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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 April 1, 2007
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
May 4, 2007: 8,768,636 shares.
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TABLE OF CONTENTS
Page
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PART I
Item 1. Financial Statements 3
Item 1A. Risk Factors 10
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations 10
Item 3. Quantitative and Qualitative Disclosures About Market Risk 16
Item 4. Controls and Procedures 16
PART II
Item 1. Legal Proceedings 17
Item 6. Exhibits 17
Signatures 18
Exhibit Index 19
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)
April 1, December 31,
2007 2006
------------ ------------
Assets
Current assets:
Cash and cash equivalents $ 14,082 11,756
Marketable securities 57,813 52,829
Accounts receivable - franchisees, net
of allowance of $25 and $47, respectively 873 929
Accounts receivable - other 5,180 5,212
Inventory 2,015 1,767
Prepaid expenses 1,664 1,052
Deferred income taxes 1,800 1,405
------------ ------------
Total current assets 83,427 74,950
Property and equipment, net 78,819 78,137
Restricted cash 3,661 6,007
Other assets 1,744 1,720
Goodwill 369 369
------------ ------------
Total assets $ 168,020 161,183
============ ============
Liabilities and Stockholders' Equity
Current liabilities:
Unearned franchise fees $ 2,373 2,347
Accounts payable 6,710 5,874
Income tax payable 2,095 264
Accrued compensation and benefits 9,411 10,963
Accrued expenses 5,010 5,538
Current portion of deferred lease credits 724 794
------------ ------------
Total current liabilities 26,323 25,780
Long-term liabilities:
Other liabilities 1,356 478
Marketing fund payables 3,661 6,007
Deferred income taxes 2,795 3,162
Deferred lease credits, net of current portion 9,542 9,540
------------ ------------
Total liabilities 43,677 44,967
------------ ------------
Commitments and contingencies (note 9)
Stockholders' equity:
Undesignated stock, 5,600,000 shares authorized; none issued -- --
Common stock, no par value. Authorized 15,600,000 shares;
issued and outstanding 8,928,006 and 8,795,590 respectively 77,616 75,030
Retained earnings 46,727 41,186
------------ ------------
Total stockholders' equity 124,343 116,216
------------ ------------
Total liabilities and stockholders' equity $ 168,020 161,183
============ ============
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
-------------------------
April 1, March 26,
2007 2006
---------- ----------
Revenue:
Restaurant sales $ 71,059 57,092
Franchise royalties and fees 8,843 7,169
---------- ----------
Total revenue 79,902 64,261
---------- ----------
Costs and expenses:
Restaurant operating costs:
Cost of sales 22,058 18,005
Labor 21,107 16,595
Operating 11,472 9,443
Occupancy 4,718 4,089
Depreciation 3,892 3,330
General and administrative (1) 8,617 7,078
Preopening 318 487
Loss on equipment disposal 79 210
---------- ----------
Total costs and expenses 72,261 59,237
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Income from operations 7,641 5,024
Interest income 700 470
---------- ----------
Earnings before income taxes 8,341 5,494
Income tax expense 2,800 1,978
---------- ----------
Net earnings $ 5,541 3,516
========== ==========
Earnings per common share - basic $ 0.64 0.41
Earnings per common share - diluted 0.63 0.40
Weighted average shares outstanding - basic 8,724,015 8,531,792
Weighted average shares outstanding - diluted 8,841,891 8,736,336
(1) Includes stock-based compensation of $1,268 and $856, respectively
4
BUFFALO WILD WINGS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Dollar amounts in thousands)
(unaudited)
Three months ended
----------------------
April 1, March 26,
2007 2006
--------- ---------
Cash flows from operating activities:
Net earnings $ 5,541 3,516
Adjustments to reconcile net earnings to cash provided by operations:
Depreciation 3,892 3,330
Amortization 19 37
Loss on equipment disposal 87 210
Deferred lease credits 302 87
Deferred income taxes (762) (1,250)
Stock-based compensation 1,268 856
Excess tax benefit from stock issuance (585) (83)
Change in operating assets and liabilities:
Purchase of marketable securities (91) --
Accounts receivable (282) (1,474)
Inventory (248) (65)
Prepaid expenses (612) 482
Other assets (24) (6)
Unearned franchise fees 26 190
