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 September 26, 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 October 29,
2010: 18,190,161 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)
|
|
September 26,
2010
|
|
December 27,
2009
|
|
Assets
|
|
|
|
|
|
Current assets:
|
|
|
|
|
|
Cash and cash equivalents
|
|
$
|
7,288
|
|
9,580
|
|
Marketable securities
|
|
63,838
|
|
43,632
|
|
Accounts receivable franchisees, net of allowance
of $25
|
|
1,160
|
|
2,118
|
|
Accounts receivable other
|
|
9,907
|
|
7,383
|
|
Inventory
|
|
3,631
|
|
3,644
|
|
Prepaid expenses
|
|
3,925
|
|
2,972
|
|
Refundable income taxes
|
|
5,597
|
|
1,872
|
|
Deferred income taxes
|
|
1,954
|
|
2,938
|
|
Restricted assets
|
|
32,120
|
|
24,384
|
|
Total current assets
|
|
129,420
|
|
98,523
|
|
|
|
|
|
|
|
Property and equipment, net
|
|
211,466
|
|
189,639
|
|
Other assets
|
|
9,859
|
|
9,665
|
|
Goodwill
|
|
11,246
|
|
11,246
|
|
Total assets
|
|
$
|
361,991
|
|
309,073
|
|
|
|
|
|
|
|
Liabilities
and Stockholders Equity
|
|
|
|
|
|
Current liabilities:
|
|
|
|
|
|
Unearned franchise fees
|
|
$
|
2,265
|
|
2,706
|
|
Accounts payable
|
|
22,521
|
|
13,436
|
|
Accrued compensation and benefits
|
|
19,566
|
|
19,554
|
|
Accrued expenses
|
|
6,449
|
|
6,540
|
|
Current portion of deferred lease credits
|
|
1
|
|
84
|
|
System-wide payables
|
|
32,120
|
|
24,384
|
|
Total current liabilities
|
|
82,922
|
|
66,704
|
|
|
|
|
|
|
|
Long-term liabilities:
|
|
|
|
|
|
Other liabilities
|
|
1,541
|
|
1,422
|
|
Deferred income taxes
|
|
16,284
|
|
14,940
|
|
Deferred lease credits, net of current portion
|
|
17,859
|
|
16,174
|
|
Total liabilities
|
|
118,606
|
|
99,240
|
|
|
|
|
|
|
|
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 18,190,046 and 18,054,375 respectively
|
|
99,208
|
|
93,887
|
|
Retained earnings
|
|
144,177
|
|
115,946
|
|
Total stockholders equity
|
|
243,385
|
|
209,833
|
|
Total liabilities and stockholders equity
|
|
$
|
361,991
|
|
309,073
|
|
See accompanying notes to consolidated financial statements
3
Table
of Contents
BUFFALO WILD WINGS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF EARNINGS
(Dollar and share amounts in thousands except per
share data)
(unaudited)
|
|
Three months ended
|
|
Nine months ended
|
|
|
|
September 26,
2010
|
|
September 27,
2009
|
|
September 26,
2010
|
|
September 27,
2009
|
|
Revenue:
|
|
|
|
|
|
|
|
|
|
Restaurant sales
|
|
$
|
136,953
|
|
120,290
|
|
406,446
|
|
357,477
|
|
Franchise royalties and fees
|
|
14,395
|
|
12,451
|
|
42,874
|
|
36,441
|
|
Total revenue
|
|
151,348
|
|
132,741
|
|
449,320
|
|
393,918
|
|
|
|
|
|
|
|
|
|
|
|
Costs and expenses:
|
|
|
|
|
|
|
|
|
|
Restaurant operating costs:
|
|
|
|
|
|
|
|
|
|
Cost of sales
|
|
38,232
|
|
35,809
|
|
118,057
|
|
107,939
|
|
Labor
|
|
41,995
|
|
36,369
|
|
122,769
|
|
107,974
|
|
Operating
|
|
22,835
|
|
19,416
|
|
65,463
|
|
55,369
|
|
Occupancy
|
|
9,131
|
|
8,256
|
|
26,848
|
|
23,774
|
|
Depreciation and amortization
|
|
9,766
|
|
8,267
|
|
28,772
|
|
23,650
|
|
General and administrative (1)
|
|
14,003
|
|
12,943
|
|
38,958
|
|
36,136
|
|
Preopening
|
|
2,789
|
|
1,149
|
|
5,101
|
|
5,231
|
|
Loss on asset disposals and store closures
|
|
682
|
|
842
|
|
1,619
|
|
1,289
|
|
Total costs and expenses
|
|
139,433
|
|
123,051
|
|
407,587
|
|
361,362
|
|
Income from operations
|
|
11,915
|
|
9,690
|
|
41,733
|
|
32,556
|
|
Investment income
|
|
305
|
|
379
|
|
334
|
|
868
|
|
Earnings before income taxes
|
|
12,220
|
|
