FORM 10-Q
QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
For the quarter ended June 29, 2008
Commission File No. 000-24743
BUFFALO WILD WINGS, INC.
(Exact name of registrant as specified in its charter)
Minnesota No. 31-1455915
(State or Other Jurisdiction of (IRS Employer
Incorporation or Organization) Identification No.)
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5500 Wayzata Boulevard, Suite 1600, Minneapolis, MN 55416
(Address of Principal Executive Offices)
Registrant's telephone number (952) 593-9943
Indicate by check mark whether the registrant (1) filed all reports required to be filed by Section 13 or 15(d) of the Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. YES |X| NO |_|
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of "accelerated filer", "large accelerated filer", and "smaller reporting company" in Rule 12b-2 of the Exchange Act. (Check one):
Large accelerated filer |_| Accelerated filer |X| Non-accelerated filer |_| Smaller reporting company |_|
Indicate by check mark whether the registrant is a shell company (as
defined in Exchange Act Rule 12b-2 of the Exchange Act).
YES |_| NO |X|
The number of shares outstanding of the registrant's common stock as of August 1, 2008: 17,822,356 shares.
TABLE OF CONTENTS
Page
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PART I - FINANCIAL INFORMATION
Item 1. Financial Statements 3
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations 12
Item 3. Quantitative and Qualitative Disclosures About Market Risk 19
Item 4. Controls and Procedures 19
PART II - OTHER INFORMATION
Item 1. Legal Proceedings 20
Item 4. Submission of Matters to a Vote of Security Holders 20
Item 6. Exhibits 20
Signatures 21
Exhibit Index 22
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PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
BUFFALO WILD WINGS, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(Dollar amounts in thousands, except share data)
(unaudited)
June 29, December 30,
2008 2007
--------------- ----------------
Assets
Current assets:
Cash and cash equivalents $ 8,678 1,521
Marketable securities 65,279 66,513
Accounts receivable - franchisees, net of allowance of $25 842 885
Accounts receivable - other 6,045 6,976
Inventory 2,517 2,362
Prepaid expenses 1,962 3,060
Refundable income tax 1,228 1,886
Deferred income taxes 2,046 1,303
--------------- ----------------
Total current assets 88,597 84,506
Property and equipment, net 121,309 102,742
Restricted cash 6,764 7,161
Other assets 2,399 2,320
Goodwill 369 369
--------------- ----------------
Total assets $ 219,438 197,098
=============== ================
Liabilities and Stockholders' Equity
Current liabilities:
Unearned franchise fees $ 2,405 2,316
Accounts payable 16,879 10,692
Accrued compensation and benefits 11,139 12,615
Accrued expenses 5,618 6,207
Current portion of deferred lease credits 319 660
--------------- ---------------
Total current liabilities 36,360 32,490
Long-term liabilities:
Other liabilities 1,068 1,031
Marketing fund payables 6,764 7,161
Deferred income taxes 5,295 2,166
Deferred lease credits, net of current portion 13,247 12,585
--------------- ---------------
Total liabilities 62,734 55,433
--------------- ---------------
Commitments and contingencies (note 11)
Stockholders' equity:
Undesignated stock, 1,000,000 shares authorized; none issued -- --
Common stock, no par value. Authorized 44,000,000 shares; issued and outstanding
18,265,464 and 17,933,497 respectively 83,724 80,825
Retained earnings 72,980 60,840
--------------- ---------------
Total stockholders' equity 156,704 141,665
--------------- ---------------
Total liabilities and stockholders' equity $ 219,438 197,098
=============== ===============
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See accompanying notes to consolidated financial statements
BUFFALO WILD WINGS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF EARNINGS
(Dollar and share amounts in thousands except per share data)
(unaudited)
Three months ended Six months ended
------------------------------ -------------------------
June 29, July 1, June 29, July 1,
2008 2007 2008 2007
--------------- ------------- ------------ -----------
Revenue:
Restaurant sales $ 87,462 67,535 174,358 138,594
Franchise royalties and fees 10,406 8,464 20,772 17,307
--------------- ------------- ------------ -----------
Total revenue 97,868 75,999 195,130 155,901
--------------- ------------- ------------ -----------
Costs and expenses:
Restaurant operating costs:
Cost of sales 26,248 20,591 52,663 42,649
Labor 27,020 21,050 52,878 42,157
Operating 13,857 10,729 27,132 22,201
Occupancy 5,902 4,892 11,599 9,610
Depreciation 5,510 4,028 10,749 7,920
General and administrative (1) 9,047 8,538 18,388 17,155
Preopening 1,758 987 2,943 1,305
Loss on asset disposals and impairment 385 153 1,138 232
--------------- ------------- ------------ -----------
Total costs and expenses 89,727 70,968 177,490 143,229
--------------- ------------- ------------ -----------
Income from operations 8,141 5,031 17,640 12,672
Interest income 400 755 832 1,455
--------------- ------------- ------------ -----------
Earnings before income taxes 8,541 5,786 18,472 14,127
Income tax expense 2,926 1,945 6,332 4,745
--------------- ------------- ------------ -----------
Net earnings $ 5,615 3,841 12,140 9,382
=============== ============= ============ ===========
Earnings per common share - basic $ 0.32 0.22 0.68 0.54
Earnings per common share - diluted 0.31 0.22 0.68 0.53
Weighted average shares outstanding - basic 17,810 17,560 17,788 17,504
Weighted average shares outstanding - diluted 17,906 17,744 17,893 17,716
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(1) Includes stock-based compensation of $904, $1,065, $1,924, and $2,332, respectively
See accompanying notes to consolidated financial statements
BUFFALO WILD WINGS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Dollar amounts in thousands)
(unaudited)
Six months ended
-------------------------
June 29, July 1,
2008 2007
------------ -----------
Cash flows from operating activities:
Net earnings $ 12,140 9,382
Adjustments to reconcile net earnings to cash provided by operations:
Depreciation 10,749 7,920
Amortization 36 (43)
Loss on asset disposals and impairment 1,138 232
Deferred lease credits 1,113 391
Deferred income taxes 2,386 (952)
Stock-based compensation 1,924 2,332
Excess tax benefit from the exercise of stock options (302) (720)
Change in operating assets and liabilities:
Trading securities (76) (210)
Accounts receivable 182 (392)
Inventory (155) (185)
Prepaid expenses 1,098 (419)
Other assets (79) (32)
Unearned franchise fees 89 17
Accounts payable 376 217
Refundable income tax 960 (1,073)
Accrued expenses (928) 1,176
------------ -----------
Net cash provided by operating activities 30,651 17,641
------------ -----------
Cash flows from investing activities:
Acquisition of property and equipment (24,643) (11,769)
Purchase of marketable securities (68,578) (93,339)
Proceeds of marketable securities 69,852 81,916
------------ -----------
Net cash used in investing activities (23,369) (23,192)
------------ -----------
Cash flows from financing activities:
Issuance of common stock 562 860
Tax payments for restricted stock units (989) (1,183)
Excess tax benefit from the exercise of stock options 302 720
------------ -----------
Net cash provided by (used in) financing activities (125) 397
------------ -----------
Net increase (decrease) in cash and cash equivalents 7,157 (5,154)
Cash and cash equivalents at beginning of period 1,521 11,756
------------ -----------
Cash and cash equivalents at end of period $ 8,678 6,602
============ ===========
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See accompanying notes to consolidated financial statements
BUFFALO WILD WINGS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE THREE MONTHS AND SIX MONTHS ENDED JUNE 29, 2008 AND JULY 1, 2007
(Dollar amounts in thousands, except share and per-share amounts)
(1) Basis of Financial Statement Presentation
The consolidated financial statements as of June 29, 2008 and December 30, 2007, and for the three-month and six-month periods ended June 29, 2008 and July 1, 2007, have been prepared by Buffalo Wild Wings, Inc. pursuant to the rules and regulations of the Securities and Exchange Commission (the "SEC"). The financial information for the three-month and six-month periods ended June 29, 2008 and July 1, 2007 is unaudited, but, in the opinion of management, reflects all adjustments and accruals necessary for a fair presentation of the financial position, results of operations, and cash flows for the interim periods.
