UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
FORM 10-Q
QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
For the quarter ended June 29, 2008
Commission File No. 000-24743
BUFFALO WILD WINGS, INC.
(Exact name of registrant as specified in its charter)
Minnesota No. 31-1455915
(State or Other Jurisdiction of (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
August 1, 2008: 17,822,356 shares.
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 Results of Operations 12
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 4. Submission of Matters to a Vote of Security Holders 20
Item 6. Exhibits 20
Signatures 21
Exhibit Index 22
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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)
June 29, December 30,
2008 2007
--------------- ----------------
Assets
Current assets:
Cash and cash equivalents $ 8,678 1,521
Marketable securities 65,279 66,513
Accounts receivable - franchisees, net of allowance of $25 842 885
Accounts receivable - other 6,045 6,976
Inventory 2,517 2,362
Prepaid expenses 1,962 3,060
Refundable income tax 1,228 1,886
Deferred income taxes 2,046 1,303
--------------- ----------------
Total current assets 88,597 84,506
Property and equipment, net 121,309 102,742
Restricted cash 6,764 7,161
Other assets 2,399 2,320
Goodwill 369 369
--------------- ----------------
Total assets $ 219,438 197,098
=============== ================
Liabilities and Stockholders' Equity
Current liabilities:
Unearned franchise fees $ 2,405 2,316
Accounts payable 16,879 10,692
Accrued compensation and benefits 11,139 12,615
Accrued expenses 5,618 6,207
Current portion of deferred lease credits 319 660
--------------- ---------------
Total current liabilities 36,360 32,490
Long-term liabilities:
Other liabilities 1,068 1,031
Marketing fund payables 6,764 7,161
Deferred income taxes 5,295 2,166
Deferred lease credits, net of current portion 13,247 12,585
--------------- ---------------
Total liabilities 62,734 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
18,265,464 and 17,933,497 respectively 83,724 80,825
Retained earnings 72,980 60,840
--------------- ---------------
Total stockholders' equity 156,704 141,665
--------------- ---------------
Total liabilities and stockholders' equity $ 219,438 197,098
=============== ===============
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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 Six months ended
------------------------------ -------------------------
June 29, July 1, June 29, July 1,
2008 2007 2008 2007
--------------- ------------- ------------ -----------
Revenue:
Restaurant sales $ 87,462 67,535 174,358 138,594
Franchise royalties and fees 10,406 8,464 20,772 17,307
--------------- ------------- ------------ -----------
Total revenue 97,868 75,999 195,130 155,901
--------------- ------------- ------------ -----------
Costs and expenses:
Restaurant operating costs:
Cost of sales 26,248 20,591 52,663 42,649
Labor 27,020 21,050 52,878 42,157
Operating 13,857 10,729 27,132 22,201
Occupancy 5,902 4,892 11,599 9,610
Depreciation 5,510 4,028 10,749 7,920
General and administrative (1) 9,047 8,538 18,388 17,155
Preopening 1,758 987 2,943 1,305
Loss on asset disposals and impairment 385 153 1,138 232
--------------- ------------- ------------ -----------
Total costs and expenses 89,727 70,968 177,490 143,229
--------------- ------------- ------------ -----------
Income from operations 8,141 5,031 17,640 12,672
Interest income 400 755 832 1,455
--------------- ------------- ------------ -----------
Earnings before income taxes 8,541 5,786 18,472 14,127
Income tax expense 2,926 1,945 6,332 4,745
--------------- ------------- ------------ -----------
Net earnings $ 5,615 3,841 12,140 9,382
=============== ============= ============ ===========
Earnings per common share - basic $ 0.32 0.22 0.68 0.54
Earnings per common share - diluted 0.31 0.22 0.68 0.53
Weighted average shares outstanding - basic 17,810 17,560 17,788 17,504
Weighted average shares outstanding - diluted 17,906 17,744 17,893 17,716
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(1) Includes stock-based compensation of $904, $1,065, $1,924, and $2,332,
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)
Six months ended
-------------------------
June 29, July 1,
2008 2007
------------ -----------
Cash flows from operating activities:
Net earnings $ 12,140 9,382
Adjustments to reconcile net earnings to cash provided by operations:
Depreciation 10,749 7,920
Amortization 36 (43)
Loss on asset disposals and impairment 1,138 232
Deferred lease credits 1,113 391
Deferred income taxes 2,386 (952)
Stock-based compensation 1,924 2,332
Excess tax benefit from the exercise of stock options (302) (720)
Change in operating assets and liabilities:
Trading securities (76) (210)
Accounts receivable 182 (392)
Inventory (155) (185)
Prepaid expenses 1,098 (419)
Other assets (79) (32)
Unearned franchise fees 89 17
Accounts payable 376 217
Refundable income tax 960 (1,073)