10,069
|
|
42,067
|
|
33,424
|
|
Income tax expense
|
|
3,716
|
|
3,197
|
|
13,836
|
|
11,091
|
|
Net earnings
|
|
$
|
8,504
|
|
6,872
|
|
28,231
|
|
22,333
|
|
Earnings per common share basic
|
|
$
|
0.47
|
|
0.38
|
|
1.55
|
|
1.24
|
|
Earnings per common share diluted
|
|
0.47
|
|
0.38
|
|
1.55
|
|
1.24
|
|
Weighted average shares outstanding basic
|
|
18,187
|
|
18,024
|
|
18,167
|
|
18,001
|
|
Weighted average shares outstanding diluted
|
|
18,253
|
|
18,098
|
|
18,238
|
|
18,068
|
|
(1) Includes
stock-based compensation of $ 2,041, $1,788, $4,579, and $4,278, 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)
|
|
Nine months ended
|
|
|
|
September 26,
2010
|
|
September 27,
2009
|
|
|
|
|
|
|
|
Cash flows from operating activities:
|
|
|
|
|
|
Net earnings
|
|
$
|
28,231
|
|
22,333
|
|
Adjustments to reconcile net earnings to cash
provided by operations:
|
|
|
|
|
|
Depreciation
|
|
28,312
|
|
23,191
|
|
Amortization
|
|
460
|
|
459
|
|
Loss on asset disposals and store closures
|
|
1,425
|
|
1,289
|
|
Deferred lease credits
|
|
1,468
|
|
1,705
|
|
Deferred income taxes
|
|
2,328
|
|
2,999
|
|
Stock-based compensation
|
|
4,579
|
|
4,278
|
|
Excess tax benefit from the exercise of stock
options
|
|
(172
|
)
|
(418
|
)
|
Change in operating assets and liabilities:
|
|
|
|
|
|
Trading securities
|
|
(1,072
|
)
|
(1,731
|
)
|
Accounts receivable
|
|
(1,432
|
)
|
(1,979
|
)
|
Inventory
|
|
13
|
|
(123
|
)
|
Prepaid expenses
|
|
(953
|
)
|
(218
|
)
|
Other assets
|
|
(654
|
)
|
(52
|
)
|
Unearned franchise fees
|
|
(441
|
)
|
255
|
|
Accounts payable
|
|
3,165
|
|
2,792
|
|
Refundable income taxes
|
|
(3,553
|
)
|
519
|
|
Accrued expenses
|
|
1,342
|
|
2,662
|
|
Net cash provided by operating activities
|
|
63,046
|
|
57,961
|
|
|
|
|
|
|
|
Cash flows from investing activities:
|
|
|
|
|
|
Acquisition of property and equipment
|
|
(45,546
|
)
|
(51,309
|
)
|
Purchase of marketable securities
|
|
(84,398
|
)
|
(39,115
|
)
|
Proceeds of marketable securities
|
|
65,264
|
|
36,720
|
|
Net cash used in investing activities
|
|
(64,680
|
)
|
(53,704
|
)
|
|
|
|
|
|
|
Cash flows from financing activities:
|
|
|
|
|
|
Issuance of common stock
|
|
795
|
|
574
|
|
Tax payments for restricted stock units
|
|
(1,625
|
)
|
(1,513
|
)
|
Excess tax benefit from the exercise of stock options
|
|
172
|
|
418
|
|
Net cash used in financing activities
|
|
(658
|
)
|
(521
|
)
|
Net increase (decrease) in cash and cash
equivalents
|
|
(2,292
|
)
|
3,736
|
|
Cash and cash equivalents at beginning of period
|
|
9,580
|
|
8,347
|
|
Cash and cash equivalents at end of period
|
|
$
|
7,288
|
|
12,083
|
|
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 AND NINE MONTHS ENDED SEPTEMBER
26, 2010 AND SEPTEMBER 27, 2009
(Dollar amounts in thousands except share and per
share data)
(1)
Basis of Financial Statement Presentation
The
consolidated financial statements as of September 26, 2010 and December 27,
2009, and for the three-month and nine-month periods ended September 26,
2010 and September 27, 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 as of September 26, 2010 and December 27,
2009 and for the three-month and nine-month periods ended September 26,
2010 and September 27, 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 and nine-month periods ended September 26,
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 September 26, 2010 and September 27, 2009,
chicken wings were 22.4% and 25.4%, respectively, of restaurant cost of sales.
