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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
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FORM 10-Q
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QUARTERLY REPORT UNDER SECTION 13 OR 15(D) OF
THE SECURITIES EXCHANGE ACT OF 1934
FOR THE QUARTER ENDED MARCH 26, 2006
COMMISSION FILE NO. 000-24743
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BUFFALO WILD WINGS, INC.
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
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MINNESOTA NO. 31-1455915
(STATE OR OTHER JURISDICTION OF (IRS EMPLOYER
INCORPORATION OR ORGANIZATION) IDENTIFICATION NO.)
1600 UTICA AVENUE SOUTH, SUITE 700, MINNEAPOLIS, MN 55416
(ADDRESS OF PRINCIPAL EXECUTIVE OFFICES)
REGISTRANT'S TELEPHONE NUMBER (952) 593-9943
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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, or a non-accelerated filer. See definition of
"accelerated filer and large accelerated filer" in Rule 12b-2 of the Exchange
Act. (Check one):
Large accelerated filer |_| Accelerated filer |X| Non-accelerated filer |_|
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 April
21, 2006: 8,539,421 shares.
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TABLE OF CONTENTS
PAGE
------
PART I
Item 1.Financial Statements 3
Item 2.Management's Discussion and Analysis of Financial
Condition and Results of Operations 11
Item 3.Quantitative and Qualitative Disclosures About Market Risk 16
Item 4.Controls and Procedures 17
PART II
Item 1.Legal Proceedings 18
Item 2.Unregistered Sales of Equity Securities and Use of Proceeds 18
Item 6.Exhibits 18
Signatures 19
Exhibit Index 20
2
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
BUFFALO WILD WINGS, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(DOLLAR AMOUNTS IN THOUSANDS, EXCEPT SHARE DATA)
(UNAUDITED)
December 25, March 26,
ASSETS 2005 2006
--------- ---------
Current assets:
Cash and cash equivalents $ 3,986 6,528
Marketable securities 48,418 50,037
Accounts receivable - franchisees, net of allowance of $25 731 829
Accounts receivable - other 3,700 5,070
Inventory 1,502 1,567
Prepaid expenses 1,972 1,490
Deferred income taxes 770 1,374
--------- ---------
Total current assets 61,079 66,895
Property and equipment, net 68,693 69,839
Restricted cash 2,115 2,224
Other assets 867 873
Goodwill 369 369
--------- ---------
Total assets $ 133,123 140,200
========= =========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Unearned franchise fees $ 2,194 2,384
Accounts payable 6,628 7,505
Accrued income tax payable 102 2,775
Accrued compensation and benefits 6,775 5,711
Accrued expenses 3,900 4,318
Current portion of deferred lease credits 604 523
--------- ---------
Total current liabilities 20,203 23,216
Long-term liabilities:
Marketing fund payables 2,115 2,224
Deferred income taxes 4,755 4,109
Deferred lease credits, net of current portion 9,202 9,364
--------- ---------
Total liabilities 36,275 38,913
--------- ---------
Commitments and contingencies (note 8)
Stockholders' equity:
Undesignated stock, 5,600,000 shares authorized; none issued -- --
Common stock, no par value. Authorized 15,600,000 shares; issued and outstanding
8,616,222 and 8,707,174 respectively 74,503 72,858
Deferred compensation (2,568) --
Retained earnings 24,913 28,429
--------- ---------
Total stockholders' equity 96,848 101,287
--------- ---------
Total liabilities and stockholders' equity $ 133,123 140,200
========= =========
3
BUFFALO WILD WINGS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF EARNINGS
(DOLLAR AMOUNTS IN THOUSANDS EXCEPT SHARE AND PER SHARE DATA)
(UNAUDITED)
Three months ended
------------------------
March 27, March 26,
2005 2006
---------- ----------
Revenue:
Restaurant sales $ 45,073 57,092
Franchise royalties and fees 5,720 7,169
---------- ----------
Total revenue 50,793 64,261
---------- ----------
Costs and expenses:
Restaurant operating costs:
Cost of sales 15,231 18,005
Labor 13,217 16,595
Operating 6,857 9,443
Occupancy 3,156 4,089
Depreciation 2,675 3,330
General and administrative (1) 5,626 7,078
Preopening 313 487
Loss on equipment disposal 18 210
---------- ----------
Total costs and expenses 47,093 59,237
---------- ----------
Income from operations 3,700 5,024
Interest income 272 470
---------- ----------
Earnings before income taxes 3,972 5,494
Income tax expense 1,521 1,978
---------- ----------
Net earnings $ 2,451 3,516
========== ==========
Earnings per common share - basic $ 0.29 0.41
Earnings per common share - diluted 0.28 0.40
Weighted average shares outstanding - basic 8,367,068 8,531,792
Weighted average shares outstanding - diluted 8,676,772 8,736,336
(1) Includes stock-based compensation of $523 and $856