Accrued expenses (928) 1,176
------------ -----------
Net cash provided by operating activities 30,651 17,641
------------ -----------
Cash flows from investing activities:
Acquisition of property and equipment (24,643) (11,769)
Purchase of marketable securities (68,578) (93,339)
Proceeds of marketable securities 69,852 81,916
------------ -----------
Net cash used in investing activities (23,369) (23,192)
------------ -----------
Cash flows from financing activities:
Issuance of common stock 562 860
Tax payments for restricted stock units (989) (1,183)
Excess tax benefit from the exercise of stock options 302 720
------------ -----------
Net cash provided by (used in) financing activities (125) 397
------------ -----------
Net increase (decrease) in cash and cash equivalents 7,157 (5,154)
Cash and cash equivalents at beginning of period 1,521 11,756
------------ -----------
Cash and cash equivalents at end of period $ 8,678 6,602
============ ===========
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See accompanying notes to consolidated financial statements
5
BUFFALO WILD WINGS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE THREE MONTHS AND SIX MONTHS ENDED JUNE 29, 2008 AND JULY 1, 2007
(Dollar amounts in thousands, except share and per-share amounts)
(1) Basis of Financial Statement Presentation
The consolidated financial statements as of June 29, 2008 and December 30,
2007, and for the three-month and six-month periods ended June 29, 2008
and July 1, 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 six-month
periods ended June 29, 2008 and July 1, 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 six-month periods ended
June 29, 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. Material
increases in fresh chicken wing costs may adversely affect our
operating results. For the three-month periods ended June 29, 2008
and July 1, 2007, fresh chicken wings were 20.4% and 23.0%,
respectively, of restaurant cost of sales. For the six-month periods
ended June 29, 2008 and July 1, 2007, fresh chicken wings were 21.5%
and 24.2%, 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
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.
6
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 June 29, 2008:
Fair Value Measurements
---------------------------------------------------------
Level 1 Level 2 Level 3 Total
------------- -------------- -------------- ------------
Assets
Short-term investments (1) $ 1,667 $ 42,820 $ -- $ 44,487
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(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 June 29, 2008, no assets or
liabilities were measured at fair value on a nonrecurring basis.
(3) Marketable Securities
Marketable securities were comprised of the following:
As of
----------------------------------
June 29, December 30,
2008 2007
---------------- ----------------
Held-to-maturity:
Municipal securities $ 20,792 23,718
Available-for-sale:
Municipal securities 42,820 41,206
Trading:
Mutual funds 1,667 1,589
---------------- ----------------
Total $ 65,279 66,513
================ ================
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All held-to-maturity debt securities are due within one year and had
aggregate fair values of $20,812 and $23,753 as of June 29, 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
----------------------------------
June 29, December 30,
2008 2007
---------------- ----------------
Construction in-process $ 13,790 1,851
Furniture, fixtures, and equipment 76,375 69,962
Leasehold improvements 105,656 97,916
---------------- ----------------
195,821 169,729
Less accumulated depreciation (74,512) (66,987)
---------------- ----------------
$ 121,309 102,742
================ ================
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(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 six months ended June 29, 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 (38,699) 3.41
Cancelled (8,590) 7.55
-------------- ---------------- ------------------ ---------------------
Outstanding, June 29, 2008 187,586 11.98 4.6 2,595
Exercisable, June 29, 2008 127,339 6.00 3.7 2,524
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The aggregate intrinsic value in the table above is before
applicable income taxes, based on our closing stock price of
$25.82 as of the last business day of the quarter ended June 29,
2008, which would have been received by the optionees had all
options been exercised on that date. As of June 29, 2008, total
unrecognized stock-based compensation expense related to
nonvested stock options was approximately $573, which is expected
to be recognized over a weighted average period of approximately
2.0 years. During the six-month periods ended June 29, 2008 and
July 1, 2007, the total intrinsic value of stock options
exercised was $867 and $5,012, respectively. During the six-month
periods ended June 29, 2008 and July 1, 2007, the total fair
value of options vested was $24 and $480, respectively.