For the nine-month periods ended September 26, 2010 and September 27,
2009, chicken wings were 24.8%, 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 September 26,
2010:
|
|
Fair Value Measurements
|
|
|
|
Level 1
|
|
Level 2
|
|
Level 3
|
|
Total
|
|
Assets
|
|
|
|
|
|
|
|
|
|
Marketable
Securities
|
|
$
|
4,691
|
|
28,883
|
|
|
|
33,574
|
|
Liabilities
|
|
|
|
|
|
|
|
|
|
Derivatives
|
|
136
|
|
|
|
|
|
136
|
|
|
|
|
|
|
|
|
|
|
|
|
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 derivatives consist of natural gas commodity
futures contracts which are valued with a Level 1 approach using quoted prices
in an active market for identical derivative liabilities that are traded on
exchanges. Our available-for-sale marketable securities are valued using a
Level 2 approach using observable direct and indirect inputs for municipal
bonds.
There
were no transfers between Level 1 and Level 2 of the fair value hierarchy
during the nine-month period ended September 26, 2010.
(4)
Marketable Securities
Marketable
securities were comprised of the following:
|
|
As of
|
|
|
|
September 26,
2010
|
|
December 27,
2009
|
|
Held-to-maturity
|
|
|
|
|
|
Municipal securities
|
|
$
|
30,264
|
|
15,707
|
|
Available-for-sale
|
|
|
|
|
|
Municipal securities
|
|
28,883
|
|
24,307
|
|
Trading
|
|
|
|
|
|
Mutual funds
|
|
4,691
|
|
3,618
|
|
Total
|
|
$
|
63,838
|
|
43,632
|
|
All
held-to-maturity debt securities mature within one year and had aggregate fair
values of $30,261 and $15,712 as of September 26, 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
|
|
|
|
September 26,
2010
|
|
December 27,
2009
|
|
Construction in-process
|
|
$
|
14,274
|
|
6,443
|
|
Buildings
|
|
21,080
|
|
18,338
|
|
Furniture, fixtures, and equipment
|
|
131,808
|
|
121,166
|
|
Leasehold improvements
|
|
168,867
|
|
152,108
|
|
|
|
336,029
|
|
298,055
|
|
Less accumulated depreciation
|
|
(124,563
|
)
|
(108,416
|
)
|
|
|
$
|
211,466
|
|
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 $192 and $365 were recognized in the first nine months of 2010
and 2009, respectively. The fair value of our derivative instruments as of September 26,
2010 and December 27, 2009 was $136 and $11, respectively, and is a
liability included in accrued expenses in the accompanying consolidated balance
sheets. As of September 26, 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 six months. As of September 26, 2010 and December 27,
2009, we were party to natural gas swap contracts with notional values of $469
and $525, respectively.
(7)
Income
Taxes
The
total unrecognized tax benefits reflected on our consolidated balance sheet as
of September 26, 2010 and December 27, 2009 were $671 and $566,
respectively. The increase between the periods was due to accruals for tax
positions taken in 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 $132 and
$89 at September 26, 2010 and December 27, 2009, respectively.
Included in the balance at September 26, 2010 and December 27, 2009,
were unrecognized tax benefits of $436 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 September 26,
2011.
The
Internal Revenue Service has completed the audit of our 2008 U.S. Income Tax
Return. 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 nine-month period ended September 26, 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
|
|
35,984
|
|
48.41
|
|
|
|
|
|
Exercised
|
|
(19,356
|
)
|
9.51
|
|
|
|
|
|
Cancelled
|
|
(1,833
|
)
|
27.94
|
|
|
|
|
|
Outstanding, September 26, 2010
|
|
193,929
|
|
$
|
25.32
|
|
4.2
|
|
$
|
4,397
|
|
Exercisable, September 26, 2010
|
|
95,932
|
|
14.60
|
|
2.9
|
|
3,194
|
|
The
aggregate intrinsic value in the table above is before applicable income taxes,
based on our closing stock price of $47.90 as of the last business day of the
quarter ended September 26, 2010, which would have been received by the
optionees had all options been exercised on that date. As of September 26,
2010, total unrecognized stock-based compensation expense related to nonvested
stock options was approximately $1,252, which is expected to be recognized over
a weighted average period of approximately 2.5 years. During the nine-month
periods ended September 26, 2010 and September 27, 2009, the total
intrinsic value of stock options exercised was $658 and $79, respectively.
During the nine-month period ended September 27, 2009, the total fair
value of options vested was $7. No options vested during the nine-month period
ended September 26, 2010. During the nine-month periods ended September 26,
2010 and September 27, 2009, the weighted average grant date fair value of
options granted was $23.82 and $15.96, respectively.