4
BUFFALO WILD WINGS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(DOLLAR AMOUNTS IN THOUSANDS)
(UNAUDITED)
Three months ended
---------------------
March 27, March 26,
2005 2006
-------- ---------
Cash flows from operating activities:
Net earnings $ 2,451 3,516
Adjustments to reconcile net earnings to cash provided by operations:
Depreciation 2,675 3,330
Amortization 5 37
Loss on equipment disposal 18 210
Deferred lease credits (61) 87
Deferred income taxes 190 (1,250)
Stock-based compensation 523 856
Excess tax benefit from the exercise of stock options -- (83)
Change in operating assets and liabilities:
Accounts receivable (981) (1,474)
Inventory (53) (65)
Prepaid expenses 298 482
Other assets (22) (6)
Unearned franchise fees (159) 190
Accounts payable (1,420) 877
Income taxes 1,003 2,756
Accrued expenses (1,758) (68)
-------- --------
Net cash provided by operating activities 2,709 9,395
-------- --------
Cash flows from investing activities:
Acquisition of property and equipment (2,662) (4,686)
Purchase of marketable securities (20,587) (24,530)
Proceeds of marketable securities 14,430 22,874
-------- --------
Net cash used in investing activities (8,819) (6,342)
-------- --------
Cash flows from financing activities:
Issuance of common stock 286 93
Tax payments for restricted stock (326) (687)
Excess tax benefit from the exercise of stock options -- 83
-------- --------
Net cash used in financing activities (40) (511)
-------- --------
Net increase (decrease) in cash and cash equivalents (6,150) 2,542
Cash and cash equivalents at beginning of period 12,557 3,986
-------- --------
Cash and cash equivalents at end of period $ 6,407 6,528
======== ========
5
BUFFALO WILD WINGS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE THREE MONTHS ENDED MARCH 27, 2005 AND MARCH 26, 2006
(DOLLAR AMOUNTS IN THOUSANDS EXCEPT SHARE AND PER SHARE DATA)
(1) BASIS OF FINANCIAL STATEMENT PRESENTATION
The consolidated financial statements as of December 25, 2005 and March
26, 2006, and for the three-month periods ended March 27, 2005 and March
26, 2006, 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 periods ended March
27, 2005 and March 26, 2006 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,"
"company," "we," "us" and "our" refer to the business of Buffalo Wild
Wings, Inc. and our subsidiaries.
The financial information as of December 25, 2005 is derived from our
audited consolidated financial statements and notes thereto for the fiscal
year ended December 25, 2005, included in item 8 in the Fiscal 2005 Annual
Report on Form 10-K, and should be read in conjunction with such financial
statements.
The results of operations for the three-month period ended March 26, 2006,
are not necessarily indicative of the results of operations that may be
achieved for the entire year ending December 31, 2006.
(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. The primary food product used by our
restaurants and our franchised restaurants is fresh chicken wings.
Fresh chicken wings are purchased by us based on current market
conditions and are subject to fluctuation. Material increases in
fresh chicken wing costs may adversely effect our operating results.
For the three-month periods ended March 27, 2005 and March 26, 2006,
fresh chicken wings were 31% and 24%, respectively, of restaurant
cost of sales.
(B) STOCK-BASED COMPENSATION
We maintain a stock equity incentive plan under which we may grant
non-qualified stock options, incentive stock options, and restricted
stock units to employees, non-employee directors and consultants. We
also have an employee stock purchase plan ("ESPP").
Prior to the December 26, 2005 adoption of the Financial Accounting
Standards Board ("FASB") Statement No. 123R, "Shared-Based Payment"
("SFAS 123R"), we accounted for stock-based compensation using the
intrinsic value method prescribed in Accounting Principles Board
("APB") Opinion No. 25, "Accounting for Stock Issued to Employees,"
and related interpretations. Accordingly, because the stock option
grant price equaled the market price on the date of grant, and any
purchase discounts under our stock purchase plans were within
statutory limits, no compensation expense was recognized by us for
stock-based compensation related to stock options or ESPP shares.
Restricted stock units vesting upon the achievement of certain
performance targets were expensed under the requirements of APB 25.
Stock-based compensation recognized for restricted stock in the
first quarter of 2005 was $523. As permitted by SFAS No. 123,
"Accounting for Stock-Based Compensation" ("SFAS 123"), stock-based
compensation was included as a pro forma disclosure in the notes to
the consolidated financial statements.