The plan has 1,323,512 shares available for grant as of June 29,
2008.
(b) Restricted Stock Units
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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, restricted stock units were granted subject to
cumulative three-year income targets. The number of units that
vest each year are based on performance against those targets.
These restricted stock units have a three-year life and are
subject to forfeiture if not vested at the end of that period.
Compensation expense is recognized for the expected number of
units to vest over the three-year period. One third of the
expected cumulative expense is recorded each year.
Restricted stock unit activity is summarized for the six months
ended June 29, 2008:
Weighted
average
Number grant date
of shares fair value
-------------- ----------------
Outstanding, December 30, 2007 140,692 $ 20.92
Granted 325,121 23.10
Vested (18,151) 23.14
Cancelled (4,504) 22.43
-------------- ----------------
Outstanding, June 29, 2008 443,158 22.42
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As of June 29, 2008, the total stock-based compensation expense
related to nonvested awards not yet recognized was $5,174, which
is expected to be recognized over a weighted average period of
1.3 years. During the six-month periods ended June 29, 2008 and
July 1, 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 six months ended July
1, 2007 was $26.75.
9
(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 six months of 2008 and 2007, we issued 17,974
and 12,744 shares of common stock under the plan. As of June 29,
2008, the ESPP has 415,004 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 six-month periods ended June 29, 2008 and
July 1, 2007:
Three months ended June 29, 2008
-------------------------------------------------
Earnings Shares Per-share
(numerator) (denominator) amount
--------------- ------------------ ------------
Net earnings $ 5,615
---------------
Earnings per common share--basic 5,615 17,810,391 $ 0.32
Effect of dilutive securities
Stock options -- 96,085
--------------- ------------------
Earnings per common share--diluted $ 5,615 17,906,476 0.31
=============== ==================
Three months ended July 1, 2007
-------------------------------------------------
Earnings Shares Per-share
(numerator) (denominator) amount
--------------- ------------------ ------------
Net earnings $ 3,841
---------------
Earnings per common share--basic 3,841 17,560,163 $ 0.22
Effect of dilutive securities
Stock options -- 183,713
--------------- ------------------
Earnings per common share--diluted $ 3,841 17,743,876 0.22
=============== ==================
Six months ended June 29, 2008
-------------------------------------------------
Earnings Shares Per-share
(numerator) (denominator) amount
--------------- ------------------ ------------
Net earnings $ 12,140
---------------
Earnings per common share--basic 12,140 17,788,361 $ 0.68
Effect of dilutive securities
Stock options -- 104,341
--------------- ------------------
Earnings per common share--diluted $ 12,140 17,892,702 0.68
=============== ==================
Six months ended July 1, 2007
-------------------------------------------------
Earnings Shares Per-share
(numerator) (denominator) amount
--------------- ------------------ ------------
Net earnings $ 9,382
---------------
Earnings per common share--basic 9,382 17,504,096 $ 0.54
Effect of dilutive securities
Stock options -- 211,517
--------------- ------------------
Earnings per common share--diluted $ 9,382 17,715,613 0.53
=============== ==================
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501,430 shares and 292,836 shares for the three-month periods ended June
29, 2008 and July 1, 2007, respectively, and 486,382 shares and 292,836
shares for the six-month periods ended June 29, 2008 and July 1, 2007,
respectively, have been excluded from the fully diluted calculation because
the effect on earnings per common share would have been antidilutive.
