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Buffalo Wild Wings 10-Q 2005

Documents found in this filing:

  1. 10-Q
  2. Ex-31.1
  3. Ex-31.2
  4. Ex-32.1
  5. Ex-32.2
  6. Ex-32.2
Form 10-Q
Table of Contents

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, DC 20549

 


 

FORM 10-Q

 


 

QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF

THE SECURITIES EXCHANGE ACT OF 1934

 

For the fiscal quarter ended June 26, 2005

 

Commission File No. 000-24743

 


 

BUFFALO WILD WINGS, INC.

(Exact name of registrant as specified in its charter)

 


 

Minnesota   No. 31-1455915

(State or Other Jurisdiction of

Incorporation or Organization)

 

(IRS Employer

Identification No.)

 

1600 Utica Avenue South, Suite 700, Minneapolis, MN 55416

(Address of Principal Executive Offices)

 

Registrant’s telephone number (952) 593-9943

 


 

Indicate by check mark whether the registrant (1) filed all reports required to be filed by Section 13 or 15(d) of the Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.    YES  x    NO  ¨

 

Indicate by check mark whether the registrant is an accelerated filer (as defined in Exchange Act Rule 12b-2).    YES  x    NO  ¨

 

The number of shares outstanding of the registrant’s common stock as of July 28, 2005: 8,470,518 shares.

 



Table of Contents

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    9
Item 3.   Quantitative and Qualitative Disclosures About Market Risk    16
Item 4.   Controls and Procedures    16
PART II
Item 1.   Legal Proceedings    16
Item 2.   Unregistered Sales of Equity Securities and Use of Proceeds    17
Item 4.   Submission of Matters to a Vote of Security Holders    17
Item 6.   Exhibits    18
Signatures        19
Exhibit Index    20

 

 

2


Table of Contents

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 26,
2004


    June 26,
2005


 
Assets               

Current assets:

              

Cash and cash equivalents

   $ 12,557     4,501  

Marketable securities

     36,454     46,482  

Accounts receivable—franchisees, net of allowance of $25

     689     726  

Accounts receivable—other

     2,077     2,792  

Inventory

     1,207     1,122  

Income taxes receivable

     1,727     745  

Prepaid expenses

     1,470     758  

Deferred income taxes

     840     1,059  
    


 

Total current assets

     57,021     58,185  

Property and equipment, net

     59,649     62,581  

Restricted cash

     782     3,017  

Other assets

     774     792  

Goodwill

     759     759  
    


 

Total assets

   $ 118,985     125,334  
    


 

Liabilities and Stockholders’ Equity               

Current liabilities:

              

Unearned franchise fees

   $ 2,433     2,138  

Accounts payable

     5,383     5,023  

Accrued compensation and benefits

     6,339     5,715  

Accrued expenses

     3,663     3,315  

Current portion of deferred lease credits

     509     488  
    


 

Total current liabilities

     18,327     16,679  

Long-term liabilities:

              

Marketing fund payables

     782     3,017  

Deferred income taxes

     6,298     5,625  

Deferred lease credits, net of current portion

     7,871     8,674  
    


 

Total liabilities

     33,278     33,995  
    


 

Commitments and contingencies (note 7)

              

Stockholders’ equity:

              

Undesignated stock, 5,600,000 shares authorized

     —       —    

Common stock, no par value. Authorized 15,600,000 shares; issued and outstanding 8,425,771 and 8,600,010, respectively

     71,491     74,348  

Deferred compensation

     (1,817 )   (3,429 )

Retained earnings

     16,033     20,420  
    


 

Total stockholders’ equity

     85,707     91,339  
    


 

Total liabilities and stockholders’ equity

   $ 118,985     125,334  
    


 

 

3


Table of Contents

BUFFALO WILD WINGS, INC. AND SUBSIDIARIES

 

CONSOLIDATED STATEMENTS OF EARNINGS

 

(Dollar amounts in thousands except share and per share data)

 

(unaudited)

 

     Three months ended

   Six months ended

     June 27,
2004


   June 26,
2005


   June 27,
2004


   June 26,
2005


Revenue:

                     

Restaurant sales

   $ 35,291    42,570    71,217    87,643

Franchise royalties and fees

     4,261    5,653    8,518    11,373
    

  
  
  

Total revenue

     39,552    48,223    79,735    99,016
    

  
  
  

Costs and expenses:

                     