References in the remainder of this document to "Buffalo Wild Wings," "we," "us" and "our" refer to the business of Buffalo Wild Wings, Inc. and our subsidiaries.
The financial information as of December 30, 2007 is derived from our audited consolidated financial statements and notes thereto for the fiscal year ended December 30, 2007, which is included in Item 8 in the fiscal 2007 Annual Report on Form 10-K, and should be read in conjunction with such financial statements.
The results of operations for the three-month and six-month periods ended June 29, 2008 are not necessarily indicative of the results of operations that may be achieved for the entire year ending December 28, 2008.
(2) Summary of Significant Accounting Policies
(a) Inventories
Inventories are stated at the lower of cost or market. Cost is determined by the first-in, first-out (FIFO) method.
We purchase our products from a number of suppliers and believe there are alternative suppliers. We have minimum purchase commitments from some of our vendors, but the terms of the contracts and nature of the products are such that our purchase requirements do not create a market risk. We currently have numerous products subject to fixed price contracts. These contracts are typically less than one year in length. When these contracts are up for renewal, we may be exposed to price volatility. The primary food product used by our restaurants and our franchised restaurants is fresh chicken wings. We are currently purchasing chicken wings at market prices. Fresh chicken wings were purchased by us based on a chicken wing contract which fixed 80-90% of our chicken wing purchases at $1.23 per pound. This one-year agreement expired in March 2008. Material increases in fresh chicken wing costs may adversely affect our operating results. For the three-month periods ended June 29, 2008 and July 1, 2007, fresh chicken wings were 20.4% and 23.0%, respectively, of restaurant cost of sales. For the six-month periods ended June 29, 2008 and July 1, 2007, fresh chicken wings were 21.5% and 24.2%, respectively, of restaurant cost of sales.
(b) New Accounting Pronouncements
In December 2007, the Financial Accounting Standards Board (FASB) issued SFAS No. 141R, "Business Combinations" (SFAS No. 141R), which provides companies with principles and requirements on how an acquirer recognizes and measures in its financial statements the identifiable assets acquired, liabilities assumed, and any noncontrolling interest in the acquiree as well as the recognition and measurement of goodwill acquired in a business combination. SFAS No. 141R also requires certain disclosures to enable users of the financial statements to evaluate the nature and financial effects of the business combination. Acquisition costs associated with the business combination will generally be expensed as incurred. SFAS No. 141R is effective for business combinations occurring in fiscal years beginning after December 15, 2008. Early adoption of SFAS No. 141R is prohibited.
In February 2007, the FASB issued SFAS No. 159 "The Fair Value Option for Financial Assets and Financial Liabilities" (SFAS No. 159), which permitted an entity to measure certain financial assets and liabilities at fair value. The statement's objective is to improve financial reporting by allowing entities to mitigate volatility in reported earnings caused by the measurement of related assets and liabilities using different attributes, without having to apply complex hedge accounting provisions. This statement became effective for fiscal years beginning after November 15, 2007 and was to be applied prospectively. We adopted the provisions of SFAS No. 159 on January 1, 2008. As we did not elect to measure existing assets and liabilities at fair value, the adoption of this statement did not have an effect on our financial statements.
In September 2006, the FASB issued SFAS No. 157, "Fair Value Measurements," (SFAS No. 157). This statement does not require any new fair value measurements, but rather, it provides enhanced guidance to other pronouncements that require or permit assets or liabilities to be measured at fair value. The changes to current practice resulting from the application of this statement relate to the definition of fair value, the methods used to estimate fair value, and the requirement for expanded disclosures about estimates of fair value. This statement became effective for fiscal years beginning after November 15, 2007, and interim periods within those fiscal years. The effective date for this statement for all nonfinancial assets and nonfinancial liabilities, except for items that are recognized or disclosed at fair value in the financial statements on a recurring basis, has been delayed by one year. We adopted the provisions of SFAS No. 157 related to financial assets and financial liabilities on December 31, 2007. The partial adoption of this statement did not have a material impact on our financial statements. It is expected that the remaining provisions of this statement will not have a material effect on our financial statements.
Fair value is defined as the price at which an asset could be exchanged in a current transaction between knowledgeable, willing parties or the amount that would be paid to transfer a liability to a new obligor, not the amount that would be paid to settle the liability with the creditor. Where available, fair value is based on observable market prices or parameters or derived from such prices or parameters. Where observable prices or inputs are not available, valuation models are applied. These valuation techniques involve some level of management estimation and judgment, the degree of which is dependent on the price transparency for the instruments or market and the instruments' complexity.
Assets recorded at fair value in our consolidated balance sheets are categorized based upon the level of judgment associated with the inputs used to measure their fair value. Hierarchical levels, defined by SFAS No. 157 and directly related to the amount of subjectivity associated with the inputs to fair valuation of these assets and liabilities, are as follows:
Level 1 - Inputs were unadjusted, quoted prices in active markets for identical assets or liabilities at the measurement date.
Level 2 - Inputs (other than quoted prices included in Level
1) were either directly or indirectly observable for the asset
or liability through correlation with market data at the
measurement date and for the duration of the instrument's
anticipated life.
Level 3 - Inputs reflected management's best estimate of what market participants would use in pricing the asset or liability at the measurement date. Consideration was given to the risk inherent in the valuation technique and the risk inherent in the inputs to the model.
Determining which hierarchical level an asset falls within requires significant judgment. We will evaluate our hierarchy disclosures each quarter. The following table summarizes the financial instruments measured at fair value in our consolidated balance sheet as of June 29, 2008:
Fair Value Measurements
---------------------------------------------------------
Level 1 Level 2 Level 3 Total
------------- -------------- -------------- ------------
Assets
Short-term investments (1) $ 1,667 $ 42,820 $ -- $ 44,487
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(1) We classified a portion of our marketable securities as available-for-sale and trading securities which were reported at fair market value, using the "market approach" valuation technique. The "market approach" valuation method used prices and other relevant information observable in market transactions involving identical or comparable assets. Our trading securities are valued using the Level 1 approach. Our available-for-sale marketable securities are valued using the Level 2 approach.
SFAS No. 157 requires separate disclosure of assets measured at fair value on a recurring basis, as documented above, from those measured at fair value on a nonrecurring basis. As of June 29, 2008, no assets or liabilities were measured at fair value on a nonrecurring basis.
(3) Marketable Securities
Marketable securities were comprised of the following:
As of
----------------------------------
June 29, December 30,
2008 2007
---------------- ----------------
Held-to-maturity:
Municipal securities $ 20,792 23,718
Available-for-sale:
Municipal securities 42,820 41,206
Trading:
Mutual funds 1,667 1,589
---------------- ----------------
Total $ 65,279 66,513
================ ================
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All held-to-maturity debt securities are due within one year and had aggregate fair values of $20,812 and $23,753 as of June 29, 2008 and December 30, 2007, respectively. Trading securities represents investments held for future needs of a non-qualified deferred compensation plan.
