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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 quarter ended September 28, 2008
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.)
5500 Wayzata Boulevard, Suite 1600, 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, a non-accelerated filer, or a smaller reporting
company. See the definitions of "accelerated filer," "large accelerated filer,"
and "smaller reporting company" in Rule 12b-2 of the Exchange Act. (Check one):
Large accelerated filer |_| Accelerated filer |X|
Non-accelerated filer |_| Smaller reporting company |_|
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 31, 2008: 17,826,049 shares.
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TABLE OF CONTENTS
Page
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PART I - FINANCIAL INFORMATION
Item 1. Financial Statements 3
Item 2. Management's Discussion and Analysis of Financial Condition and 12
Results of Operations
Item 3. Quantitative and Qualitative Disclosures About Market Risk 19
Item 4. Controls and Procedures 19
PART II - OTHER INFORMATION
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)
September 28, December 30,
2008 2007
------------ ------------
Assets
Current assets:
Cash and cash equivalents $ 4,531 1,521
Marketable securities 40,425 66,513
Accounts receivable - franchisees, net of allowance of $25 886 885
Accounts receivable - other 6,245 6,976
Inventory 2,958 2,362
Prepaid expenses 2,704 3,060
Refundable income tax 1,305 1,886
Deferred income taxes 2,371 1,303
------------ ------------
Total current assets 61,425 84,506
Property and equipment, net 142,166 102,742
Restricted cash 7,242 7,161
Other assets 9,874 2,320
Goodwill 10,972 369
------------ ------------
Total assets $231,679 197,098
============ ============
Liabilities and Stockholders' Equity
Current liabilities:
Unearned franchise fees $ 2,369 2,316
Accounts payable 18,333 10,692
Accrued compensation and benefits 12,924 12,615
Accrued expenses 6,416 6,207
Current portion of deferred lease credits 103 660
------------ ------------
Total current liabilities 40,145 32,490
Long-term liabilities:
Other liabilities 1,119 1,031
Marketing fund payables 7,242 7,161
Deferred income taxes 7,163 2,166
Deferred lease credits, net of current portion 13,301 12,585
------------ ------------
Total liabilities 68,970 55,433
------------ ------------
Commitments and contingencies (note 11)
Stockholders' equity:
Undesignated stock, 1,000,000 shares authorized; none
issued -- --
Common stock, no par value. Authorized 44,000,000 shares;
issued and outstanding 17,823,001 and 17,657,020
respectively 85,161 80,825
Retained earnings 77,548 60,840
------------ ------------
Total stockholders' equity 162,709 141,665
------------ ------------
Total liabilities and stockholders' equity $231,679 197,098
============ ============
See accompanying notes to consolidated financial statements
3
BUFFALO WILD WINGS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF EARNINGS
(Dollar and share amounts in thousands except per share data)
(unaudited)
Three months ended Nine months ended
--------------------------- ---------------------------
September 28, September 30, September 28, September 30,
2008 2007 2008 2007
------------- ------------- ------------ --------------
Revenue:
Restaurant sales $ 95,492 73,280 269,850 211,874
Franchise royalties and fees 10,582 9,086 31,354 26,393
------------- ------------- ----------- --------------
Total revenue 106,074 82,366 301,204 238,267
------------- ------------- ----------- --------------
Costs and expenses:
Restaurant operating costs:
Cost of sales 28,422 22,517 81,085 65,166
Labor 29,289 22,156 82,167 64,313
Operating 15,675 12,272 42,807 34,473
Occupancy 6,273 5,076 17,872 14,686
Depreciation 5,971 4,284 16,720 12,204
General and administrative (1) 10,684 9,147 29,072 26,302
Preopening 2,476 988 5,419 2,293
Loss on asset disposals and impairment 930 306 2,068 538
------------- ------------- ----------- --------------
Total costs and expenses 99,720 76,746 277,210 219,975
------------- ------------- ----------- --------------
Income from operations 6,354 5,620 23,994 18,292
Interest income 264 768 1,096 2,223
------------- ------------- ----------- --------------
Earnings before income taxes 6,618 6,388 25,090 20,515
Income tax expense 2,050 2,121 8,382 6,866
------------- ------------- ----------- --------------
Net earnings $ 4,568 4,267 16,708 13,649
============= ============= =========== ==============
Earnings per common share - basic $ 0.26 0.24 0.94 0.78
Earnings per common share - diluted 0.25 0.24 0.93 0.77
Weighted average shares outstanding - basic 17,823 17,597 17,800 17,535
Weighted average shares outstanding - diluted 17,920 17,767 17,903 17,733
(1) Includes stock-based compensation of $1,297, $715, $3,221, and $3,047,
respectively
See accompanying notes to consolidated financial statements
4
BUFFALO WILD WINGS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Dollar amounts in thousands)
(unaudited)
Nine months ended
--------------------------
September 28, September 30,
2008 2007
---------------------------
Cash flows from operating activities:
Net earnings $ 16,708 13,649
Adjustments to reconcile net earnings to cash provided by
operations:
Depreciation 16,720 12,204
Amortization 80 (95)
Loss on asset disposals and impairment 2,068 538
Deferred lease credits 1,426 2,221
Deferred income taxes 3,929 (1,359)
Stock-based compensation 3,221 3,047
Excess tax benefit from the exercise of stock options (435) (660)
Change in operating assets and liabilities, net of effect
of acquisition:
Trading securities (164) (315)
Accounts receivable (62) (421)
Inventory (327) (375)
Prepaid expenses 438 (1,860)
Other assets (429) (378)
Unearned franchise fees 53 198
Accounts payable 2,519 1,742
Refundable income tax 1,016 (699)
Accrued expenses 1,511 2,355
----------- --------------
Net cash provided by operating activities 47,272 29,792
----------- --------------
Cash flows from investing activities:
Acquisition of property and equipment (48,378) (23,127)
Acquisition of franchised restaurants (23,071) --
Purchase of marketable securities (98,984) (128,782)
Proceeds of marketable securities 125,156 115,333
----------- --------------
Net cash used in investing activities (45,277) (36,576)
----------- --------------
Cash flows from financing activities:
Issuance of common stock 569 875
Tax payments for restricted stock units (989) (1,183)
Excess tax benefit from the exercise of stock options 435 660
----------- --------------
Net cash provided by financing activities 15 352
----------- --------------
Net increase (decrease) in cash and cash
equivalents 3,010 (6,432)
Cash and cash equivalents at beginning of period 1,521 11,756
----------- --------------
Cash and cash equivalents at end of period $ 4,531 5,324
=========== ==============
See accompanying notes to consolidated financial statements
5
BUFFALO WILD WINGS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE THREE MONTHS AND NINE MONTHS ENDED SEPTEMBER 28, 2008 AND
SEPTEMBER 30, 2007
(Dollar amounts in thousands, except share and per-share amounts)
(1) Basis of Financial Statement Presentation
The consolidated financial statements as of September 28, 2008 and
December 30, 2007, and for the three-month and nine-month periods ended
September 28, 2008 and September 30, 2007, 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 28, 2008 and September
30, 2007 is unaudited, but, in the opinion of management, reflects all
adjustments and accruals necessary for a fair presentation of the
financial position, results of operations, and cash flows for the interim
periods.