Effective December 26, 2005, we adopted the fair value recognition
provisions of SFAS 123R, using the modified-prospective transition
method. Under this transition method, stock-based compensation
expense is recognized in the consolidated financial statements for
granted, modified, or settled stock options and for expense related
to the ESPP, since the related purchase discounts exceeded the
amount allowed under SFAS 123R for non-compensatory treatment.
Compensation expense recognized includes the estimated expense for
the portion of stock options vesting in the period for options
granted prior to, but not vested as of December 26, 2005, based on
the grant date fair value estimated in accordance with the original
provisions of SFAS 123. There were no new stock option grants in the
first quarter of 2006. Restricted stock units vesting upon the
achievement of certain performance targets are expensed based on the
fair value on the date of grant. Results for prior periods have not
been restated, as provided for under the modified-prospective
transition method.
6
Total stock-based compensation expense recognized in the
consolidated statement of earnings for the quarter ended March 26,
2006 was $856 before income taxes and consisted of restricted stock,
stock options, and ESPP expense of $799, $24 and $33 respectively.
Stock-based compensation recognized for the quarter ended March 27,
2005 was $523 and related to restricted stock. The related total tax
benefit was $200 and $308 for the quarters ended March 27, 2005 and
March 26, 2006 respectively. Stock-based compensation is recognized
as a part of general and administrative expense.
Prior to the adoption of SFAS 123R, we presented all tax benefits
resulting from the exercise of stock options as operating cash
inflows in the consolidated statements of cash flows, in accordance
with the provisions of the Emerging Issues Task Force ("EITF") Issue
No 00-15, "Classification in the Statement of Cash Flows of the
Income Tax Benefit Received by a Company upon Exercise of a
Nonqualified Employee Stock Option." SFAS 123R requires the benefits
of tax deductions in excess of the compensation cost recognized for
those options to be classified as financing cash inflows rather than
operating cash inflows, on a prospective basis. This amount is shown
as "Excess tax benefit from exercise of stock options" on the 2006
consolidated statement of cash flows.
The following table shows the effect on net earnings and earnings
per share had compensation cost been recognized based upon the
estimated fair value on the grant date of stock options and ESPP, in
accordance with SFAS 123, as amended by SFAS No. 148 "Accounting for
Stock-Based Compensation - Transition and Disclosure." The impact of
calculating compensation cost for stock options under SFAS No. 123
is reflected over the options' vesting period, typically four years.
Three Months Ended
March 27,
2005
----------
Net earnings, as reported $ 2,451
Add:
Total stock-based employee compensation expense included in
reported earnings, net of related tax effects 323
Deduct:
Total stock-based employee compensation expense determined under
fair value-based method for stock option, restricted stock,
and ESPP, net of related tax effects (374)
---------
Pro forma net earnings $ 2,400
=========
Net earnings per common share:
As reported (basic) $ 0.29
Pro forma (basic) 0.29
As reported (diluted) 0.28
Pro forma (diluted) 0.28
Proforma disclosures for the quarter ended March 26, 2006 are not
presented because the amounts are recognized in the consolidated
financial statements.
7
The fair value for stock awards was estimated at the date of grant
using the Black-Scholes-Merton ("BSM") option valuation model with
the following weighted average assumptions for the quarter ended
March 26, 2006 and March 27, 2005:
Stock Options ESPP
----------------------------- ----------------------------
March 27, March 26, March 27, March 26,
2005 2006 2005 2006
------------- ------------ ------------ ------------
Expected term (in years) 5.0 N/A 0.5 0.5
Expected stock price volatility 40.1% N/A 38.0% 40.9%
Risk-free interest rate 3.5% N/A 3.4% 4.3%
Expected dividend yield 0.0% N/A 0.0% 0.0%
The expected term of the options represents the estimated period of
time until exercise and is based on historical experience of similar
awards, giving consideration to the contractual terms, vesting
schedules and expectations of future employee behavior. Expected
stock price volatility is based on historical volatility of our
stock. The risk-free interest rate is based on the implied yield
available on U.S. Treasury zero-coupon issues with an equivalent
remaining term. We have not paid dividends in the past and do not
plan to pay any dividends in the near future.
(3) MARKETABLE SECURITIES
Marketable securities were comprised as follows:
As of
----------------------
December 25, March 26,
2005 2006
Held-to-maturity: ----------- --------
Municipal securities $14,887 17,501
----------- --------
14,887 17,501
Available-for-sale:
Municipal securities 33,531 32,536
----------- --------
Total $48,418 50,037
=========== ========
All held-to-maturity debt securities are due within one year and had
aggregate fair values of $14.9 million and $17.5 million as of December
25, 2005 and March 26, 2006, respectively.