Restaurant operating costs:

                     

Cost of sales

     12,342    13,291    24,769    28,522

Labor

     10,095    12,976    20,054    26,193

Operating

     5,358    6,666    10,780    13,523

Occupancy

     2,582    3,395    4,875    6,551

Depreciation

     2,156    2,832    4,189    5,507

General and administrative (1)

     4,569    5,634    8,623    11,260

Preopening

     451    600    794    913

Restaurant closures and impairment

     28    4    39    22
    

  
  
  

Total costs and expenses

     37,581    45,398    74,123    92,491
    

  
  
  

Income from operations

     1,971    2,825    5,612    6,525
    

  
  
  

Other income:

                     

Interest income

     155    337    288    609
    

  
  
  
       155    337    288    609
    

  
  
  

Earnings before income taxes

     2,126    3,162    5,900    7,134

Income tax expense

     829    1,226    2,301    2,747
    

  
  
  

Net earnings

   $ 1,297    1,936    3,599    4,387
    

  
  
  

Earnings per common share—basic

   $ 0.16    0.23    0.45    0.52

Earnings per common share—diluted

     0.15    0.22    0.42    0.51

Weighted average shares outstanding—basic

     8,096,981    8,448,459    8,044,525    8,407,764

Weighted average shares outstanding—diluted

     8,575,186    8,674,507    8,565,395    8,671,148

(1) Contains stock-based compensation of $127, $330, $127, and $854

 

4


Table of Contents

BUFFALO WILD WINGS, INC. AND SUBSIDIARIES

 

CONSOLIDATED STATEMENTS OF CASH FLOWS

 

(Dollar amounts in thousands)

 

(unaudited)

 

     Six months ended

 
    

June 27,

2004


   

June 26,

2005


 

Cash flows from operating activities:

              

Net earnings

   $ 3,599     4,387  

Adjustments to reconcile net earnings to cash provided by operations:

              

Depreciation

     4,189     5,507  

Amortization

     72     (20 )

Restaurant closures and impairment

     39     22  

Deferred lease credits

     62     643  

Deferred income taxes

     213     (892 )

Stock-based compensation

     127     854  

Change in operating assets and liabilities:

              

Accounts receivable

     (681 )   (752 )

Inventory

     38     85  

Prepaid expenses

     291     712  

Other assets

     (73 )   (18 )

Unearned franchise fees

     183     (295 )

Accounts payable

     (367 )   (360 )

Income taxes

     29     982  

Accrued expenses

     (628 )   (972 )
    


 

Net cash provided by operating activities

     7,093     9,883  
    


 

Cash flows from investing activities:

              

Acquisition of property and equipment

     (10,768 )   (8,322 )

Purchase of marketable securities

     (57,817 )   (47,079 )

Proceeds of marketable securities

     24,200     37,071  
    


 

Net cash used in investing activities

     (44,385 )   (18,330 )
    


 

Cash flows from financing activities:

              

Issuance of common stock

     976     717  

Tax payments for restricted stock

     —       (326 )
    


 

Net cash provided by financing activities

     976     391  
    


 

Net decrease in cash and cash equivalents

     (36,316 )   (8,056 )

Cash and cash equivalents at beginning of period

     49,538     12,557  
    


 

Cash and cash equivalents at end of period

   $ 13,222     4,501  
    


 

 

 

5


Table of Contents

BUFFALO WILD WINGS, INC. AND SUBSIDIARIES

 

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

 

FOR THE THREE AND SIX MONTHS ENDED JUNE 27, 2004 AND JUNE 26, 2005

(Dollar amounts in thousands except share and per share data)

 

(1) Basis of Financial Statement Presentation

 

The consolidated statements as of December 26, 2004 and June 26, 2005, and for the three-month and six-month periods ended June 27, 2004 and June 26, 2005, have been prepared by Buffalo Wild Wings, Inc. (the “Company”) pursuant to the rules and regulations of the Securities and Exchange Commission (the “SEC”). The financial information for the three-month and six-month periods ended June 27, 2004 and June 26, 2005, 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.

 

The financial information as of December 26, 2004, is derived from the Company’s audited consolidated financial statements and notes thereto for the fiscal year ended December 26, 2004, included in item 8 in the Fiscal 2004 Annual Report on Form 10-K, and should be read in conjunction with such financial statements.