References in the remainder of this document to "Buffalo Wild Wings,"
"we," "us" and "our" refer to the business of Buffalo Wild Wings, Inc. and
our subsidiaries.
The financial information as of December 30, 2007 is derived from our
audited consolidated financial statements and notes thereto for the fiscal
year ended December 30, 2007, which is included in Item 8 in the fiscal
2007 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 28, 2008 are not necessarily indicative of the results of
operations that may be achieved for the entire year ending December 28,
2008.
(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. We currently have numerous products
subject to fixed price contracts. These contracts are typically less
than one year in length. When these contracts are up for renewal, we
may be exposed to price volatility. The primary food product used by
our restaurants and our franchised restaurants is fresh chicken
wings. We are currently purchasing chicken wings at market prices.
Fresh chicken wings were purchased by us based on a chicken wing
contract which fixed 80-90% of our chicken wing purchases at $1.23
per pound. This one-year agreement expired in March 2008. For the
third quarter of 2008, fresh chicken wing prices averaged $1.17 per
pound. Material increases in fresh chicken wing costs may adversely
affect our operating results. For the three-month periods ended
September 28, 2008 and September 30, 2007, fresh chicken wings were
19.5% and 23.3%, respectively, of restaurant cost of sales. For the
nine-month periods ended September 28, 2008 and September 30, 2007,
fresh chicken wings were 20.8% and 23.9%, respectively, of
restaurant cost of sales.
(b) New Accounting Pronouncements
In December 2007, the Financial Accounting Standards Board (FASB)
issued SFAS No. 141R, "Business Combinations" (SFAS No. 141R), which
provides companies with principles and requirements on how an
acquirer recognizes and measures in its financial statements the
identifiable assets acquired, liabilities assumed, and any
noncontrolling interest in the acquiree as well as the recognition
and measurement of goodwill acquired in a business combination. SFAS
No. 141R also requires certain disclosures to enable users of the
financial statements to evaluate the nature and financial effects of
the business combination. Acquisition costs associated with the
business combination will generally be expensed as incurred. SFAS
No. 141R is effective for business combinations occurring in fiscal
years beginning after December 15, 2008. Early adoption of SFAS No.
141R is prohibited.
In February 2007, the FASB issued SFAS No. 159 "The Fair Value
Option for Financial Assets and Financial Liabilities" (SFAS No.
159), which permitted an entity to measure certain financial assets
and liabilities at fair value. The statement's objective is to
improve financial reporting by allowing entities to mitigate
6
volatility in reported earnings caused by the measurement of related
assets and liabilities using different attributes, without having to
apply complex hedge accounting provisions. This statement became
effective for fiscal years beginning after November 15, 2007 and was
to be applied prospectively. We adopted the provisions of SFAS No.
159 on January 1, 2008. As we did not elect to measure existing
assets and liabilities at fair value, the adoption of this statement
did not have an effect on our financial statements.
In September 2006, the FASB issued SFAS No. 157, "Fair Value
Measurements," (SFAS No. 157). This statement does not require any
new fair value measurements, but rather, it provides enhanced
guidance to other pronouncements that require or permit assets or
liabilities to be measured at fair value. The changes to current
practice resulting from the application of this statement relate to
the definition of fair value, the methods used to estimate fair
value, and the requirement for expanded disclosures about estimates
of fair value. This statement became effective for fiscal years
beginning after November 15, 2007, and interim periods within those
fiscal years. The effective date for this statement for all
nonfinancial assets and nonfinancial liabilities, except for items
that are recognized or disclosed at fair value in the financial
statements on a recurring basis, has been delayed by one year. We
adopted the provisions of SFAS No. 157 related to financial assets
and financial liabilities on December 31, 2007. The partial adoption
of this statement did not have a material impact on our financial
statements. It is expected that the remaining provisions of this
statement will not have a material effect on our financial
statements.
Fair value is defined as the price at which an asset could be
exchanged in a current transaction between knowledgeable, willing
parties or the amount that would be paid to transfer a liability to
a new obligor, not the amount that would be paid to settle the
liability with the creditor. Where available, fair value is based on
observable market prices or parameters or derived from such prices
or parameters. Where observable prices or inputs are not available,
valuation models are applied. These valuation techniques involve
some level of management estimation and judgment, the degree of
which is dependent on the price transparency for the instruments or
market and the instruments' complexity.
Assets recorded at fair value in our consolidated balance sheets are
categorized based upon the level of judgment associated with the
inputs used to measure their fair value. Hierarchical levels,
defined by SFAS No. 157 and directly related to the amount of
subjectivity associated with the inputs to fair valuation of these
assets and liabilities, are as follows:
Level 1 - Inputs were unadjusted, quoted prices in active
markets for identical assets or liabilities at the measurement
date.
Level 2 - Inputs (other than quoted prices included in Level
1) were either directly or indirectly observable for the asset
or liability through correlation with market data at the
measurement date and for the duration of the instrument's
anticipated life.
Level 3 - Inputs reflected management's best estimate of what
market participants would use in pricing the asset or
liability at the measurement date. Consideration was given to
the risk inherent in the valuation technique and the risk
inherent in the inputs to the model.
Determining which hierarchical level an asset falls within requires
significant judgment. We will evaluate our hierarchy disclosures
each quarter. The following table summarizes the financial
instruments measured at fair value in our consolidated balance sheet
as of September 28, 2008:
Fair Value Measurements
--------------------------------------------
Level 1 Level 2 Level 3 Total
---------- ----------- --------- ------
Assets
Short-term investments (1) $ 1,754 $ 18,433 $ -- $ 20,187
(1) We classified a portion of our marketable securities as
available-for-sale and trading securities which were
reported at fair market value, using the "market
approach" valuation technique. The "market approach"
valuation method used prices and other relevant
information observable in market transactions involving
identical or comparable assets. Our trading securities
are valued using the Level 1 approach. Our
available-for-sale marketable securities are valued
using the Level 2 approach.