(4) PROPERTY AND EQUIPMENT
Property and equipment consists of the following:
As of
----------------------
December 25, March 26,
2005 2006
--------- ---------
Construction in-process $ 956 2,736
Leasehold improvements 64,535 65,999
Furniture, fixtures, and equipment 45,279 45,899
--------- ---------
110,770 114,634
Less accumulated depreciation and amortization (42,077) (44,795)
--------- ---------
$ 68,693 69,839
========= =========
8
(5) STOCKHOLDERS' EQUITY
(A) STOCK OPTIONS
We have 1.1 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 with respect to incentive stock options, or 85% of
fair market value for nonqualified stock options.. Incentive stock options
become exercisable in four equal installments from the date of the grant and
have a contractual life of 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 ten years. In 2003, our shareholders approved amendments
to the plan to allow the granting of restricted stock and extended the plan to
2013. We issue new shares of common stock upon exercise of stock options and
disbursement of restricted stock units. Option activity is summarized for the
quarter-ended March 26, 2006:
Weighted Average
Weighted Remaining Aggregate
Number average Contractual Intrinsic
of shares exercise price Life Value
------------ ------------- --------- ----------
Outstanding, December 25, 2005 302,296 $ 8.08
Granted -- --
Exercised (10,873) 8.68
Cancelled (684) 20.31
------------ ------------- --------- ----------
Outstanding, March 26, 2006 290,739 8.03 4.47 $9,519
Exercisable, March 26, 2006 262,208 6.87 4.17 8,888
The aggregate intrinsic value in the table above is before applicable income
taxes, based on our closing stock price of $40.77 as of the last business day of
the quarter ended March 26, 2006, which would have been received by the
optionees had all options been exercised on that date. As of March 26, 2006,
total unrecognized stock-based compensation expense related to nonvested stock
options was approximately $125, which is expected to be recognized over a
weighted average period of approximately 9 months. During the quarter-ended
March 26, 2006, the total intrinsic value of stock options exercised was $305.
During the quarter-ended March 26, 2006, the total fair value of options vested
was $125.
The following table summarizes our stock options outstanding at March 26,
2006:
Options outstanding Options exercisable
-------------------------------------------------- ---------------------------
Average Weighted Weighted
remaining average average
contractual exercise exercise
Range Shares life(years) price Shares price
- ------------------ ---------------- ------------------ ----------- -------------- -----------
$ 2.50 - 3.90 79,677 3.49 $ 3.62 79,677 $ 3.62
4.15 - 7.50 122,625 3.50 5.84 122,625 5.84
11.25 - 18.15 75,501 6.47 13.12 56,427 12.53
18.65 - 34.81 12,936 8.05 26.26 3,479 26.09
----------------- -------
2.50 - 34.81 290,739 4.47 8.03 262,208 6.87
================= =======
The plan has 62,450 shares available for grant as of March 26, 2006.
(B) RESTRICTED STOCK
We adopted a stock performance plan in June 2004, under which restricted stock
units are granted annually at the discretion of the Board. These units are
subject to annual vesting upon achieving performance targets established by the
Board of Directors. We record compensation expense for the restricted stock
units if vesting, based on the achievement of performance targets, is probable.
The restricted stock units may vest one-third annually over a ten-year period as
determined by meeting performance targets. However, the second 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 has vested.
9
Restricted stock activity is summarized for the quarter ended March 26, 2006:
Weighted
average
Number grant date
of shares fair value
------------ -------------
Outstanding, December 25, 2005 75,964 $ 32.56
Granted 99,516 33.80
Vested (5,849) 33.80
Cancelled (1,701) 33.16
------------ --------------
Outstanding, March 26, 2006 167,930 33.25
As of March 26, 2006, the total stock-based compensation expense related to
nonvested awards not yet recognized was $4,620, which is expected to be
recognized over a weighted average period of 1.5 years.
(C) EMPLOYEE STOCK PURCHASE PLAN
We have reserved 300,000 shares of common stock for issuance under the Plan.