Accounts payable 79 877
Income taxes payable 2,416 2,756
Accrued expenses 273 (68)
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Net cash provided by operating activities 11,299 9,395
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Cash flows from investing activities:
Acquisition of property and equipment (3,904) (4,686)
Purchase of marketable securities (39,605) (24,530)
Proceeds of marketable securities 34,693 22,874
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Net cash used in investing activities (8,816) (6,342)
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Cash flows from financing activities:
Issuance of common stock 441 93
Tax payments for restricted stock (1,183) (687)
Excess tax benefit from stock issuance 585 83
--------- ---------
Net cash used in financing activities (157) (511)
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Net increase in cash and cash equivalents 2,326 2,542
Cash and cash equivalents at beginning of period 11,756 3,986
--------- ---------
Cash and cash equivalents at end of period $ 14,082 6,528
========= =========
5
BUFFALO WILD WINGS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE THREE MONTHS ENDED APRIL 1, 2007 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 April 1, 2007 and December 31,
2006, and for the three-month periods ended April 1, 2007 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 April 1, 2007 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 31, 2006 is derived from our
audited consolidated financial statements and notes thereto for the fiscal
year ended December 31, 2006, which is included in item 8 in the Fiscal
2006 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 April 1, 2007,
are not necessarily indicative of the results of operations that may be
achieved for the entire year ending December 30, 2007.
(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 prices are subject to fluctuation. Material increases
in fresh chicken wing costs may adversely effect our operating
results. For the three-month periods ended April 1, 2007 and March
26, 2006, fresh chicken wings were 25% and 24%, respectively, of
restaurant cost of sales.
(b) New Accounting Pronouncements
In September 2006, the FASB issued SFAS No. 157, "Fair Value
Measurements" ("SFAS 157"), which defines fair value, establishes a
framework for measuring fair value in GAAP, and expands disclosures
above fair value measurements. SFAS 157 is effective for financial
statements issued for fiscal years beginning after November 15,
2007, and interim periods within those fiscal years. Early adoption
is permitted. We do not believe the adoption of SFAS 157 will have a
significant impact on our financial statements.
In February 2007, the FASB issued SFAS No. 159, "The Fair Value
Option for Financial Assets and Financial Liabilities - Including an
amendment of FASB Statement No. 115" ("SFAS 159"). SFAS 159 permits
entities to choose to measure many financial instruments and certain
warranty and insurance contracts at fair value on a
contract-by-contract basis. A business entity is required to report
unrealized gains and losses on items for which the fair value option
has been elected in earnings at each subsequent reporting date. The
objective of this Statement is to improve financial reporting by
providing entities with the opportunity to mitigate volatility in
reported earnings caused by measuring related assets and liabilities
differently without having to apply complex hedge accounting
provisions. SFAS 159 is effective for financial statements issued
for fiscal years beginning after November 15, 2007. We have not yet
determined the effect on our financial statements, if any, upon
adoption of SFAS 159.
6
(3) Marketable Securities
Marketable securities were comprised of the following:
As of
---------------------------
April 1, December 31,
2007 2006
------------ ------------
Held-to-maturity:
Municipal securities $ 27,588 33,522
Available-for-sale:
Municipal securities 28,845 18,019
Trading:
Mutual funds 1,380 1,288
------------ ------------
Total $ 57,813 52,829
============ ============
All held-to-maturity debt securities are due within one year and had
aggregate fair values of $27,579 and $33,512 as of April 1, 2007 and
December 31, 2006, respectively. Trading securities represents investments
held for future needs of a non-qualified deferred compensation plan.
