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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 UNDER SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
For the fiscal quarter ended September 24, 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
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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
October 24, 2006: 8,613,887 shares.
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TABLE OF CONTENTS
Page
------
PART I
Item 1. Financial Statements 3
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations 12
Item 3. Quantitative and Qualitative Disclosures About Market Risk 19
Item 4. Controls and Procedures 19
Item 5. Other Information 19
PART II
Item 1. Legal Proceedings 20
Item 6. Exhibits 20
Signatures 21
Exhibit Index 22
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, September 24,
2005 2006
------------- -------------
Assets
Current assets:
Cash and cash equivalents $ 3,986 3,457
Marketable securities 48,418 53,133
Accounts receivable--franchisees, net of allowance of $25
and $65 731 871
Accounts receivable--other 3,700 5,187
Inventory 1,502 1,644
Prepaid expenses 1,972 1,736
Deferred income taxes 770 1,871
------------- -------------
Total current assets 61,079 67,899
Property and equipment, net 68,693 77,624
Restricted cash 2,115 4,328
Other assets 867 892
Goodwill 369 369
------------- -------------
Total assets $133,123 151,112
============= =============
Liabilities and Stockholders' Equity
Current liabilities:
Unearned franchise fees $ 2,194 2,348
Accounts payable 6,628 8,953
Accrued income tax payable 102 351
Accrued compensation and benefits 6,775 8,061
Accrued expenses 3,900 4,114
Current portion of deferred lease credits 604 722
------------- -------------
Total current liabilities 20,203 24,549
Long-term liabilities:
Marketing fund payables 2,115 4,328
Deferred income taxes 4,755 3,471
Deferred lease credits, net of current portion 9,202 9,439
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Total liabilities 36,275 41,787
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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 8,776,187,
respectively 74,503 74,938
Deferred compensation (2,568) --
Retained earnings 24,913 34,387
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Total stockholders' equity 96,848 109,325
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Total liabilities and stockholders' equity $133,123 151,112
============= =============
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 Nine months ended
---------------------------- ---------------------------
September 25, September 24, September 25, September 24,
2005 2006 2005 2006
-------------- ------------- ------------- -------------
Revenue:
Restaurant sales $ 45,892 60,800 133,535 172,928
Franchise royalties and fees 5,840 7,548 17,213 21,941
-------------- ------------- ------------- -------------
Total revenue 51,732 68,348 150,748 194,869
-------------- ------------- ------------- -------------
Costs and expenses:
Restaurant operating costs:
Cost of sales 14,096 18,557 42,618 53,590
Labor 13,743 18,265 39,936 51,422
Operating 7,529 10,291 21,052 28,970
Occupancy 3,616 4,450 10,167 12,808
Depreciation 2,998 3,649 8,505 10,412
General and administrative (1) 5,383 7,600 16,643 22,119
Preopening 818 755 1,731 2,276
Loss on equipment disposal and impairment 849 102 871 356
-------------- ------------- ------------- -------------
Total costs and expenses 49,032 63,669 141,523 181,953
-------------- ------------- ------------- -------------
Income from operations 2,700 4,679 9,225 12,916
Interest income 349 556 958 1,526
-------------- ------------- ------------- -------------
Earnings before income taxes 3,049 5,235 10,183 14,442
Income tax expense 1,174 1,709 3,921 4,968
-------------- ------------- ------------- -------------
Net earnings $ 1,875 3,526 6,262 9,474
============== ============= ============= =============
Earnings per common share - basic $ 0.22 0.41 0.74 1.11
Earnings per common share - diluted 0.22 0.40 0.72 1.08
Weighted average shares outstanding - basic 8,472,529 8,597,918 8,429,352 8,561,767
Weighted average shares outstanding - diluted 8,678,108 8,762,079 8,673,544 8,751,838
-----------------------------------------
(1) Contains stock-based compensation of $193, $669, $1,047, and $2,208, respectively
4
BUFFALO WILD WINGS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Dollar amounts in thousands)
(unaudited)
Nine months ended
---------------------------
September 25, September 24,
2005 2006
------------- -------------
Cash flows from operating activities:
Net earnings $ 6,262 9,474
Adjustments to reconcile net earnings to cash provided by
operations:
Depreciation 8,505 10,412
Amortization (62) (88)
Loss on equipment disposal and impairment 871 356
Deferred lease credits 554 185
Deferred income taxes (1,749) (2,385)
Stock-based compensation 1,047 2,208
Excess tax benefit from the exercise of stock options -- (185)
Change in operating assets and liabilities:
Purchase of marketable securities -- (1,144)
Accounts receivable (1,158) (1,457)
Inventory (77) (142)
Prepaid expenses (285) 236
Other assets 36 (25)
Unearned franchise fees (305) 154
Accounts payable 144 (404)