The
Plan has 488,300 shares available for grant as of September 26, 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 and 2010, 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 nine months of fiscal 2010 was as follows:
|
|
Number
of shares
|
|
Weighted
average
grant date
fair value
|
|
Outstanding, December 27, 2009
|
|
450,869
|
|
$
|
28.43
|
|
|
|
|
|
|
|
Granted
|
|
214,157
|
|
40.80
|
|
Vested
|
|
(9,408
|
)
|
38.25
|
|
Cancelled
|
|
(9,853
|
)
|
31.42
|
|
Outstanding, September 26, 2010
|
|
645,765
|
|
$
|
32.34
|
|
As
of September 26, 2010, the total stock-based compensation expense related
to nonvested awards not yet recognized was $3,791, which is expected to be
recognized over a weighted average period of 1.0 years. The weighted average
grant date fair value of restricted stock units granted during the nine months
ended September 27, 2009 was $33.30. During the nine-month period ended September 26,
2010, we recognized $3,653 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 nine-month period ending in May and November.
During the first nine months of 2010 and 2009, we issued 18,634 and 29,269
shares of common stock under the plan. As of September 26, 2010, we have
322,204 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 and nine-month periods ended September 26, 2010
and September 27, 2009:
|
|
Three months ended September 26, 2010
|
|
|
|
Earnings
(numerator)
|
|
Shares
(denominator)
|
|
Per-share
amount
|
|
Net earnings
|
|
$
|
8,504
|
|
|
|
|
|
Earnings per common share
|
|
8,504
|
|
18,186,957
|
|
$
|
0.47
|
|
Effect of dilutive securities stock options
|
|
|
|
66,407
|
|
|
|
Earnings per common share assuming dilution
|
|
$
|
8,504
|
|
18,253,364
|
|
0.47
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three months ended September 27, 2009
|
|
|
|
Earnings
(numerator)
|
|
Shares
(denominator)
|
|
Per-share
amount
|
|
Net earnings
|
|
$
|
6,872
|
|
|
|
|
|
Earnings per common share
|
|
6,872
|
|
18,024,346
|
|
$
|
0.38
|
|
Effect of dilutive securities stock options
|
|
|
|
73,856
|
|
|
|
Earnings per common share assuming dilution
|
|
$
|
6,872
|
|
18,098,202
|
|
0.38
|
|
|
|
|
|
|
|
|
|
|
|
10
Table
of Contents
|
|
Nine months ended September 26, 2010
|
|
|
|
Earnings
(numerator)
|
|
Shares
(denominator)
|
|
Per-share
amount
|
|
Net earnings
|
|
$
|
28,231
|
|
|
|
|
|
Earnings per common share
|
|
28,231
|
|
18,167,195
|
|
$
|
1.55
|
|
Effect of dilutive securities stock options
|
|
|
|
70,690
|
|
|
|
Earnings per common share assuming dilution
|
|
$
|
28,231
|
|
18,237,885
|
|
1.55
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Nine months ended September 27, 2009
|
|
|
|
Earnings
(numerator)
|
|
Shares
(denominator)
|
|
Per-share
amount
|
|
Net earnings
|
|
$
|
22,333
|
|
|
|
|
|
Earnings per common share
|
|
22,333
|
|
18,001,176
|
|
$
|
1.24
|
|
Effect of dilutive securities stock options
|
|
|
|
66,643
|
|
|
|
Earnings per common share assuming dilution
|
|
$
|
22,333
|
|
18,067,819
|
|
1.24
|
|
|
|
|
|
|
|
|
|
|
|
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-contingent shares for which the
performance criteria had not yet been met:
|
|
Three months ended
|
|
Nine months ended
|
|
|
|
September 26,
2010
|
|
September 27,
2009
|
|
September 26,
2010
|
|
September 27,
2009
|
|
Stock options
|
|
21,376
|
|
54,970
|
|
19,993
|
|
43,022
|
|
Restricted stock units
|
|
645,765
|
|
577,260
|
|
645,765
|
|
577,620
|
|
(10)
Supplemental Disclosures of Cash Flow
Information
|
|
Nine months ended
|
|
|
|
September 26,
2010
|
|
September 27,
2009
|
|
Cash paid during the period for:
|
|
|
|
|
|
Income taxes
|
|
$
|
15,141
|
|
7,692
|
|
Noncash financing and investing transactions:
|
|
|
|
|
|
Property and equipment not yet paid for
|
|
5,920
|
|
199
|
|
Goodwill adjustment
|
|
|
|
274
|
|
|
|
|
|
|
|
|
(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
11
Table of Contents
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 September 26, 2010, we owned and operated 244 company-owned restaurants
and franchised an additional 457 Buffalo Wild Wings
®
Grill &
Bar restaurants in 43 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.
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 27.9% 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, both domestic and
international. 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 third quarter
of 2010. Food and nonalcoholic beverages accounted for 78% of restaurant sales.
