Table
of Contents
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington,
DC 20549
FORM 10-Q
QUARTERLY REPORT PURSUANT TO SECTION 13
OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended March 28,
2010
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
Incorporation
or Organization)
|
|
(IRS
Employer
Identification
No.)
|
5500 Wayzata Boulevard, Suite 1600,
Minneapolis, MN 55416
(Address
of Principal Executive Offices) (Zip Code)
(952) 593-9943
(Registrants
Telephone Number, Including Area Code)
Indicate by check mark whether the registrant (1) has
filed all reports required to be filed by Section 13 or 15(d) of the
Securities Exchange Act of 1934 during the preceding 12 months (or for such
shorter period that the registrant was required to file such reports), and (2) has
been subject to such filing requirements for the past 90
days. YES
x
NO
o
Indicate by check mark whether the registrant has
submitted electronically and posted on its corporate Web site, if any, every
Interactive Data File required to be submitted and posted pursuant to Rule 405
of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or
for such shorter period that the registrant was required to submit and post
such files). YES
o
NO
o
Indicate by check mark whether the registrant is a
large accelerated filer, an accelerated filer, a non-accelerated filer, or a
smaller reporting company. See the definitions of large accelerated filer, accelerated
filer, and smaller reporting company in Rule 12b-2 of the Exchange Act.
(Check one):
Large accelerated filer
o
|
Accelerated filer
x
|
|
Non-accelerated
filer
o
|
Smaller
reporting company
o
|
Indicate by check mark whether the registrant is a
shell company (as defined in Rule 12b-2 of the Exchange Act). YES
o
NO
x
The number of shares outstanding of the registrants
common stock as of April 30, 2010:
18,155,017 shares.
Table
of Contents
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
BUFFALO WILD WINGS, INC. AND
SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(Dollar amounts in thousands)
(unaudited)
|
|
March 28,
2010
|
|
December 27,
2009
|
|
Assets
|
|
|
|
|
|
Current assets:
|
|
|
|
|
|
Cash and cash equivalents
|
|
$
|
14,873
|
|
9,580
|
|
Marketable securities
|
|
51,943
|
|
43,632
|
|
Accounts receivable franchisees, net of allowance
of $25
|
|
1,182
|
|
2,118
|
|
Accounts receivable other
|
|
9,191
|
|
7,383
|
|
Inventory
|
|
3,602
|
|
3,644
|
|
Prepaid expenses
|
|
2,901
|
|
2,972
|
|
Refundable income taxes
|
|
|
|
1,872
|
|
Deferred income taxes
|
|
3,425
|
|
2,938
|
|
Restricted assets
|
|
26,127
|
|
24,384
|
|
Total current assets
|
|
113,244
|
|
98,523
|
|
|
|
|
|
|
|
Property and equipment, net
|
|
190,142
|
|
189,639
|
|
Other assets
|
|
9,557
|
|
9,665
|
|
Goodwill
|
|
11,246
|
|
11,246
|
|
Total assets
|
|
$
|
324,189
|
|
309,073
|
|
|
|
|
|
|
|
Liabilities
and Stockholders Equity
|
|
|
|
|
|
Current liabilities:
|
|
|
|
|
|
Unearned franchise fees
|
|
$
|
2,591
|
|
2,706
|
|
Income tax payable
|
|
4,155
|
|
|
|
Accounts payable
|
|
14,574
|
|
13,436
|
|
Accrued compensation and benefits
|
|
17,466
|
|
19,554
|
|
Accrued expenses
|
|
6,196
|
|
6,540
|
|
Current portion of deferred lease credits
|
|
365
|
|
84
|
|
System-wide payables
|
|
26,127
|
|
24,384
|
|
Total current liabilities
|
|
71,474
|
|
66,704
|
|
|
|
|
|
|
|
Long-term liabilities:
|
|
|
|
|
|
Other liabilities
|
|
1,500
|
|
1,422
|
|
Deferred income taxes
|
|
14,291
|
|
14,940
|
|
Deferred lease credits, net of current portion
|
|
16,349
|
|
16,174
|
|
Total liabilities
|
|
103,614
|
|
99,240
|
|
|
|
|
|
|
|
Commitments and contingencies (note 11)
|
|
|
|
|
|
Stockholders equity:
|
|
|
|
|
|
Undesignated stock, 1,000,000 shares authorized
|
|
|
|
|
|
Common stock, no par value. Authorized 44,000,000
shares; issued and outstanding 18,154,900 and 18,054,375 respectively
|
|
94,068
|
|
93,887
|
|
Retained earnings
|
|
126,507
|
|
115,946
|
|
Total stockholders equity
|
|
220,575
|
|
209,833
|
|
Total liabilities and stockholders equity
|
|
$
|
324,189
|
|
309,073
|
|
See accompanying notes to consolidated financial
statements
3
Table
of Contents
BUFFALO WILD WINGS, INC. AND
SUBSIDIARIES
CONSOLIDATED STATEMENTS OF EARNINGS
(Amounts in thousands except per
share data)
(unaudited)
|
|
Three months
ended
|
|
|
|
March 28,
2010
|
|
March 29,
2009
|
|
Revenue:
|
|
|
|
|
|
Restaurant sales
|
|
$
|
137,962
|
|
119,424
|
|
Franchise royalties and fees
|
|
14,309
|
|
12,131
|
|
Total revenue
|
|
152,271
|
|
131,555
|
|
|
|
|
|
|
|
Costs and expenses:
|
|
|
|
|
|
Restaurant operating costs:
|
|
|
|
|
|
Cost of sales
|
|
42,224
|
|
36,208
|
|
Labor
|
|
40,685
|
|
35,549
|
|
Operating
|
|
21,455
|
|
17,987
|
|
Occupancy
|
|
8,910
|
|
7,594
|
|
Depreciation and amortization
|
|
9,550
|
|
7,495
|
|
General and administrative (1)
|
|
12,026
|
|
11,420
|
|
Preopening
|
|
1,115
|
|
2,409
|
|
Loss on asset disposals
|
|
411
|
|
175
|
|
Total costs and expenses