 

The results of operations for the three-month and six-month period ended June 26, 2005, are not necessarily indicative of the results of operations that may be achieved for the entire year ending December 25, 2005.

 

(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.

 

The Company purchases its product from a number of suppliers and believes there are alternative suppliers. The primary food product used by Company-owned and franchised restaurants is fresh chicken wings. Fresh chicken wings are purchased by the Company based on current market conditions and are subject to fluctuation. Material increases in fresh chicken wing costs may adversely effect the Company’s operating results. For the three-month periods ended June 27, 2004 and June 26, 2005, fresh chicken wings were 36.8% and 26.5% respectively, of restaurant cost of sales. For the six-month periods ended June 27, 2004 and June 26, 2005, fresh chicken wings were 37.6% and 29.0% respectively, of restaurant cost of sales.

 

  (b) Stock-Based Compensation

 

The Company 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 the Company achieving performance targets established by the Board of Directors. The Company records 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. An aggregate 51,924 restricted stock units in 2005 and 78,331 restricted stock units in future periods are subject to vesting.

 

The Company records compensation expense for option grants to employees under its stock option plan if the current market value of the underlying stock at the grant date exceeds the stock option exercise price. No such grants have been issued. The Company applies the intrinsic-value method in accounting for its employee stock option grants and, accordingly, no compensation cost has been recognized for its stock options in the financial statements.

 

Pro forma disclosure of the net earnings impact of applying an alternative method of recognizing stock compensation expense over the vesting period is based on the fair value of all stock-based awards on the date of grant. If the Company had elected to recognize compensation cost based on the fair value at the grant date for its stock options under SFAS No. 123, the Company’s net earnings would have been decreased to the pro forma amounts indicated in the table below.

 

 

6


Table of Contents

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

    Six months ended

 
     June 27,
2004


    June 26,
2005


    June 27,
2004


    June 26,
2005


 

Net earnings, as reported

   $ 1,297     1,936     3,599     4,387  

Add:

                          

Total stock-based employee compensation expense included in reported earnings, net of related tax effects

     77     203     77     525  

Deduct:

                          

Total stock-based employee compensation expense determined under fair value-based method for stock option, stock performance, and purchase plans, net of related tax effects

     (113 )   (261 )   (150 )   (633 )
    


 

 

 

Pro forma net earnings

   $ 1,261     1,878     3,526     4,279  
    


 

 

 

Net earnings (loss) per common share:

                          

As reported (basic)

   $ 0.16     0.23     0.45     0.52  

Pro forma (basic)

     0.16     0.22     0.44     0.51  

As reported (dilutive)

     0.15     0.22     0.42     0.51  

Pro forma (dilutive)

     0.15     0.22     0.41     0.49  

 

The fair value of each option grant is estimated on the date of grant using the Black-Scholes option-pricing model with the following assumptions:

 

     Three months ended

    Six months ended

 
     June 27,
2004


    June 26,
2005


    June 27,
2004


    June 26,
2005


 

Expected dividend yield

   0.0 %   0.0 %   0.0 %   0.0 %

Expected stock price volatility

   38.0 %   41.3 %   38.0 %   41.3 %

Risk-free interest rate

   2.9 %   3.7 %   2.9 %   4.0 %

Expected life in years

   5     5     5     5  

 

Volatility was calculated based on an analysis of the Company’s industry peers and its own stock price since the initial public offering in November 2003.

 

  (c) Reclassifications

 

The accompanying consolidated financial statements for fiscal 2004 contain certain reclassifications to conform with the presentation used in fiscal 2005. These reclassifications include proceeds from lessors previously included in financing activities which now are included in deferred lease credits within operating activities in the fiscal 2004 consolidated statements of cash flows.

 

7


Table of Contents
(3) Marketable Securities

 

Marketable securities were comprised as follows:

 

     As of

     December 26,
2004


   June 26,
2005


Held-to-maturity

           

Federal agencies

   $ 5,645    8,218

Municipal securities

     14,184    10,157
    

  
       19,829    18,375
    

  

Available-for-sale

           

Municipal securities

     16,625    28,107
    

  

Total

   $ 36,454    46,482
    

  

 

All held-to-maturity debt securities are due within one year and had aggregate fair values of $19.8 million and $18.4 million as of December 26, 2004 and June 26, 2005, respectively.