The remaining 22% of restaurant sales was from alcoholic beverages. The menu
items with the highest sales volume are traditional and boneless wings at 21%
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 and store closures is
related to company-owned restaurants and includes the costs associated with
closures of locations and normal asset
12
Table of
Contents
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 third 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 and nine-month period is unaudited, and we have prepared it on
the same basis as the audited financial statements. In the opinion of
management, all necessary adjustments, consisting only of normal recurring
adjustments, have been included to present fairly the unaudited quarterly
results.
Quarterly
and annual operating results may fluctuate significantly as a result of a
variety of factors, including increases or decreases in same-store sales,
changes in commodity prices, the timing and number of new restaurant openings
and related expenses, asset impairment charges, store closing charges, general
economic conditions, stock-based compensation, and seasonal fluctuations. As a
result, our quarterly results of operations are not necessarily indicative of
the results that may be achieved for any future period.
|
|
Three months ended
|
|
Nine months ended
|
|
|
|
September 26,
2010
|
|
September 27,
2009
|
|
September 26,
2010
|
|
September 27,
2009
|
|
Revenue:
|
|
|
|
|
|
|
|
|
|
Restaurant sales
|
|
90.5
|
%
|
90.6
|
%
|
90.5
|
%
|
90.7
|
%
|
Franchising royalties and fees
|
|
9.5
|
|
9.4
|
|
9.5
|
|
9.3
|
|
Total revenue
|
|
100.0
|
|
100.0
|
|
100.0
|
|
100.0
|
|
|
|
|
|
|
|
|
|
|
|
Costs and expenses:
|
|
|
|
|
|
|
|
|
|
Restaurant operating costs:
|
|
|
|
|
|
|
|
|
|
Cost of sales
|
|
27.9
|
|
29.8
|
|
29.0
|
|
30.2
|
|
Labor
|
|
30.7
|
|
30.2
|
|
30.2
|
|
30.2
|
|
Operating
|
|
16.7
|
|
16.1
|
|
16.1
|
|
15.5
|
|
Occupancy
|
|
6.7
|
|
6.9
|
|
6.6
|
|
6.7
|
|
Depreciation and amortization
|
|
6.5
|
|
6.2
|
|
6.4
|
|
6.0
|
|
General and administrative
|
|
9.3
|
|
9.8
|
|
8.7
|
|
9.2
|
|
Preopening
|
|
1.8
|
|
0.9
|
|
1.1
|
|
1.3
|
|
Loss on asset disposals and store closures
|
|
0.5
|
|
0.6
|
|
0.4
|
|
0.3
|
|
Total costs and expenses
|
|
92.1
|
|
92.7
|
|
90.7
|
|
91.7
|
|
Income from operations
|
|
7.9
|
|
7.3
|
|
9.3
|
|
8.3
|
|
Investment income
|
|
0.2
|
|
0.3
|
|
0.1
|
|
0.2
|
|
Earnings before income taxes
|
|
8.1
|
|
7.6
|
|
9.4
|
|
8.5
|
|
Income tax expense
|
|
2.5
|
|
2.4
|
|
3.1
|
|
2.8
|
|
Net earnings
|
|
5.6
|
|
5.2
|
|
6.3
|
|
5.7
|
|
13
Table of
Contents
The
number of company-owned and franchised restaurants open are as follows:
|
|
As of
|
|
|
|
September 26,
2010
|
|
September 27,
2009
|
|
Company-owned restaurants
|
|
244
|
|
220
|
|
Franchised restaurants
|
|
457
|
|
400
|
|
The
restaurant sales for company-owned and franchised restaurants are as follows
(amounts in thousands):
|
|
Three months ended
|
|
Nine months ended
|
|
|
|
September 26,
2010
|
|
September 27,
2009
|
|
September 26,
2010
|
|
September 27,
2009
|
|
Company-owned restaurant sales
|
|
$
|
136,953
|
|
$
|
120,290
|
|
$
|
406,446
|
|
$
|
357,477
|
|
Franchised restaurant sales
|
|
286,309
|
|
244,470
|
|
848,171
|
|
725,071
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Increases
in comparable same-store sales are as follows (based on restaurants operating
at least fifteen months):
|
|
Three months ended
|
|
Nine months ended
|
|
|
|
September 26,
2010
|
|
September 27,
2009
|
|
September 26,
2010
|
|
September 27,
2009
|
|
Company-owned same-store sales
|
|
2.6
|
%
|
0.8
|
%
|
0.9
|
%
|
3.3
|
%
|
Franchised same-store sales
|
|
0.3
|
|
1.9
|
|
0.1
|
|
3.8
|
|
The
average prices paid per pound for chicken wings are as follows:
|
|
Three months ended
|
|
Nine months ended
|
|
|
|
September 26,
2010
|
|
September 27,
2009
|
|
September 26,
2010
|
|
September 27,
2009
|
|
Average price per pound
|
|
$
|
1.42
|
|
1.67
|
|
1.62
|
|
1.66
|
|
|
|
|
|
|
|
|
|
|
|
|
Results of Operations for the Three Months Ended September 26,
2010 and September 27, 2009
Restaurant
sales increased by $16.7 million, or 13.9%, to $137.0 million in 2010 from
$120.3 million in 2009. The increase in restaurant sales was due to a $13.7
million increase associated with 20 new company-owned restaurants that opened
in 2010 and 38 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 $2.9 million related to a 2.6% increase in same-store sales.