Income taxes 2,746 434
Accrued expenses (626) 2,078
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Net cash provided by operating activities 15,903 19,707
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Cash flows from investing activities:
Acquisition of property and equipment (15,180) (16,970)
Purchase of marketable securities (65,590) (76,752)
Proceeds of marketable securities 55,847 73,269
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Net cash used in investing activities (24,923) (20,453)
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Cash flows from financing activities:
Issuance of common stock 763 719
Tax payments for restricted stock (326) (687)
Excess tax benefit from the exercise of stock options -- 185
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Net cash provided by financing activities 437 217
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Net decrease in cash and cash equivalents (8,583) (529)
Cash and cash equivalents at beginning of period 12,557 3,986
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Cash and cash equivalents at end of period $ 3,974 3,457
============= =============
5
BUFFALO WILD WINGS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE THREE AND NINE MONTHS ENDED SEPTEMBER 25, 2005 AND SEPTEMBER 24, 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
September 24, 2006, and for the three-month and nine-month periods ended
September 25, 2005 and September 24, 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 nine-month periods ended September 25, 2005 and September
24, 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 nine-month periods ended
September 24, 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, with the fourth quarter having
fourteen weeks.
(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 September 25, 2005 and September
24, 2006, fresh chicken wings were 24.4% and 23.1%, respectively, of
restaurant cost of sales. For the nine-month periods ended September
25, 2005 and September 24, 2006, fresh chicken wings were 27.5% 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 plan 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 nine-month periods ended September 25, 2005 were
$193 and $1,047, 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
September 24, 2006 was $669 before income taxes and consisted of
restricted stock, stock options, and ESPP expense of $618, $18 and
$33, respectively. Stock-based compensation recognized for the nine
months ended September 24, 2006 was $2,208 before income taxes and
consisted of restricted stock, stock options and ESPP expense of
$2,045, $63, and $100, respectively. The related total tax benefit
was $218 and $760 for the three months and nine months ended
September 24, 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 for the 2005 periods 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 months Nine months
ended ended
September 25, September 25,
2005 2005
------------- -----------
Net earnings, as reported $1,875 6,262
Add:
Total stock-based employee compensation expense included
in reported earnings, net of related tax effects 119 644
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 (166) (799)
------------- -----------
Pro forma net earnings $1,828 6,107
============= ===========
Net earnings per common share:
As reported (basic) $ 0.22 0.74
Pro forma (basic) 0.22 0.72
As reported (diluted) 0.22 0.72
Pro forma (diluted) 0.21 0.70
Pro forma disclosures for the three-month and nine-month periods ended
September 24, 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. No
stock options or ESPP shares were granted during the three months
ended September 25, 2005 and September 24, 2006. 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 nine months ended September 25, 2005 and September 24, 2006:
Stock options ESPP
--------------------------------------- --------------------------------------
September 25, September 24, September 25, September 24,
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.
(c) New Accounting Pronouncements
In September 2006, the Financial Accounting Standards Board ("FASB")
issued Statement of Financial Accounting Standards ("SFAS") No. 157,
"Fair Value Measurements" which is effective for fiscal years
beginning after November 15, 2007 and for interim periods within
those years. This statement defines fair value, establishes a
framework for measuring fair value and expands the related
disclosure requirements. We are currently evaluating the potential
impact of this statement on our consolidated financial statements.
In June 2006, the Financial Accounting Standards Board (FASB) issued
FASB Interpretation No. 48, "Accounting for Uncertainty in Income
Taxes, an interpretation of FASB Statement No. 109," ("FIN 48"). FIN
48 clarifies the accounting for uncertainties in income taxes
recognized in a company's financial statements in accordance with
Statement 109 and prescribes a recognition threshold and measurement
attributable for financial disclosure of tax positions taken or
expected to be taken on a tax return. Additionally, Interpretation
48 provides guidance on derecognition, classification, interest and
penalties, accounting in interim periods, disclosure and transition.