This plan is available to substantially all employees subject to employment
eligibility requirements. The Plan became effective upon the effective date of
our initial public offering (IPO). 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 quarter of 2006
and 2005, we issued no shares of common stock under the plan. As of March 26,
2006, we have 250,309 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 periods ended March 27, 2005 and March 26, 2006:
Three months ended March 27, 2005
---------------------------------------------
Earnings Shares Per-share
(numerator) (denominator) amount
---------- -------------- ---------
Net earnings $ 2,451
---------
Earnings per common share--basic 2,451 8,367,068 $ 0.29
Effect of dilutive securities
Stock options -- 309,704
---------- ---------
Earnings per common share--diluted $ 2,451 8,676,772 $ 0.28
========== =========
Three months ended March 26, 2006
---------------------------------------------
Earnings Shares Per-share
(numerator) (denominator) amount
---------- -------------- ---------
Net earnings $ 3,516
----------
Earnings per common share--basic 3,516 8,531,792 $ 0.41
Effect of dilutive securities
Stock options -- 204,544
---------- ---------
Earnings per common share--diluted $ 3,516 8,736,336 $ 0.40
=========
131,843 shares and 171,916 shares for the three-month periods ended March
27, 2005 and March 26, 2006, respectively, have been excluded from the
fully diluted calculation because the effect on net earnings per share
would not have been dilutive.
10
(7) SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION
Three months ended
-----------------------
March 27, March 26,
2005 2006
--------- -----------
Cash paid during the period for:
Income taxes $ 330 542
Non cash financing and investing transactions:
Capitalization of preopening rent expense 58 --
Adjustment of restricted stock units to fair value 3,450 --
Adjustment of restricted stock units to fair value on grant date -- 2568
(8) 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, and 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 notes thereto 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 25, 2005. This discussion and analysis contains certain statements that
are not historical facts, including, among others, those relating to our
anticipated financial performance for 2006 and our expected store openings. Such
statements are forward-looking and involve risks and uncertainties including but
not limited to those discussed in Item 1 of the 10-K under "Risk
Factors/Forward-Looking Statements." 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 information is an important measure of our performance and is
useful in assessing consumer acceptance of the Buffalo Wild Wings (R) Grill &
Bar concept and the overall strength of the concept. Franchise information also
provides an understanding of our revenue as franchise royalties and fees are
based on the opening of franchised units and their sales. However, franchised
sales and same-store sales information does not show 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 similar 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,
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 25, 2005. There
have been no changes to those policies during this period.
OVERVIEW
As of March 26, 2006, we owned and operated 124 company-owned and franchised an
additional 260 Buffalo Wild Wings (R) Grill & Bar restaurants in 36 states. Of
the 384 system-wide restaurants, 81 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, with 20% annual unit growth in the next several years,
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 our cost of goods sold. The cost of goods sold is
difficult to predict, as it ranged from 30.7% to 33.8% quarter to quarter in
2005 and 2006, mostly due to the price fluctuation in chicken wings. We are
working to counteract the effect of the volatility of chicken wing prices with
the introduction of popular new menu items like our new ribs, effective
marketing promotions, and menu price increases. We will continue to monitor the
cost of fresh chicken wing prices, as it can significantly change our cost of
sales and cash flow from company-owned restaurants. We also are exploring
purchasing strategies to lesson 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.
11
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 2006, 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 implementation of revised new restaurant opening procedures,
will help mitigate the overall risk associated with opening restaurants.
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, as evidenced by the implementation of our new flexible service
style in our restaurants and our franchised restaurants.
Our revenue is generated by:
o Sales at our company-owned restaurants, which were 89% of total
revenue in the first quarter of 2006. Food and nonalcoholic beverages
accounted for 71% of restaurant sales. The remaining 29% of
restaurant sales was from alcoholic beverages. The menu item with the
highest sales volume is chicken wings at 23% 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. Loss on
equipment disposal is related to company-owned restaurants and includes the
write down of miscellaneous assets. Certain other expenses, such as general and
administrative, relate to both company-owned and franchising operations.
As a growing company, we review our trend in general and administrative
expenses, exclusive of stock-based compensation expense, and are focused on
reducing this expense as a percentage of revenue.
We operate on a 52 or 53-week fiscal year ending on the last Sunday in December.
Both of the first quarters of 2005 and 2006 consisted of thirteen weeks. We have
a 53-week fiscal year in 2006, with the fourth quarter having 14 weeks.
QUARTERLY RESULTS OF OPERATIONS
Our operating results for the periods indicated are expressed below as a
percentage of total revenue, except for the components of restaurant operating
costs, which are expressed as a percentage of restaurant sales. The information
for each three-month period is unaudited and we have prepared it on the same
basis as the audited financial statements. In the opinion of management, all
necessary adjustments, consisting only of normal recurring adjustments, have
been included to present fairly the unaudited quarterly results.
Quarterly and annual operating results may fluctuate significantly as a result
of a variety of factors, including increases or decreases in same-store sales,
changes in fresh chicken wing prices, the timing and number of new restaurant
openings and related expenses, asset impairment charges, store closing charges,
general economic conditions, stock-based compensation, and seasonal
fluctuations. As a result, our quarterly results of operations are not
necessarily indicative of the results that may be achieved for any future
period.