|
|
136,376
|
|
118,837
|
|
Income from operations
|
|
15,895
|
|
12,718
|
|
Investment income
|
|
185
|
|
76
|
|
Earnings before income taxes
|
|
16,080
|
|
12,794
|
|
Income tax expense
|
|
5,519
|
|
4,308
|
|
Net earnings
|
|
$
|
10,561
|
|
8,486
|
|
|
|
|
|
|
|
|
Earnings per common share basic
|
|
$
|
0.58
|
|
0.47
|
|
Earnings per common share diluted
|
|
0.58
|
|
0.47
|
|
Weighted average shares outstanding basic
|
|
18,147
|
|
17,980
|
|
Weighted average shares outstanding diluted
|
|
18,229
|
|
18,041
|
|
(1) Includes stock-based compensation of $1,225
and $801, respectively
See accompanying notes to consolidated financial
statements
4
Table
of Contents
BUFFALO WILD WINGS, INC. AND
SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Dollar amounts in thousands)
(unaudited)
|
|
Three
months ended
|
|
|
|
March 28,
2010
|
|
March 29,
2009
|
|
Cash flows from operating activities:
|
|
|
|
|
|
Net earnings
|
|
$
|
10,561
|
|
8,486
|
|
Adjustments to reconcile net earnings to cash
provided by operations:
|
|
|
|
|
|
Depreciation
|
|
9,396
|
|
7,342
|
|
Amortization
|
|
154
|
|
153
|
|
Loss on asset disposals
|
|
410
|
|
175
|
|
Deferred lease credits
|
|
537
|
|
620
|
|
Deferred income taxes
|
|
(1,136
|
)
|
1,153
|
|
Stock-based compensation
|
|
1,225
|
|
801
|
|
Excess tax benefit from stock issuance
|
|
(74
|
)
|
(2
|
)
|
Change in operating assets and liabilities:
|
|
|
|
|
|
Trading securities
|
|
(205
|
)
|
(691
|
)
|
Accounts receivable
|
|
(953
|
)
|
(2,339
|
)
|
Inventory
|
|
42
|
|
(411
|
)
|
Prepaid expenses
|
|
71
|
|
698
|
|
Other assets
|
|
(46
|
)
|
(78
|
)
|
Unearned franchise fees
|
|
(115
|
)
|
171
|
|
Accounts payable
|
|
866
|
|
784
|
|
Income taxes
|
|
6,101
|
|
2,779
|
|
Accrued expenses
|
|
(2,099
|
)
|
(384
|
)
|
Net cash provided by operating activities
|
|
24,735
|
|
19,257
|
|
|
|
|
|
|
|
Cash flows from investing activities:
|
|
|
|
|
|
Acquisition of property and equipment
|
|
(9,908
|
)
|
(18,916
|
)
|
Purchase of marketable securities
|
|
(17,960
|
)
|
(13,070
|
)
|
Proceeds of marketable securities
|
|
9,854
|
|
12,639
|
|
Net cash used in investing activities
|
|
(18,014
|
)
|
(19,347
|
)
|
|
|
|
|
|
|
Cash flows from financing activities:
|
|
|
|
|
|
Issuance of common stock
|
|
123
|
|
3
|
|
Excess tax benefit from stock issuance
|
|
74
|
|
2
|
|
Tax payments for restricted stock
|
|
(1,625
|
)
|
(1,517
|
)
|
Net cash used in financing activities
|
|
(1,428
|
)
|
(1,512
|
)
|
Net increase (decrease) in cash and cash equivalents
|
|
5,293
|
|
(1,602
|
)
|
Cash and cash equivalents at beginning of period
|
|
9,580
|
|
8,347
|
|
Cash and cash equivalents at end of period
|
|
$
|
14,873
|
|
6,745
|
|
See accompanying notes to consolidated financial
statements
5
Table
of Contents
BUFFALO WILD WINGS, INC. AND
SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS
FOR THE THREE MONTHS ENDED MARCH 28,
2010 AND MARCH 29, 2009
(Dollar amounts in thousands except
share and per share data)
(1)
Basis of Financial Statement
Presentation
The consolidated
financial statements as of March 28, 2010 and December 27, 2009, and
for the three-month periods ended March 28, 2010 and March 29, 2009
have been prepared by Buffalo Wild Wings, Inc. pursuant to the rules and
regulations of the Securities and Exchange Commission (SEC). The financial
information for the three-month periods ended March 28, 2010 and March 29,
2009 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 27, 2009 is derived from our audited consolidated financial
statements and notes thereto for the fiscal year ended December 27, 2009,
which is included in Item 8 in the Fiscal 2009 Annual Report on Form 10-K
and should be read in conjunction with such financial statements.
The results of operations
for the three-month period ended March 28, 2010 are not necessarily
indicative of the results of operations that may be achieved for the entire
year ending December 26, 2010.
(2)
Summary of Significant Accounting
Policies
(a)
Inventories
Inventories are stated at
the lower of cost or market. Cost is determined by the first-in, first-out
(FIFO) method. Cash flows related to
inventory sales are classified in net cash provided by operating activities in
the Consolidated Statements of Cash Flows.
We purchase our products
from a number of suppliers and believe there are alternative suppliers. We have
minimum purchase commitments from some of our vendors, but the terms of the
contracts and nature of the products are such that our purchase requirements do
not create a market risk. The primary food product used by our restaurants and
our franchised restaurants is chicken wings. Chicken wings are purchased by us
at market prices. Material increases in chicken wing costs may adversely affect
our operating results. For the three-month periods ended March 28, 2010
and March 29, 2009, chicken wings were 28.1% and 23.6%, respectively, of
restaurant cost of sales.