(4) Property and Equipment
Property and equipment were comprised of the following:
As of
----------------------------------
June 29, December 30,
2008 2007
---------------- ----------------
Construction in-process $ 13,790 1,851
Furniture, fixtures, and equipment 76,375 69,962
Leasehold improvements 105,656 97,916
---------------- ----------------
195,821 169,729
Less accumulated depreciation (74,512) (66,987)
---------------- ----------------
$ 121,309 102,742
================ ================
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(5) Stockholders' Equity
(a) Stock Options
We have 3.9 million shares of common stock reserved for issuance under a stock-based compensation plan for employees, officers, and directors. The option price for shares issued under this plan is to be not less than the fair market value on the date of grant. Incentive stock options become exercisable in four equal installments from the date of the grant and have a contractual life of seven to ten years. Nonqualified stock options issued pursuant to the plan have varying vesting periods from immediately to one year and have a contractual life of ten years. Incentive stock options may be granted under this plan until May 15, 2018. We issue new shares of common stock upon exercise of stock options and disbursement of restricted stock units. Option activity is summarized for the six months ended June 29, 2008 as follows:
Weighted Weighted Average
Number average Remaining Aggregate Intrinsic
of shares exercise price Contractual Life Value
-------------- ---------------- ------------------ ---------------------
Outstanding, December 30, 2007 176,603 $ 5.61 3.9 $ 3,096
Granted 58,272 24.96
Exercised (38,699) 3.41
Cancelled (8,590) 7.55
-------------- ---------------- ------------------ ---------------------
Outstanding, June 29, 2008 187,586 11.98 4.6 2,595
Exercisable, June 29, 2008 127,339 6.00 3.7 2,524
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The aggregate intrinsic value in the table above is before applicable income taxes, based on our closing stock price of $25.82 as of the last business day of the quarter ended June 29, 2008, which would have been received by the optionees had all options been exercised on that date. As of June 29, 2008, total unrecognized stock-based compensation expense related to nonvested stock options was approximately $573, which is expected to be recognized over a weighted average period of approximately 2.0 years. During the six-month periods ended June 29, 2008 and July 1, 2007, the total intrinsic value of stock options exercised was $867 and $5,012, respectively. During the six-month periods ended June 29, 2008 and July 1, 2007, the total fair value of options vested was $24 and $480, respectively.
The plan has 1,323,512 shares available for grant as of June 29,
2008.
(b) Restricted Stock Units
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We adopted a stock performance plan in June 2004, under which restricted stock units are granted annually at the discretion of the Board. For restricted stock units granted prior to 2008, units vest annually upon achieving performance targets. Our performance targets are annual income targets set by our Board of Directors at the beginning of the year. We record compensation expense for the restricted stock units if vesting, based on the achievement of the performance targets. The restricted stock units may vest one-third annually over a ten-year period as determined by meeting performance targets. However, the second one-third of the restricted stock units is not subject to vesting until the first one-third has vested and the final one-third is not subject to vesting until the first two-thirds of the award have vested.
In 2008, restricted stock units were granted subject to cumulative three-year income targets. The number of units that vest each year are based on performance against those targets. These restricted stock units have a three-year life and are subject to forfeiture if not vested at the end of that period. Compensation expense is recognized for the expected number of units to vest over the three-year period. One third of the expected cumulative expense is recorded each year.
Restricted stock unit activity is summarized for the six months ended June 29, 2008:
Weighted
average
Number grant date
of shares fair value
-------------- ----------------
Outstanding, December 30, 2007 140,692 $ 20.92
Granted 325,121 23.10
Vested (18,151) 23.14
Cancelled (4,504) 22.43
-------------- ----------------
Outstanding, June 29, 2008 443,158 22.42
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As of June 29, 2008, the total stock-based compensation expense related to nonvested awards not yet recognized was $5,174, which is expected to be recognized over a weighted average period of 1.3 years. During the six-month periods ended June 29, 2008 and July 1, 2007, the total fair value of vested shares were $420 and $372, respectively. The weighted average grant date fair value of restricted stock units granted during the six months ended July 1, 2007 was $26.75.
(c) Employee Stock Purchase Plan
We have reserved 600,000 shares of common stock for issuance under the Employee Stock Purchase Plan (ESPP). The ESPP is available to substantially all employees subject to employment eligibility requirements. Participants may purchase our common stock at 85% of the beginning or ending closing price, whichever is lower, for each six-month period ending in May and November. During the first six months of 2008 and 2007, we issued 17,974 and 12,744 shares of common stock under the plan. As of June 29, 2008, the ESPP has 415,004 shares available for future issuance.
(6) Earnings Per Share
The following is a reconciliation of basic and fully diluted earnings per share for the three-month and six-month periods ended June 29, 2008 and July 1, 2007:
Three months ended June 29, 2008
-------------------------------------------------
Earnings Shares Per-share
(numerator) (denominator) amount
--------------- ------------------ ------------
Net earnings $ 5,615
---------------
Earnings per common share--basic 5,615 17,810,391 $ 0.32
Effect of dilutive securities
Stock options -- 96,085
--------------- ------------------
Earnings per common share--diluted $ 5,615 17,906,476 0.31
=============== ==================
Three months ended July 1, 2007
-------------------------------------------------
Earnings Shares Per-share
(numerator) (denominator) amount
--------------- ------------------ ------------
Net earnings $ 3,841
---------------
Earnings per common share--basic 3,841 17,560,163 $ 0.22
Effect of dilutive securities
Stock options -- 183,713
--------------- ------------------
Earnings per common share--diluted $ 3,841 17,743,876 0.22
=============== ==================
Six months ended June 29, 2008
-------------------------------------------------
Earnings Shares Per-share
(numerator) (denominator) amount
--------------- ------------------ ------------
Net earnings $ 12,140
---------------
Earnings per common share--basic 12,140 17,788,361 $ 0.68
Effect of dilutive securities
Stock options -- 104,341
--------------- ------------------
Earnings per common share--diluted $ 12,140 17,892,702 0.68
=============== ==================
Six months ended July 1, 2007
-------------------------------------------------
Earnings Shares Per-share
(numerator) (denominator) amount
--------------- ------------------ ------------
Net earnings $ 9,382
---------------
Earnings per common share--basic 9,382 17,504,096 $ 0.54
Effect of dilutive securities
Stock options -- 211,517
--------------- ------------------
Earnings per common share--diluted $ 9,382 17,715,613 0.53
=============== ==================
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501,430 shares and 292,836 shares for the three-month periods ended June 29, 2008 and July 1, 2007, respectively, and 486,382 shares and 292,836 shares for the six-month periods ended June 29, 2008 and July 1, 2007, respectively, have been excluded from the fully diluted calculation because the effect on earnings per common share would have been antidilutive.
(7) Supplemental Disclosures of Cash Flow Information
Six months ended
------------------------------------
June 29, July 1,
2008 2007
----------------- -----------------
Cash paid during the period for:
Income taxes $ 3,023 $ 6,411
Noncash financing and investing transactions:
Property and equipment not yet paid for 5,811 710
Tax withholding for restricted stock units -- 1,086
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(8) Income Taxes
We adopted the provisions of FASB Interpretation No. 48, "Accounting for Uncertainty in Income Taxes" (FIN 48), on January 1, 2007. The total unrecognized tax benefits reflected on our balance sheet as of December 30, 2007 and June 29, 2008 were $241 and $283, respectively. The increase was due to additions based on tax positions related to the current year. We recognize potential accrued interest and penalties related to unrecognized tax benefits within its operations in income tax expense. The accrual for interest and penalties related to unrecognized tax benefits were $99 at June 29, 2008. Included in the total unrecognized tax benefits at December 30, 2007 and June 29, 2008 are benefits of $157 and $184, respectively, which if recognized would affect the annual effective tax rate. We do not anticipate any significant change to the total unrecognized tax benefits prior to June 28, 2009.
The Internal Revenue Service has completed its examination of our 2005 U.S. Income Tax Return. No changes were reported. With few exceptions, we are no longer subject to state income tax examinations for years before 2004.
(9) Acquisition of Don Pablo's Locations and Restaurant Impairment
During February 2008, we acquired certain leases and assets of eight locations from Avado Brands, Inc. for approximately $1,200. Due to this acquisition, we recorded an impairment charge for the assets of a restaurant being relocated. An impairment charge of $395 was recorded to the extent that the carrying amount was not considered recoverable based on estimated future discounted cash flows.
(10) Acquisition of Las Vegas Franchise
On May 18, 2007, the Company exercised a right of first refusal to acquire the assets of nine Buffalo Wild Wings franchised restaurants in the Las Vegas, Nevada area. The Company expects the acquisition, if completed, to close in the third quarter of 2008. The purchase price is approximately $26 million and will be funded with available cash and marketable securities. The acquisition is subject to purchase price adjustments. The transaction also remains dependent on receipt of necessary approvals for gaming and liquor licenses, and other customary closing conditions.