7
SFAS No. 157 requires separate disclosure of assets measured at fair
value on a recurring basis, as documented above, from those measured
at fair value on a nonrecurring basis. As of September 28, 2008, no
assets or liabilities were measured at fair value on a nonrecurring
basis.
(c) Reclassifications
We revised our common stock issued and outstanding on the balance
sheet to eliminate the inclusion of restricted stock units issued
but not vested. The amount of common stock of December 30, 2007 was
reduced by 276,477 shares to 17,657,020 shares.
(3) Marketable Securities
Marketable securities were comprised of the following:
As of
--------------------------
September 28, December 30,
2008 2007
------------- ------------
Held-to-maturity:
Municipal securities $ 20,238 $ 23,718
Available-for-sale:
Municipal securities 18,433 41,206
Trading:
Mutual funds 1,754 1,589
------------ ------------
Total $ 40,425 66,513
============ ============
All held-to-maturity debt securities are due within one year and had
aggregate fair values of $20,187 and $23,753 as of September 28, 2008 and
December 30, 2007, respectively. Trading securities represents investments
held for future needs of a non-qualified deferred compensation plan.
(4) Property and Equipment
Property and equipment were comprised of the following:
As of
--------------------------
September 28, December 30,
2008 2007
------------- ------------
Construction in-process $ 9,862 1,851
Buildings 5,559 1,601
Furniture, fixtures, and equipment 87,539 69,962
Leasehold improvements 114,126 96,315
------------- ------------
217,086 169,729
Less accumulated depreciation (74,920) (66,987)
------------- ------------
$ 142,166 102,742
============= ============
(5) Stockholders' Equity
(a) Stock Options
We have 3.9 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.
Incentive stock options become exercisable in four equal
installments from the date of the grant and have a contractual life
of seven to ten years. Nonqualified stock options issued pursuant to
the plan have varying vesting periods from immediately to one year
and have a contractual life of ten years. Incentive stock options
may be granted under this plan until May 15, 2018. We issue new
shares of common stock upon exercise of stock options and
disbursement of restricted stock units. Option activity is
summarized for the nine months ended September 28, 2008 as follows:
8
Weighted Weighted Average
Number average Remaining Aggregate Intrinsic
of shares exercise price Contractual Life Value
-------------------- --------------------- ---------------------------- -----------------------
Outstanding, December 30, 2007 176,603 $ 5.61 3.9 $ 3,096
Granted 58,272 24.96
Exercised (39,297) 3.54
Cancelled (8,788) 7.75
-------------------- --------------------- ---------------------------- -----------------------
Outstanding, September 28, 2008 186,790 11.98 4.4 5,327
Exercisable, September 28, 2008 127,293 6.00 3.5 4,391
The aggregate intrinsic value in the table above is before
applicable income taxes, based on our closing stock price of $40.50
as of the last business day of the quarter ended September 28, 2008,
which would have been received by the optionees had all options been
exercised on that date. As of September 28, 2008, total unrecognized
stock-based compensation expense related to nonvested stock options
was approximately $529, which is expected to be recognized over a
weighted average period of approximately 1.7 years. During the
nine-month periods ended September 28, 2008 and September 30, 2007,
the total intrinsic value of stock options exercised was $880 and
$5,050, respectively. During the nine-month periods ended September
28, 2008 and September 30, 2007, the total fair value of options
vested was $70 and $391, respectively.
The plan has 1,319,143 shares available for grant as of September
28, 2008.
(b) Restricted Stock Units
We adopted a stock performance plan in June 2004, under which
restricted stock units are granted annually at the discretion of the
Board. For restricted stock units granted prior to 2008, units vest
annually upon achieving performance targets. Our performance targets
are annual income targets set by our Board of Directors at the
beginning of the year. We record compensation expense for the
restricted stock units if vesting, based on the achievement of the
performance targets. The restricted stock units may vest one-third
annually over a ten-year period as determined by meeting performance
targets. However, the second one-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 have vested.
In 2008, we granted restricted stock units subject to cumulative
one-year, two-year, and three-year net earnings targets. The number
of units that vest each year are based on performance against those
targets. The restricted stock units are subject to forfeiture if
they have not vested at the end of the three-year period.
Stock-based compensation is recognized for the expected number of
units vesting at the end of each annual period. Restricted stock
units expected to vest at the end of the first year are fully
expensed in the first year. Restricted stock units expected to vest
at the end of the second year are expensed during the first and
second years. Restricted stock units expected to vest at the end of
the third year are expensed over all three years. Therefore, the
stock-based compensation is more heavily expensed in the first year
of the grant.
Restricted stock units meeting the performance criteria will vest as
of the end of our fiscal year. The distribution of vested restricted
stock units as common stock typically occurs in March of the
following year. The common stock is issued to participants net of
the number of shares needed for the minimum employee withholding
taxes. Restricted stock units are contingently issuable shares, and
the activity for fiscal 2008 is as follows:
Weighted
average
Number grant date
of shares fair value
--------------------- -----------------
Outstanding, December 30, 2007 140,692 $ 20.92
Granted 329,688 23.21
Vested (18,151) 23.14
Cancelled (4,504) 22.43
--------------------- -----------------
Outstanding, September 28, 2008 447,725 22.50
9
As of September 28, 2008, the total stock-based compensation expense
related to nonvested awards not yet recognized was $3,366, which is
expected to be recognized over a weighted average period of 1.1
years. During the nine-month periods ended September 28, 2008 and
September 30, 2007, the total fair value of vested shares were $420
and $372, respectively. The weighted average grant date fair value
of restricted stock units granted during the nine months ended
September 30, 2007 was $26.92.
(c) Employee Stock Purchase Plan
We have reserved 600,000 shares of common stock for issuance under
the Employee Stock Purchase Plan (ESPP). The ESPP is available to
substantially all employees subject to employment eligibility
requirements. Participants may purchase our common stock at 85% of
the beginning or ending closing price, whichever is lower, for each
six-month period ending in May and November. During the first nine
months of 2008 and 2007, we issued 18,071 and 12,744 shares of
common stock under the plan. As of September 28, 2008, the ESPP has
414,907 shares 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 nine-month periods ended September 28, 2008
and September 30, 2007:
Three months ended September 30, 2007
--------------------------------------
Earnings Shares Per-share
(numerator) (denominator) amount
------------ ------------ -----------
Net earnings $ 4,267
------------
Earnings per common share - basic 4,267 17,596,959 $0.24
Effect of dilutive securities
Stock options -- 170,212
------------ -------------
Earnings per common share - diluted $ 4,267 17,767,171 0.24
============ =============
Nine months ended September 28, 2008
--------------------------------------
Earnings Shares Per-share
(numerator) (denominator) amount
------------ ------------ -----------
Net earnings $ 16,708
------------
Earnings per common share - basic 17,799,752 $0.94
Effect of dilutive securities
Stock options -- 102,772
------------ -------------
Earnings per common share - diluted $ 16,708 17,902,524 0.93
============ =============
Nine months ended September 30, 2007
--------------------------------------
Earnings Shares Per-share
(numerator) (denominator) amount
------------ ------------ -----------
Net earnings $ 13,649
------------
Earnings per common share - basic 13,649 17,535,019 $0.78
Effect of dilutive securities
Stock options -- 197,932
------------ -------------
Earnings per common share - diluted $ 13,649 17,732,951 0.77
============ =============
10
Shares excluded from the fully diluted calculation because the effect on
earnings per common share would have been antidilutive were 505,997 shares
and 280,540 shares for the three-month periods ended September 28, 2008
and September 30, 2007, respectively, and 495,965 shares and 280,540
shares for the nine-month periods ended September 28, 2008 and September
30, 2007, respectively.