(4) Property and Equipment
Property and equipment consists of the following:
As of
----------------------------
April 1, December 31,
2007 2006
------------ ------------
Construction in-process $ 3,371 1,037
Leasehold improvements 78,843 77,794
Furniture, fixtures, and equipment 54,722 53,994
------------ ------------
136,936 132,825
Less accumulated depreciation
and amortization (58,117) (54,688)
------------ ------------
$ 78,819 78,137
============ ============
(5) Stockholders' Equity
(a) Stock Options
We have 1.5 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 April 1, 2007:
Weighted Weighted Average
Number average Remaining Aggregate Intrinsic
of shares exercise price Contractual Life Value
------------------- ------------------- ------------------- -------------------
Outstanding, December 31, 2006 210,493 $ 8.45 3.9 $ 9,419
Granted -- --
Exercised (83,211) 5.32
Cancelled (796) 17.16
------------------- ------------------- ------------------- -------------------
Outstanding, April 1, 2007 126,486 10.46 4.6 6,734
Exercisable, April 1, 2007 117,493 9.52 4.4 6,366
7
The aggregate intrinsic value in the table above is before applicable income
taxes, based on our closing stock price of $63.70 as of the last business day of
the quarter ended April 1, 2007, which would have been received by the optionees
had all options been exercised on that date. As of April 1, 2007, total
unrecognized stock-based compensation expense related to nonvested stock options
was approximately $45, which is expected to be recognized over a weighted
average period of approximately six months. During the quarters ended April 1,
2007 and March 26, 2006, the total intrinsic value of stock options exercised
was $3,863 and $305, respectively. During the quarters ended April 1, 2007 and
March 26, 2006, the total fair value of options vested was $93 and $125,
respectively.
The plan has 354,063 shares available for grant as of April 1, 2007.
(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.
Restricted stock activity is summarized for the quarter ended April 1, 2007:
Weighted
average
Number grant date
of shares fair value
---------- ----------
Outstanding, December 31, 2006 84,106 $ 34.19
Granted 80,790 53.23
Vested (7,000) 53.20
Cancelled (10,749) 41.66
---------- ----------
Outstanding, April 1, 2007 147,147 43.19
As of April 1, 2007, the total stock-based compensation expense related to
nonvested awards not yet recognized was $5,377, which is expected to be
recognized over a weighted average period of 1.4 years. During the quarters
ended April 1, 2007 and March 26, 2006 the total fair value of vested shares
were $372 and $198, respectively. The weighted average grant date fair value of
restricted stock units granted during the first quarter of 2006 was $33.80.
(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 2007
and 2006, we issued no shares of common stock under the plan. As of April 1,
2007, we have 231,907 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 April 1, 2007 and March 26, 2006:
Three months ended April 1, 2007
---------------------------------------------
Earnings Shares Per-share
(numerator) (denominator) amount
------------- ------------- -------------
Net earnings $ 5,541
-------------
Earnings per common share--basic 5,541 8,724,015 $ 0.64
Effect of dilutive securities
Stock options -- 117,876
------------- -------------
Earnings per common share--diluted $ 5,541 8,841,891 $ 0.63
============= =============
8
(7) Supplemental Disclosures of Cash Flow Information
Three months ended
---------------------
April 1, March 26,
2007 2006
--------- ---------
Cash paid during the period for:
Income taxes $ 628 $ 542
Noncash financing and investing transactions:
Property and equipment not yet paid for 757 --
Tax withholding for restricted stock units 417 --
Adjustment of restricted stock units
to fair value on grant date -- 2,568
(8) Income Taxes
The Company adopted the provisions of FASB Interpretation No. 48,
Accounting for Uncertainty in Income Taxes (FIN 48), on January 1, 2007.
As a result of the implementation of FIN 48, we did not recognize an
adjustment in the liability for unrecognized income tax benefits. The
total unrecognized tax benefits reflected on the Company's balance sheet
as of the January 1, 2007 adoption date amounted to $565, of which $146
represented interest and penalties. The Company recognizes potential
accrued interest and penalties related to unrecognized tax benefits within
its operations in income tax expense. There was no significant change in
the unrecognized tax benefit for the period. Included in the balance at
January 1, 2007, are unrecognized tax benefits of $493, which if
recognized, would affect the annual effective tax rate.
The Company files a consolidated return in the United States federal
jurisdiction and in many state jurisdictions. With few exceptions, the
Company is no longer subject to federal or state income tax examinations
for years before 2003.
The Company does not anticipate that total unrecognized tax benefits will
significantly change due to the settlement of audits and the expiration of
statute of limitations prior to March 30, 2008.
(9) Contingencies
We are involved in various legal actions arising in the ordinary course of
business. In the opinion of management, the ultimate disposition of these
matters will not have a material adverse effect on our consolidated
financial position, results of operations, or cash flows.