(11) Contingencies
We are involved in various legal actions arising in the ordinary course of
business. In the opinion of management, the ultimate disposition of these
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matters will not have a material adverse effect on our consolidated financial position, results of operations, or cash flows.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The following discussion and analysis of our financial condition and results of operations should be read in conjunction with our consolidated financial statements and related notes included in Item 1 of Part 1 of this Quarterly Report and the audited consolidated financial statements and related notes and Management's Discussion and Analysis of Financial Condition and Results of Operations contained in our Annual Report on Form 10-K for the fiscal year ended December 30, 2007. This discussion and analysis contains certain statements that are not historical facts, including, among others, those relating to our anticipated financial performance for 2008, cash requirements, and our expectations and strategies relating to store openings. Such statements are forward-looking and risks and uncertainties include, but are not limited to, those discussed in this Form 10-Q under Item 2 of Part I as well as in Item 1A of Part I of the fiscal 2007 Form 10-K.
Critical Accounting Policies and Use of Estimates
Our most critical accounting policies, which are those that require significant judgment, include: valuation of long-lived assets and store closing reserves, vendor allowances, revenue recognition from franchise operations, and self-insurance liability. An in-depth description of these can be found in our Annual Report on Form 10-K for the fiscal year ended December 30, 2007. There have been no changes to those policies during this period.
Overview
As of June 29, 2008, we owned and operated 169 company-owned and franchised an additional 346 Buffalo Wild Wings(R) Grill & Bar restaurants in 37 states. Of the 515 system-wide restaurants, 86 are located in Ohio. The restaurants have elements of both the quick casual and casual dining styles, both of which are part of a growing industry. Our long-term focus is to grow to a national chain of over 1,000 locations, continuing the strategy of developing both company-owned and franchised restaurants.
Our growth and success depend on several factors and trends. First, we continue to monitor and react to changes in our cost of goods sold. The cost of goods sold is difficult to predict, as it ranged from 30.0% to 31.0% of restaurant sales per quarter in 2008 and 2007. We are working to counteract the volatility of chicken wing prices with the introduction of popular new menu items, effective marketing promotions, focused efforts on food costs and waste, and menu price increases. We will continue to monitor the cost of fresh chicken wings, as it can significantly change our cost of sales and cash flow from company-owned restaurants. We are also exploring purchasing strategies to lessen the severity of cost increases and fluctuations and are reviewing menu additions and other strategies that may decrease the percentage that fresh chicken wings represent in terms of total restaurant sales. We are currently purchasing chicken wings at market prices. In March 2007, we had entered into a one-year pricing agreement which fixed 80-90% of our chicken wing purchases at $1.23 per pound. This agreement expired in March 2008. We currently have numerous products subject to fixed price contracts. These contracts are typically less than one year in length. When these contracts are up for renewal, we may be exposed to price volatility.
A second factor is our success in new markets. There are inherent risks in opening new restaurants, especially in new markets, for various reasons, including the lack of experience, logistical support, and brand awareness in a new market. These factors may result in lower than anticipated sales and cash flow for new restaurants in new markets. In 2008, we plan to develop the majority of our company-owned restaurants primarily in markets where we currently have either company-owned or franchised restaurants. We believe this development focus, together with our focus on our new restaurant opening procedures, will help mitigate the overall risk associated with opening restaurants in new markets.
Third, we will continue our focus on trends in company-owned and franchised same-store sales as an indicator of the continued acceptance of our concept by consumers. We also review the overall trend in average weekly sales as an indicator of our ability to increase the sales volume and, therefore, cash flow per location. We remain committed to high quality operations and guest hospitality.
Our revenue is generated by:
o Sales at our company-owned restaurants, which were 89% of total revenue in the second quarter of 2008. Food and nonalcoholic beverages accounted for 75% of restaurant sales. The remaining 25% of restaurant sales was from alcoholic beverages. The menu item with the highest sales volume was chicken wings at 22% of total restaurant sales.
o Royalties and franchise fees received from our franchisees.
We generate cash from the operation of company-owned restaurants and from franchise royalties and fees. We highlight the specific costs associated with the on-going operation of our company-owned restaurants in the statement of earnings under "Restaurant operating costs." Nearly all of our depreciation expense relates to assets used by our company-owned restaurants. Preopening costs are those costs associated with opening new company-owned restaurants and will vary quarterly based on the number of new locations opened and under construction. Loss on asset disposals and impairment expense is related to company-owned restaurants and includes the impairment of assets due to a relocation and the write-down of miscellaneous assets. Certain other expenses, such as general and administrative, relate to both company-owned and franchising operations.
We operate on a 52 or 53-week fiscal year ending on the last Sunday in December. Both of the second quarters of 2008 and 2007 consisted of thirteen weeks.
Quarterly Results of Operations
Our operating results for the periods indicated are expressed below as a percentage of total revenue, except for the components of restaurant operating costs, which are expressed as a percentage of restaurant sales. The information for each three-month and six-month period is unaudited, and we have prepared it on the same basis as the audited financial statements. In the opinion of management, all necessary adjustments, consisting only of normal recurring adjustments, have been included to present fairly the unaudited quarterly results.
Quarterly and annual operating results may fluctuate significantly as a result of a variety of factors, including increases or decreases in same-store sales, changes in commodity prices, the timing and number of new restaurant openings and related expenses, asset impairment charges, store closing charges, general economic conditions, stock-based compensation, and seasonal fluctuations. As a result, our quarterly results of operations are not necessarily indicative of the results that may be achieved for any future period.
Three months ended Six months ended
------------------- ------------------
June 29, July 1, June 29, July 1,
2008 2007 2008 2007
-------- --------- ------- --------
Revenue:
Restaurant sales 89.4% 88.9% 89.4% 88.9%
Franchising royalties and fees 10.6 11.1 10.6 11.1
-------- --------- ------- --------
Total revenue 100.0 100.0 100.0 100.0
-------- --------- ------- --------
Costs and expenses:
Restaurant operating costs:
Cost of sales 30.0 30.5 30.2 30.8
Labor 30.9 31.2 30.3 30.4
Operating 15.8 15.9 15.6 16.0
Occupancy 6.7 7.2 6.7 6.9
Depreciation 5.6 5.3 5.5 5.1
General and administrative 9.2 11.2 9.4 11.0
Preopening 1.8 1.3 1.5 0.8
Loss on asset disposals and impairment 0.4 0.2 0.6 0.1
-------- --------- ------- --------
Total costs and expenses 91.7 93.4 91.0 91.9
-------- --------- ------- --------
Income from operations 8.3 6.6 9.0 8.1
Interest income 0.4 1.0 0.4 0.9
-------- --------- ------- --------
Earnings before income taxes 8.7 7.6 9.5 9.1
Income tax expense 3.0 2.6 3.2 3.0
-------- --------- ------- --------
Net earnings 5.7 5.1 6.2 6.0
======== ========= ======= ========
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The number of company-owned and franchised restaurants open are as follows:
As of
------------------------
June 29, July 1,
2008 2007
---------- ------------
Company-owned restaurants 169 145
Franchised restaurants 346 301
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The restaurant sales for company-owned and franchised restaurants are as follows (amounts in thousands):
Three months ended Six months ended
----------------------- ------------------------
June 29, July 1, June 29, July 1,
2008 2007 2008 2007
----------- ---------- ---------- ------------
Company-owned restaurant sales $ 87,462 $ 67,535 $ 174,358 $ 138,594
Franchised restaurant sales 206,718 169,859 413,606 347,316
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Increases in comparable same-store sales are as follows (based on restaurants operating at least fifteen months):
Three months ended Six months ended
----------------------- ------------------------
June 29, July 1, June 29, July 1,
2008 2007 2008 2007
----------- ---------- ---------- ------------
Company-owned same-store sales 8.3% 8.1% 6.1% 8.4%
Franchised same-store sales 4.5 4.0 3.3 3.7
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The quarterly average prices paid per pound for fresh chicken wings are as follows:
Three months ended Six months ended
----------------------- ------------------------
June 29, July 1, June 29, July 1,
2008 2007 2008 2007
----------- ---------- ---------- ------------
Average price per pound $ 1.17 1.25 1.25 1.32
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Results of Operations for the Three Months Ended June 29, 2008 and July 1, 2007
Restaurant sales increased by $19.9 million, or 29.5%, to $87.5 million in 2008 from $67.5 million in 2007. The increase in restaurant sales was due to a $14.6 million increase associated with five new company-owned restaurants that opened in 2008 and 27 company-owned restaurants opened before 2008 that did not meet the criteria for same-store sales for all or part of the three-month period and $5.4 million related to an 8.3% increase in same-store sales.