(7) Supplemental Disclosures of Cash Flow Information
Nine months ended
----------------------------------------
September 28, September 30,
2008 2007
---------------------- -----------------
Cash paid during the period for:
Income taxes $ 3,498 $ 8,537
Noncash financing and investing transactions:
Property and equipment not yet paid for 5,122 5,821
Tax withholding for restricted stock units -- 1,086
(8) Income Taxes
We adopted the provisions of FASB Interpretation No. 48, "Accounting for
Uncertainty in Income Taxes" (FIN 48), on January 1, 2007. The total
unrecognized tax benefits reflected on our balance sheet as of September
28, 2008 and December 30, 2007 were $344 and $241, respectively. The
increase was due to additions based on tax positions related to the
current year. We recognize potential accrued interest and penalties
related to unrecognized tax benefits within our operations in income tax
expense. The accrual for interest and penalties related to unrecognized
tax benefits was $97 at September 28, 2008. Included in the total
unrecognized tax benefits at September 28, 2008 and December 30, 2007 are
benefits of $235 and $157, respectively, which if recognized would affect
the annual effective tax rate. We do not anticipate any significant change
to the total unrecognized tax benefits prior to September 27, 2009.
The Internal Revenue Service has completed its examination of our 2005
U.S. Income Tax Return. No changes to the tax return were reported. With
few exceptions, we are no longer subject to state income tax examinations
for years before 2005.
(9) Acquisition of Don Pablo's Locations and Restaurant Impairment
During February 2008, we acquired certain leases and assets of eight
locations from Avado Brands, Inc. for approximately $1,200. Due to this
acquisition, we recorded an impairment charge for the assets of a
restaurant being relocated. The impairment charge of $395 was recorded in
the first quarter of 2008 to the extent that the carrying amount was not
considered recoverable based on estimated future discounted cash flows. In
the third quarter of 2008, the relocation of this restaurant resulted in a
charge of $184 for remaining lease obligations and utilities.
During the third quarter of 2008, we recorded an impairment charge for the
assets of one underperforming restaurant. An impairment charge of $111 was
recorded to the extent that the carrying amount of these assets was not
considered recoverable based on estimated discounted future cash flows and
the underlying fair value of the assets.
(10) Acquisition of Las Vegas Franchise
On September 23, 2008, we acquired the assets of nine Buffalo Wild Wings
franchised restaurants located in Las Vegas, Nevada. The total purchase
price of $23,071, which includes acquisition costs of $426, was paid in
cash and was funded by cash and the sale of marketable securities. The
acquisition was accounted for as a business combination. The assets
acquired were recorded based on their fair values. We recorded goodwill of
$10,603 in connection with the acquisition. Intangible assets relating to
the reacquisition of a franchise right were $7,040 and will be amortized
over the next 14 years. Fixed assets including equipment, leasehold
improvements, and a building acquired with the transaction of $4,517 and
will be depreciated over their economic useful lives. Inventory, prepaid
items, and other assets of $436 were also acquired. Deferred lease credits
totaling $475 will be amortized over the length of the leases.
(11) Contingencies
We are involved in various legal actions arising in the ordinary course of
business. In the opinion of management, the ultimate disposition of these
matters will not have a material adverse effect on our consolidated
financial position, results of operations, or cash flows.
11
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
The following discussion and analysis of our financial condition and
results of operations should be read in conjunction with our consolidated
financial statements and related notes included in Item 1 of Part 1 of this
Quarterly Report and the audited consolidated financial statements and related
notes and Management's Discussion and Analysis of Financial Condition and
Results of Operations contained in our Annual Report on Form 10-K for the fiscal
year ended December 30, 2007. This discussion and analysis contains certain
statements that are not historical facts, including, among others, those
relating to our anticipated financial performance for 2008, cash requirements,
and our expectations and strategies relating to store openings. Such statements
are forward-looking and risks and uncertainties include, but are not limited to,
those discussed in this Form 10-Q under Item 2 of Part I as well as in Item 1A
of Part I of the fiscal 2007 Form 10-K.
Critical Accounting Policies and Use of Estimates
Our most critical accounting policies, which are those that require significant
judgment, include: valuation of long-lived assets and store closing reserves,
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 30, 2007. There
have been no changes to those policies during this period.
Overview
As of September 28, 2008, we owned and operated 187 company-owned and franchised
an additional 348 Buffalo Wild Wings(R) Grill & Bar restaurants in 38 states. Of
the 535 system-wide restaurants, 86 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. Our long-term focus is to grow to a national chain
of over 1,000 locations, continuing the strategy of developing both
company-owned and franchised restaurants.
Our growth and success depend on several factors and trends. First, we continue
to monitor and react to changes in our cost of goods sold. The cost of goods
sold is difficult to predict, as it ranged from 29.8% to 31.0% of restaurant
sales per quarter in 2008 and 2007, respectively. We are working to counteract
the volatility of chicken wing prices with the introduction of popular new menu
items, effective marketing promotions, focused efforts on food costs and waste,
and menu price increases. We will continue to monitor the cost of fresh chicken
wings, as it can significantly affect our cost of sales and cash flow from
company-owned restaurants. We are also exploring purchasing strategies to lessen
the severity of cost increases and fluctuations. We are currently purchasing
chicken wings at market prices. In March 2007, we had entered into a one-year
pricing agreement which fixed 80-90% of our chicken wing purchases at $1.23 per
pound. This agreement expired in March 2008. For the third quarter of 2008,
fresh chicken wing prices averaged $1.17 per pound. We currently have numerous
other products subject to fixed price contracts. These contracts are typically
less than one year in length. When these contracts are up for renewal, we may be
exposed to price volatility.