10
(7) Supplemental Disclosures of Cash Flow Information
Six months ended
------------------------------------
June 29, July 1,
2008 2007
----------------- -----------------
Cash paid during the period for:
Income taxes $ 3,023 $ 6,411
Noncash financing and investing transactions:
Property and equipment not yet paid for 5,811 710
Tax withholding for restricted stock units -- 1,086
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(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 December 30,
2007 and June 29, 2008 were $241 and $283, 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 its operations in income tax expense. The accrual for
interest and penalties related to unrecognized tax benefits were $99 at
June 29, 2008. Included in the total unrecognized tax benefits at December
30, 2007 and June 29, 2008 are benefits of $157 and $184, 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 June 28, 2009.
The Internal Revenue Service has completed its examination of our 2005 U.S.
Income Tax Return. No changes were reported. With few exceptions, we are no
longer subject to state income tax examinations for years before 2004.
(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. An impairment charge of $395 was recorded to
the extent that the carrying amount was not considered recoverable based on
estimated future discounted cash flows.
(10) Acquisition of Las Vegas Franchise
On May 18, 2007, the Company exercised a right of first refusal to acquire
the assets of nine Buffalo Wild Wings franchised restaurants in the Las
Vegas, Nevada area. The Company expects the acquisition, if completed, to
close in the third quarter of 2008. The purchase price is approximately $26
million and will be funded with available cash and marketable securities.
The acquisition is subject to purchase price adjustments. The transaction
also remains dependent on receipt of necessary approvals for gaming and
liquor licenses, and other customary closing conditions.
(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 June 29, 2008, we owned and operated 169 company-owned and franchised an
additional 346 Buffalo Wild Wings(R) Grill & Bar restaurants in 37 states. Of
the 515 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 30.0% to 31.0% of restaurant
sales per quarter in 2008 and 2007. 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 change 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 and are reviewing menu additions
and other strategies that may decrease the percentage that fresh chicken wings
represent in terms of total restaurant sales. 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. 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.
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 89% of total
revenue in the second 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 22% 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 on-going 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 second 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 six-month period is unaudited, and we have prepared it
on the same basis as the audited financial statements. In the opinion of
management, all necessary adjustments, consisting only of normal recurring
adjustments, have been included to present fairly the unaudited quarterly
results.
Quarterly and annual operating results may fluctuate significantly as a result
of a variety of factors, including increases or decreases in same-store sales,
changes in commodity prices, the timing and number of new restaurant openings
and related expenses, asset impairment charges, store closing charges, general
economic conditions, stock-based compensation, and seasonal fluctuations. As a
result, our quarterly results of operations are not necessarily indicative of
the results that may be achieved for any future period.
Three months ended Six months ended
------------------- ------------------
June 29, July 1, June 29, July 1,
2008 2007 2008 2007
-------- --------- ------- --------
Revenue:
Restaurant sales 89.4% 88.9% 89.4% 88.9%
Franchising royalties and fees 10.6 11.1 10.6 11.1
-------- --------- ------- --------
Total revenue 100.0 100.0 100.0 100.0
-------- --------- ------- --------
Costs and expenses:
Restaurant operating costs:
Cost of sales 30.0 30.5 30.2 30.8
Labor 30.9 31.2 30.3 30.4
Operating 15.8 15.9 15.6 16.0
Occupancy 6.7 7.2 6.7 6.9
Depreciation 5.6 5.3 5.5 5.1
General and administrative 9.2 11.2 9.4 11.0
Preopening 1.8 1.3 1.5 0.8
Loss on asset disposals and impairment 0.4 0.2 0.6 0.1
-------- --------- ------- --------
Total costs and expenses 91.7 93.4 91.0 91.9