Franchise royalties and fees increased by $1.9 million, or 22.9%, to $10.4 million in 2008 from $8.5 million in 2007. The increase was primarily due to additional royalties collected from 17 new franchised restaurants that opened in 2008 and 33 franchised restaurants that opened in the last six months of 2007. Same-store sales for franchised restaurants increased 4.5% in 2008.
Cost of sales increased by $5.7 million, or 27.5%, to $26.2 million in 2008 from $20.6 million in 2007 due primarily to more restaurants being operated in 2008. Cost of sales as a percentage of restaurant sales decreased to 30.0% in 2008 from 30.5% in 2007. The decrease in cost of sales as a percentage of restaurant sales was primarily due to the leverage of food and alcohol costs as a result of menu price increases. Also, boneless wing sales have increased as a part of our menu mix providing better margins and a corresponding lower cost of goods percentage. The pricing agreement which fixed 80-90% of our chicken wing purchases at $1.23 per pound in the second quarter of 2007 expired in March 2008. For the second quarter of 2008, wing prices averaged $1.17 per pound which was a 6.4% decrease over the same period in 2007.
Labor expenses increased by $6.0 million, or 28.4%, to $27.0 million in 2008 from $21.1 million in 2007 due primarily to more restaurants being operated in 2008. Labor expenses as a percentage of restaurant sales decreased to 30.9% in 2008 from 31.2% in 2007. The decrease in labor expenses as a percentage of restaurant sales was primarily due to lower-than-expected workers' compensation costs partially offset by higher health insurance cost and higher unit-level bonus.
Operating expenses increased by $3.1 million, or 29.2%, to $13.9 million in 2008 from $10.7 million in 2007 due primarily to more restaurants being operated in 2008. Operating expenses as a percentage of restaurant sales decreased to 15.8% in 2008 from 15.9% in 2007. The decrease in operating expenses as a percentage of restaurant sales is primarily due to lower repair and maintenance costs and cable programming expense partially offset by higher utility charges.
Occupancy expenses increased by $1.0 million, or 20.6%, to $5.9 million in 2008 from $4.9 million in 2007 due primarily to more restaurants being operated in 2008. Occupancy expenses as a percentage of restaurant sales decreased to 6.7% in 2008 from 7.2% in 2007.
Depreciation increased by $1.5 million, or 36.8%, to $5.5 million in 2008 from $4.0 million in 2007. The increase was primarily due to the additional depreciation on nine new restaurants opened in 2008 and the 17 new restaurants that opened in the last six months of 2007. Accelerated depreciation related to three upcoming relocations as part of the conversion of Don Pablos sites, remodels, and HDTV upgrades also contributed to the increase.
General and administrative expenses increased by $509,000, or 6.0%, to $9.0 million in 2008 from $8.5 million in 2007 primarily due to additional headcount and higher payroll and travel-related expenditures. General and administrative expenses as a percentage of total revenue decreased to 9.2% in 2008 from 11.2% in 2007. Exclusive of stock-based compensation, we reduced our general and administrative expenses as a percentage of revenue to 8.3% from 9.8% with lower conference and travel costs.
Preopening costs increased by $771,000, to $1.8 million in 2008 from $987,000 in 2007. In 2008, we incurred costs of $988,000 for five new company-owned restaurants opened in the second quarter of 2008, and incurred $674,000 for restaurants that will open in the second half of 2008. In 2007, we incurred costs of $769,000 for the five new company-owned restaurants opened in the second quarter of 2007, and incurred $216,000 for restaurants that opened in the third quarter of 2007 or later. In 2008, we expect average preopening costs per restaurant to be $215,000.
Loss on asset disposals and impairment increased by $232,000 to $385,000 in 2008 from $153,000 in 2007. In 2008, the loss was related to HDTV upgrades and write-off of miscellaneous equipment. In 2007, the loss was due to the write-off of miscellaneous equipment.
Interest income decreased by $355,000 to $400,000 in 2008 from $755,000 in 2007. The decrease was primarily due to lower interest rates. Cash and marketable securities balances at the end of the quarter totaled $74.0 million in 2008 compared to $71.1 million for the second quarter of 2007.
Provision for income taxes increased $981,000 to $2.9 million in 2008 from $1.9 million in 2007. The effective tax rate as a percentage of income before taxes increased to 34.3% in 2008 from 33.6% in 2007. The 2008 income tax rate was higher due to lower tax exempt interest income and higher state income taxes. For 2008, we believe our effective tax rate will be about 34.0%.
Results of Operations for the Six Months Ended June 29, 2008 and July 1, 2007
Restaurant sales increased by $35.8 million, or 25.8%, to $174.4 million in 2008 from $138.6 million in 2007. The increase in restaurant sales was due to a $27.6 million increase associated with nine new company-owned restaurants that opened in 2008 and 30 company-owned restaurants opened before 2008 that did not meet the criteria for same-store sales for all or part of the six-month period and $8.2 million related to a 6.1% increase in same-store sales.
Franchise royalties and fees increased by $3.5 million, or 20.0%, to $20.8 million in 2008 from $17.3 million in 2007. The increase was primarily due to additional royalties collected from 17 new franchised restaurants that opened in 2008 and 33 franchised restaurants that opened in the last six months of 2007. Same-store sales for franchised restaurants increased 3.3% in 2008.
Cost of sales increased by $10.0 million, or 23.5%, to $52.7 million in 2008 from $42.6 million in 2007 due primarily to more restaurants being operated in 2008. Cost of sales as a percentage of restaurant sales decreased to 30.2% in 2008 from 30.8% in 2007. The decrease in cost of sales as a percentage of restaurant sales was primarily due to the leverage of food and alcohol costs as a result of menu price increases. Also, boneless wing sales have increased as a part of our menu mix providing better margins and a corresponding lower cost of goods percentage. The pricing agreement which fixed 80-90% of our chicken wing purchases at $1.23 per pound in the second quarter of 2007 expired in March 2008. For the first half of 2008, wing prices averaged $1.25 per pound which was a 5.3% decrease over the same period in 2007.
Labor expenses increased by $10.7 million, or 25.4%, to $52.9 million in 2008 from $42.2 million in 2007 due primarily to more restaurants being operated in 2008. Labor expenses as a percentage of restaurant sales decreased to 30.3% in 2008 from 30.4% in 2007. The decrease in labor expenses as a percentage of restaurant sales was primarily due to lower-than-expected workers' compensation costs.
Operating expenses increased by $4.9 million, or 22.2%, to $27.1 million in 2008 from $22.2 million in 2007 due primarily to more restaurants being operated in 2008. Operating expenses as a percentage of restaurant sales decreased to 15.6% in 2008 from 16.0% in 2007. The decrease in operating expenses as a percentage of restaurant sales is primarily due to lower repair and maintenance costs and lower general liability insurance costs partially offset by higher utility charges.
Occupancy expenses increased by $2.0 million, or 20.7%, to $11.6 million in 2008 from $9.6 million in 2007 due primarily to more restaurants being operated in 2008. Occupancy expenses as a percentage of restaurant sales decreased to 6.7% in 2008 from 6.9% in 2007.
Depreciation increased by $2.8 million, or 35.7%, to $10.7 million in 2008 from $7.9 million in 2007. The increase was primarily due to the additional depreciation on nine new restaurants opened in 2008 and the 17 new restaurants that opened in the last six months of 2007. Accelerated depreciation related to three upcoming relocations as part of the conversion of Don Pablos sites, remodels, and HDTV upgrades also contributed to the increase.
General and administrative expenses increased by $1.2 million, or 7.2%, to $18.4 million in 2008 from $17.2 million in 2007 primarily due to additional headcount and higher payroll and travel-related expenditures. General and administrative expenses as a percentage of total revenue decreased to 9.4% in 2008 from 11.0% in 2007. Exclusive of stock-based compensation, we reduced our general and administrative expenses as a percentage of revenue to 8.4% from 9.5% with lower conference expense and better leverage of our wage-related expenses with the higher revenue.