Interpretation 48 is effective for fiscal years beginning after
December 15, 2006. We are currently evaluating the potential impact
of this statement on our consolidated financial statements.
In September 2006, the Securities and Exchange Commission (SEC)
issued Staff Accounting Bulletin 108, "Considering the Effects on
Prior Year Misstatements when Quantifying Misstatements in Current
Year Financial Statements," ("SAB 108"). SAB 108 requires
registrants to quantify errors using both the income statement
method (i.e. iron curtain method) and the rollover method and
requires adjustment if either method indicates a material error. If
a correction in current year relating to prior year errors is
material to current year, then the prior year financial information
needs to be corrected. A correction to the prior year results that
are not material to those years, would not require a "restatement
process" where prior financials would be amended. SAB 108 is
effective for fiscal years ending after November 15, 2006. We do not
anticipate that this bulletin will have a material effect on our
financial position, results of operations or cash flows.
8
(3) Marketable Securities
Marketable securities were comprised as follows:
As of
--------------------------
December 25, September 24,
2005 2006
------------ -------------
Held-to-maturity:
Municipal securities $14,887 20,808
Available-for-sale:
Municipal securities 33,531 31,181
Trading:
Mutual funds -- 1,144
------------ -------------
Total $48,418 53,133
============ =============
All held-to-maturity debt securities are due within one year and had
aggregate fair values of $14,862 and $20,811 as of December 25, 2005 and
September 24, 2006, respectively. Trading securities represents
investments held for future needs of a non-qualified deferred compensation
plan.
(4) Property and Equipment
Property and equipment consists of the following:
As of
--------------------------
December 25, September 24,
2005 2006
------------ -------------
Construction in-process $ 956 4,674
Leasehold improvements 64,535 73,130
Furniture, fixtures, and equipment 45,279 51,255
------------ -------------
110,770 129,059
Less accumulated depreciation and
amortization (42,077) (51,435)
------------ -------------
$ 68,693 77,624
============ =============
(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. Option activity is summarized for the nine months ended
September 24, 2006:
Average
Weighted remaining
Number average contractual Aggregate Intrinsic
of shares exercise price life (years) Value
-------------- --------------- ------------ -----------------
Outstanding, December 25, 2005 302,296 $ 8.08
Granted -- --
Exercised (73,318) 6.56
Cancelled (4,653) 12.75
-------------- --------------- ------------ -----------------
Outstanding, September 24, 2006 224,325 $ 8.48 4.2 $ 6,554
Exercisable, September 24, 2006 209,582 7.63 4.0 6,302
9
The aggregate intrinsic value in the table above is before applicable income
taxes, based on our closing stock price of $37.70 as of September 24, 2006,
which would have been received by the optionees had all options been exercised
on that date. As of September 24, 2006, total unrecognized stock-based
compensation expense related to nonvested stock options was approximately $83,
which is expected to be recognized over a weighted average period of
approximately nine months. During the nine months ended September 24, 2006, the
total intrinsic value of stock options exercised was $2,156. During the nine
months ended September 24, 2006, the total fair value of options vested was
$369.
The following table summarizes our stock options outstanding at September
24, 2006:
Options outstanding Options exercisable
----------------------------------------------- -------------------------------
Average Weighted Weighted
remaining average average
contractual exercise exercise
Range Shares life (years) price Shares price
---------------- -------------- --------------- ------------------------------- ----------------
$ 3.35 - 4.15 94,082 2.4 $ 3.87 94,082 $ 3.87
5.00 - 11.25 94,352 4.9 8.95 92,902 8.91
12.75 - 28.25 34,541 6.8 18.76 22,295 17.79
34.81 - 34.81 1,350 8.3 34.81 303 34.81
-------------- --------------
3.35 - 34.81 224,325 4.2 8.48 209,582 7.63
============== ==============
The plan has 421,722 shares available for grant as of September 24, 2006.