Franchise
royalties and fees increased by $1.9 million, or 15.6%, to $14.4 million in
2010 from $12.5 million in 2009. The increase was primarily due to additional
royalties collected from 43 new franchised restaurants that opened in 2010 and
20 franchised restaurants that opened in the last three months of 2009.
Same-store sales for franchised restaurants increased 0.3% in the third quarter
of 2010.
Cost
of sales increased by $2.4 million, or 6.8%, to $38.2 million in 2010 from
$35.8 million in 2009 due primarily to more restaurants being operated in 2010.
Cost of sales as a percentage of restaurant sales decreased to 27.9% in 2010
from 29.8% in 2009 primarily due to lower chicken wing prices. For the third
quarter of 2010, the cost of chicken wings averaged $1.42 per pound which was a
15.0% decrease over the same period in 2009. Traditional wing sales decreased
to 20.8% of our restaurant sales in 2010 from 20.9% in 2009. However, boneless wings, which are a better
margin item than traditional wings, increased to 19.2% of our restaurant sales
in 2010 from 19.0% in 2009.
Labor expenses increased by $5.6 million, or 15.5%, to $42.0 million in
2010 from $36.4 million in 2009 due primarily to more restaurants being
operated in 2010. Labor expenses as a percentage of restaurant sales increased
to 30.7% in 2010 from 30.2% in 2009. The increase in labor expenses as a
percentage of restaurant sales was primarily due to higher workers compensation
costs and management bonuses partially offset by lower medical costs.
Operating expenses increased by $3.4 million, or 17.6%, to $22.8
million in 2010 from $19.4 million in 2009 due primarily to more restaurants
being operated in 2010. Operating expenses as a percentage of restaurant sales
increased to 16.7% in 2010 from 16.1% in 2009. The increase in operating
expenses as a percentage of restaurant sales is primarily due to increased
utility and natural gas expenses.
Occupancy
expenses increased by $875,000, or 10.6%, to $9.1 million in 2010 from $8.3
million in 2009 due primarily to more restaurants being operated in 2010.
Occupancy expenses as a percentage of restaurant sales decreased to 6.7% in
2010 from 6.9% in 2009.
14
Table
of Contents
Depreciation
and amortization increased by $1.5 million, or 18.1%, to $9.8 million in 2010
from $8.3 million in 2009. The increase was primarily due to the additional
depreciation on 20 new restaurants opened in 2010 and the 12 new restaurants
that opened in the last three months of 2009.
General
and administrative expenses increased by $1.1 million, or 8.2%, to $14.0
million in 2010 from $12.9 million in 2009 primarily due to additional
headcount. General and administrative expenses as a percentage of total revenue
decreased to 9.3% in 2010 from 9.8% in 2009. Exclusive of stock-based
compensation, our general and administrative expenses as a percentage of
revenue decreased to 7.9% from 8.4% due primarily to leverage of our
wage-related expenses against higher revenue and lower cash incentive expense,
partially offset by higher professional fees.
Preopening
costs increased by $1.6 million, to $2.8 million in 2010 from $1.1 million in
2009. In 2010, we incurred costs of $2.0 million for 11 new company-owned
restaurants opened in the third quarter of 2010 and costs of $797,000 for
restaurants that will open in the fourth quarter of 2010 or later. In 2009, we
incurred costs of $811,000 million for five new company-owned restaurants
opened in the third quarter of 2009, and incurred $320,000 for restaurants that
opened in the fourth quarter of 2009 or later. In 2010, we expect average
preopening costs per restaurant to be approximately $230,000.
Loss on asset disposals and store closures decreased by $160,000 to
$682,000 in 2010 from $842,000 in 2009. In 2010, the loss was related to store
closing costs related to one store closure of $8,000 and the write-off of
miscellaneous equipment and disposals due to remodels. In 2009, the loss was
due to the write-off of miscellaneous equipment and disposals due to remodels.
Investment
income decreased by $74,000 to $305,000 in 2010 from $379,000 in 2009. The
decrease was primarily due to a reduction of earnings on investments held for a
deferred compensation plan. Cash and marketable securities balances at the end
of the third quarter totaled $71.1 million in 2010 compared to $52.4 million at
the end of the third quarter of 2009.