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 2008, we plan to develop the
majority of our company-owned restaurants primarily in markets where we
currently have either company-owned or franchised restaurants. We believe this
development focus, together with our focus on our new restaurant opening
procedures, will help mitigate the overall risk associated with opening
restaurants in new markets.
Third, we will continue our focus on trends in company-owned and franchised
same-store sales as an indicator of the continued acceptance of our concept by
consumers. We also review the overall trend in average weekly sales as an
indicator of our ability to increase the sales volume and, therefore, cash flow
per location. We remain committed to high quality operations and guest
hospitality.
Our revenue is generated by:
o Sales at our company-owned restaurants, which were 90% of total
revenue in the third quarter of 2008. Food and nonalcoholic beverages
accounted for 75% of restaurant sales. The remaining 25% of
restaurant sales was from alcoholic beverages. The menu item with the
highest sales volume was chicken wings at 20.9% of total restaurant
sales.
o Royalties and franchise fees received from our franchisees.
12
We generate cash from the operation of company-owned restaurants and from
franchise royalties and fees. We highlight the specific costs associated with
the ongoing operation of 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 quarterly based on the number of new locations opened and under
construction. Loss on asset disposals and impairment expense is related to
company-owned restaurants and includes the impairment of assets due to a
relocation and the write-down of miscellaneous assets. Certain other expenses,
such as general and administrative, relate to both company-owned and franchising
operations.
We operate on a 52 or 53-week fiscal year ending on the last Sunday in December.
Both of the third quarters of 2008 and 2007 consisted of thirteen weeks.
Quarterly Results of Operations
Our operating results for the periods indicated are expressed below as a
percentage of total revenue, except for the components of restaurant operating
costs, which are expressed as a percentage of restaurant sales. The information
for each three-month and nine-month period is unaudited, and we have prepared it
on the same basis as the audited financial statements. In the opinion of
management, all necessary adjustments, consisting only of normal recurring
adjustments, have been included to present fairly the unaudited quarterly
results.
Quarterly and annual operating results may fluctuate significantly as a result
of a variety of factors, including increases or decreases in same-store sales,
changes in commodity prices, the timing and number of new restaurant openings
and related expenses, asset impairment charges, store closing charges, general
economic conditions, stock-based compensation, and seasonal fluctuations. As a
result, our quarterly results of operations are not necessarily indicative of
the results that may be achieved for any future period.
Three months ended Nine months ended
--------------------------------------- -----------------------------------
September 28, September 30, September 28, September 30,
2008 2007 2008 2007
-------------------- ------------------ ----------------- ----------------
Revenue:
Restaurant sales 90.0% 89.0% 89.6% 88.9%
Franchising royalties and fees 10.0 11.0 10.4 11.1
-------------------- ------------------ ----------------- ----------------
Total revenue 100.0 100.0 100.0 100.0
-------------------- ------------------ ----------------- ----------------
Costs and expenses:
Restaurant operating costs:
Cost of sales 29.8 30.7 30.0 30.8
Labor 30.7 30.2 30.4 30.4
Operating 16.4 16.7 15.9 16.3
Occupancy 6.6 6.9 6.6 6.9
Depreciation 5.6 5.2 5.6 5.1
General and administrative 10.1 11.1 9.7 11.0
Preopening 2.3 1.2 1.8 1.0
Loss on asset disposals and impairment 0.9 0.4 0.7 0.2
-------------------- ------------------ ----------------- ----------------
Total costs and expenses 94.0 93.2 92.0 92.3
-------------------- ------------------ ----------------- ----------------
Income from operations 6.0 6.8 8.0 7.7
Interest income 0.2 0.9 0.4 0.9
-------------------- ------------------ ----------------- ----------------
Earnings before income taxes 6.2 7.8 8.3 8.6
Income tax expense 1.9 2.6 2.8 2.9
-------------------- ------------------ ----------------- ----------------
Net earnings 4.3 5.2 5.5 5.7
==================== ================== ================= ================
13
The number of company-owned and franchised restaurants open are as follows:
As of
-----------------------------
September 28, September 30,
2008 2007
-------------- --------------
Company-owned restaurants 187 148
Franchised restaurants 348 313
Three months ended Nine months ended
----------------------------------- ----------------------------------
September 28, September 30, September 28, September 30,
2008 2007 2008 2007
------------------ ---------------- ----------------- ----------------
Company-owned restaurant sales $ 95,492 73,280 269,850 211,874
Franchised restaurant sales 212,408 180,356 626,018 527,742
Increases in comparable same-store sales are as follows (based on restaurants
operating at least fifteen months):
Three months ended Nine months ended
------------------------------------------ ---------------------------------------
September 28, September 30, September 28, September 30,
2008 2007 2008 2007
--------------------- -------------------- ------------------- -------------------
Company-owned same-store sales 6.8% 8.3% 6.4% 8.4%
Franchised same-store sales 2.1 5.9 2.9 4.4
The average prices paid per pound for fresh chicken wings are as
follows:
Three months ended Nine months ended
--------------------------------- ---------------------------------
September 28, September 30, September 28, September 30,
2008 2007 2008 2007
---------------- ---------------- ---------------- ----------------
Average price per pound $ 1.17 1.24 1.21 1.29
Results of Operations for the Three Months Ended September 28, 2008 and
September 30, 2007
Restaurant sales increased by $22.2 million, or 30.3%, to $95.5 million in 2008
from $73.3 million in 2007. The increase in restaurant sales was due to a $17.7
million increase associated with 21 new company-owned restaurants that opened in
2008 and 37 company-owned restaurants opened before 2008 that did not meet the
criteria for same-store sales for all or part of the three-month period and $4.5
million related to a 6.8% increase in same-store sales.
Franchise royalties and fees increased by $1.5 million, or 16.5%, to $10.6
million in 2008 from $9.1 million in 2007. The increase was primarily due to
additional royalties collected from 29 new franchised restaurants that opened in
2008 and 20 franchised restaurants that opened in the last three months of 2007.
Same-store sales for franchised restaurants increased 2.1% in 2008.
Cost of sales increased by $5.9 million, or 26.2%, to $28.4 million in 2008 from
$22.5 million in 2007 due primarily to more restaurants being operated in 2008.
Cost of sales as a percentage of restaurant sales decreased to 29.8% in 2008
from 30.7% in 2007. The decrease in cost of sales as a percentage of restaurant
sales was primarily due to the leverage of food and alcohol costs as a result of
menu price increases and lower chicken wing prices. Also, boneless wing sales
have increased as a part of our menu mix providing better margins and a
corresponding lower cost of goods percentage. The pricing agreement which fixed
80-90% of our chicken wing purchases at $1.23 per pound in the third quarter of
2007 expired in March 2008. For the third quarter of 2008, wing prices averaged
$1.17 per pound which was a 5.6% decrease over the same period in 2007.