9
ITEM 1A. RISK FACTORS
In Item 1A. of our Annual Report on Form 10-K for the fiscal year ended December
31, 2006, we identified a number of risk factors related to our business. In
light of a pricing agreement that we have executed with our of our suppliers, we
have determined to update these risk factors by replacing the risk factor
entitled "Fluctuations in chicken wing prices could reduce our operating
income." with the following:
Fluctuations in chicken wing prices could reduce our operating income.
The primary food product used by our company-owned and franchised restaurants is
fresh chicken wings. We purchase fresh chicken wings based on current market
prices that are subject to fluctuations. A material increase in fresh chicken
wing costs may adversely affect our operating results if we are unable to
successfully adjust menu prices or menu mix or otherwise make operational
adjustments to account for the higher wing prices. For example, fresh chicken
wings accounted for approximately 24%, 27% and 35% of our coast of sales in
2006, 2005 and 2004, respectively, with an annual average price per pound of
$1.17, $1.20 and $1.39, respectively. A 10% increase in the fresh chicken wing
costs for 2006 would have increased restaurant cost of sales by approximately
$1.8 million. The supply of chicken wings, and thus the cost, may be adversely
affected by a number of factors, including but not limited to the avian flu, and
the availability and cost of corn or other feed for the chickens. In an effort
to limit the price volatility of chicken wings, we entered into a pricing
agreement with one of our chicken suppliers in March 2007. If our past buying
trend with this supplier continues, we expect the price for 80-90% of the wings
used by our company-owned restaurants to be $1.23 per pound during the one-year
term of the agreement. However, the pricing agreement does not obligate the
supplier to sell us any chicken nor are we bound to purchase any chicken from
such supplier. We will review the agreement periodically during its term and may
modify it with the mutual consent of both parties. Thus, we are still subject to
the risk of price fluctuations and the cost of wings per pound in the future may
be higher than our expectations and market pricing.
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 31, 2006. This discussion and analysis contains certain statements that
are not historical facts, including, among others, those relating to our
anticipated financial performance for 2007 and our expected store openings. Such
statements are forward-looking and involve risks and uncertainties including but
not limited to those discussed in this Form 10-Q under Item 1A and later in Item
2 under the heading "Risk Factors/Forward-Looking Statements" as well as in Item
1A of the fiscal 2006 Form 10-K. Information included in this discussion and
analysis includes commentary on company-owned and franchised restaurant units,
restaurant sales, same-store sales, and average weekly sales volumes. Management
believes such 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 health of the concept. Franchise information also
provides an understanding of our revenue because 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 represent sales in
accordance with U.S. Generally Accepted Accounting Principles (GAAP), should not
be considered in isolation or as a substitute for other measures of performance
prepared in accordance with GAAP and may not be comparable to 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 31, 2006. There
have been no changes to those policies during this period.
Overview
As of April 1, 2007, we owned and operated 140 company-owned and franchised an
additional 299 Buffalo Wild Wings (R) Grill & Bar restaurants in 37 states. Of
the 439 system-wide restaurants, 83 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 15% annual unit growth in the next three years,
continuing the strategy of developing both company-owned and franchised
restaurants.
10
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 30.3% to 31.5% of restaurant sales per
quarter in 2007 and 2006, mostly due to the price fluctuation in 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. In March
2007, we entered into a pricing agreement with one of our chicken suppliers with
the intent to limit the price volatility that we have experienced in our
quarterly cost of sales percentage. If our past buying trend with this supplier
continues, we expect the price for 80-90% of the wings used by our company-owned
restaurants to be $1.23 per pound during the one-year term of the agreement.
However, the pricing agreement does not obligate the supplier to sell us any
chicken nor are we bound to purchase any chicken from such supplier. We will
review the agreement periodically during its term and may modify it with the
mutual consent of both parties. Thus, the cost of wings per pound in the future
may be higher than our expectations and market pricing.
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 2007, 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.
Our revenue is generated by:
o Sales at our company-owned restaurants, which were 89% of total
revenue in the first quarter of 2007. Food and nonalcoholic beverages
accounted for 72% of restaurant sales. The remaining 28% 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 2007 and 2006 consisted of thirteen weeks. We had
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.