(b)
New Accounting
Pronouncement
In January 2010,
the Financial Accounting Standards Board (FASB) issued Accounting Standards
Update (ASU) 2010-06 Fair Value Measurements and Disclosures (Topic 820):
Improving Disclosures about Fair Value Measurements. ASU 2010-06
amends ASC 820 Fair Value Measurements and Disclosures to require new
disclosures related to transfers into and out of Levels 1 and 2 of the fair
value hierarchy and additional disclosure requirements related to Level 3
measurements. The guidance also clarifies existing fair value
measurement disclosures about the level of disaggregation and about inputs and
valuation techniques used to measure fair value. The additional
disclosure requirements are effective for the first reporting period
beginning after December 15, 2009, except for the additional disclosure
requirements related to Level 3 measurements which are effective for fiscal
years beginning after December 15, 2010. The additional
disclosure requirements did not have any financial impact on our consolidated
financial statements.
6
Table
of Contents
(3)
Fair
Value Measurements
The
guidance for fair
value measurements establishes the authoritative definition of fair value, sets
out a framework for measuring fair value, and outlines the required disclosures
regarding fair value measurements. Fair value
is the price that would be received to sell an asset or paid to transfer a
liability (an exit price) in the principal or most advantageous market for the
asset or liability in an orderly transaction between market participants at the
measurement date. We use a three-tier fair value hierarchy based upon
observable and non-observable inputs as follows:
·
Level 1 Observable inputs such as
quoted prices in active markets;
·
Level 2 Inputs, other than the quoted
prices in active markets, that are observable either directly or indirectly;
and
·
Level 3 Unobservable inputs in which
there is little or no market data, which require the reporting entity to
develop its own assumptions.
The following
table summarizes the financial instruments measured at fair value in our
consolidated balance sheet as of March 28, 2010:
|
|
Fair Value Measurements
|
|
|
|
Level 1
|
|
Level 2
|
|
Level 3
|
|
Total
|
|
Assets
|
|
|
|
|
|
|
|
|
|
Marketable
Securities
(1)
|
|
$
|
3,823
|
|
30,189
|
|
|
|
34,012
|
|
Derivatives
|
|
|
|
88
|
|
|
|
88
|
|
|
|
|
|
|
|
|
|
|
|
|
(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
a Level 2 approach.
There were no transfers
between Level 1 and Level 2 of the fair value hierarchy during the three-month
period ended March 28, 2010.
(4)
Marketable Securities
Marketable securities
were comprised as follows:
|
|
As of
|
|
|
|
March 28,
2010
|
|
December 27,
2009
|
|
Held-to-maturity
|
|
|
|
|
|
Municipal securities
|
|
$
|
17,931
|
|
15,707
|
|
Available-for-sale
|
|
|
|
|
|
Municipal securities
|
|
30,189
|
|
24,307
|
|
Trading
|
|
|
|
|
|
Mutual funds
|
|
3,823
|
|
3,618
|
|
Total
|
|
$
|
51,943
|
|
43,632
|
|
All
held-to-maturity debt securities mature within one year and had aggregate fair
values of $17,928 and $15,712 as of March 28, 2010 and
December 27, 2009
, respectively.
Trading securities represent investments held for future needs of a
non-qualified deferred compensation plan.
7
Table
of Contents
(5)
Property and Equipment
Property and equipment
consisted of the following:
|
|
As of
|
|
|
|
March 28,
2010
|
|
December 27,
2009
|
|
Construction in-process
|
|
$
|
7,309
|
|
6,443
|
|
Buildings
|
|
19,054
|
|
18,338
|
|
Furniture, fixtures, and equipment
|
|
122,570
|
|
121,166
|
|
Leasehold improvements
|
|
155,876
|
|
152,108
|
|
|
|
304,809
|
|
298,055
|
|
Less accumulated depreciation
|
|
(114,667
|
)
|
(108,416
|
)
|
|
|
$
|
190,142
|
|
189,639
|
|
(6)
Derivative Instruments
We use commodity
derivatives to manage our exposure to price fluctuations. We enter into options
and future contracts to reduce our risk of natural gas price fluctuations.
These derivatives do not qualify for hedge accounting and changes in fair value
are included in current net income. These changes are classified as a component
of restaurant operating expenses. All changes in the fair value of these
contracts are recorded in earnings in the period in which they occur. Net
losses of $93 and $247 were recognized in the first three months of 2010 and
2009, respectively. The fair value of our derivative instruments as of March 28,
2010 and December 27, 2009 was $88 and $11, respectively, and is a
liability in accrued expenses in the accompanying consolidated balance sheets.
As of March 28, 2010, the maximum length of time over which we are hedging
our exposure to the variability in future cash flows related to the purchase of
natural gas is 12 months. As of March 28, 2010 and December 27, 2009,
we were party to natural gas swap contracts with notional values of $885 and
$525, respectively.
(7)
Income Taxes
The total unrecognized
tax benefits reflected on our consolidated balance sheet as of
March 28,
2010
and December 27,
2009 were $629 and $566, 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 in income tax
expense. Interest and penalties related to unrecognized tax benefits totaled
$116 and $89 at
March 28, 2010 and December 27, 2009,
respectively
.
Included in the balance at
March 28, 2010
and December 27, 2009, are
unrecognized tax benefits of $409 and $368, 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 March 27,
2011.
The Internal Revenue
Service completed their examination of our 2005 U.S. Income Tax Return in 2008.
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.