Labor expenses increased by $7.1 million, or 32.2%, to $29.3 million in 2008
from $22.2 million in 2007 due primarily to more restaurants being operated in
2008. Labor expenses as a percentage of restaurant sales increased to 30.7% in
2008 from 30.2% in 2007. The increase in labor expenses as a percentage of
restaurant sales was primarily due to higher management salaries and unit-level
bonuses at the restaurants.
Operating expenses increased by $3.4 million, or 27.7%, to $15.7 million in 2008
from $12.3 million in 2007 due primarily to more restaurants being operated in
2008. Operating expenses as a percentage of restaurant sales decreased to 16.4%
in 2008 from 16.7% in 2007. The decrease in operating expenses as a percentage
of restaurant sales is primarily due to lower local store marketing costs,
repair and maintenance costs and general liability insurance costs partially
offset by higher natural gas hedging costs for future months.
14
Occupancy expenses increased by $1.2 million, or 23.6%, to $6.3 million in 2008
from $5.1 million in 2007 due primarily to more restaurants being operated in
2008. Occupancy expenses as a percentage of restaurant sales decreased to 6.6%
in 2008 from 6.9% in 2007 due to increased leverage from higher sales volume.
Depreciation increased by $1.7 million, or 39.4%, to $6.0 million in 2008 from
$4.3 million in 2007. The increase was primarily due to the additional
depreciation on 21 new restaurants opened in 2008, the 14 new restaurants that
opened in the last three months of 2007, and the nine restaurants acquired from
a franchisee in the third quarter of 2008.
General and administrative expenses increased by $1.5 million, or 16.8%, to
$10.7 million in 2008 from $9.1 million in 2007 primarily due to additional
headcount and higher payroll. General and administrative expenses as a
percentage of total revenue decreased to 10.1% in 2008 from 11.1% in 2007.
Exclusive of stock-based compensation, we reduced our general and administrative
expenses as a percentage of revenue to 8.9% from 10.2% with lower travel,
professional fees, meeting expenses, and better overall leveraging of our
general and administrative expenses.
Preopening costs increased by $1.5 million, to $2.5 million in 2008 from
$988,000 in 2007. In 2008, we incurred costs of $1.7 million for 12 new
company-owned restaurants opened in the third quarter of 2008, $77,000 related
to the purchase of nine franchise restaurants, and $516,000 for restaurants that
will open in the fourth quarter of 2008 or later. In 2007, we incurred costs of
$497,000 for the three new company-owned restaurants opened in the third quarter
of 2007, and incurred $479,000 for restaurants that opened in the fourth quarter
of 2007 or later. In the fourth quarter of 2008, we expect average preopening
costs per restaurant to be $225,000.
Loss on asset disposals and impairment increased by $624,000 to $930,000 in 2008
from $306,000 in 2007. In 2008, the loss was related to the asset impairment of
one underperforming restaurant of $110,000, store closing reserves for one
restaurant relocated in the quarter of $184,000, disposals related to remodels
of $322,000, and the write-off of miscellaneous equipment. In 2007, the loss was
due to the write-off of miscellaneous equipment.
Interest income decreased by $504,000 to $264,000 in 2008 from $768,000 in 2007.
The decrease was primarily due to lower rates of return on investments. Cash and
marketable securities balances at the end of the quarter totaled $45.0 million
in 2008 compared to $72.0 million for the third quarter of 2007.
Provision for income taxes was $2.1 million in 2008 and 2007. The effective tax
rate as a percentage of income before taxes decreased to 31.0% in 2008 from
33.2% in 2007. The 2008 income tax rate was lower due to changes in estimates
for annual tax credits. For the full year 2008, we believe our effective tax
rate will be approximately 33.5%.
Results of Operations for the Nine Months Ended September 28, 2008 and September
30, 2007
Restaurant sales increased by $58.0 million, or 27.4%, to $269.9
million in 2008 from $211.9 million in 2007. The increase in restaurant sales
was due to a $45.3 million increase associated with 21 new company-owned
restaurants that opened in 2008, the nine restaurants acquired from a franchisee
on September 23, 2008, and 34 company-owned restaurants opened before 2008 that
did not meet the criteria for same-store sales for all or part of the nine-month
period and $12.7 million related to a 6.4% increase in same-store sales.
Franchise royalties and fees increased by $5.0 million, or 18.8%, to $31.4
million in 2008 from $26.4 million in 2007. The increase was primarily due to
additional royalties collected from 29 new franchised restaurants that opened in
2008 and 20 franchised restaurants that opened in the last three months of 2007.
Same-store sales for franchised restaurants increased 2.9% in 2008.
Cost of sales increased by $15.9 million, or 24.4%, to $81.1 million in 2008
from $65.2 million in 2007 due primarily to more restaurants being operated in
2008. Cost of sales as a percentage of restaurant sales decreased to 30.0% in
2008 from 30.8% in 2007. The decrease in cost of sales as a percentage of
restaurant sales was primarily due to the leverage of food and alcohol costs as
a result of menu price increases and lower fresh chicken wing prices. Also,
boneless wing sales have increased as a part of our menu mix providing better
margins and a corresponding lower cost of goods percentage. The pricing
agreement which fixed 80-90% of our chicken wing purchases at $1.23 per pound in
the second and third quarters of 2007 expired in March 2008. For the first nine
months of 2008, wing prices averaged $1.21 per pound which was a 6.2% decrease
from an average price of $1.29 per pound during the same period in 2007.
Labor expenses increased by $17.9 million, or 27.8%, to $82.2 million in 2008
from $64.3 million in 2007 due primarily to more restaurants being operated in
2008. Labor expenses as a percentage of restaurant sales remained consistent at
30.4% in 2008 and 2007 with lower workers compensation costs offsetting higher
management salaries at the restaurant level.
15
Operating expenses increased by $8.3 million, or 24.2%, to $42.8 million in 2008
from $34.5 million in 2007 due primarily to more restaurants being operated in
2008. Operating expenses as a percentage of restaurant sales decreased to 15.9%
in 2008 from 16.3% in 2007. The decrease in operating expenses as a percentage
of restaurant sales is primarily due to lower repair and maintenance costs and
lower general liability insurance costs partially offset by higher utility
charges and natural gas hedging costs for future months.
Occupancy expenses increased by $3.2 million, or 21.7%, to $17.9 million in 2008
from $14.7 million in 2007 due primarily to more restaurants being operated in
2008. Occupancy expenses as a percentage of restaurant sales decreased to 6.6%
in 2008 from 6.9% in 2007.