11
Three months ended
--------------------
April 1, March 26,
2007 2006
--------- ---------
Revenue:
Restaurant sales 88.9 88.8%
Franchising royalties and fees 11.1 11.2
--------- ---------
Total revenue 100.0 100.0
--------- ---------
Costs and expenses:
Restaurant operating costs:
Cost of sales 31.0 31.5
Labor 29.7 29.1
Operating 16.1 16.5
Occupancy 6.6 7.2
Depreciation 4.9 5.2
General and administrative 10.8 11.0
Preopening 0.4 0.8
Loss on equipment disposal 0.1 0.3
--------- ---------
Total costs and expenses 90.4 92.2
--------- ---------
Income from operations 9.6 7.8
Interest income 0.9 0.7
--------- ---------
Earnings before income taxes 10.4 8.5
Income tax expense 3.5 3.1
--------- ---------
Net earnings 6.9 5.5%
========= =========
The number of company-owned and franchised restaurants open are as follows:
As of
---------------------
April 1, March 26,
2007 2006
--------- ---------
Company-owned restaurants 140 124
Franchised restaurants 299 260
The restaurant sales for company-owned and franchised restaurants are as follows
(amounts in thousands):
Three months ended
----------------------
April 1, March 26,
2007 2006
--------- ---------
Company-owned restaurant sales $ 71,059 57,092
Franchised restaurant sales 177,457 144,691
Increases in comparable same-store sales are as follows (based on restaurants
operating at least fifteen months):
Three months ended
----------------------
April 1, March 26,
2007 2006
--------- ---------
Company-owned same-store sales 8.7% 7.7%
Franchised same-store sales 3.3% 6.7%
The quarterly average prices paid per pound for fresh chicken wings are as
follows:
Three months ended
---------------------
April 1, March 26,
2007 2006
--------- ---------
Average price per pound $ 1.40 1.24
12
Results of Operations for the Three Months Ended April 1, 2007 and March 26,
2006
Restaurant sales increased by $14.0 million, or 24.5%, to $71.1 million in 2007
from $57.1 million in 2006. The increase in restaurant sales was due to a $9.3
million increase associated with the opening of one new company-owned
restaurants in 2007 and 25 company-owned restaurants opened before 2007 that did
not meet the criteria for same-store sales for all or part of the three-month
period and $4.7 million related to an 8.7% increase in same-store sales.
Franchise royalties and fees increased by $1.7 million, or 23.4%, to $8.8
million in 2007 from $7.2 million in 2006. The increase was primarily due to
additional royalties collected from 11 new franchised restaurants that opened in
2007 and 34 franchised restaurants that opened in the last nine months of 2006.
Same-store sales for franchised restaurants increased 3.3% in 2007.
Cost of sales increased by $4.1 million, or 22.5%, to $22.1 million in 2007 from
$18.0 million in 2006 due primarily to more restaurants being operated in 2007.
Cost of sales as a percentage of restaurant sales decreased to 31.0% in 2007
from 31.5% in 2006. 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
price increases. For the first quarter of 2007, wing prices averaged $1.40 per
pound which was a 12.9% increase over the same period in 2006. With the new
pricing agreement in place, the cost of wings at company-owned locations in the
first quarter was eight cents per pound lower than it would have been at market
pricing. We expect the cost of fresh chicken wings for company-owned locations
for the second quarter to be about $1.25 per pound. However, the future cost of
wings per pound may be higher than our expectations and market pricing.
Labor expenses increased by $4.5 million, or 27.2%, to $21.1 million in 2007
from $16.6 million in 2006 due primarily to more restaurants being operated in
2007. Labor expenses as a percentage of restaurant sales increased to 29.7% in
2007 from 29.1% in 2006. The increase in labor expenses as a percentage of
restaurant sales was primarily due to the impact of higher minimum wage
increases and management costs.
Operating expenses increased by $2.0 million, or 21.5%, to $11.5 million in 2007
from $9.4 million in 2006 due primarily to more restaurants being operated in
2007. Operating expenses as a percentage of restaurant sales decreased to 16.1%
in 2007 from 16.5% in 2006. The decrease in operating expenses as a percentage
of restaurant sales is primarily due to lower utility costs, with other expenses
leveraging on our strong sales performance.
Occupancy expenses increased by $629,000, or 15.4%, to $4.7 million in 2007 from
$4.1 million in 2006 due primarily to more restaurants being operated in 2007.
