance of common stock from the exercise of stock options and
employee stock purchase plan of $717,000.
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. Except for one restaurant
building, we do not currently own any of the properties on which our restaurants
operate.
The following table presents a summary of our contractual operating lease
obligations and commitments as of June 25, 2006 (amounts in thousands):
Payments Due By Period
-----------------------------------------
Less than After 5
Total One year 1-3 years 3-5 years years
-------- ---------- --------- --------- ----------
Operating lease obligations............................. $120,628 14,362 27,104 23,411 55,751
Lease commitments for restaurants under development..... 12,181 900 2,161 2,201 6,919
-------- ---------- --------- --------- ----------
Total............................................... $132,809 15,262 29,265 25,612 62,670
======== ========== ========= ========= ==========
We believe the cash flows from our operating activities and our balance of cash
and marketable securities will be sufficient to fund our operations, building
commitments, and to meet our obligations for the foreseeable future.
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," "estimate," "expect," "intend,"
"may," "could," "possible," "plan," "project," "will," "forecast" and similar
words or expressions. Our forward-looking statements generally relate to our
long-term goal of over 1,000 locations, expected annual unit growth of 20%,
efforts to manage cost of sales particularly related to chicken wing costs,
plans for entry into new markets, expansion and improving existing markets,
focus on reducing general and administrative expenses, estimated tax rates for
2006, and cash requirements. 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 25, 2005):
o Fluctuations in chicken wing prices could reduce our operating income.
o If we are unable to successfully open new restaurants, our revenue growth
rate and profits may be reduced.
o We must identify and obtain a sufficient number of suitable new restaurant
sites for us to sustain our revenue growth rate.
o Our restaurants may not achieve market acceptance in the new geographic
regions we enter.
o New restaurants added to our existing markets may take sales from existing
restaurants.
o Implementing our expansion strategy may strain our resources.
o We are dependent on franchisees and their success.
o We may not be able to attract and retain qualified personnel to operate and
manage our restaurants.
17
o Our franchisees may take actions that could harm our business.
o We could face liability from our franchisees.
o Changes in consumer preferences or discretionary consumer spending could
harm our performance.
o Implementation of local smoking bans could harm our business.
Investors are cautioned that all forward-looking statements involve risk and
uncertainties.
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.
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 restaurants and franchised
restaurants is fresh chicken wings. We purchase fresh chicken wings based on
current market prices which are subject to monthly fluctuation.
A material increase in fresh chicken wing costs may adversely affect our
operating results. Fresh chicken wing prices during the second quarter of 2006
averaged 3.5% lower than the average per pound price in the second quarter of
2005. If there is a significant rise in the price of fresh chicken wings, or we
are unable to successfully adjust menu prices or menu mix or otherwise make
operational adjustments to account for these changes, our operating results
could be adversely affected. Fresh chicken wings accounted for approximately
26.5% and 22.5% of our cost of sales in the second quarter of 2005 and 2006,
respectively, with an average price per pound of $1.14 and $1.10, respectively.
Fresh chicken wings accounted for approximately 29.0% and 23.2% of our cost of
sales in the six-month periods ended 2005 and 2006, respectively, with an
average price per pound of $1.29 and $1.16 respectively. If we had experienced a
10% increase in fresh chicken wing costs during the second quarter and six
months ended June 25, 2006, restaurant cost of sales would have increased by
approximately $383,000 and $814,000, respectively.
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 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. During the past
year, we have been affected by higher energy costs. Except as described in the
paragraph above, we believe inflation has not had a material impact on our
results of operations in recent years.
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.
18
ITEM 4. 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 principal executive
officer and principal financial officer, of our disclosure controls and
procedures as defined in Rules 13(a)-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 recorded,
processed, summarized and reported within the time periods specified in
Securities and Exchange Commission rules and forms. There were no changes in our
internal control over financial reporting during our most recently completed
fiscal quarter that has materially affected, or is reasonably likely to
materially affect, our internal control 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 significantly in excess of our insurance coverage or involving punitive
damages, which may not be covered by insurance, could materially adversely
affect our financial condition or results of operations.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
At the Annual Shareholders meeting held on May 11, 2006, we submitted to a vote
of our shareholders the following matters, which received the indicated votes:
1. Approving setting the number of members of the Board of Directors at eight
(8):
For: 8,117,262 Against: 52,619 Abstain: 4,169 Broker Non-Vote: 0
2. Election of Directors:
For: Withheld:
--------------- ---------------
Sally J. Smith.................................. 8,123,686 50,364
Kenneth H. Dahlberg............................. 8,121,111 52,939
Dale M. Applequist.............................. 8,034,016 140,034
Robert W. MacDonald............................. 8,148,447 25,603
Warren E. Mack.................................. 7,858,396 315,654
J. Oliver Maggard............................... 8,029,774 144,276
Michael P. Johnson.............................. 8,027,754 146,296
James Damian.................................... 8,111,476 62,574
3. Approve increasing the number of shares from 1,100,000 to 1,450,000 under
2003 Equity incentive plan:
For: 3,995,559 Against: 2,023,490 Abstain: 6,598 Broker Non-Vote: 2,148,403
4. Ratify KPMG LLC as our independent registered public accounting firm:
For: 8,129,479 Against: 41,350 Abstain: 3,221 Broker Non-Vote: 0
ITEM 6. EXHIBITS
See Exhibit Index following signature page of this Report.
19
SIGNATURES
In accordance with the requirements of the Exchange Act, the registrant
caused this report to be signed on its behalf by the undersigned, thereunto duly
authorized.
Date: August 2, 2006 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)
20
EXHIBIT INDEX
BUFFALO WILD WINGS, INC.
FORM 10-Q FOR QUARTER ENDED JUNE 25, 2006
Exhibit
Number Description
------- -----------------------------------------------------------------------
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
21