12
Three months ended
--------------------------------
March 27, March 26,
2005 2006
----------- -----------
Revenue:
Restaurant sales 88.7% 88.8%
Franchising royalties and fees 11.3 11.2
----------- -----------
Total revenue 100.0 100.0
----------- -----------
Costs and expenses:
Restaurant operating costs:
Cost of sales 33.8 31.5
Labor 29.3 29.1
Operating 15.2 16.5
Occupancy 7.0 7.2
Depreciation 5.3 5.2
General and administrative 11.1 11.0
Preopening 0.6 0.8
Loss on equipment disposal 0.0 0.3
----------- -----------
Total costs and expenses 92.7 92.2
----------- -----------
Income from operations 7.3 7.8
Interest income 0.5 0.7
----------- -----------
Earnings before income taxes 7.8 8.5
Income tax expense 3.0 3.1
----------- -----------
Net earnings 4.8% 5.5%
=========== ===========
The number of company-owned and franchised restaurants open are as follows:
As of
--------------------------------
March 27, March 26,
2005 2006
----------- -----------
Company-owned restaurants 106 124
Franchised restaurants 212 260
The restaurant sales for company-owned and franchised restaurants are
as follows:
Three months ended
--------------------------------
March 27, March 26,
2005 2006
----------- -----------
Company-owned restaurant sales $ 45,073 57,092
Franchised restaurant sales 110,250 144,691
Increases in comparable same-store sales are as follows (based on restaurants
operating at least fifteen months):
Three months ended
--------------------------------
March 27, March 26,
2005 2006
----------- -----------
Company-owned same-store sales 6.1% 7.7%
Franchised same-store sales 3.2% 6.7%
The quarterly average prices paid per pound for fresh chicken wings are
as follows:
Three months ended
--------------------------------
March 27, March 26,
2005 2006
----------- -----------
Average price per pound $ 1.45 1.24
13
RESULTS OF OPERATIONS FOR THE THREE MONTHS ENDED MARCH 26, 2006
AND MARCH 27, 2005
Restaurant sales increased by $12.0 million, or 26.7%, to $57.1 million in 2006
from $45.1 million in 2005. The increase in restaurant sales was due to a $8.7
million increase associated with the opening of two new company-owned
restaurants in 2006 and 27 company-owned restaurants opened before 2006 that did
not meet the criteria for same-store sales for all or part of the three-month
period and $3.3 million related to a 7.7% increase in same-store sales.
Franchise royalties and fees increased by $1.4 million, or 25.3%, to $7.2
million in 2006 from $5.7 million in 2005. The increase was due primarily to
additional royalties collected from 12 new franchised restaurants that opened in
2006 and 37 franchised restaurants that opened in the last nine months of 2005.
Same-store sales for franchised restaurants increased 6.7% in 2006.
Cost of sales increased by $2.8 million, or 18.2%, to $18.0 million in 2006 from
$15.2 million in 2005 due primarily to more restaurants being operated in 2006.
Cost of sales as a percentage of restaurant sales decreased to 31.5% in 2006
from 33.8% in 2005. The decrease in cost of sales as a percentage of restaurant
sales was primarily due to lower fresh chicken wing costs. We are susceptible to
wing price fluctuations. For the first quarter of 2006, wing prices averaged
$1.24 per pound which was a 14.5% decrease over the same period in 2005. Also,
boneless wing sales have increased as a part of our menu mix, providing better
margins and a corresponding lower cost of goods percentage than the prior year.
Labor expenses increased by $3.4 million, or 25.6%, to $16.6 million in 2006
from $13.2 million in 2005 due primarily to more restaurants being operated in
2006. Labor expenses as a percentage of restaurant sales decreased to 29.1% in
2006 from 29.3% in 2005. The decrease in labor expenses as a percentage of
restaurant sales was primarily due to lower health insurance and workers'
compensation costs.
Operating expenses increased by $2.6 million, or 37.7%, to $9.4 million in 2006
from $6.9 million in 2005 due primarily to more restaurants being operated in
2006. Operating expenses as a percentage of restaurant sales increased to 16.5%
in 2006 from 15.2% in 2005. The increase in operating expenses as a percentage
of restaurant sales is primarily due to the .5% increase in contributions to the
advertising fund, increased credit card use by our guests and higher utility
costs.
Occupancy expenses increased by $933,000, or 29.6%, to $4.1 million in 2006 from
$3.2 million in 2005 due primarily to more restaurants being operated in 2006.
Occupancy expenses as a percentage of restaurant sales increased to 7.2% in 2006
from 7.0% in 2005, primarily due to higher rent expense as a percentage of
current sales level for restaurants in our newer markets.