(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. We issue new shares of common stock upon the
disbursement of restricted stock units. Restricted stock activity is summarized
for the nine months ended September 24, 2006:
Weighted
average
Number grant date
of shares fair value
------------- ------------
Outstanding, December 25, 2005 75,964 $32.56
Granted 102,994 32.75
Vested (6,472) 33.80
Cancelled (9,977) 34.03
------------- ------------
Outstanding, September 24, 2006 162,509 32.54
As of September 24, 2006, the total stock-based compensation expense related to
nonvested awards not yet recognized was $2,246, which is expected to be
recognized over a weighted average period of 1.0 years. During the nine months
ended September 24, 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 nine months of
2006 and 2005, we issued 10,976 and 10,527, respectively, shares of common stock
under the plan. As of September 24, 2006, we have 239,144 available for future
issuance.
10
(6) Earnings Per Share
The following is a reconciliation of basic and fully diluted earnings per
share for the three-month and nine-month periods ended September 25, 2005
and September 24, 2006:
Three months ended September 25, 2005
----------------------------------------
Earnings Shares Per-share
(numerator) (denominator) amount
------------- -------------- -----------
Net earnings available to common shareholders $1,875
-------------
Earnings per common share--basic 1,875 8,472,529 $0.22
Effect of dilutive securities
Stock options -- 205,579
------------- --------------
Earnings per common share--diluted $1,875 8,678,108 0.22
============= ==============
Three months ended September 24, 2006
----------------------------------------
Earnings Shares Per-share
(numerator) (denominator) amount
------------- -------------- -----------
Net earnings available to common shareholders $3,526
-------------
Earnings per common share--basic 3,526 8,597,918 $0.41
Effect of dilutive securities
Stock options -- 164,161
------------- --------------
Earnings per common share--diluted $3,526 8,762,079 0.40
============= ==============
Nine months ended September 25, 2005
----------------------------------------
Earnings Shares Per-share
(numerator) (denominator) amount
------------- -------------- -----------
Net earnings available to common shareholders $6,262
-------------
Earnings per common share--basic 6,262 8,429,352 $0.74
Effect of dilutive securities
Stock options -- 244,192
------------- --------------
Earnings per common share--diluted $6,262 8,673,544 0.72
============= ==============
Nine months ended September 24, 2006
----------------------------------------
Earnings Shares Per-share
(numerator) (denominator) amount
------------- -------------- -----------
Net earnings available to common shareholders $9,474
-------------
Earnings per common share--basic 9,474 8,561,767 $1.11
Effect of dilutive securities
Stock options -- 190,071
------------- --------------
Earnings per common share--diluted $9,474 8,751,838 1.08
============= ==============
129,495 shares and 164,221 shares for the three-month periods ended September
25, 2005 and September 24, 2006, respectively, and 129,528 shares and 164,045
shares for the nine-month periods ended September 25, 2005 and September 24,
2006, respectively, have been excluded from the fully diluted calculation
because the effect on net earnings per share would not have been dilutive.
11
(7) Supplemental Disclosures of Cash Flow Information
Nine months ended
---------------------------
September 25, September 24,
2005 2006
------------- -------------
Cash paid during the period for:
Income taxes $ 2,924 7,148
Noncash financing and investing transactions:
Capitalization of preopening rent expense 352 --
Adjustment of restricted stock units to fair value 1,714 --
Adjustment of restricted stock units to fair value on
grant date -- 2,568
Property and equipment not yet paid for (101) 2,729
(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
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 September 24, 2006, we owned and operated 134 and franchised an additional
278 Buffalo Wild Wings (R) Grill & Bar restaurants in 37 states. Of the 412
system-wide restaurants, 83 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 over 15% unit
growth in each of the next three 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 30.5% to 33.8% quarter to quarter in
2005 and 2006, mostly due to the price fluctuation in fresh chicken wings. We
are working to counteract the effect of the volatility of 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
12
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 are developing
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.
Our revenue is generated by:
o Sales at our company-owned restaurants. These were 89% of total
revenue in the third 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 24% 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. Loss on equipment disposal 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.
We operate on a 52 or 53-week fiscal year ending on the last Sunday in December.
Both of the third quarters of 2005 and 2006 consisted of thirteen weeks. Both of
the nine-month periods of 2005 and 2006 consisted of thirty-nine 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, 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.