Preopening costs increased by $1.6 million, to $2.9 million in 2008 from $1.3 million in 2007. In 2008, we incurred costs of $1.9 million for nine new company-owned restaurants opened in the first six months of 2008, and incurred $990,000 for restaurants that will open in the third or fourth quarters of 2008. In 2007, we incurred costs of $1.1 million for the six new company-owned restaurants opened in the first half of 2007, and incurred $217,000 for restaurants that opened in the third quarter of 2007 or later. In 2008, we expect average preopening costs per restaurant to be $215,000.
Loss on asset disposals and impairment increased by $906,000 to $1.1 million in 2008 from $232,000 in 2007. In 2008, we impaired the assets of one of our Texas restaurants due to a relocation for $395,000. The remaining loss was related to the HDTV upgrades and write-off of miscellaneous equipment. In 2007, the loss was due to the write-off of miscellaneous equipment.
Interest income decreased by $623,000 to $832,000 in 2008 from $1.5 million in 2007. The decrease was primarily due to lower interest rates. Cash and marketable securities balances at the end of the quarter totaled $74.0 million in 2008 compared to $71.1 million for the second quarter of 2007.
Provision for income taxes increased $1.6 million to $6.3 million in 2008 from $4.7 million in 2007. The effective tax rate as a percentage of income before taxes increased to 34.3% in 2008 from 33.6% in 2007. The 2008 income tax rate was higher due to lower tax exempt interest income and higher state income taxes. For 2008, we believe our effective tax rate will be about 34.0%.
Liquidity and Capital Resources
Our primary liquidity and capital requirements have been for new restaurant construction, remodeling and maintaining our existing company-owned restaurants, working capital, and other general business needs. We fund these expenses primarily with cash from operations. The cash and marketable securities balance at June 29, 2008 was $74.0 million. We invest our cash balances in debt securities with the focus on protection of principal, adequate liquidity, and maximization of after-tax returns. As of June 29, 2008, nearly all excess cash was invested in high-quality municipal securities.
For the six months ended June 29, 2008, net cash provided by operating activities was $30.7 million. Net cash provided by operating activities consisted primarily of net earnings adjusted for non-cash expenses, a decrease in prepaid expenses and refundable income taxes, and a decrease in accrued expenses. The decrease in prepaid expenses is due to the timing of insurance payments. The decrease in income taxes was due to the timing of income tax payments. The decrease in accrued expenses was due to the payout of year-end incentive compensation.
For the six months ended July 1, 2007, net cash provided by operating activities was $17.6 million. Net cash provided by operating activities consisted primarily of net earnings adjusted for non-cash expenses, an increase in accrued expenses, partially offset by a decrease in income tax payable. The increase in accrued expenses was primarily due to higher convention and workers' compensation liabilities. The decrease in income taxes was due to the timing of income tax payments.
For the six months ended June 29, 2008 and July 1, 2007, net cash used in investing activities was $23.4 million and $23.2 million, respectively. Investing activities included purchases of property and equipment related to the opening of new company-owned restaurants and restaurants under construction in both periods. During the first six months of 2008 and 2007, we opened nine restaurants and six restaurants, respectively. In 2008, we expect capital expenditures to be approximately $1.4 million per location for approximately 25 new company-owned restaurants, expenditures to be approximately $18 million for the upgrade and remodel of existing restaurants, and $26 million for the purchase of nine Las Vegas franchised locations. In 2008, we purchased $68.6 million of marketable securities and received proceeds of $69.9 million as these investments matured or were sold. In 2007, we purchased $93.3 million of marketable securities and received proceeds of $81.9 million as these investments matured or were sold.
For the six months ended June 29, 2008 and July 1, 2007, net cash provided by (used in) financing activities was ($125,000) and $397,000, respectively. Net cash used in financing activities for the first half of 2008 resulted from tax payments for restricted stock units of $989,000, offset by proceeds from the exercise of stock options of $562,000 and the excess tax benefit from stock issuance of $302,000. No additional funding from the issuance of common stock (other than from the exercise of options and purchase of stock under the employee stock purchase plan) is anticipated for the remainder of 2008. Net cash used in financing activities for the first half of 2007 resulted from tax payments for restricted stock units of $1.2 million, offset by proceeds from the exercise of stock options of $860,000 and excess tax benefits from stock issuance of $720,000.
Our liquidity is impacted by minimum cash payment commitments resulting from operating lease obligations for our restaurants and our corporate offices. Lease terms are generally 10 to 15 years with renewal options and generally require us to pay a proportionate share of real estate taxes, insurance, common area maintenance, and other operating costs. Some restaurant leases provide for contingent rental payments based on sales thresholds. Except for one restaurant building, we do not currently own any of the properties on which our restaurants operate and, therefore, do not have the ability to enter into sale-leaseback transactions as a potential source of cash.
The following table presents a summary of our contractual operating lease obligations and commitments as of June 29, 2008:
Payments Due By Period (in thousands)
--------------------------------------------------
Less than After 5
Total One year 1-3 years 3-5 years years
------------- ------------ ----------- ----------- ----------
Operating lease obligations $ 161,707 20,077 37,704 33,548 70,378
Lease commitments for restaurants under development 42,894 2,694 7,216 7,277 25,707
------------- ------------ ----------- ----------- ----------
Total $ 204,601 22,771 44,920 40,825 96,085
============= ============ =========== =========== ==========
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We believe the cash flows from our operating activities and our balance of cash and marketable securities will be sufficient to fund our operations and building commitments and meet our obligations for the foreseeable future. Our future cash flows related to income tax uncertainties amount to $283,000. These amounts are excluded from the contractual obligations table due to the high degree of uncertainty regarding the timing of these liabilities.
Risk Factors/Forward-Looking Statements
The foregoing discussion and other statements in this report contain various "forward-looking statements" within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended. Forward-looking statements are based on current expectations or beliefs concerning future events. Such statements can be identified by the use of terminology such as "anticipate," "believe," "estimate," "expect," "intend," "may," "could," "possible," "plan," "project," "will," "forecast" and similar words or expressions. Our forward-looking statements generally relate to our long-term goal of over 1,000 locations, expected annual unit growth of over 15%, efforts to manage cost of sales particularly related to chicken wing costs, plans for entry into new markets, expansion and improving existing markets, estimated tax rates for 2008, expected store openings for 2008 and related capital expenditures, our expectations regarding preopening costs, and sources of funding and cash requirements. Although it is not possible to foresee all of the factors that may cause actual results to differ from our forward-looking statements, such factors include, among others, the following risk factors (each of which is discussed in greater detail in our Annual Report on Form 10-K for the fiscal year ended December 30, 2007):
o Fluctuations in chicken wing prices could reduce our operating income.
o If we are unable to successfully open new restaurants, our revenue growth rate and profits may be reduced.
o We must identify and obtain a sufficient number of suitable new restaurant sites for us to sustain our revenue growth rate.
o Our restaurants may not achieve market acceptance in the new geographic regions we enter.
o New restaurants added to our existing markets may take sales from existing restaurants.
o Implementing our expansion strategy may strain our resources.
o We are dependent on franchisees and their success.
o Franchisees may take actions that could harm our business.
o We could face liability from our franchisees.
o We may be unable to compete effectively in the restaurant industry.
o A reduction in vendor allowances currently received could affect our costs of goods sold.
o Our quarterly operating results may fluctuate due to the timing of special events and other factors, including the recognition of impairment losses.
o We may not be able to attract and retain qualified personnel to operate and manage our restaurants.
o We may not be able to obtain and maintain licenses and permits necessary to operate our restaurants.
o Changes in employment laws or regulation could harm our performance.
o Changes in consumer preferences or discretionary consumer spending could harm our performance.
o We are susceptible to adverse trends in Ohio.
o Changes in public health concerns may impact our performance.
o A decline in visitors to any of the business districts near the locations of our restaurants could negatively affect our restaurant sales.
o The acquisition of existing restaurants from our franchisees or other acquisitions may have unanticipated consequences that could harm our business and our financial condition.
o Improper food handling may affect our business adversely.
o Complaints or litigation may hurt us.
o Our current insurance may not provide adequate levels of coverage against claims.
o Natural disasters and other events could harm our performance.
o We may not be able to protect our trademarks, service marks or trade
secrets.