Depreciation increased by $655,000, or 24.5%, to $3.3 million in 2006 from $2.7
million in 2005. The increase was primarily due to the additional depreciation
on two new restaurants opened in 2006 and the 16 new restaurants that opened in
the last nine months of 2005.
General and administrative expenses increased by $1.5 million, or 25.8%, to $7.1
million in 2006 from $5.6 million in 2005 primarily due to higher
payroll-related expenditures from stock-based compensation and higher provisions
for incentive compensation based on our strong operating results for fiscal
first quarter of 2006. General and administrative expenses as a percentage of
total revenue decreased to 11.0% in 2006 from 11.1% in 2005. We adopted the fair
value recognition provisions of SFAS 123R, using the modified-prospective
transition method. Under this transition method, we recognized $856,000 of
stock-based compensation in the first quarter of 2006. In the first quarter of
2005, we recognized $523,000 of stock-based compensation under APB 25 and other
related pronouncements. Exclusive of stock-based compensation, we reduced our
general and administrative expenses as a percentage of sales from 10.0% to 9.7%
with better leverage of our overhead expenses.
Preopening costs increased by $174,000, to $487,000 in 2006 from $313,000 in
2005. In 2006, we incurred costs of $305,000 for the two new company-owned
restaurants opened in the first quarter of 2006, incurred costs of approximately
$6,000 for openings before the first quarter of 2006, and incurred $176,000 for
restaurants that will open in the second quarter of 2006 or later. In 2005, we
incurred cost of $223,000 for the three new company-owned restaurants opened in
the first quarter of 2005, incurred costs of $35,000 for restaurants that opened
before the first quarter of 2005, and incurred costs of $55,000 for restaurants
that opened in the second quarter of 2005 or later. In 2006, due to the
expensing of preopening rent, we expect average preopening costs per restaurant
to be $165,000.
14
Loss on equipment disposal increased by $192,000 to $210,000 in 2006 from
$18,000 in 2005. The charge in both years was related to the write-off of
miscellaneous equipment.
Interest income increased by $198,000 to $470,000 in 2006 from $272,000 in 2005.
The increase was primarily due to higher interest rates. Cash and marketable
securities balances at the end of the quarter totaled $56.6 million in 2006
compared to $49.0 million for the first quarter of 2005.
Provision for income taxes increased $457,000 to $2.0 million in 2006 from $1.5
million in 2005. The effective tax rate as a percentage of income before taxes
decreased to 36.0% in 2006 from 38.3% in 2005. The 2005 income tax rate was
higher due to the increase in the deferred tax rate to 38% and an increase in
provision for tax contingencies. These items did not recur in 2006. For 2006, we
believe our effective tax rate will be approximately 36%.
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. Our main sources of liquidity
and capital are cash flows from operations and proceeds from the issuance of
common stock through the IPO in November 2003. The cash and marketable
securities balance at March 26, 2006 was $56.6 million. We invest our cash and
marketable securities balances in short-term investment instruments with the
focus on protection of principal, adequate liquidity and maximization of
after-tax returns. These investments include, but are not limited to, high
quality money market funds, commercial paper, US government-backed instruments,
repurchase agreements, municipal securities, and asset-backed securities.
For the three months ended March 26, 2006, net cash provided by operating
activities was $9.4 million. Net cash provided by operating activities consisted
primarily of net earnings adjusted for non-cash expenses, adjusted for increases
in income taxes payable and accounts payable offset by an increase in accounts
receivable. The change in income taxes was due to the timing of income tax
payments. The increase in accounts payable was due to a higher sales and
construction activity at the end of March 2006 as compared to December 2005. The
increase in accounts receivable was due to higher credit card and
convention-related sponsorships.
For the three months ended March 27, 2005, net cash provided by operating
activities was $2.7 million. Net cash provided by operating activities consisted
primarily of net earnings adjusted for non-cash expenses, adjusted for increases
in income taxes payable offset by an increase in accounts receivable and a
decrease in accounts payable and accrued expenses. The change in income taxes
was due to the timing of income tax payments. The increase in accounts
receivable was due to higher credit card and interest receivables. The decrease
in accounts payable and accrued expenses is due to the payout of incentive
compensation and lower construction payments at the end of March 2005.
For the three months ended March 26, 2006 and March 27, 2005, net cash used in
investing activities was $6.3 million and $8.8 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 quarter of 2006 and 2005, we opened two and three
restaurants, respectively. We expect capital expenditures for the entire year of
2006 to be approximately $26 million primarily for the addition of 20 new
company-owned restaurants and the renovation and maintenance of existing
restaurants. In 2006, the Company purchased $24.5 million of marketable
securities and received proceeds of $22.9 million as these investments matured
or were sold. In 2005, the Company purchased $20.6 million of marketable
securities and received proceeds of $14.4 million as these investments matured
or were sold.