 

(4) Property and Equipment

 

Property and equipment consists of the following:

 

     As of

 
     December 26,
2004


    June 26,
2005


 

Construction in-process

   $ 3,088     2,449  

Leasehold improvements

     51,736     57,024  

Furniture, fixtures, and equipment

     36,296     39,975  
    


 

       91,120     99,448  

Less accumulated depreciation and amortization

     (31,471 )   (36,867 )
    


 

     $ 59,649     62,581  
    


 

 

(5) Earnings Per Share

 

The following is a reconciliation of basic and fully diluted earnings per share for the three-month and six-month periods ended June 27, 2004 and June 26, 2005:

 

     Three months ended June 27, 2004

     Earnings
(numerator)


   Shares
(denominator)


   Per-share
amount


Net earnings available to common shareholders

   $ 1,297            
    

           

Earnings per common share—basic

     1,297    8,096,981    $ 0.16

Effect of dilutive securities

                  

Stock options and warrants

     —      478,205       
    

  
      

Earnings per common share—diluted

   $ 1,297    8,575,186      0.15
    

  
      

 

     Three months ended June 26, 2005

     Earnings
(numerator)


   Shares
(denominator)


   Per-share
amount


Net earnings available to common shareholders

   $ 1,936            
    

           

Earnings per common share—basic

     1,936    8,448,459    $ 0.23

Effect of dilutive securities

                  

Stock options

     —      226,048       
    

  
      

Earnings per common share—diluted

   $ 1,936    8,674,507      0.22
    

  
      

 

8


Table of Contents
     Six months ended June 27, 2004

     Earnings
(numerator)


   Shares
(denominator)


   Per-share
amount


Net earnings available to common shareholders

   $ 3,599            
    

           

Earnings per common share—basic

     3,599    8,044,525    $ 0.45

Effect of dilutive securities

                  

Stock options and warrants

     —      520,870       
    

  
      

Earnings per common share—diluted

   $ 3,599    8,565,395      0.42
    

  
      

 

     Six months ended June 26, 2005

     Earnings
(numerator)


   Shares
(denominator)


   Per-share
amount


Net earnings available to common shareholders

   $ 4,387            
    

           

Earnings per common share—basic

     4,387    8,407,764    $ 0.52

Effect of dilutive securities

                  

Stock options

     —      263,384       
    

  
      

Earnings per common share—diluted

   $ 4,387    8,671,148      0.51
    

  
      

 

79,527 shares and 132,405 shares for the three-month periods ended June 27, 2004 and June 26, 2005, respectively, and 80,464 shares and 130,255 shares for the six-month periods ended June 27, 2004 and June 26, 2005, respectively, have been excluded from the fully diluted calculation because the effect on net earnings per share would not have been dilutive.

 

(6) Supplemental Disclosures of Cash Flow Information

 

     Six months ended

     June 27,
2004


   June 26,
2005


Cash paid during the period for:

           

Income taxes

   $ 2,094    2,658

Noncash financing and investing transactions:

           

Capitalization of preopening rent expense

     —      139

Adjustment of restricted stock units to fair value

     2,251    2,466

 

(7) Contingencies

 

The Company is 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 the Company’s consolidated financial position and results of operations.

 

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 the Company’s Annual Report on Form 10-K for the fiscal year ended December 26, 2004. Information included in this discussion and analysis includes commentary on 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® Grill & Bar concept. Franchise information also provides an understanding of the Company’s revenues 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 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 system-wide financial information as defined or used by other companies.

 

9


Table of Contents

Critical Accounting Policies

 

Our most critical accounting policies, which are those that require significant judgment, include: valuation of long-lived assets and store closing reserves, vendor allowances, and revenue recognition from franchise operations. An in-depth description of these can be found in our Annual Report on Form 10-K for the fiscal year ended December 26, 2004. There have been no changes to those policies during this period.

 

Overview

 

As of June 26, 2005, we owned and operated 110 and franchised an additional 224 Buffalo Wild Wings ® Grill & Bar restaurants in 34 states. Of the 334 system-wide restaurants, 80 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. The grill and bar segment is generally considered to be the largest and a growing sub-segment of the casual dining industry. Our long-term focus is to grow to a national chain of over 1,000 locations, with 20-25% 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 31.2% to 35.0% quarter to quarter in 2004 and 2005, mostly due to the price fluctuation in chicken wings. We work to counteract higher prices of chicken wings with the introduction of new menu items, effective marketing promotions to drive sales, 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.