13
Three months ended Nine months ended
--------------------------- ---------------------------
September 25, September 24, September 25, September 24,
2005 2006 2005 2006
------------- ------------- ------------- -------------
Revenue:
Restaurant sales 88.7% 89.0% 88.6% 88.7%
Franchising royalties and fees 11.3 11.0 11.4 11.3
------------- ------------- ------------- -------------
Total revenue 100.0 100.0 100.0 100.0
------------- ------------- ------------- -------------
Costs and expenses:
Restaurant operating costs:
Cost of sales 30.7 30.5 31.9 31.0
Labor 29.9 30.0 29.9 29.7
Operating 16.4 16.9 15.8 16.8
Occupancy 7.9 7.3 7.6 7.4
Depreciation 5.8 5.3 5.6 5.3
General and administrative 10.4 11.1 11.0 11.4
Preopening 1.6 1.1 1.1 1.2
Loss on equipment disposal and impairment 1.6 0.1 0.6 0.2
------------- ------------- ------------- -------------
Total costs and expenses 94.8 93.2 93.9 93.4
------------- ------------- ------------- -------------
Income from operations 5.2 6.8 6.1 6.6
Interest income 0.7 0.8 0.6 0.8
------------- ------------- ------------- -------------
Earnings before income taxes 5.9 7.7 6.8 7.4
Income tax expense 2.3 2.5 2.6 2.5
------------- ------------- ------------- -------------
Net earnings 3.6 5.2 4.2 4.9
============= ============= ============= =============
The number of company-owned and franchised restaurants open are as follows:
As of
---------------------------
September 25, September 24,
2005 2006
------------- -------------
Company-owned restaurants 116 134
Franchised restaurants 234 278
The restaurant sales for company-owned and franchised restaurants are as follows
(amounts in thousands):
Three months ended Nine months ended
---------------------------- ---------------------------
September 25, September 24, September 25, September 24,
2005 2006 2005 2006
-------------- ------------- ------------- -------------
Company-owned restaurant sales $ 45,892 60,800 133,535 172,928
Franchised restaurant sales 117,615 151,572 339,733 441,327
Increases in comparable same-store sales are as follows (based on restaurants
operating at least fifteen months):
Three months ended Nine months ended
--------------------------- ---------------------------
September 25, September 24, September 25, September 24,
2005 2006 2005 2006
-------------- ------------- ------------- -------------
Company-owned same-store sales 1.8% 11.8% 3.5% 9.3%
Franchised same-store sales 1.1 6.4 2.1 5.9
The quarterly average prices paid per pound for fresh chicken wings are as
follows:
Three months ended Nine months ended
--------------------------- ---------------------------
September 25, September 24, September 25, September 24,
2005 2006 2005 2006
-------------- ------------- ------------- -------------
Average price per pound............................ $1.08 1.14 1.22 1.15
14
Results of Operations for the Three Months Ended September 24, 2006 and
September 25, 2005
Restaurant sales increased by $14.9 million, or 32.5%, to $60.8 million in 2006
from $45.9 million in 2005. The increase in restaurant sales was due to a $9.9
million increase associated with the opening of 12 new company-owned restaurants
in the first nine months of 2006 and 17 company-owned restaurants opened before
2006 that did not meet the criteria for same-store sales and $5.0 million
related to an 11.8% increase in same-store sales.
Franchise royalties and fees increased by $1.7 million, or 29.2%, to $7.5
million in 2006 from $5.8 million in 2005. The increase was due primarily to
additional royalties collected from 31 new franchised restaurants that opened in
2006 and 14 franchised restaurants that opened in the last three months of 2005.
Same-store sales for franchised restaurants increased 6.4% in the third quarter
of 2006.
Cost of sales increased by $4.5 million, or 31.6%, to $18.6 million in 2006 from
$14.1 million in 2005 due primarily to more restaurants in operation in 2006.
Cost of sales as a percentage of restaurant sales decreased to 30.5% in 2006
from 30.7% in 2005. The decrease in cost of sales as a percentage of restaurant
sales was primarily due to a shift in our sales mix, providing better margins
and better leverage of costs due to a menu price increase in August. This was
partially offset by higher fresh chicken wing costs. For the third quarter of
2006, wing prices averaged $1.14 per pound, which was a 5.6% increase from 2005.
Labor expenses increased by $4.5 million, or 32.9%, to $18.3 million in 2006
from $13.7 million in 2005 due primarily to more restaurants in operation in
2006. Labor expenses as a percentage of restaurant sales increased to 30.0% in
2006 from 29.9% in 2005. The increase in labor expenses as a percentage of
restaurant sales was primarily due to higher workers' compensation costs which
offset lower hourly and salary labor costs.