Investors are cautioned that all forward-looking statements involve risk and
uncertainties.
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ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
We are exposed to market risk related to our cash and cash equivalents and marketable securities. We invest our excess cash in highly liquid short-term investments with maturities of less than one year. These investments are not held for trading or other speculative purposes. Changes in interest rates affect the investment income we earn on our cash and cash equivalents and marketable securities and, therefore, impact our cash flows and results of operations. We also hold investments in mutual funds for the future needs of a non-qualified deferred compensation plan.
Financial Instruments
Financial instruments that potentially subject us to concentrations of credit risk consist principally of municipal securities. We do not believe there is a significant risk of non-performance by these municipalities because of our investment policy restrictions as to acceptable investment vehicles.
Inflation
The primary inflationary factors affecting our operations are food and alcohol, labor, and restaurant operating costs. Substantial increases in these costs could impact operating results to the extent that such increases cannot be passed along through higher menu prices. A large number of our restaurant personnel are paid at rates based on the applicable federal and state minimum wages, and increases in the minimum wage rates and tip-credit wage rates could directly affect our labor costs. Many of our leases require us to pay taxes, maintenance, repairs, insurance, and utilities, all of which are generally subject to inflationary increases.
Commodity Price Risk
Many of the food products purchased by us are affected by weather, production, availability, and other factors outside our control. We believe that almost all of our food and supplies are available from several sources, which helps to control food product risks. We negotiate directly with independent suppliers for our supply of food and paper products. We use members of UniPro Food Services, Inc., a national cooperative of independent food distributors, to distribute these products from the suppliers to our restaurants. We have minimum purchase requirements with some of our vendors, but the terms of the contracts and nature of the products are such that our purchase requirements do not create a market risk. We currently have numerous products subject to fixed price contracts. These contracts are typically less than one year in length. When these contracts are up for renewal, we may be exposed to price volatility. The primary food product used by company-owned and franchised restaurants is fresh chicken wings. We work to counteract the effect of the volatility of chicken wing prices, which can significantly change our cost of sales and cash flow, with the introduction of popular new menu items, effective marketing promotions, focused efforts on food costs and waste, and menu price increases. We also explore purchasing strategies to reduce the severity of cost increases and fluctuations. We are currently purchasing chicken wings at market prices. In March 2007, we had entered into a one-year pricing agreement with one of our chicken suppliers which limited the price volatility that we had experienced in our quarterly cost of sales percentage. This one-year agreement expired in March 2008. If there is a significant rise in the price of fresh chicken wings, and we are unable to successfully adjust menu prices or menu mix or otherwise make operational adjustments to account for the higher wing prices, our operating results could be adversely affected. Fresh chicken wings accounted for approximately 20.4% and 23.0% of our cost of sales in the second quarter of 2008 and 2007, respectively, with a quarterly average price per pound of $1.17 and $1.25, respectively.
ITEM 4. CONTROLS AND PROCEDURES
As of the end of the period covered by this report, we conducted an evaluation, under the supervision and with the participation of our principal executive officer and principal financial officer, of our disclosure controls and procedures as defined in Rules 13(a)-15(e) under the Securities Exchange Act of 1934 ("the Exchange Act"). Based on this evaluation, the principal executive officer and principal financial officer concluded that our disclosure controls and procedures are effective to ensure that information required to be disclosed by us in the reports we file or submit under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in Securities and Exchange Commission rules and forms. There were no changes in our internal controls over financial reporting during our most recently completed fiscal quarter that have materially affected, or are reasonably likely to materially affect, our internal controls over financial reporting.
PART II - OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
Occasionally, we are a defendant in litigation arising in the ordinary course of our business, including claims arising from personal injuries, contract claims, franchise-related claims, dram shop claims, employment-related claims and claims from guests or employees alleging injury, illness or other food quality, health or operational concerns. To date, none of these types of litigation, most of which are typically covered by insurance, has had a material effect on us. We have insured and continue to insure against most of these types of claims. A judgment significantly in excess of our insurance coverage or involving punitive damages, which may not be covered by insurance, could materially adversely affect our financial condition or results of operations.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
At the Annual Shareholders meeting held on May 15, 2008, we submitted to a vote of our shareholders the following matters, which received the indicated votes.
1. Approving setting the number of members of the Board of Directors at seven (7):
For: 15,398,422 Against: 109,727 Abstain: 106,514 Broker Non-Vote: 0
2. Election of Directors:
For: Withheld:
--------------- -----------------
Sally J. Smith................................... 15,188,360 426,303
Dale M. Applequist............................... 15,133,207 481,456
Robert W. MacDonald.............................. 15,341,199 273,464
Warren E. Mack................................... 15,041,837 572,826
J. Oliver Maggard................................ 15,292,971 321,692
Michael P. Johnson............................... 15,294,388 320,275
James Damian..................................... 15,296,047 318,616
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3. Approve amendment and restatement of our 2003 Equity Incentive Plan to increase reserved shares:
For: 6,558,409 Against: 359,773 Abstain: 59,090 Broker Non-Vote: 8,637,391
4. Approve the amendment to our Articles of Incorporation to increase the authorized common shares:
For: 14,167,424 Against: 1,341,812 Abstain: 105,427 Broker Non-Vote: 0
5. Ratify appointment of KPMG LLP as our independent registered public accounting firm for fiscal year ending December 30, 2007:
For: 15,151,874 Against: 375,433 Abstain: 87,356 Broker Non-Vote: 0
ITEM 6. EXHIBITS
See Exhibit Index following the signature page of this report.
SIGNATURES
In accordance with the requirements of the Exchange Act, the registrant caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
Date: August 8, 2008 BUFFALO WILD WINGS, INC.
By: /s/ Sally J. Smith
--------------------------------------------
Sally J. Smith, President and Chief
Executive Officer
(principal executive officer)
By: /s/ Mary J. Twinem
--------------------------------------------
Mary J. Twinem, Executive Vice President,
Chief Financial Officer and Treasurer
(principal financial and accounting officer)
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EXHIBIT INDEX
BUFFALO WILD WINGS, INC.
FORM 10-Q FOR QUARTER ENDED JUNE 29, 2008
Exhibit
Number Description
------ --------------------------------------------------------------------
3.1 Restated Articles of Incorporation, as amended
10.1 2003 Equity Incentive Plan, as Amended and Restated on May 15,
2008 (incorporated by reference to Exhibit 10.1 to our Form 8-K
filed on May 21, 2008)*
10.2 The Executive Nonqualified Excess Plan as of May 15, 2008
(incorporated by reference to Exhibit 10.2 to our Form 8-K filed
on May 21, 2008)*
10.3 The Executive Nonqualified Excess Plan Adoption Agreement as of
May 15, 2008 (incorporated by reference to Exhibit 10.3 to our
Form 8-K filed on May 21, 2008)*
31.1 Certification of Chief Executive Officer Pursuant to Section 302
of the Sarbanes-Oxley Act
31.2 Certification of Chief Financial Officer Pursuant to Section 302
of the Sarbanes-Oxley Act
32.1 Certification of Chief Executive Officer Pursuant to Section 906
of the Sarbanes-Oxley Act
32.2 Certification of Chief Financial Officer Pursuant to Section 906
of the Sarbanes-Oxley Act
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*Management agreement or compensatory plan or arrangement.
EXHIBIT 3.1
ARTICLES OF AMENDMENT OF
ARTICLES OF INCORPORATION
OF
BUFFALO WILD WINGS, INC.