-------- --------- ------- --------
Income from operations 8.3 6.6 9.0 8.1
Interest income 0.4 1.0 0.4 0.9
-------- --------- ------- --------
Earnings before income taxes 8.7 7.6 9.5 9.1
Income tax expense 3.0 2.6 3.2 3.0
-------- --------- ------- --------
Net earnings 5.7 5.1 6.2 6.0
======== ========= ======= ========
|
13
The number of company-owned and franchised restaurants open are as follows:
As of
------------------------
June 29, July 1,
2008 2007
---------- ------------
Company-owned restaurants 169 145
Franchised restaurants 346 301
|
The restaurant sales for company-owned and franchised restaurants are as follows
(amounts in thousands):
Three months ended Six months ended
----------------------- ------------------------
June 29, July 1, June 29, July 1,
2008 2007 2008 2007
----------- ---------- ---------- ------------
Company-owned restaurant sales $ 87,462 $ 67,535 $ 174,358 $ 138,594
Franchised restaurant sales 206,718 169,859 413,606 347,316
|
Increases in comparable same-store sales are as follows (based on restaurants
operating at least fifteen months):
Three months ended Six months ended
----------------------- ------------------------
June 29, July 1, June 29, July 1,
2008 2007 2008 2007
----------- ---------- ---------- ------------
Company-owned same-store sales 8.3% 8.1% 6.1% 8.4%
Franchised same-store sales 4.5 4.0 3.3 3.7
|
The quarterly average prices paid per pound for fresh chicken wings are as
follows:
Three months ended Six months ended
----------------------- ------------------------
June 29, July 1, June 29, July 1,
2008 2007 2008 2007
----------- ---------- ---------- ------------
Average price per pound $ 1.17 1.25 1.25 1.32
|
Results of Operations for the Three Months Ended June 29, 2008 and July 1, 2007
Restaurant sales increased by $19.9 million, or 29.5%, to $87.5 million in 2008
from $67.5 million in 2007. The increase in restaurant sales was due to a $14.6
million increase associated with five new company-owned restaurants that opened
in 2008 and 27 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
$5.4 million related to an 8.3% increase in same-store sales.
Franchise royalties and fees increased by $1.9 million, or 22.9%, to $10.4
million in 2008 from $8.5 million in 2007. The increase was primarily due to
additional royalties collected from 17 new franchised restaurants that opened in
2008 and 33 franchised restaurants that opened in the last six months of 2007.
Same-store sales for franchised restaurants increased 4.5% in 2008.
Cost of sales increased by $5.7 million, or 27.5%, to $26.2 million in 2008 from
$20.6 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 30.5% 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. 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 quarter of 2007 expired in March
2008. For the second quarter of 2008, wing prices averaged $1.17 per pound which
was a 6.4% decrease over the same period in 2007.
Labor expenses increased by $6.0 million, or 28.4%, to $27.0 million in 2008
from $21.1 million in 2007 due primarily to more restaurants being operated in
2008. Labor expenses as a percentage of restaurant sales decreased to 30.9% in
2008 from 31.2% in 2007. The decrease in labor expenses as a percentage of
restaurant sales was primarily due to lower-than-expected workers' compensation
costs partially offset by higher health insurance cost and higher unit-level
bonus.
Operating expenses increased by $3.1 million, or 29.2%, to $13.9 million in 2008
from $10.7 million in 2007 due primarily to more restaurants being operated in
2008. Operating expenses as a percentage of restaurant sales decreased to 15.8%
in 2008 from 15.9% in 2007. The decrease in operating expenses as a percentage
of restaurant sales is primarily due to lower repair and maintenance costs and
cable programming expense partially offset by higher utility charges.
14
Occupancy expenses increased by $1.0 million, or 20.6%, to $5.9 million in 2008
from $4.9 million in 2007 due primarily to more restaurants being operated in
2008. Occupancy expenses as a percentage of restaurant sales decreased to 6.7%
in 2008 from 7.2% in 2007.
Depreciation increased by $1.5 million, or 36.8%, to $5.5 million in 2008 from
$4.0 million in 2007. The increase was primarily due to the additional
depreciation on nine new restaurants opened in 2008 and the 17 new restaurants
that opened in the last six months of 2007. Accelerated depreciation related to
three upcoming relocations as part of the conversion of Don Pablos sites,
remodels, and HDTV upgrades also contributed to the increase.