8
Table
of Contents
(8)
Stockholders Equity
(a)
Stock
Options
We have 3.9 million
shares of common stock reserved for issuance under the Equity Incentive Plan
(Plan) for employees, officers, and directors. The option price for shares
issued under the Plan is to be not less than the fair market value on the date
of grant with respect to incentive and nonqualified stock options. Incentive
stock options become exercisable in four equal installments from the date of
the grant and have a contractual life of seven to ten years. Nonqualified stock
options issued pursuant to the Plan have varying vesting periods from
immediately to four years and have a contractual life of seven to 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. Option
activity is summarized for the three months ended March 28, 2010 as
follows:
|
|
Number
of shares
|
|
Weighted
average
exercise price
|
|
Average remaining
contractual Life
(years)
|
|
Aggregate intrinsic
value
|
|
Outstanding, December 27, 2009
|
|
179,134
|
|
$
|
19.00
|
|
4.3
|
|
$
|
4,285
|
|
|
|
|
|
|
|
|
|
|
|
Granted
|
|
|
|
|
|
|
|
|
|
Exercised
|
|
(10,584
|
)
|
11.63
|
|
|
|
|
|
Cancelled
|
|
(1,605
|
)
|
29.74
|
|
|
|
|
|
Outstanding, March 28, 2010
|
|
166,945
|
|
$
|
19.37
|
|
4.1
|
|
$
|
4,929
|
|
Exercisable, March 28, 2010
|
|
104,932
|
|
13.97
|
|
3.3
|
|
3,665
|
|
The aggregate intrinsic
value in the table above is before applicable income taxes, based on our
closing stock price of $48.89 as of the last business day of the quarter ended March 28,
2010, which would have been received by the optionees had all options been
exercised on that date. As of March 28, 2010, total unrecognized stock-based
compensation expense related to nonvested stock options was approximately $725,
which is expected to be recognized over a weighted average period of
approximately 2.4 years. During the three-month periods ended March 28,
2010 and March 29, 2009, the total intrinsic value of stock options
exercised was $357 and $6, respectively. During the three-month period ended March 29,
2009, the total fair value of options vested was $8. During the three-month
period ended March 29, 2009, the weighted average grant date fair value of
options granted was $15.96. No shares were granted or vested during the
three-month period ended March 28, 2010.
The plan has 838,926
shares available for grant as of March 28, 2010.
(b)
Restricted
Stock Units
We
have a stock-based performance plan under which restricted stock units are
granted annually at the discretion of the Board of Directors. 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 is
based on performance against those cumulative targets. These restricted stock
units are subject to forfeiture if they have not vested at the end of the
three-year period. Stock-based compensation is recognized for the 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.
In
2009, we granted restricted stock units subject to three-year cliff vesting and
a cumulative three-year earnings target. The number of units which vest at the
end of the three-year period is based on performance against the target. These
restricted stock units are subject to forfeiture if they have not vested at the
end of the three-year period. Stock-based compensation is recognized for the
expected number of units vesting at the end of the period and is expensed over
the three-year period.
For
each 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 required minimum employee withholding taxes. We issue new shares of common
stock upon the disbursement of restricted stock
9
Table
of Contents
units.
Restricted stock units are contingently issuable shares, and the activity for
the first quarter of fiscal 2010 is as follows:
|
|
Number
of shares
|
|
Weighted
average
grant date
fair value
|
|
Outstanding, December 27, 2009
|
|
450,869
|
|
$
|
28.43
|
|
|
|
|
|
|
|
Granted
|
|
|
|
|
|
Vested
|
|
|
|
|
|
Cancelled
|
|
(5,179
|
)
|
32.00
|
|
Outstanding, March 28, 2010
|
|
445,690
|
|
$
|
28.39
|
|
As
of
March 28,
2010
, the total stock-based compensation expense related to nonvested
awards not yet recognized was $5,560, which is expected to be recognized over a
weighted average period of 1.3 years. No shares vested during the three-month
periods ended
March 28,
2010 and March 29, 2009
. The weighted average grant date fair value
of restricted stock units granted during the three months ended
March 29, 2009
was
$30.90.
During the three-month period ended March 28,
2010, we recognized $707 of stock-based compensation expense related to
restricted stock units.
(c)
Employee
Stock Purchase Plan
We
have reserved 600,000 shares of common stock for issuance under 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 quarters of 2010 and 2009, we issued no shares of common stock
under the plan. As of
March 28,
2010
, we have 340,838 shares available for future issuance under the ESPP.
(9)
Earnings Per Share
The
following is a reconciliation of basic and fully diluted earnings per common
share for the three-month periods ended
March 28, 2010 and March 29, 2009
:
|
|
Three
months ended March 28, 2010
|
|
|
|
Earnings
(numerator)
|
|
Shares
(denominator)
|
|
Per-share
amount
|
|
Net earnings
|
|
$
|
10,561
|
|
|
|
|
|
Earnings per common share
|
|
|
|
18,147,388
|
|
$
|
0.58
|
|
Effect of dilutive securities stock options
|
|
|
|
81,472
|
|
|
|
Earnings per common share assuming dilution
|
|
$
|
10,561
|
|
18,228,860
|
|
0.58
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three
months ended March 29, 2009
|
|
|
|
Earnings
(numerator)
|
|
Shares
(denominator)
|
|
Per-share
amount
|
|
Net earnings
|
|
$
|
8,486
|
|
|
|
|
|
Earnings per common share
|
|
|
|
17,979,858
|
|
$
|
0.47
|
|
Effect of dilutive securities stock options
|
|
|
|
60,693
|
|
|
|
Earnings per common share assuming dilution
|
|
$
|
8,486
|
|
18,040,551
|
|
0.47
|
|
|
|
|
|
|
|
|
|
|
|
10
Table of Contents
The following is a summary of those securities
outstanding at the end of the respective periods, which have been excluded from
the fully diluted calculations because the effect on net earnings per common
share would have been antidilutive or were performance-granted shares for which
the performance criteria had not yet been met:
|
|
March 28,
2010
|
|
March 29,
2009
|
|
Stock
options
|
|
|
|
74,261
|
|
Restricted
stock units
|
|
445,690
|
|
451,858
|
|
(10)
Supplemental Disclosures of Cash Flow
Information
|
|
Three months ended
|
|
|
|
March 28,
2010
|
|
March 29,
2009
|
|
Cash
paid during the period for:
|
|
|
|
|
|
Income
taxes
|
|
$
|
533
|
|
437
|
|
Noncash
financing and investing transactions:
|
|
|
|
|
|
Property
and equipment not yet paid for
|
|
272
|
|
(2,760
|
)
|
|
|
|
|
|
|
|
(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.