Depreciation increased by $4.5 million, or 37.0%, to $16.7 million in 2008 from
$12.2 million in 2007. The increase was primarily due to the additional
depreciation on 21 new restaurants opened in 2008, the nine restaurants acquired
from a franchisee on September 23, 2008, and the 14 new restaurants that opened
in the last three months of 2007. Accelerated depreciation related to three
relocations as part of the conversion of Don Pablo's sites also contributed to
the increase.
General and administrative expenses increased by $2.8 million, or 10.5%, to
$29.1 million in 2008 from $26.3 million in 2007 primarily due to additional
headcount and higher payroll and travel-related expenditures. General and
administrative expenses as a percentage of total revenue decreased to 9.7% in
2008 from 11.0% in 2007. Exclusive of stock-based compensation, we reduced our
general and administrative expenses as a percentage of revenue to 8.6% from 9.8%
with lower professional fees, conference costs, and better leverage of our
wage-related expenses.
Preopening costs increased by $3.1 million, to $5.4 million in 2008 from $2.3
million in 2007. In 2008, we incurred costs of $4.6 million for 21 new
company-owned restaurants opened in the first nine months of 2008, $77,000
related to the purchase of nine franchise restaurants, and $709,000 for
restaurants that will open in the fourth quarter of 2008 or later. In 2007, we
incurred costs of $1.8 million for the nine new company-owned restaurants opened
in the first nine months of 2007, and incurred $484,000 for restaurants that
opened in the fourth quarter of 2007 or later.
Loss on asset disposals and impairment increased by $1.5 million to $2.1 million
in 2008 from $538,000 in 2007. In 2008, we impaired the assets of two
restaurants for $506,000 and incurred store closing costs for one restaurant
being relocated for $184,000. The remaining loss was related to the HDTV
upgrades, remodels, and the write-off of miscellaneous equipment. In 2007, the
loss was due to the write-off of miscellaneous equipment.
Interest income decreased by $1.1 million to $1.1 million in 2008 from $2.2
million in 2007. The decrease was primarily due to lower rates of return on our
investments. Cash and marketable securities balances at the end of the quarter
totaled $45.0 million in 2008 compared to $72.0 million for the third quarter of
2007.
Provision for income taxes increased $1.5 million to $8.4 million in 2008 from
$6.9 million in 2007. Our effective tax rate was approximately the same at 33.4%
in 2008 and 33.5% in 2007.
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. We fund these expenses
primarily with cash from operations. The cash and marketable securities balance
at September 28, 2008 was $45.0 million. We invest our marketable securities
balances in debt securities with the focus on protection of principal, adequate
liquidity, and maximization of after-tax returns. As of September 28, 2008,
nearly all excess cash was invested in high-quality municipal securities.
For the nine months ended September 28, 2008, net cash provided by operating
activities was $47.8 million. Net cash provided by operating activities
consisted primarily of net earnings adjusted for non-cash expenses, and an
increase in accounts payable, accrued expenses, and refundable income taxes. The
increase in accounts payable is due to an increase in the number of restaurants
and the timing of payments. The increase in income taxes was due to the timing
of income tax payments. The increase in accrued expenses was due to accruals for
fuel hedges that will be settled in future quarters as well as activity related
to additional restaurants.
For the nine months ended September 30, 2007, net cash provided by operating
activities was $29.8 million. Net cash provided by operating activities
consisted primarily of net earnings adjusted for non-cash expenses, and an
increase in accounts payable and accrued expenses. The increase in accounts
payable was due to a greater number of restaurants open and higher seasonal
sales activity and corresponding purchases. The increase in accrued expenses was
primarily due to higher accrued incentive compensation and activity from more
restaurants.
16
For the nine months ended September 28, 2008 and September 30, 2007, net cash
used in investing activities was $44.8 million and $36.6 million, respectively.
Investing activities included purchases of property and equipment related to the
opening of new company-owned restaurants and restaurants under construction in
both periods. During the first nine months of 2008, we purchased nine Las Vegas
franchised locations for $22.6 million and opened 21 new restaurants. During the
first nine months of 2007, we opened nine restaurants. In the fourth quarter of
2008, we expect capital expenditures to be approximately $1.5 million per
location for approximately 10 to 12 new company-owned restaurants. In 2008, we
purchased $99.0 million of marketable securities and received proceeds of $125.2
million as these investments matured or were sold. In 2007, we purchased $128.8
million of marketable securities and received proceeds of $115.3 million as
these investments matured or were sold.
For the nine months ended September 28, 2008 and September 30, 2007, net cash
provided by financing activities was $15,000 and $352,000, respectively. Net
cash provided by financing activities for the first nine months of 2008 resulted
from proceeds from the exercise of stock options of $569,000 and the excess tax
benefit from stock issuance of $435,000, offset by tax payments for restricted
stock units of $989,000. No additional funding from the issuance of common stock
(other than from the exercise of options and purchase of stock under the
employee stock purchase plan) is anticipated for the remainder of 2008. Net cash
provided by financing activities for the first nine months of 2007 resulted in
proceeds from the exercise of stock options of $875,000 and excess tax benefits
from stock issuance of $660,000, offset by tax payments for restricted stock
units of $1.2 million.
Our liquidity is impacted by minimum cash payment commitments resulting from
operating lease obligations for our restaurants and our corporate offices. Lease
terms are generally 10 to 15 years with renewal options and generally require us
to pay a proportionate share of real estate taxes, insurance, common area
maintenance, and other operating costs. Some restaurant leases provide for
contingent rental payments based on sales thresholds. We own a few of the
buildings in which our restaurants operate and, therefore, have limited ability
to enter into sale-leaseback transactions as a potential source of cash.
The following table presents a summary of our contractual operating lease
obligations and commitments as of September 28, 2008:
Payments Due By Period (in thousands)
-----------------------------------------------------------
Less than After 5
Total One year 1-3 years 3-5 years years
------------------ ---------------- -------------- ------------ --------------
Operating lease obligations $ 194,507 23,211 43,952 39,663 87,681
Lease commitments for restaurants under development 44,122 2,296 6,488 6,506 28,832
------------------ ---------------- -------------- ------------ --------------
Total $ 238,629 25,507 50,440 46,169 116,513
================== ================ ============== ============ ==============
We believe the cash flows from our operating activities and our balance of cash
and marketable securities will be sufficient to fund our operations and building
commitments and meet our obligations for the foreseeable future. Our future cash
flows related to income tax uncertainties amount to $344,000. These amounts are
excluded from the contractual obligations table due to the high degree of
uncertainty regarding the timing of these liabilities.