General and administrative expenses increased by $509,000, or 6.0%, to $9.0
million in 2008 from $8.5 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 9.2% in 2008 from 11.2%
in 2007. Exclusive of stock-based compensation, we reduced our general and
administrative expenses as a percentage of revenue to 8.3% from 9.8% with lower
conference and travel costs.
Preopening costs increased by $771,000, to $1.8 million in 2008 from $987,000 in
2007. In 2008, we incurred costs of $988,000 for five new company-owned
restaurants opened in the second quarter of 2008, and incurred $674,000 for
restaurants that will open in the second half of 2008. In 2007, we incurred
costs of $769,000 for the five new company-owned restaurants opened in the
second quarter of 2007, and incurred $216,000 for restaurants that opened in the
third quarter of 2007 or later. In 2008, we expect average preopening costs per
restaurant to be $215,000.
Loss on asset disposals and impairment increased by $232,000 to $385,000 in 2008
from $153,000 in 2007. In 2008, the loss was related to HDTV upgrades and
write-off of miscellaneous equipment. In 2007, the loss was due to the write-off
of miscellaneous equipment.
Interest income decreased by $355,000 to $400,000 in 2008 from $755,000 in 2007.
The decrease was primarily due to lower interest rates. Cash and marketable
securities balances at the end of the quarter totaled $74.0 million in 2008
compared to $71.1 million for the second quarter of 2007.
Provision for income taxes increased $981,000 to $2.9 million in 2008 from $1.9
million in 2007. The effective tax rate as a percentage of income before taxes
increased to 34.3% in 2008 from 33.6% in 2007. The 2008 income tax rate was
higher due to lower tax exempt interest income and higher state income taxes.
For 2008, we believe our effective tax rate will be about 34.0%.
Results of Operations for the Six Months Ended June 29, 2008 and July 1, 2007
Restaurant sales increased by $35.8 million, or 25.8%, to $174.4 million in 2008
from $138.6 million in 2007. The increase in restaurant sales was due to a $27.6
million increase associated with nine new company-owned restaurants that opened
in 2008 and 30 company-owned restaurants opened before 2008 that did not meet
the criteria for same-store sales for all or part of the six-month period and
$8.2 million related to a 6.1% increase in same-store sales.
Franchise royalties and fees increased by $3.5 million, or 20.0%, to $20.8
million in 2008 from $17.3 million in 2007. The increase was primarily due to
additional royalties collected from 17 new franchised restaurants that opened in
2008 and 33 franchised restaurants that opened in the last six months of 2007.
Same-store sales for franchised restaurants increased 3.3% in 2008.
Cost of sales increased by $10.0 million, or 23.5%, to $52.7 million in 2008
from $42.6 million in 2007 due primarily to more restaurants being operated in
2008. Cost of sales as a percentage of restaurant sales decreased to 30.2% 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. 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 quarter of 2007 expired in March
2008. For the first half of 2008, wing prices averaged $1.25 per pound which was
a 5.3% decrease over the same period in 2007.
Labor expenses increased by $10.7 million, or 25.4%, to $52.9 million in 2008
from $42.2 million in 2007 due primarily to more restaurants being operated in
2008. Labor expenses as a percentage of restaurant sales decreased to 30.3% in
2008 from 30.4% in 2007. The decrease in labor expenses as a percentage of
restaurant sales was primarily due to lower-than-expected workers' compensation
costs.
15
Operating expenses increased by $4.9 million, or 22.2%, to $27.1 million in 2008
from $22.2 million in 2007 due primarily to more restaurants being operated in
2008. Operating expenses as a percentage of restaurant sales decreased to 15.6%
in 2008 from 16.0% 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.
Occupancy expenses increased by $2.0 million, or 20.7%, to $11.6 million in 2008
from $9.6 million in 2007 due primarily to more restaurants being operated in
2008. Occupancy expenses as a percentage of restaurant sales decreased to 6.7%
in 2008 from 6.9% in 2007.