ITEM 2
. MANAGEMENTS 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 Managements
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 27,
2009. This discussion and analysis contains certain statements that are not
historical facts, including, among others, those relating to our anticipated
financial performance for 2010, cash requirements, and our expected store
openings and preopening costs. Such statements are forward-looking and speak
only as of the date on which they are made. There are risks and uncertainties
including, but not limited to, those discussed in this Form 10-Q under
Item 2 of Part I as well as in Item 1A of Part I of the fiscal 2009 Form 10-K.
Information included in this discussion and analysis includes commentary on
company-owned and franchised restaurant units, restaurant sales, same-store
sales, and average weekly sales volumes. Management believes such sales
information is an important measure of our performance, and is useful in
assessing consumer acceptance of the Buffalo Wild Wings
®
Grill &
Bar concept and the overall health of the concept. Franchise information also
provides an understanding of our revenues because franchise royalties and fees
are based on the opening of franchised units and their sales. However, franchise
sales and same-store sales information does not represent sales in accordance
with U. S. generally accepted accounting principles (GAAP), should not be
considered in isolation or as a substitute for other measures of performance
prepared in accordance with GAAP and may not be comparable to financial
information as defined or used by other companies.
Critical
Accounting 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, goodwill,
vendor allowances, revenue recognition from franchise operations,
self-insurance liability, and stock-based compensation. An in-depth description
of these can be found in our Annual Report on Form 10-K for the fiscal
year ended December 27, 2009. There have been no changes to those policies
during this period.
Overview
As of
March 28,
2010
, we owned and
operated 235 company-owned and franchised an additional 430 Buffalo Wild Wings
®
Grill &
Bar restaurants in 42 states. Our long-term focus is to grow to a national
chain of over 1,000 locations in the United States, continuing the strategy of
developing both company-owned and franchised restaurants.
11
Table of Contents
Our unit growth target
for 2010 is 13% to 15%. We had previously announced a net earnings growth goal
for 2010 of 20%. This goal may be
achievable, however, key to meeting this goal will be improvement in same-store
sales and moderate wing costs. 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 has ranged
from 29.8% to 30.6% of restaurant sales per quarter in our 2009 fiscal year and
year-to-date in 2010. 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 chicken wings, as it can
significantly change our cost of sales and cash flow from company-owned
restaurants. We are exploring purchasing strategies to lessen the severity of
cost increases and fluctuations, and are reviewing menu additions and other
strategies that may decrease the percentage that chicken wings represent in
terms of total restaurant sales. We are currently purchasing chicken wings at
market prices. If a satisfactory long-term price agreement for chicken wings
were to arise, we would consider locking in prices to reduce our price
volatility.
A second factor is our
success in developing new markets. There are inherent risks in opening new
restaurants, especially in new markets, 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 2010, we plan to develop company-owned restaurants primarily in
markets where we currently have either company-owned or franchised restaurants.
We believe this development focus, together with our focus on our new
restaurant opening procedures, will help to 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:
·
Sales at our company-owned restaurants, which were 91%
of total revenue in the first quarter of 2010. Food and nonalcoholic beverages
accounted for 76% of restaurant sales. The remaining 24% of restaurant sales
was from alcoholic beverages. The menu items with the highest sales volume are
traditional and boneless wings at 20% and 19%, respectively, of total
restaurant sales.
·
Royalties and franchise fees received from our
franchisees.
We generate cash from the
operation of company-owned restaurants and from franchise royalties and fees.
We highlight the specific costs associated with the on-going operation of our
company-owned restaurants in the consolidated statement of earnings under Restaurant
operating costs. 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 opening and under construction. Loss on asset disposals
expense is related to company-owned restaurants and includes the costs
associated with closures of locations and normal asset retirements. Certain
other expenses, such as general and administrative, relate to both
company-owned restaurant and franchising operations.
We
operate on a 52 or 53-week fiscal year ending on the last Sunday in December.
Both of the first quarters of 2010 and 2009 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 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.
12
Table of Contents
|
|
Three months ended
|
|
|
|
March 28,
2010
|
|
March 29,
2009
|
|
Revenue:
|
|
|
|
|
|
Restaurant
sales
|
|
90.6
|
%
|
90.8
|
%
|
Franchising
royalties and fees
|
|
9.4
|
|
9.2
|
|
Total
revenue
|
|
100.0
|
|
100.0
|
|
|
|
|
|
|
|
Costs
and expenses:
|
|
|
|
|
|
Restaurant
operating costs:
|
|
|
|
|
|
Cost
of sales
|
|
30.6
|
|
30.3
|
|
Labor
|
|
29.5
|
|
29.8
|
|
Operating
|
|
15.6
|
|
15.1
|
|
Occupancy
|
|
6.5
|
|
6.4
|
|
Depreciation
and amortization
|
|
6.3
|
|
5.7
|
|
General
and administrative
|
|
7.9
|
|
8.7
|
|
Preopening
|
|
0.7
|
|
1.8
|
|
Loss
on asset disposals
|
|
0.3
|
|
0.1
|
|
Total
costs and expenses
|
|
89.6
|
|
90.3
|
|
|
|
|
|
|
|
Income
from operations
|
|
10.4
|
|
9.7
|
|
Investment
income
|
|
0.1
|
|
0.1
|
|
Earnings
before income taxes
|
|
10.6
|
|
9.7
|
|
Income
tax expense
|
|
3.6
|
|
3.3
|
|
Net
earnings
|
|
6.9
|
%
|
6.5
|
%
|
The number of
company-owned and franchised restaurants open are as follows:
|
|
As of
|
|
|
|
March 28,
2010
|
|
March 29,
2009
|
|
Company-owned
restaurants
|
|
235
|
|
206
|
|
Franchised
restaurants
|
|
430
|
|
373
|
|
The restaurant sales for
company-owned and franchised restaurants are as follows (amounts in thousands):
|
|
Three months ended
|
|
|
|
March 28,
2010
|
|
March 29,
2009
|
|
Company-owned
restaurant sales
|
|
$
|
137,962
|
|
119,424
|
|
Franchised
restaurant sales
|
|
283,447
|
|
242,120
|
|
|
|
|
|
|
|
|
Increases in comparable
same-store sales are as follows (based on restaurants operating at least 15
months):
|
|
Three months ended
|
|
|
|
March 28,
2010
|
|
March 29,
2009
|
|
Company-owned
same-store sales
|
|
0.1
|
%
|
6.4
|
%
|
Franchised
same-store sales
|
|
0.7
|
%
|
6.0
|
%
|
The quarterly average
prices paid per pound for chicken wings are as follows:
|
|
Three months ended
|
|
|
|
March 28,
2010
|
|
March 29,
2009
|
|
Average
price per pound
|
|
$
|
1.91
|
|
1.63
|
|
|
|
|
|
|
|
|
13
Table of Contents
Results
of Operations for the Three Months Ended March 28, 2010 and March 29,
2009
Restaurant sales
increased by $18.5 million, or 15.5%, to $138.0 million in 2010 from $119.4
million in 2009. The increase in restaurant sales was due to a $18.4 million
increase associated with 5 new company-owned restaurants that opened in 2010
and 47 company-owned restaurants opened before 2010 that did not meet the
criteria for same-store sales for all or part of the three-month period, and
$119,000 related to a 0.1% increase in same-store sales.