Occupancy expenses as a percentage of restaurant sales decreased to 6.6% in 2007
from 7.2% in 2006, primarily due to better leveraging of costs with the higher
sales levels.
Depreciation increased by $562,000, or 16.9%, to $3.9 million in 2007 from $3.3
million in 2006. The increase was primarily due to the additional depreciation
on one new restaurant opened in 2007 and the 16 new restaurants that opened in
the last nine months of 2006.
General and administrative expenses increased by $1.5 million, or 21.7%, to $8.6
million in 2007 from $7.1 million in 2006 primarily due to higher
payroll-related expenditures from stock-based compensation, additional
headcount, and higher provisions for incentive compensation based on our strong
operating results in the first quarter of 2007. General and administrative
expenses as a percentage of total revenue decreased to 10.8% in 2007 from 11.0%
in 2006. Exclusive of stock-based compensation, we reduced our general and
administrative expenses as a percentage of revenue to 9.2% from 9.7% with better
leverage of our expenses with the higher sales levels.
Preopening costs decreased by $169,000, to $318,000 in 2007 from $487,000 in
2006. In 2007, we incurred costs of $172,000 for the one new company-owned
restaurant opened in the first quarter of 2007, and incurred $146,000 for
restaurants that will open in the second quarter of 2007. 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 $6,000 for restaurants that opened before the
first quarter of 2006, and incurred costs of $176,000 for restaurants that
opened in the second quarter of 2006 or later. In 2007, we expect average
preopening costs per restaurant to be $180,000.
Loss on equipment disposal decreased by $131,000 to $79,000 in 2007 from
$210,000 in 2006. The charge in both years was related to the write-off of
miscellaneous equipment.
Interest income increased by $230,000 to $700,000 in 2007 from $470,000 in 2006.
The increase was primarily due to higher interest rates and overall cash and
marketable securities balance levels. Cash and marketable securities balances at
the end of the quarter totaled $71.9 million in 2007 compared to $56.6 million
for the first quarter of 2006.
13
Provision for income taxes increased $822,000 to $2.8 million in 2007 from $2.0
million in 2006. The effective tax rate as a percentage of income before taxes
decreased to 33.6% in 2007 from 36.0% in 2006. The 2007 income tax rate was
lower due to more store openings in states with lower tax rates. For 2007, we
believe our effective tax rate will range from 33 to 34%.
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 during the last three years have been cash flows from operations.
The cash and marketable securities balance at April 1, 2007 was $71.9 million.
We invest our cash and marketable securities balances in debt securities with
the focus on protection of principal, adequate liquidity and maximization of
after-tax returns. As of April 1, 2007, nearly all excess cash was invested in
high-quality municipal securities.
For the three months ended April 1, 2007, net cash provided by operating
activities was $11.3 million. Net cash provided by operating activities
consisted primarily of net earnings adjusted for non-cash expenses, and an
increase in income tax payable. The change in income taxes was due to the timing
of income tax payments.
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, and for increases in
income tax 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 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 April 1, 2007 and March 26, 2006, net cash used in
investing activities was $8.8 million and $6.3 million, respectively. Investing
activities included purchases of property and equipment related to the opening
of new company-owned restaurants and restaurants under construction in both
periods. During the first quarter of 2007 and 2006, we opened one and two
restaurants, respectively. In 2007, we expect capital expenditures for over 20
new company-owned restaurants to cost approximately $1.2 million per location
and expenditures to be approximately $12 million for the maintenance and remodel
of existing restaurants and the relocation of our home office in Minneapolis. In
2007, the Company purchased $39.6 million of marketable securities and received
proceeds of $34.7 million as these investments matured or were sold. 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.
For the three months ended April 1, 2007 and March 26, 2006, net cash used in
financing activities was $157,000 and $511,000, respectively. Net cash used in
financing activities for 2007 resulted primarily from tax payments for
restricted stock of $1.2 million, offset by proceeds from the exercise of stock
options of $441,000. No additional funding from the issuance of common stock
(other than from the exercise of options and purchase of stock from the employee
stock purchase plan) is anticipated for the remainder of 2007. 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.