For the three months ended March 26, 2006 and March 27, 2005, net cash used in
financing activities was $511,000 and $40,000, respectively. Net cash used in
financing activities for 2006 resulted primarily from tax payments for
restricted stock of $687,000 offset by the issuance of common stock of $93,000.
Net cash used in financing activities for 2005 resulted primarily from the
issuance of common stock from the exercise of stock options of $286,000, offset
by tax payments for restricted stock of $326,000. No additional funding from the
issuance of common stock (other than from the exercise of options) is
anticipated for the remainder of 2006.
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.
15
The following table presents a summary of our contractual operating lease
obligations and commitments as of March 26, 2006:
Payments Due By Period (in thousands)
------------------------------------------------------
Less than After 5
Total One year 1-3 years 3-5 years years
-------- -------- ---------- ---------- --------
Operating lease obligations $121,197 14,122 26,873 23,341 56,861
Lease commitments for restaurants under development 15,162 1,119 2,908 2,984 8,151
-------- -------- -------- -------- --------
Total $136,359 15,241 29,781 26,325 65,012
======== ======== ======== ======== ========
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.
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 restaurants, expected annual unit growth of 20%,
efforts to manage cost of sales particularly related to chicken wing costs,
plans for entry into new markets, expansion and improving existing markets,
focus on reducing general and administrative expenses, estimated tax rates for
2006, 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 are found and discussed in greater detail in our Annual
Report on Form 10-K for the fiscal year ended December 25, 2005. Investors are
cautioned that all forward-looking statements involve risks and uncertainties.
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.
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 restaurants and franchised
restaurants is fresh chicken wings. We purchase fresh chicken wings based on
current market prices which are subject to monthly fluctuation.
A material increase in fresh chicken wing costs may adversely affect our
operating results. Fresh chicken wing prices during the first quarter of 2006
averaged 14.5% lower than the average per pound price in the first quarter of
2005 as the average price per pound dropped from $1.45 in 2005 to $1.24 in 2006.
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 31% and 24% of our cost of sales in the first quarter of 2005 and
2006, respectively, with an average price per pound of $1.45 and $1.24,
respectively. A 10% increase in fresh chicken wing costs during the first
quarter of 2006, would have increased restaurant cost of sales by approximately
$431,000.
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 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. During the past 15
months, we have been affected by higher energy costs. Except as described above,
we believe inflation has not had a material impact on our results of operations
in recent years.
16
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.
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 has materially affected, or is reasonably likely to
materially affect, our internal controls over financial reporting.
17
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 2. UNREGISTERED SALES OF EQUITY SECURITIES
The following table sets out shares of our Common Stock repurchased by us in the
first quarter of 2006:
(d) Maximum
Number (or
Approximate
(c) Total Number Dollar Value) of
of Shares (or Shares (or Units)
Units) Purchased that May Yet Be
(a) Total Number (b) Average Price as Part of Publicly Purchased Under
of Shares (or Units) Paid per Share (or Announced Plans the Plans of
Period Purchased(1) Unit) or Programs Programs
- ---------------------- --------------------- --------------------- --------------------- --------------------
March 2, 2006 9,575 $36.21 N/A N/A
- ---------------------- --------------------- --------------------- --------------------- --------------------
Total 9,575
- ---------------------- --------------------- --------------------- --------------------- --------------------
(1) All of the shares were repurchased by us in connection with payment of taxes
upon vesting of restricted stock by seven employees, all of whom are executive
officers.
ITEM 6. EXHIBITS
See Exhibit Index following the signature page of this report.
18
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: MAY 3, 2006 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)
19
EXHIBIT INDEX
BUFFALO WILD WINGS, INC.
FORM 10-Q FOR QUARTER ENDED MARCH 26, 2006
EXHIBIT
NUMBER DESCRIPTION
- --------- ---------------------------------------------------------------------
10.1 Amendment No. 2 to Management Deferred Compensation Plan*
31.1 Certification of Chief Executive Officer Pursuant to Section 302
of the Sarbanes-Oxley Act
31.2 Certification of Chief Financial Officer Pursuant to Section 302 of
the Sarbanes-Oxley Act
32.1 Certification of Chief Executive Officer Pursuant to Section 906 of
the Sarbanes-Oxley Act
32.2 Certification of Chief Financial Officer Pursuant to Section 906 of
the Sarbanes-Oxley Act
*Management agreement or compensatory plan or arrangement.
20