Pursuant to the provisions of Minnesota Statutes, Section 302A.135, the amendment to the Articles of Incorporation of Buffalo Wild Wings, Inc. amending and restating Article 3.1 in its entirety, as set forth below, was duly adopted at a meeting of the shareholders of the corporation on May 15, 2008:
3.1) Authorized Shares. The aggregate number of shares the corporation has authority to issue shall be 45,000,000 shares, which shall have a par value of $.01 per share solely for the purpose of a statute or regulation imposing a tax or fee based upon the capitalization of the corporation, and which shall consist of 44,000,000 shares of Common Stock and 1,000,000 shares of Undesignated Stock. The Board of Directors of the corporation is authorized to establish from the Undesignated Stock, by resolution adopted and filed in the manner provided by law, one or more classes or series of shares, to designate each such class or series (which may include but is not limited to designation as additional Common Stock), and to fix the relative rights and preferences of each such class or series.
The undersigned swears that the foregoing is true and accurate and that the undersigned has the authority to sign this document on behalf of the corporation.
Dated: May 15, 2008
/s/ Sally J. Smith
-----------------------------------------
Sally J. Smith
Chief Executive Officer and President
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RESTATED ARTICLES OF INCORPORATION
OF
BUFFALO WILD WINGS, INC.
The undersigned hereby certifies that Restated Articles of Incorporation of Buffalo Wild Wings, Inc., in the form attached hereto as Exhibit A, were duly authorized by the Board of Directors pursuant to Minnesota Statutes Chapter 302A.
I swear that the foregoing is true and accurate and that I have the authority to sign this document on behalf of the corporation.
Dated: October 3, 2007 /s/ James M. Schmidt
---------------------------------------------
James M. Schmidt
Executive Vice President and General Counsel
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RESTATED ARTICLES OF INCORPORATION
OF
BUFFALO WILD WINGS, INC.
1.1) The name of the corporation shall be Buffalo Wild Wings, Inc.
2.1) The registered office of the corporation is located at 5500 Wayzata Boulevard, Suite 1600, Minneapolis, Minnesota 55416.
3.1) Authorized Shares. The aggregate number of shares the corporation has authority to issue shall be 21,200,000 shares, which shall have a par value of $.01 per share solely for the purpose of a statute or regulation imposing a tax or fee based upon the capitalization of the corporation, and which shall consist of 20,200,000 shares of Common Stock and 1,000,000 shares of Undesignated Stock. The Board of Directors of the corporation is authorized to establish from the Undesignated Stock, by resolution adopted and filed in the manner provided by law, one or more classes or series of shares, to designate each such class or series (which may include but is not limited to designation as additional Common Stock), and to fix the relative rights and preferences of each such class or series.
3.2) Issuance of Shares. The Board of Directors of the corporation is authorized from time to time to accept subscriptions for, issue, sell and deliver shares of any class or series of the corporation to such persons, at such times and upon such terms and conditions as the Board shall determine, establishing a price in money or other consideration, or a minimum price, or a general formula or method by which the price will be determined.
3.3) Issuance of Rights to Purchase Shares. The Board of Directors is further authorized from time to time to grant and issue rights to subscribe for, purchase, exchange securities for, or convert securities into, shares of the corporation of any class or series, and to fix the terms, provisions and conditions of such rights, including the exchange or conversion basis or the price at which such shares may be purchased or subscribed for.
4.1) No Preemptive Rights. No shares of any class or series of the corporation shall entitle the holders to any preemptive rights to subscribe for or purchase additional shares of that class or series or any other class or series of the corporation now or hereafter authorized or issued.
4.2) No Cumulative Voting Rights. There shall be no cumulative voting by the shareholders of the corporation.
5.1) Written Action by Directors. Any action required or permitted to be taken at a Board meeting may be taken by written action signed by all of the directors.
6.1) Where approval of shareholders is required by law, the affirmative vote of the holders of at least a majority of the voting power of all shares entitled to vote shall be required to authorize the corporation (i) to merge into or with one or more other corporations, (ii) to exchange its shares for shares of one or more other corporations, (iii) to sell, lease, transfer or otherwise dispose of all or substantially all of its property and assets, including its good will, or (iv) to commence voluntary dissolution.
7.1) After the issuance of shares by the corporation, any provision contained in these Articles of Incorporation may be amended, altered, changed or repealed by the affirmative vote of the holders of at least a majority of the voting power of all shares entitled to vote or such greater percentage as may be otherwise prescribed by the laws of the State of Minnesota.
8.1) To the fullest extent permitted by Chapter 302A, Minnesota Statutes, as the same exists or may hereafter be amended, a director of this corporation shall not be personally liable to the corporation or its shareholders for monetary damages for breach of fiduciary duty as a director.
EXHIBIT 31.1
CERTIFICATION
PURSUANT TO SECTION 302 OF THE SARBANES-OXLEY ACT
I, Sally J. Smith, Chief Executive Officer of Buffalo Wild Wings, Inc. certify that:
1. I have reviewed this quarterly report on Form 10-Q of Buffalo Wild Wings, Inc.;
2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;
3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;
4. The registrant's other certifying officer(s) and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f) for the registrant and have:
(a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;
(b) Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;
(c) Evaluated the effectiveness of the registrant's disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and
(d) Disclosed in this report any change in the registrant's internal control over financial reporting that occurred during the registrant's most recent fiscal quarter (the registrant's fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant's internal control over financial reporting; and
5. The registrant's other certifying officer(s) and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant's auditors and the audit committee of the registrant's board of directors (or persons performing the equivalent functions):
(a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant's ability to record, process, summarize and report financial information; and
(b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal control over financial reporting.
Date: August 8, 2008
By: /s/ Sally J. Smith
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Sally J. Smith
Chief Executive Officer
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EXHIBIT 31.2
CERTIFICATION
PURSUANT TO SECTION 302 OF THE SARBANES-OXLEY ACT
I, Mary J. Twinem, Chief Financial Officer of Buffalo Wild Wings, Inc., certify that:
1. I have reviewed this quarterly report on Form 10-Q of Buffalo Wild Wings, Inc.;
2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;
3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;
4. The registrant's other certifying officer(s) and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f) for the registrant and have:
(a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;
(b) Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;
(c) Evaluated the effectiveness of the registrant's disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and
(d) Disclosed in this report any change in the registrant's internal control over financial reporting that occurred during the registrant's most recent fiscal quarter (the registrant's fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant's internal control over financial reporting; and
5. The registrant's other certifying officer(s) and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant's auditors and the audit committee of the registrant's board of directors (or persons performing the equivalent functions):
(a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant's ability to record, process, summarize and report financial information; and
(b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal control over financial reporting.
Date: August 8, 2008
By: /s/ Mary J. Twinem
--------------------------
Mary J. Twinem
Chief Financial Officer
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EXHIBIT 32.1
CERTIFICATION PURSUANT TO
18 U.S.C. SECTION 1350,
AS ADOPTED PURSUANT TO
SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002
In connection with the Quarterly Report of Buffalo Wild Wings, Inc. (the "Company") on Form 10-Q for the period ended June 29, 2008 as filed with the Securities and Exchange Commission (the "Report"), I, Sally J. Smith, Chief Executive Officer of the Company, certify, pursuant to 18 U.S.C. ss.1350, as adopted pursuant to ss.906 of the Sarbanes-Oxley Act of 2002, that:
(1) The Report fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934; and
(2) The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company.
Date: August 8, 2008
By: /s/ Sally J. Smith
------------------------------
Sally J. Smith
Chief Executive Officer
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EXHIBIT 32.2
CERTIFICATION PURSUANT TO
18 U.S.C. SECTION 1350,
AS ADOPTED PURSUANT TO
SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002
In connection with the Quarterly Report of Buffalo Wild Wings, Inc. (the "Company") on Form 10-Q for the period ended June 29, 2008 as filed with the Securities and Exchange Commission (the "Report"), I, Mary J. Twinem, Chief Financial Officer of the Company, certify, pursuant to 18 U.S.C. ss.1350, as adopted pursuant to ss.906 of the Sarbanes-Oxley Act of 2002, that:
(1) The Report fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934; and
(2) The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company.
Date: August 8, 2008
By: /s/ Mary J. Twinem
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Mary J. Twinem
Chief Financial Officer
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