Operating expenses increased by $2.8 million, or 36.7%, to $10.3 million in 2006
from $7.5 million in 2005 due primarily to more restaurants in operation in
2006. Operating expenses as a percentage of restaurant sales increased to 16.9%
in 2006 from 16.4% 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. Increases in other operating expenses, such as local store
marketing and credit card fees, were offset by lower insurance and utility
costs.
Occupancy expenses increased by $834,000, or 23.1%, to $4.5 million in 2006 from
$3.6 million in 2005 due primarily to more restaurants in operation in 2005.
Occupancy expenses as a percentage of restaurant sales decreased to 7.3% in 2006
from 7.9% in 2005. The decrease in occupancy costs as a percentage of restaurant
sales is due to better leverage of rent costs with the increased sales levels.
Depreciation increased by $651,000, or 21.7%, to $3.6 million in 2006 from $3.0
million in 2005. The increase was primarily due to the additional depreciation
on 12 new restaurants opened in 2006 and the six new restaurants that opened in
the last three months of 2005.
General and administrative expenses increased by $2.2 million, or 41.2%, to $7.6
million in 2006 from $5.4 million in 2005 due to higher corporate headcount, and
accrued incentive and stock-based compensation. General and administrative
expenses as a percentage of total revenue increased to 11.1% in 2006 from 10.4%
in 2005. We adopted the fair value recognition provisions of SFAS 123R, using
the modified-prospective transition method. Under this transition method, we
recognized $669,000 of stock-based compensation in the third quarter of 2006. In
the third quarter of 2005, we recognized $193,000 of stock-based compensation
under APB 25 and other related pronouncements. Exclusive of stock-based
compensation, our general and administrative expenses increased as a percentage
of total revenue to 10.1% in 2006 from 10.0% in 2005 due to higher incentive
compensation costs.
Preopening costs decreased by $63,000, or 7.7%, to $755,000 in 2006 from
$818,000 in 2005. We opened five new company-owned restaurants in the third
quarter of 2006, incurred $40,000 for restaurants that opened before the third
quarter of 2006, and incurred $225,000 for restaurants that will open in the
last quarter of 2006 or later. In the third quarter 2005, we opened six new
company-owned restaurants, incurred costs of $2,000 for restaurants that opened
before the third quarter of 2005, and incurred costs of $107,000 for restaurants
that opened in the last quarter of 2005 or later.
Loss on equipment disposal and impairment decreased by $747,000 to $102,000 in
2006 from $849,000 in 2005. The amount expensed in 2006 represents miscellaneous
asset disposals. In 2005, we impaired the assets and goodwill of one
underperforming restaurant in North Carolina. Also, miscellaneous asset
disposals occurred in 2005.
Interest income increased by $207,000 to $556,000 in 2006 from $349,000 in 2005.
The increase was primarily due to higher interest rates. Cash and marketable
securities balances at the end of the quarter were $56.6 million in 2006
compared to $50.2 million for the third quarter of 2005.
15
Provision for income taxes increased $535,000 to $1.7 million in 2006 from $1.2
million in 2005. The effective tax rate as a percentage of income before taxes
decreased to 32.6% in 2006 from 38.5% in 2005. This brings our overall rate for
the year to 34.4%. The decrease in the income tax rate for the quarter was
primarily due to the reallocation of state apportionment factors to reflect the
locations of our new restaurants many of which are in states with lower tax
rates. Our effective tax rate reflects the full federal and state statutory
rates on taxable income. For the year ending December 31, 2006, we believe our
effective tax rate will be between 33.5% and 34.5%.
Results of Operations for the Nine Months Ended September 24, 2006 and September
25, 2005
Restaurant sales increased by $39.4 million, or 29.5%, to $172.9 million in 2006
from $133.5 million in 2005. The increase in restaurant sales was due to a $27.7
million increase associated with the opening of 12 new company-owned restaurants
in the first nine months of 2006 and the 28 company-owned restaurants opened
before 2006 that did not meet the criteria for same-store sales and $11.7
million related to a 9.3% increase in same-store sales.