 

A second factor is our success in new markets. In 2005, we do not plan to enter any markets in which we do not already have a presence, although we are opening new corporate restaurants in markets where we already have franchise locations. We will, however, continue our development efforts in the markets we entered in 2004, including new Company-owned restaurants in the Dallas and Denver markets, which have met our expectations, and will focus on improving performance in the Atlanta market. 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 Choice Service Style in Company-owned and franchised restaurants.

 

Our revenue is generated by:

 

    Sales at our company-owned restaurants were 88% of total revenue in the second quarter of 2005. 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 26% of total restaurant sales.

 

    Royalties and franchise fees received from our franchisees.

 

We generate cash from the operation of our Company-owned restaurants and also from franchise royalties and fees. We highlight the specific costs associated with operating 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 annually based on the number of new locations opened. Restaurant closures and impairment expense is related to Company-owned restaurants and includes the writedown of poor performing locations, the costs associated with closures of locations and normal asset retirements. Certain other expenses, such as general and administrative, relate to both Company-owned restaurant and franchising operations.

 

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 second quarters of 2004 and 2005 consisted of thirteen weeks. Both of the six-month periods of 2004 and 2005 consisted of twenty-six weeks.

 

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Table of Contents

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 quarter 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.

 

     Three months ended

    Six months ended

 
     June 27,
2004


    June 26,
2005


    June 27,
2004


    June 26,
2005


 

Revenue:

                        

Restaurant sales

   89.2 %   88.3 %   89.3 %   88.5 %

Franchising royalties and fees

   10.8     11.7     10.7     11.5  
    

 

 

 

Total revenue

   100.0     100.0     100.0     100.0  
    

 

 

 

Costs and expenses:

                        

Restaurant operating costs:

                        

Cost of sales

   35.0     31.2     34.8     32.5  

Labor

   28.6     30.5     28.2     29.9  

Operating

   15.2     15.7     15.1     15.4  

Occupancy

   7.3     8.0     6.8     7.5  

Depreciation

   5.5     5.9     5.3     5.6  

General and administrative

   11.6     11.7     10.8     11.4  

Preopening

   1.1     1.2     1.0     0.9  

Restaurant closures and asset impairment

   0.1     0.0     0.0     0.0  
    

 

 

 

Total costs and expenses

   95.0     94.1     93.0     93.4  
    

 

 

 

Income from operations

   5.0     5.9     7.0     6.6  
    

 

 

 

Other income:

                        

Interest income

   0.4     0.7     0.4     0.6  
    

 

 

 

Earnings before income taxes

   5.4     6.6     7.4     7.2  

Income tax expense

   2.1     2.5     2.9     2.8  
    

 

 

 

Net earnings

   3.3     4.0     4.5     4.4  
    

 

 

 

 

11


Table of Contents

The number of company-owned and franchised restaurants open are as follows:

 

     As of

     June 27,
2004


   June 26,
2005


Company-owned restaurants

   92    110

Franchised restaurants

   175    224

 

The total restaurant sales for company-owned and franchised restaurants are as follows (dollars in thousands):

 

     Three months ended

   Six months ended

     June 27,
2004


   June 26,
2005


   June 27,
2004


   June 26,
2005


Company-owned restaurant sales

   $ 35,291    42,570    71,217    87,643

Franchised restaurant sales

     82,045    111,868    165,601    222,118

 

Increases in comparable same-store sales are as follows (based on restaurants operating at least fifteen months):

 

     Three months ended

    Six months ended

 
     June 27,
2004


    June 26,
2005


    June 27,
2004


    June 26,
2005


 

Company-owned same-store sales

   10.6 %   2.7 %   10.8 %   4.4 %

Franchised same-store sales

   10.4 %   1.8 %   11.2 %   2.5 %

 

The quarterly average prices paid per pound for fresh chicken wings are as follows:

 

     Three months ended

   Six months ended

     June 27,
2004


   June 26,
2005


   June 27,
2004


   June 26,
2005


Average price per pound

   $ 1.46    1.14    1.47    1.29

 

Results of Operations for the Three Months Ended June 26, 2005 and June 27, 2004

 

Restaurant sales increased by $7.3 million, or 20.6%, to $42.6 million in 2005 from $35.3 million in 2004. The increase in restaurant sales was due to a $6.4 million increase associated with the opening of seven new Company-owned restaurants in the first six months of 2005 and the 19 company-owned restaurants opened in 2004 that did not meet the criteria for same-store sales and $886,000 related to a 2.7% increase in same-store sales. The decrease in same-store sales from 10.6% in 2004 to 2.7% in 2005 was a drop from historically high to more modest levels of same-store sales approximating our menu price increases.