Provision for income taxes increased $519,000 to $3.7 million in 2010
from $3.2 million in 2009. The effective tax rate as a percentage of income
before taxes decreased to 30.4% in 2010 from 31.8% in 2009. For 2010, we
believe our effective annual tax rate will be between 33.0-33.5%.
Results of Operations for the Nine Months Ended September 26,
2010 and September 27, 2009
Restaurant
sales increased by $49.0 million, or 13.7%, to $406.4 million in 2010 from
$357.5 million in 2009. The increase in restaurant sales was due to a $46.0
million increase associated with 20 new company-owned restaurants that opened
in 2010 and 64 company-owned restaurants opened before 2010 that did not meet
the criteria for same-store sales for all or part of the nine-month period, and
$3.0 related to a 0.9% increase in same-store sales.
Franchise
royalties and fees increased by $6.4 million, or 17.7%, to $42.9 million in
2010 from $36.4 million in 2009. The increase was primarily due to additional
royalties collected from 43 new franchised restaurants that opened in 2010 and
20 franchised restaurants that opened in the last three months of 2009.
Same-store sales for franchised restaurants increased 0.1% in 2010.
Cost
of sales increased by $10.1 million, or 9.4%, to $118.1 million in 2010 from $107.9
million in 2009 due primarily to more restaurants being operated in 2010. Cost
of sales as a percentage of restaurant sales decreased to 29.0% in 2010 from
30.2% in 2009. Cost of sales as a percentage of restaurant sales decreased
primarily due to the leverage of food and alcohol costs as a result of menu
price increases and lower chicken wing prices. For the first nine months of
2010, the cost of chicken wings averaged $1.62 per pound which was a 2.4%
decrease over the same period in 2009. Traditional wing sales increased to
20.3% of our restaurant sales in 2010 from 20.2% in 2009. Boneless wings also increased to 19.0% of our
restaurant sales in 2010 from 18.4% in 2009.
Labor expenses increased by $14.8 million, or 13.7%, to $122.8 million
in 2010 from $108.0 million in 2009 due primarily to more restaurants being
operated in 2010. Labor expenses as a percentage of restaurant sales remained
consistent at 30.2% in 2010 and 2009. Labor expenses as a percentage of
restaurant sales was affected by an increase in workers compensation costs
offset by lower medical costs.
Operating expenses increased by $10.1 million, or 18.2%, to $65.5
million in 2010 from $55.4 million in 2009 due primarily to more restaurants
being operated in 2010. Operating expenses as a percentage of restaurant sales
increased to 16.1% in 2010 from 15.5% in 2009. The increase in operating
expenses as a percentage of restaurant sales is primarily due to additional
costs related to pay-per-view sporting events and higher self-insurance costs.
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Occupancy
expenses increased by $3.1 million, or 12.9%, to $26.8 million in 2010 from
$23.8 million in 2009 due primarily to more restaurants being operated in 2010.
Occupancy expenses as a percentage of restaurant sales decreased to 6.6% in
2010 from 6.7% in 2009.
Depreciation
and amortization increased by $5.1 million, or 21.7%, to $28.8 million in 2010
from $23.7 million in 2009. The increase was primarily due to the additional
depreciation on 20 new restaurants opened in 2010 and the 12 new restaurants
that opened in the last three months of 2009.
General
and administrative expenses increased by $2.8 million, or 7.8%, to $39.0
million in 2010 from $36.1 million in 2009 primarily due to additional
headcount and higher professional fees. General and administrative expenses as
a percentage of total revenue decreased to 8.7% in 2010 from 9.2% in 2009. Exclusive
of stock-based compensation, we reduced our general and administrative expenses
as a percentage of revenue to 7.7% from 8.1% due to leverage of our
wage-related expenses against higher revenue and lower cash incentive plan
expenses, partially offset by higher professional fees.
Preopening
costs decreased by $130,000, to $5.1 million in 2010 from $5.2 million in 2009.
In 2010, we incurred costs of $4.3 million for 20 new company-owned restaurants
opened in the first nine months of 2010 and costs of $818,000 for restaurants
that will open in the fourth quarter of 2010 or later. In 2009, we incurred
costs of $4.8 million for 24 new company-owned restaurants opened in the first
nine months of 2009, and incurred costs of $345,000 for restaurants that opened
in the fourth quarter of 2009 or later.
Loss on asset disposals and store closures increased by $330,000 to
$1.6 million in 2010 from $1.3 million in 2009. In 2010, the loss was related
to store closing costs related to eight store closures of $294,000 and the
write-off of miscellaneous equipment and disposals due to remodels. In 2009,
the loss was due to the write-off of miscellaneous equipment and disposals due
to remodels.