Franchise royalties and fees increased by $4.7 million, or 27.5%, to $21.9
million in 2006 from $17.2 million in 2005. The increase was due primarily to
additional royalties collected from the 31 new franchised restaurants that
opened in 2006 and the 14 franchised restaurants that opened in the last three
months of 2005. Same-store sales for franchised restaurants increased 5.9% in
2006.
Cost of sales increased by $11.0 million, or 25.7%, to $53.6 million in 2006
from $42.6 million in 2005 due primarily to more restaurants in operation in
2006. Cost of sales as a percentage of restaurant sales decreased to 31.0% in
2006 from 31.9% in 2005. The decrease in cost of sales as a percentage of
restaurant sales was primarily due to lower fresh chicken wing costs and a shift
in our sales mix to better margined products.
Labor expenses increased by $11.5 million, or 28.8%, to $51.4 million in 2006
from $39.9 million in 2005 due primarily to more restaurants in operation in
2006. Labor expenses as a percentage of restaurant sales decreased to 29.7% 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 partially offset by
higher hourly labor.
Operating expenses increased by $7.9 million, or 37.6%, to $29.0 million in 2006
from $21.1 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 15.8% 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, and higher repair and maintenance costs.
Occupancy expenses increased by $2.6 million, or 26.0%, to $12.8 million in 2006
from $10.2 million in 2005 due primarily to more restaurants in operation in
2006. Occupancy expenses as a percentage of restaurant sales decreased to 7.4%
in 2006 from 7.6% in 2005 due to better leverage of rent costs with the
increased sales levels.
Depreciation increased by $1.9 million, or 22.4%, to $10.4 million in 2006 from
$8.5 million in 2005. The increase was primarily due to the additional
depreciation on 12 new restaurants opened in 2006 and the six new restaurants
that opened in the last three months of 2005.
General and administrative expenses increased by $5.5 million, or 32.9%, to
$22.1 million in 2006 from $16.6 million in 2005 due to higher corporate
headcount, and accrued incentive and stock-based compensation. General and
administrative expenses as a percentage of total revenue increased to 11.4% in
2006 from 11.0% in 2005. We adopted the fair value recognition provisions of
SFAS 123R, using the modified-prospective transition method. Under this
transition method, we recognized $2.2 million of stock-based compensation in the
first nine months of 2006. In the first nine months of 2005, we recognized $1.0
million 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 10.4% in 2005
to 10.2% in 2006 with better leverage of our salaried and overhead expenses.
Preopening costs increased by $545,000, or 31.5%, to $2.3 million in 2006 from
$1.7 million in 2005. We opened 12 new company-owned restaurants in the first
nine months of 2006, incurred costs of $1.2 million for openings in 2006, and
incurred $232,000 for restaurants that will open in the fourth quarter of 2006
or later. In the first nine months of 2005, we opened 13 new company-owned
restaurants, incurred costs of $42,000 for restaurants that opened in 2004, and
incurred costs of $107,000 for restaurants that opened in the fourth quarter of
2005 or later.
Loss on equipment disposal and impairment decreased by $515,000 to $356,000 in
2006 from $871,000 in 2005. The expense in 2006 represented miscellaneous asset
disposals. In 2005, we impaired the assets and goodwill of one underperforming
restaurant in North Carolina.
16
Interest income increased by $568,000 to $1.5 million in 2006 from $958,000 in
2005. The increase was primarily due to higher interest rates. Cash and
marketable securities balances at the end of the quarter were $56.6 million in
2006 compared to $50.2 million for the third quarter of 2005.
Provision for income taxes increased $1.0 million to $5.0 million in 2006 from
$3.9 million in 2005. The effective tax rate as a percentage of income before
taxes decreased to 34.4% in 2006 from 38.5% in 2005. Our effective tax rate
reflects the full federal and state statutory rates on taxable income. For the
year ending December 26, 2006, we believe our effective tax rate will be between
33.5% and 34.5%.
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 September 24, 2006 was $56.6 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 nine months ended September 24, 2006, net cash provided by operating
activities was $19.7 million. Net cash provided by operating activities
consisted primarily of net earnings adjusted for non-cash expenses, an increase
in accrued expenses partially offset by an increase in accounts receivable and
purchase of marketable securities. The increase in accrued expenses is due to
higher accrued incentive compensation, self insurance liabilities, and activity
from more restaurants. The increase in accounts receivable was due to higher
credit card and vendor-related receivables. The purchase of marketable
securities was related to the investments in trading securities held for future
needs of a non-qualified deferred compensation plan.