Franchise royalties and
fees increased by $2.2
million, or
18.0
%
, to
$
14.3 million in 2010 from
$
12.1 million in 2009. The increase was primarily due
to additional royalties collected from 11 new franchised restaurants that
opened in 2010 and 48 franchised restaurants that opened in the last nine
months of 2009. Same-store sales for franchised restaurants increased 0.7% in
2010.
Cost of sales increased
by $6.0 million, or 16.6%, to $42.2 million in 2010 from $36.2 million in 2009
due primarily to more restaurants being operated in 2010. Cost of sales as a
percentage of restaurant sales increased to 30.6% in 2010 from 30.3% in 2009.
Cost of sales as a percentage of restaurant sales increased primarily due to
higher chicken wing prices which were partially offset by menu mix changes, the
leverage of price increases, and production efficiencies. Traditional wing
sales decreased slightly to approximately 20.3% of our restaurant sales in 2010
from 20.4% in 2009. However, boneless wings, which are a better margin item
than traditional wings, increased to 19.1% of sales, from 18.5% in 2009. For
the first quarter of 2010, the cost of chicken wings averaged $1.91 per pound
which was a 17.1% increase over the same period in 2009.
Labor expenses
increased by $5.1 million, or 14.4%, to $40.7 million in 2010 from $35.5
million in 2009 due primarily to more restaurants being operated in 2010. Labor
expenses as a percentage of restaurant sales decreased to 29.5% in 2010 from
29.8% in 2009. The decrease in labor expenses as a percentage of restaurant
sales was primarily due to lower medical costs and hourly labor costs,
partially offset by an increase in workers compensation costs due to a benefit
recognized in the first quarter of 2009.
Operating expenses
increased by $3.5 million, or 19.3%, to $21.5 million in 2010 from $18.0
million in 2009 due primarily to more restaurants being operated in 2010. Operating
expenses as a percentage of restaurant sales increased to 15.6% in 2010 from
15.1% in 2009. The increase in operating expenses as a percentage of restaurant
sales is primarily due to higher general liability insurance costs due to a
benefit recognized in the first quarter of 2009.
Occupancy expenses
increased by $1.3 million, or 17.3%, to $8.9 million in 2010 from $7.6 million
in 2009 due primarily to more restaurants being operated in 2010. Occupancy
expenses as a percentage of restaurant sales increased to 6.5% in 2010 from
6.4% in 2009 due to reduced leverage from lower sales volume increases.
Depreciation and
amortization increased by $2.1 million, or 27.4%, to $9.6 million in 2010 from
$7.5 million in 2009. The increase was primarily due to the additional
depreciation on five new restaurants opened in 2010 and the 26 new restaurants
that opened in the last nine months of 2009.
General and
administrative expenses increased by $606,000, or 5.3%, to $12.0 million in
2010 from $11.4 million in 2009 primarily due to additional headcount and
higher professional fees. General and administrative expenses as a percentage
of total revenue decreased to 7.9% in 2010 from 8.7% in 2009. Exclusive of
stock-based compensation, we reduced our general and administrative expenses as
a percentage of revenue to 7.1% from 8.1% due to leverage of our wage-related
expenses against higher revenue and lower cash incentive plan expenses.
Preopening costs
decreased by $1.3 million, to $1.1 million in 2010 from $2.4 million in 2009.
In 2010, we incurred costs of $832,000 for five new company-owned restaurants
opened in the first quarter of 2010 and costs of $275,000 for restaurants that
will open in the second quarter of 2010 or later. In 2009, we incurred costs of
$1.9 million for 10 new company-owned restaurants opened in the first quarter
of 2009, and incurred $511,000 for restaurants that opened in the second or
third quarters of 2009. In 2010, we expect average preopening costs per
restaurant to be approximately $220,000.
Loss on asset
disposals increased by $236,000 to $411,000 in 2010 from $175,000 in 2009. In
2010, the loss was related to store closing costs related to two store closures
of $140,000 and the write-off of miscellaneous equipment. In 2009, the loss was
due to the write-off of miscellaneous equipment.
Investment income
increased by $109,000 to $185,000 in 2010 from $76,000 in 2009. The increase
was primarily due to gains on investments held for a deferred compensation plan
partially offset by reductions in interest income due to lower interest rates
on our investment portfolio. Cash and marketable securities balances at the end
of the first quarter totaled $66.8 million in 2010 compared to $44.0 million at
the end of the first quarter of 2009.