Depreciation increased by $2.8 million, or 35.7%, to $10.7 million in 2008 from
$7.9 million in 2007. The increase was primarily due to the additional
depreciation on nine new restaurants opened in 2008 and the 17 new restaurants
that opened in the last six months of 2007. Accelerated depreciation related to
three upcoming relocations as part of the conversion of Don Pablos sites,
remodels, and HDTV upgrades also contributed to the increase.
General and administrative expenses increased by $1.2 million, or 7.2%, to $18.4
million in 2008 from $17.2 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 9.4% 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 8.4% from 9.5% with lower
conference expense and better leverage of our wage-related expenses with the
higher revenue.
Preopening costs increased by $1.6 million, to $2.9 million in 2008 from $1.3
million in 2007. In 2008, we incurred costs of $1.9 million for nine new
company-owned restaurants opened in the first six months of 2008, and incurred
$990,000 for restaurants that will open in the third or fourth quarters of 2008.
In 2007, we incurred costs of $1.1 million for the six new company-owned
restaurants opened in the first half of 2007, and incurred $217,000 for
restaurants that opened in the third quarter of 2007 or later. In 2008, we
expect average preopening costs per restaurant to be $215,000.
Loss on asset disposals and impairment increased by $906,000 to $1.1 million in
2008 from $232,000 in 2007. In 2008, we impaired the assets of one of our Texas
restaurants due to a relocation for $395,000. The remaining loss was related to
the HDTV upgrades and write-off of miscellaneous equipment. In 2007, the loss
was due to the write-off of miscellaneous equipment.
Interest income decreased by $623,000 to $832,000 in 2008 from $1.5 million in
2007. The decrease was primarily due to lower interest rates. Cash and
marketable securities balances at the end of the quarter totaled $74.0 million
in 2008 compared to $71.1 million for the second quarter of 2007.
Provision for income taxes increased $1.6 million to $6.3 million in 2008 from
$4.7 million in 2007. The effective tax rate as a percentage of income before
taxes increased to 34.3% in 2008 from 33.6% in 2007. The 2008 income tax rate
was higher due to lower tax exempt interest income and higher state income
taxes. For 2008, we believe our effective tax rate will be about 34.0%.
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 June 29, 2008 was $74.0 million. We invest our cash balances in debt
securities with the focus on protection of principal, adequate liquidity, and
maximization of after-tax returns. As of June 29, 2008, nearly all excess cash
was invested in high-quality municipal securities.
For the six months ended June 29, 2008, net cash provided by operating
activities was $30.7 million. Net cash provided by operating activities
consisted primarily of net earnings adjusted for non-cash expenses, a decrease
in prepaid expenses and refundable income taxes, and a decrease in accrued
expenses. The decrease in prepaid expenses is due to the timing of insurance
payments. The decrease in income taxes was due to the timing of income tax
payments. The decrease in accrued expenses was due to the payout of year-end
incentive compensation.
For the six months ended July 1, 2007, net cash provided by operating activities
was $17.6 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 a decrease in income tax payable. The increase in accrued
expenses was primarily due to higher convention and workers' compensation
liabilities. The decrease in income taxes was due to the timing of income tax
payments.
16
For the six months ended June 29, 2008 and July 1, 2007, net cash used in
investing activities was $23.4 million and $23.2 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 six months of 2008 and 2007, we opened nine
restaurants and six restaurants, respectively. In 2008, we expect capital
expenditures to be approximately $1.4 million per location for approximately 25
new company-owned restaurants, expenditures to be approximately $18 million for
the upgrade and remodel of existing restaurants, and $26 million for the
purchase of nine Las Vegas franchised locations. In 2008, we purchased $68.6
million of marketable securities and received proceeds of $69.9 million as these
investments matured or were sold. In 2007, we purchased $93.3 million of
marketable securities and received proceeds of $81.9 million as these
investments matured or were sold.