Investment
income decreased by $534,000 to $334,000 in 2010 from $868,000 in 2009. The
decrease was primarily due to reduction of earnings on investments held for a
deferred compensation plan. Cash and marketable securities balances at the end
of the third quarter totaled $71.1 million in 2010 compared to $52.4 million at
the end of the third quarter of 2009.
Provision for income taxes increased $2.7 million to $13.8 million in
2010 from $11.1 million in 2009. The effective tax rate as a percentage of
income before taxes decreased to 32.9% in 2010 from 33.2% in 2009. The decrease
in the effective tax rate was due to higher employment tax credits partially
offset by the effects of increased stock-based compensation expenses.
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 September 26, 2010 was $71.1 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 September 26,
2010, nearly all excess cash was invested in high quality municipal securities.
For
the nine months ended September 26, 2010, net cash provided by operating activities
was $63.0 million. Net cash provided by operating activities consisted
primarily of net earnings adjusted for non-cash expenses, an increase in
accounts payable, partially offset by an increase in accounts receivable and
refundable income taxes. The increase in accounts payable was due to an
increase in the number of restaurants and the timing of payments. The increase
in accounts receivable was due to higher credit card balances. The increase in refundable income taxes was
due to the timing of income tax payments.
For
the nine months ended September 27, 2009, net cash provided by operating
activities was $58.0 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, partially 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 nine months ended September 26, 2010 and September 27, 2009, net
cash used in investing activities was $64.7 million and $53.7 million,
respectively. Investing activities included purchases of property and equipment
related to the opening of new company-owned restaurants and restaurants under
construction in both periods. During the first nine months of 2010 and 2009, we
opened 20 and 24 restaurants, respectively. For the full year of 2010, we
expect capital expenditures for approximately 35 new company-owned restaurants
to cost approximately $1.8 million per location and expenditures to be
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approximately
$20 million for the maintenance and remodel of existing restaurants. In the
first nine months of 2010, we purchased $84.4 million of marketable securities
and received proceeds of $65.3 million as these investments matured or were
sold. In the first nine months of 2009, we purchased $39.1 million of
marketable securities and received proceeds of $36.7 million as these investments
matured or were sold.
For
the nine months ended September 26, 2010 and September 27, 2009, net
cash used in financing activities was $658,000 and $521,000, respectively. Net
cash used in financing activities for 2010 resulted primarily from tax payments
for restricted stock units of $1.6 million, partially offset by proceeds from
the exercise of stock options of $795,000 and the excess tax benefit from stock
issuance of $172,000. Net cash used in financing activities for 2009 resulted
primarily from tax payments for restricted stock units of $1.5 million,
partially offset by proceeds from the exercise of stock options of $574,000 and
the excess tax benefit from stock issuance of $418,000. 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 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 36 of our restaurants operate and therefore have limited ability to enter
into sale-leaseback transactions as a potential source of cash.
The
following table presents a summary of our contractual operating lease
obligations and commitments as of September 26, 2010:
|
|
|
|
Payments Due By Period (in thousands)
|
|
|
|
Total
|
|
Less than
One year
|
|
1-3 years
|
|
3-5 years
|
|
After 5
years
|
|
Operating lease obligations
|
|
$
|
254,381
|
|
30,696
|
|
58,092
|
|
52,681
|
|
112,912
|
|
Lease commitments for restaurants under
development
|
|
61,764
|
|
2,843
|
|
8,094
|
|
8,187
|
|
42,640
|
|
Total
|
|
$
|
316,145
|
|
33,539
|
|
66,186
|
|
60,868
|
|
155,552
|
|
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 related to income tax uncertainties amounted to $671,000
as of September 26, 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 September 26, 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
impact our operating income.
·
If we are unable to successfully open new
restaurants, our revenue growth rate and profits may be reduced.
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·
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 domestic and international 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.
·
Economic conditions 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.
·
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.
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·
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.
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
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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 22.4% and 25.4% of our cost of sales in the third
quarters of 2010 and 2009, respectively, with a quarterly average price per
pound of $1.42 and $1.67, 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.
20
Table of
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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.
21
Table
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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: November 3, 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)
|
22
Table
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EXHIBIT INDEX
BUFFALO WILD WINGS, INC.
FORM 10-Q FOR QUARTER ENDED SEPTEMBER 26, 2010
Exhibit
Number
|
|
Description
|
3.1
|
|
|
Restated
Articles of Incorporation, as amended (Incorporated by reference to
Exhibit 3.1 to our Form 10-Q for the fiscal quarter ended
June 29, 2008).
|
|
|
|
|
3.2
|
|
|
Amended
and Restated Bylaws, as amended (Incorporated by reference to
Exhibit 3.1 to our current report on Form 8-K filed May 27,
2009).
|
|
|
|
|
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
|
23
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