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, efforts to manage cost of sales
particularly related to chicken wing costs, plans for entry into new markets,
expansion and improving existing markets, estimated tax rates for 2008, expected
store openings for 2008, anticipated capital expenditures for new and remodeled
restaurants, our expectations regarding preopening costs, sources of funding and
cash requirements, and our belief that our investment policy restrictions
mitigate our market risk on our investment portfolio. 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 30, 2007):
o Fluctuations in chicken wing prices could reduce our operating income.
17
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 Franchisees may take actions that could harm our business.
o We could face liability from our franchisees.
o We may be unable to compete effectively in the restaurant industry.
o A reduction in vendor allowances currently received could affect our costs of
goods sold.
o Our quarterly operating results may fluctuate due to the timing of
special events and other factors, including the recognition of
impairment losses.
o We may not be able to attract and retain qualified personnel to operate and
manage our restaurants.
o We may not be able to obtain and maintain licenses and permits necessary to
operate our restaurants.
o Changes in employment laws or regulation could harm our performance.
o Changes in consumer preferences or discretionary consumer spending could harm
our performance.
o We are susceptible to adverse trends in Ohio.
o Changes in public health concerns may impact our performance.
o A decline in visitors to any of the business districts near the
locations of our restaurants could negatively affect our restaurant
sales.
o The acquisition of existing restaurants from our franchisees or other
acquisitions may have unanticipated consequences that could harm our
business and our financial condition.
o Improper food handling may affect our business adversely.
o Complaints or litigation may hurt us.
o Our current insurance may not provide adequate levels of coverage against
claims.
o Natural disasters and other events could harm our performance.
o We may not be able to protect our trademarks, service marks or trade secrets.
o General economic conditions may affect consumer discretionary spending and
harm our performance.
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. Changes in interest rates affect
the investment income we earn on our cash and cash equivalents and marketable
securities and, therefore, impact our cash flows and results of operations. We
also hold investments in mutual funds for the future needs of a non-qualified
deferred compensation plan.
Financial Instruments
Financial instruments that potentially subject us to concentrations of credit
risk consist principally of municipal securities. We do not believe there is a
significant risk of non-performance by these municipalities because of our
investment policy restrictions as to acceptable investment vehicles.
Inflation
The primary inflationary factors affecting our operations are food and alcohol,
labor, and restaurant operating costs. Substantial increases in these costs
could impact operating results to the extent that such increases cannot be
passed along through higher menu prices. A large number of our restaurant
personnel are paid at rates based on the applicable federal and state minimum
wages, and increases in the minimum wage rates and tip-credit wage rates could
directly affect our labor costs. Many of our leases require us to pay taxes,
maintenance, repairs, insurance, and utilities, all of which are generally
subject to inflationary increases.
Commodity Price Risk
Many of the food products purchased by us are affected by weather, production,
availability, and other factors outside our control. We believe that almost all
of our food and supplies are available from several sources, which helps to
control food product risks. We negotiate directly with independent suppliers for
our supply of food and paper products. We use members of UniPro Food Services,
Inc., a national cooperative of independent food distributors, to distribute
these products from the suppliers to our restaurants. We have minimum purchase
requirements with some of our vendors, but the terms of the contracts and nature
of the products are such that our purchase requirements do not create a market
risk. We currently have numerous products subject to fixed price contracts.
These contracts are typically less than one year in length. When these contracts
are up for renewal, we may be exposed to price volatility. The primary food
product used by company-owned and franchised restaurants is fresh chicken wings.
We work to counteract the effect of the volatility of chicken wing prices, which
can significantly change our cost of sales and cash flow, with the introduction
of popular new menu items, effective marketing promotions, focused efforts on
food costs and waste, and menu price increases. We also explore purchasing
strategies to reduce the severity of cost increases and fluctuations. We are
currently purchasing chicken wings at market prices. In March 2007, we entered
into a one-year pricing agreement with one of our chicken suppliers which
limited the price volatility that we had experienced in our quarterly cost of
sales percentage. This one-year agreement expired in March 2008. If there is a
significant rise in the price of fresh chicken wings, and we are unable to
successfully adjust menu prices or menu mix or otherwise make operational
adjustments to account for the higher wing prices, our operating results could
be adversely affected. Fresh chicken wings accounted for approximately 19.5% and
23.3% of our cost of sales in the third quarter of 2008 and 2007, respectively,
with a quarterly average price per pound of $1.17 and $1.24, respectively.
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 controls over financial reporting during our most recently completed
fiscal quarter that have materially affected, or are reasonably likely to
materially affect, our internal controls over financial reporting.
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 the 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 7, 2008 BUFFALO WILD WINGS, INC.
By: /s/ Sally J. Smith
--------------------------------------------
Sally J. Smith, President and Chief Executive
Officer
(principal executive officer)
By: /s/ Mary J. Twinem
---------------------------------------------
Mary J. Twinem, Executive Vice President,
Chief Financial Officer and Treasurer
(principal financial and accounting officer)
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EXHIBIT INDEX
BUFFALO WILD WINGS, INC.
FORM 10-Q FOR QUARTER ENDED SEPTEMBER 28, 2008
Exhibit
Number Description
-------- ---------------------------------------------------------------------
10.1 Employment Agreement dated September 16, 2008 with Sally J. Smith
(incorporated by reference to Exhibit 10.1 to our Form 8-K filed on
September 22, 2008)*
10.2 Employment Agreement dated September 16, 2008 with Mary J. Twinem
(incorporated by reference to Exhibit 10.2 to our Form 8-K filed on
September 22, 2008)*
10.3 Employment Agreement dated September 16, 2008 with James M. Schmidt
(incorporated by reference to Exhibit 10.3 to our Form 8-K filed on
September 22, 2008)*
10.4 Employment Agreement dated September 16, 2008 with Judith A. Shoulak
(incorporated by reference to Exhibit 10.4 to our Form 8-K filed on
September 22, 2008)*
10.5 Employment Agreement dated September 16, 2008 with Kathleen M.
Benning (incorporated by reference to Exhibit 10.5 to our Form 8-K
filed on September 22, 2008)*
10.6 Form of Amendment to Notice of Restricted Stock Unit Award Relating
to Awards in Fiscal Years 2006 and 2007 to Executive Officers
(incorporated by reference to Exhibit 10.6 to our Form 8-K filed on
September 22, 2008)*
10.7 Employment Agreement dated September 16, 2008 with Linda G. Traylor*
10.8 Employment Agreement dated September 16, 2008 with Mounir N. Sawda*
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
*Management agreement or compensatory plan or arrangement.
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