Provision for
income taxes increased $1.2 million to $5.5 million in 2010 from $4.3 million
in 2009. The effective tax rate as a percentage of income before taxes
increased to 34.3% in 2010 from 33.7% in 2009. The 2009 income tax rate was
higher
14
Table of Contents
due to a decrease
in tax exempt interest and the effects of increased stock-based compensation
expenses. For 2010, we believe our effective annual tax rate will be between
33.5-34.5%.
Liquidity
and Capital Resources
Our primary liquidity and
capital requirements have been for new restaurant construction, remodeling and
maintaining our existing company-owned restaurants, working capital,
acquisitions, and other general business needs. We fund these expenses, except
for acquisitions, primarily with cash from operations. Depending on the size of
the transaction, acquisitions would generally be funded from cash and
marketable securities balances. The cash
and marketable securities balance at March 28, 2010 was $
66.8
million. We invest our cash balances in
debt securities with the focus on protection of principal, adequate liquidity,
and return on investment based on risk. As of March 28, 2010, nearly all
excess cash was invested in high quality municipal securities.
For the three months
ended March 28, 2010, net cash provided by operating activities was $24.7
million. Net cash provided by operating activities consisted primarily of net earnings
adjusted for non-cash expenses, and an increase in income taxes payable and a
decrease in accrued expenses. The increase in income taxes payable was due to
the timing of income tax payments. The
decrease in accrued expenses was primarily due to the payout of annual bonuses
during the quarter.
For the three months
ended March 29, 2009, net cash provided by operating activities was $19.3
million. Net cash provided by operating activities consisted primarily of net
earnings adjusted for non-cash expenses and increases in accounts payable and
accrued expenses offset by an increase in accounts receivable. The increase in
accounts payable was due to an increase in the number of restaurants and the
timing of payments. The increase in accrued expenses was due to higher deferred
compensation costs and higher wage-related costs. The increase in accounts receivable was due
to higher credit card balances.
For the three months
ended March 28, 2010 and March 29, 2009, net cash used in investing
activities was $18.0 million and $19.3 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 three months of 2010, we opened five restaurants.
During the first three months of 2009, we opened 10 new restaurants. In 2010,
we expect capital expenditures for approximately 42 new company-owned
restaurants to cost approximately $1.8 million per location and expenditures to
be approximately $20.1 million for the maintenance and remodel of existing
restaurants. In 2010, we purchased $18.0 million of marketable securities and
received proceeds of $9.9 million as these investments matured or were sold. In
2009, we purchased $13.1 million of marketable securities and received proceeds
of $12.6 million as these investments matured or were sold.
For the three months
ended March 28, 2010 and March 29, 2009, net cash used in financing
activities was $1.4 million and $1.5 million, respectively. Net cash used in
financing activities for 2010 resulted primarily from tax payments for
restricted stock units of $1.6 million, offset by proceeds from the exercise of
stock options of $123,000 and the excess tax benefit from stock issuance of
$74,000. Net cash used in financing activities for 2009 resulted primarily from
tax payments for restricted stock units of $1.5 million. No additional funding
from the issuance of common stock (other than from the exercise of options and
purchase of stock under the employee stock purchase plan) is anticipated for
the remainder of 2010.
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 the buildings in which 32 of our restaurants
operate and therefore have very 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 March 28, 2010:
|
|
|
|
Payments Due By Period (in thousands)
|
|
|
|
Total
|
|
Less than
One year
|
|
1-3 years
|
|
3-5 years
|
|
After 5
years
|
|
Operating
lease obligations
|
|
$
|
244,188
|
|
29,172
|
|
55,013
|
|
49,579
|
|
110,424
|
|
Lease
commitments for restaurants under development
|
|
33,833
|
|
1,607
|
|
5,275
|
|
5,307
|
|
21,644
|
|
Total
|
|
$
|
278,021
|
|
30,779
|
|
60,288
|
|
54,886
|
|
132,068
|
|
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 outflows
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related to income tax
uncertainties amounted to $629,000 as of March 28, 2010. These amounts are
excluded from the contractual obligations table due to the high degree of
uncertainty regarding the timing of these liabilities.
Off-Balance
Sheet Arrangements
As of March 28,
2010, we had no off-balance sheet arrangements or transactions.
Risk Factors/Forward-Looking
Statements
The foregoing discussion
and other statements in this report contain various forward-looking statements
within the meaning of Section 27A of the Securities Act of 1933, as
amended, and Section 21E of the Securities Exchange Act of 1934, as
amended. 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, continue, could, estimate,
expect, intend, may, plan, potential, should, will, project, will,
forecast or the negative of these terms or other comparable terminology. Our
forward-looking statements generally relate our future financial and store
performance measures and growth goals for 2010 and beyond, including but not
limited to projected annual unit and net earnings growth rates; beliefs
regarding future sales performance; benefits of menu price increases; the
effect of key initiatives, promotional activities, and advertising and
marketing campaigns; the number and timing of projected store openings and the
nature of our expansion activities; expected 2010 tax rates; adequacy of
capital resources and other future events. 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 27, 2009):
·
Fluctuations in chicken wing prices could
reduce our operating income.
·
If we are unable to successfully open new
restaurants, our revenue growth rate and profits may be reduced.
·
We must identify and obtain a sufficient
number of suitable new restaurant sites for us to sustain our revenue growth
rate.
·
Shortages or interruptions in the
availability and delivery of food and other supplies may increase costs or
reduce revenues.
·
We may experience higher-than-anticipated
costs associated with the opening of new restaurants or with the closing,
relocating, and remodeling of existing restaurants, which may adversely affect
our results of operations.
·
Our restaurants may not achieve market
acceptance in the new geographic regions we enter.
·
New restaurants added to our existing
markets may take sales from existing restaurants.