For the nine months ended September 25, 2005, net cash provided by operating
activities was $15.9 million. Net cash provided by operating activities
consisted primarily of net earnings adjusted for non-cash expenses, an increase
in accounts receivable and an increase in income tax payable. The increase in
accounts receivable was due to higher credit card receivables. The increase in
income tax was due to the timing and size of quarterly tax payments.
For the nine months ended September 24, 2006 and September 25, 2005, net cash
used in investing activities was $20.5 million and $24.9 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 nine months of 2006 and 2005, we opened 12 and 13 restaurants,
respectively. We expect capital expenditures for the entire year of 2006 to
approximate $23 to $24 million for the addition of about 18 new company-owned
restaurants during the year and the renovation and maintenance of existing
restaurants. For the first nine months of 2006, we purchased $76.8 million of
marketable securities and received proceeds of $73.3 million as these
investments matured or were sold. For the first nine months of 2005, we
purchased $65.6 million of marketable securities and received proceeds of $55.8
million as these investments matured or were sold.
For the nine months ended September 24, 2006 and September 25, 2005, net cash
provided by financing activities was $217,000 and $437,000, respectively. Net
cash provided by financing activities for 2006 primarily resulted from the
issuance of common stock from the exercise of stock options and the employee
stock purchase plan of $719,000 partially offset by tax payments for restricted
stock. 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 $763,000 partially offset by tax payments for restricted
stock.
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.
17
The following table presents a summary of our contractual operating lease
obligations and commitments as of September 24, 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........................... $127,678 15,434 28,794 24,995 58,455
Lease commitments for restaurants under development... 11,571 798 2,051 2,078 6,644
----------- ---------- --------- --------- ----------
Total............................................. $139,249 16,232 30,845 27,073 65,099
=========== ========== ========= ========= ==========
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 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 over 15%,
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, expected store openings for 2006 and related capital expenditures, and
sources of funding 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.
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 or state smoking bans could harm our business.
o Changes in state or federal minimum wage laws could harm our business.
Investors are cautioned that all forward-looking statements involve risk and
uncertainties.
18
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, except for amounts related to
the non-qualified deferred compensation plan. 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 third quarter of 2006
averaged 5.6% higher than the average per pound price in the third 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
24.4% and 23.1% of our cost of sales in the third quarter of 2005 and 2006,
respectively, with an average price per pound of $1.08 and $1.14, respectively.
Fresh chicken wings accounted for approximately 27.5% and 23.2% of our cost of
sales in the nine-month periods ended 2005 and 2006, respectively, with an
average price per pound of $1.22 and $1.15 respectively. If we had experienced a
10% increase in fresh chicken wing costs during the third quarter and nine
months ended September 24, 2006, restaurant cost of sales would have increased
by approximately $430,000 and $1.2 million, 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. 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.
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.
ITEM 5. OTHER INFORMATION
On August 1, 2006, the Board replaced the Company's Management Deferred
Compensation Plan with The Executive Nonqualified Excess Plan to expand
investment options for the participants and to comply with Section 409A of the
Internal Revenue Code. The Executive Nonqualified Excess Plan and Adoption
Agreement are filed as Exhibit 10.1 and Exhibit 10.2 respectively, to this Form
10-Q and are incorporated by reference herein as appropriate.
19
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 6. EXHIBITS
See Exhibit Index following signature page of this Report.
20
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: November 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)
21
EXHIBIT INDEX
BUFFALO WILD WINGS, INC.
FORM 10-Q FOR QUARTER ENDED SEPTEMBER 24, 2006
Exhibit
Number Description
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10.1 The Executive Nonqualified Excess Plan
10.2 The Executive Nonqualified Excess Plan Adoption Agreement
31.1 Certification of Chief Executive Officer Pursuant to Section 302 of the
Sarbanes-Oxley Act
31.2 Certification of Chief Financial Officer Pursuant to Section 302 of the
Sarbanes-Oxley Act
32.1 Certification of Chief Executive Officer Pursuant to Section 906 of the
Sarbanes-Oxley Act
32.2 Certification of Chief Financial Officer Pursuant to Section 906 of the
Sarbanes-Oxley Act
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