For the six months ended June 29, 2008 and July 1, 2007, net cash provided by
(used in) financing activities was ($125,000) and $397,000, respectively. Net
cash used in financing activities for the first half of 2008 resulted from tax
payments for restricted stock units of $989,000, offset by proceeds from the
exercise of stock options of $562,000 and the excess tax benefit from stock
issuance of $302,000. 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
used in financing activities for the first half of 2007 resulted from tax
payments for restricted stock units of $1.2 million, offset by proceeds from the
exercise of stock options of $860,000 and excess tax benefits from stock
issuance of $720,000.
Our liquidity is impacted by minimum cash payment commitments resulting from
operating lease obligations for our restaurants and our corporate offices. Lease
terms are generally 10 to 15 years with renewal options and generally require us
to pay a proportionate share of real estate taxes, insurance, common area
maintenance, and other operating costs. Some restaurant leases provide for
contingent rental payments based on sales thresholds. Except for one restaurant
building, we do not currently own any of the properties on which our restaurants
operate and, therefore, do not have the ability to enter into sale-leaseback
transactions as a potential source of cash.
The following table presents a summary of our contractual operating lease
obligations and commitments as of June 29, 2008:
Payments Due By Period (in thousands)
--------------------------------------------------
Less than After 5
Total One year 1-3 years 3-5 years years
------------- ------------ ----------- ----------- ----------
Operating lease obligations $ 161,707 20,077 37,704 33,548 70,378
Lease commitments for restaurants under development 42,894 2,694 7,216 7,277 25,707
------------- ------------ ----------- ----------- ----------
Total $ 204,601 22,771 44,920 40,825 96,085
============= ============ =========== =========== ==========
|
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 $283,000. 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, 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,
estimated tax rates for 2008, expected store openings for 2008 and related
capital expenditures, our expectations regarding preopening costs, 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 30, 2007):
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.
17
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.
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 had
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 20.4% and
23.0% of our cost of sales in the second quarter of 2008 and 2007, respectively,
with a quarterly average price per pound of $1.17 and $1.25, 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 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
At the Annual Shareholders meeting held on May 15, 2008, we submitted to a vote
of our shareholders the following matters, which received the indicated votes.
1. Approving setting the number of members of the Board of Directors at seven
(7):
For: 15,398,422 Against: 109,727 Abstain: 106,514 Broker Non-Vote: 0
2. Election of Directors:
For: Withheld:
--------------- -----------------
Sally J. Smith................................... 15,188,360 426,303
Dale M. Applequist............................... 15,133,207 481,456
Robert W. MacDonald.............................. 15,341,199 273,464
Warren E. Mack................................... 15,041,837 572,826
J. Oliver Maggard................................ 15,292,971 321,692
Michael P. Johnson............................... 15,294,388 320,275
James Damian..................................... 15,296,047 318,616
|
3. Approve amendment and restatement of our 2003 Equity Incentive Plan to
increase reserved shares:
For: 6,558,409 Against: 359,773 Abstain: 59,090 Broker Non-Vote: 8,637,391
4. Approve the amendment to our Articles of Incorporation to increase the
authorized common shares:
For: 14,167,424 Against: 1,341,812 Abstain: 105,427 Broker Non-Vote: 0
5. Ratify appointment of KPMG LLP as our independent registered public
accounting firm for fiscal year ending December 30, 2007:
For: 15,151,874 Against: 375,433 Abstain: 87,356 Broker Non-Vote: 0
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: August 8, 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 JUNE 29, 2008
Exhibit
Number Description
------ --------------------------------------------------------------------
3.1 Restated Articles of Incorporation, as amended
10.1 2003 Equity Incentive Plan, as Amended and Restated on May 15,
2008 (incorporated by reference to Exhibit 10.1 to our Form 8-K
filed on May 21, 2008)*
10.2 The Executive Nonqualified Excess Plan as of May 15, 2008
(incorporated by reference to Exhibit 10.2 to our Form 8-K filed
on May 21, 2008)*
10.3 The Executive Nonqualified Excess Plan Adoption Agreement as of
May 15, 2008 (incorporated by reference to Exhibit 10.3 to our
Form 8-K filed on May 21, 2008)*
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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*Management agreement or compensatory plan or arrangement.
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