·
An impairment in the carrying value of
our goodwill or other intangible assets could adversely affect our financial
condition and consolidated results of operations.
·
Failure of our internal controls over
financial reporting could harm our business and financial results.
·
The current economic crisis could have a
material adverse impact on our landlords or other tenants in retail centers in
which we or our franchisees are located, which in turn could negatively affect
our financial results.
·
We are dependent on franchisees and their
success.
·
Franchisees may take actions that could
harm our business.
·
We could face liability from our
franchisees.
·
We may be unable to compete effectively
in the restaurant industry.
·
Our success depends substantially on the
value of our brands and our reputation for offering guests an unparalleled
total experience.
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·
Our inability to successfully and
sufficiently raise menu prices could result in a decline in profitability.
·
A reduction in vendor allowances
currently received could affect our costs of goods sold.
·
Our quarterly operating results may
fluctuate due to the timing of special events and other factors, including the
recognition of impairment losses.
·
We may not be able to attract and retain
qualified team members to operate and manage our restaurants.
·
The loss of key executives, or
difficulties recruiting and retaining qualified team members, could jeopardize
our ability to meet our financial targets.
·
We may not be able to obtain and maintain
licenses and permits necessary to operate our restaurants.
·
The sale of alcoholic beverages at our
restaurants subjects us to additional regulations and potential liability.
·
Changes in employment laws or regulation
could harm our performance.
·
Changes in consumer preferences or
discretionary consumer spending could harm our performance.
·
Changes in public health concerns may
impact our performance.
·
A regional or global health pandemic
could severely affect our business.
·
A decline in visitors to any of the
business districts near the locations of our restaurants could negatively
affect our restaurant sales.
·
The acquisition of existing restaurants
from our franchisees or other acquisitions may have unanticipated consequences
that could harm our business and our financial condition.
·
Unfavorable publicity could harm our
business.
·
There is volatility in our stock price.
·
We may be subject to increased labor and
insurance costs.
·
Our current insurance may not provide
adequate levels of coverage against claims.
·
We are dependent on information
technology and any material failure of that technology could impair our ability
to efficiently operate our business.
·
If we are unable to maintain our rights
to use key technologies of third parties, our business may be harmed.
·
We may not be able to protect our
trademarks, service marks or trade secrets.
Investors are cautioned
that all forward-looking statements involve risk and uncertainties and speak
only as of the date on which they are made.
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 have trading
securities, which are held to generate returns that seek to offset changes in
liabilities related to the equity market risk of our deferred compensation
arrangements.
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Table of Contents
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, 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. The primary food product used by company-owned and franchised
restaurants is chicken wings. We work to counteract the effect of the
volatility of chicken wing prices, which can significantly affect our cost of
sales and cash flow, with the introduction of new menu items, effective
marketing promotions, focused efforts on food costs and waste, and menu price
increases. We also explore purchasing strategies to reduce the severity of cost
increases and fluctuations. We currently purchase our chicken wings at market
prices. If a satisfactory long-term price agreement for chicken wings were to
arise, we would consider locking in prices to reduce our price volatility. If
there is a significant rise in the price of 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. Chicken wings accounted for approximately 28.1% and
23.6% of our cost of sales in the first quarters of 2010 and 2009,
respectively, with a quarterly average price per pound of $1.91 and $1.63,
respectively.
ITEM 4. CONTROLS AND PROCEDURES
Managements
Report on Internal Control Over Financial Reporting
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 13a-15(e) and 15d-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 accumulated and communicated to our management, including our
principal executive officer and principal financial officer, as appropriate to
allow timely decisions regarding required disclosure and recorded, processed,
summarized and reported within the time periods specified in Securities and
Exchange Commission rules and forms.
Changes
in Internal Control Over Financial Reporting
There were no changes in
our internal controls over financial reporting during our most recently
completed fiscal quarter that have materially affected, or are reasonably
likely to materially affect, our internal controls over financial reporting.
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PART II OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
Occasionally, we are a
defendant in litigation arising in the ordinary course of our business,
including claims arising from personal injuries, contract claims,
franchise-related claims, dram shop claims, employment-related claims and
claims from guests or employees alleging injury, illness or other food quality,
health or operational concerns. To date, none of these types of litigation, most
of which are typically covered by insurance, has had a material effect on us.
We have insured and continue to insure against most of these types of claims. A
judgment on any claim not covered by or in excess of our insurance coverage
could adversely affect our financial condition or results of operations.
ITEM 6. EXHIBITS
See Exhibit Index
following the signature page of this report.
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SIGNATURES
Pursuant
to the requirements of the Securities Exchange Act of 1934, the registrant has
duly caused this report to be signed on its behalf by the undersigned,
thereunto duly authorized.
Date:
May 7, 2010
|
BUFFALO
WILD WINGS, INC.
|
|
|
|
|
By:
|
/s/ Sally J. Smith
|
|
|
Sally J. Smith,
President and Chief Executive Officer
(principal executive
officer)
|
|
|
|
|
By:
|
/s/ Mary J. Twinem
|
|
|
Mary J. Twinem,
Executive Vice President, Chief
Financial Officer and Treasurer (principal financial and
accounting officer)
|
20
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EXHIBIT INDEX
BUFFALO WILD WINGS, INC.
FORM 10-Q FOR QUARTER ENDED MARCH 28,
2010
Exhibit
Number
|
|
Description
|
31.1
|
|
Certification of Chief
Executive Officer Pursuant to Section 302 of the Sarbanes-Oxley Act
|
|
|
|
31.2
|
|
Certification of Chief
Financial Officer Pursuant to Section 302 of the Sarbanes-Oxley Act
|
|
|
|
32.1
|
|
Certification of Chief
Executive Officer Pursuant to Section 906 of the Sarbanes-Oxley Act
|
|
|
|
32.2
|
|
Certification of Chief
Financial Officer Pursuant to Section 906 of the Sarbanes-Oxley Act
|
21
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