 

Franchise royalties and fees increased by $1.4 million, or 32.7%, to $5.7 million in 2005 from $4.3 million in 2004. The increase was due primarily to additional royalties collected from the 23 new franchised restaurants that opened in 2005 and the 28 franchised restaurants that opened in the last six months of 2004. Same-store sales for franchised restaurants increased 1.8% in 2005.

 

Cost of sales increased by $949,000, or 7.7%, to $13.3 million in 2005 from $12.3 million in 2004 due primarily to more restaurants in operation in 2005. Cost of sales as a percentage of restaurant sales decreased to 31.2% in 2005 from 35.0% in 2004. 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, and for the second quarter of 2005 wing prices averaged $1.14 per pound, which was a 21.9% decrease from 2004.

 

Labor expenses increased by $2.9 million, or 28.5%, to $13.0 million in 2005 from $10.1 million in 2004 due primarily to more restaurants in operation in 2005. Labor expenses as a percentage of restaurant sales increased to 30.5% in 2005 from 28.6% in 2004. The increase in labor expenses as a percentage of restaurant sales was primarily due to higher labor costs in new markets, higher workers’ compensation rates for our 21 Ohio stores, and higher health insurance costs.

 

Operating expenses increased by $1.3 million, or 24.4%, to $6.7 million in 2005 from $5.4 million in 2004 due primarily to more restaurants in operation in 2005. Operating expenses as a percentage of restaurant sales increased to 15.7% in 2005 from 15.2% in 2004. The increase in operating expenses as a percentage of restaurant sales was primarily due to increased credit card use by customers resulting in greater credit card fees, and higher utility costs, partially offset by lower insurance costs.

 

 

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Table of Contents

Occupancy expenses increased by $813,000, or 31.5%, to $3.4 million in 2005 from $2.6 million in 2004 due primarily to more restaurants in operation in 2005. Occupancy expenses as a percentage of restaurant sales increased to 8% in 2005 from 7.3% in 2004, primarily due to higher rent expense as a percentage of their current sales levels for restaurants in our newer markets.

 

Depreciation increased by $676,000, or 31.4%, to $2.8 million in 2005 from $2.2 million in 2004. The increase was primarily due to the additional depreciation on seven new restaurants opened in 2005 and the 11 new restaurants that opened in the last six months of 2004.

 

General and administrative expenses increased by $1.1 million, or 23.3%, to $5.6 million in 2005 from $4.6 million in 2004 due to higher corporate headcount and accrued incentive compensation. General and administrative expenses as a percentage of total revenue increased to 11.7% in 2005 from 11.6% in 2004. This increase was primarily due to an increase in stock-based compensation of $203,000 to $330,000 from $127,000 in the prior year.

 

Preopening costs increased by $149,000, to $600,000 in 2005 from $451,000 in 2004. We opened four new Company-owned restaurants in the second quarter of 2005, incurred costs of approximately $50,000 for openings before the second quarter of 2005, and incurred $157,000 for restaurants that will open in the third quarter of 2005 or later. In the second quarter 2004, we opened four new Company-owned restaurants, incurred costs of $42,000 for restaurants that opened before the second quarter of 2004, and incurred costs of $139,000 for restaurants that opened in third quarter of 2004 or later.

 

Restaurant closures and asset impairment decreased by $24,000 to $4,000 in 2005 from $28,000 in 2004. The amount expensed in 2004 and 2005 represents miscellaneous asset impairments and retirements.

 

Interest income increased by $182,000 to $337,000 in 2005 from $155,000 in 2004. The increase was primarily due to higher interest rates. Cash and marketable securities balances at the end of the quarter were $51.0 million in 2005 compared to $46.8 million for the second quarter of 2004.

 

Provision for income taxes increased $397,000 to $1.2 million in 2005 from $829,000 in 2004. The effective tax rate as a percentage of income before taxes decreased to 38.8% in 2005 from 39.0% in 2004. Our effective tax rate reflects the full federal and state statutory rates on taxable income. For 2005, we believe our effective tax rate will be between 38% and 39%.