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 April 1, 2007:
Payments Due By Period (in thousands)
---------------------------------------------
Less than After 5
Total One year 1-3 years 3-5 years years
--------- --------- --------- --------- ---------
Operating lease obligations $ 128,271 16,077 29,529 25,386 57,279
Lease commitments for restaurants under development 25,877 1,423 4,471 4,560 15,423
--------- --------- --------- --------- ---------
Total $ 154,148 17,500 34,000 29,946 72,702
========= ========= ========= ========= =========
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.
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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, our
expectations as to chicken wing costs, plans for entry into new markets,
expansion and improving existing markets, estimated tax rates for 2007, expected
store openings for 2007 and related capital expenditures, 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 31, 2006 as updated in Item 1A of this Form 10-Q):
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 We may not be able to attract and retain qualified personnel to
operate and manage our restaurants.
o Franchisees may take actions that could harm our business.
o We could face liability from our franchisees.
o Our quarterly operating results may fluctuate due to the timing of
special events and other factors, including the recognition of
impairment losses.
o Changes in consumer preferences or discretionary consumer spending
could harm our performance.
o Changes in employment laws or regulation could harm our performance.
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.
Financial Instruments
Financial instruments that potentially subject us to concentrations of credit
risk consist principally of municipal securities. We do not believe there is a
significant risk of non-performance by these municipalities because of our
investment policy restrictions as to acceptable investment vehicles.
Inflation
The primary inflationary factors affecting our operations are food, labor, and
restaurant operating costs. Substantial increases in these costs could impact
operating results to the extent that such increases cannot be passed along
through higher menu prices. A large number of our restaurant personnel are paid
at rates based on the applicable federal and state minimum wages, and increases
in the minimum wage rates and tip-credit wage rates could directly affect our
labor costs. Many of our leases require us to pay taxes, maintenance, repairs,
insurance and utilities, all of which are generally subject to inflationary
increases. We believe inflation has not had a material impact on our results of
operations in recent years.
Commodity Price Risk
Many of the food products purchased by us are affected by weather, production,
availability and other factors outside our control. We believe that almost all
of our food and supplies are available from several sources, which helps to
control food product risks. We negotiate directly with independent suppliers for
our supply of food and paper products. We use members of UniPro Food Services,
Inc., a national cooperative of independent food distributors, to distribute
these products from the suppliers to our restaurants. We have minimum purchase
requirements with some of our vendors, but the terms of the contracts and nature
of the products are such that our purchase requirements do not create a market
risk. The primary food product used by company-owned and franchised restaurants
is fresh chicken wings. Fresh chicken wings accounted for approximately 25% and
24% of our cost of sales in the first quarter of 2007 and 2006, respectively,
with an average price per pound of $1.40 and $1.24, respectively. In March 2007,
we entered into a pricing agreement with one of our chicken suppliers with the
intent to limit the price volatility that we have experienced in our quarterly
cost of sales percentage. If our past buying trend with this supplier continues,
we expect the price for 80-90% of the wings used by our company-owned
restaurants to be $1.23 per pound during the one-year term of the agreement.
However, the pricing agreement does not obligate the supplier to sell us any
chicken nor are we bound to purchase any chicken from such supplier. We will
review the agreement periodically during its term and may modify it with the
mutual consent of both parties. Thus, the cost of wings per pound in the future
may be higher than our expectations and market pricing.
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.
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PART II--OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
Occasionally, we are a defendant in litigation arising in the ordinary course of
our business, including claims arising from personal injuries, contract claims,
franchise-related claims, dram shop claims, employment-related claims and claims
from guests or employees alleging injury, illness or other food quality, health
or operational concerns. To date, none of these types of litigation, most of
which are typically covered by insurance, has had a material effect on us. We
have insured and continue to insure against most of these types of claims. A
judgment 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 6. EXHIBITS
See Exhibit Index following the signature page of this report.
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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 11, 2007 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 APRIL 1, 2007
Exhibit
Number Description
------- -----------
31.1 Certification of Chief Executive Officer Pursuant to Section 302
of the Sarbanes-Oxley Act
31.2 Certification of Chief Financial Officer Pursuant to Section 302
of the Sarbanes-Oxley Act
32.1 Certification of Chief Executive Officer Pursuant to Section 906
of the Sarbanes-Oxley Act
32.2 Certification of Chief Financial Officer Pursuant to Section 906
of the Sarbanes-Oxley Act
*Management agreement or compensatory plan or arrangement.
19