 

Results of Operations for the Six Months Ended June 26, 2005 and June 27, 2004

 

Restaurant sales increased by $16.4 million, or 23.1%, to $87.6 million in 2005 from $71.2 million in 2004. The increase in restaurant sales was due to a $13.6 million increase associated with the opening of 7 new Company-owned restaurants in the first six months of 2005 and the 27 Company-owned restaurants opened before 2005 that did not meet the criteria for same-store sales and $2.9 million related to a 4.4% increase in same-store sales. The decrease in same-store sales from 10.8% in 2004 to 4.4% in 2005 was a drop from historically high to more modest levels.

 

Franchise royalties and fees increased by $2.9 million, or 33.5%, to $11.4 million in 2005 from $8.5 million in 2004. The increase was due primarily to additional royalties collected from the 23 new franchised restaurants that opened in 2005 and the 28 franchised restaurants that opened in the last six months of 2004. Same-store sales for franchised restaurants increased 2.5% in 2005.

 

Cost of sales increased by $3.8 million, or 15.2%, to $28.5 million in 2005 from $24.8 million in 2004 due primarily to more restaurants in operation in 2005. Cost of sales as a percentage of restaurant sales decreased to 32.5% in 2005 from 34.8% in 2004. The decrease in cost of sales as a percentage of restaurant sales was primarily due to lower fresh chicken wing costs.

 

Labor expenses increased by $6.1 million, or 30.6%, to $26.2 million in 2005 from $20.1 million in 2004 due primarily to more restaurants in operation in 2005. Labor expenses as a percentage of restaurant sales increased to 29.9% in 2005 from 28.2% in 2004. The increase in labor expenses as a percentage of restaurant sales was primarily due to higher labor costs in our newer markets, higher workers’ compensation rates for our 21 Ohio stores, and higher health insurance costs.

 

Operating expenses increased by $2.7 million, or 25.4%, to $13.5 million in 2005 from $10.8 million in 2004 due primarily to more restaurants in operation in 2005. Operating expenses as a percentage of restaurant sales increased to 15.4% in 2005 from 15.1% in 2004. The increase in operating expenses as a percentage of restaurant sales was primarily due to increased credit card use by customers resulting in greater credit card fees partially offset by lower insurance costs.

 

Occupancy expenses increased by $1.7 million, or 34.4%, to $6.6 million in 2005 from $4.9 million in 2004 due primarily to more restaurants in operation in 2005. Occupancy expenses as a percentage of restaurant sales increased to 7.5% in 2005 from 6.8% in 2004, primarily due to higher rent expense as a percentage of their current sales levels for restaurants in our newer markets.

 

13


Table of Contents

Depreciation increased by $1.3 million, or 31.5%, to $5.5 million in 2005 from $4.2 million in 2004. The increase was primarily due to the additional depreciation on seven new restaurants opened in 2005 and the 11 new restaurants that opened in the last six months of 2004.

 

General and administrative expenses increased by $2.6 million, or 30.6%, to $11.3 million in 2005 from $8.6 million in 2004 due to higher corporate headcount. General and administrative expenses as a percentage of total revenue increased to 11.4% in 2005 from 10.8% in 2004. This increase was primarily due to an increase in stock-based compensation of $727,000 to $854,000 from $127,000 in the prior year.

 

Preopening costs increased by $119,000, to $913,000 in 2005 from $794,000 in 2004. We opened seven new Company-owned restaurants in the first half of 2005, incurred costs of $50,000 for openings in 2004, and incurred $157,000 for restaurants that will open in the third quarter of 2005 or later. In the first half of 2004, we opened eight new Company-owned restaurants, incurred costs of $30,000 for restaurants that opened in 2003, and incurred costs of $171,000 for restaurants that opened in the third quarter of 2004 or later.

 

Restaurant closures and asset impairment decreased by $17,000 to $22,000 in 2005 from $39,000 in 2004. The expense in 2004 and 2005 represented miscellaneous asset impairments and retirements.

 

Interest income increased by $321,000 to $609,000 in 2005 from $288,000 in 2004. The increase was primarily due to higher interest rates. Cash and marketable securities balances at the end of the quarter were $51.0 million in 2005 compared to $46.8 million for the second quarter of 2004.

 

Provision for income taxes increased $446,000 to $2.7 million in 2005 from $2.3 million in 2004. The effective tax rate as a percentage of income before taxes decreased to 38.5% in 2005 from 39.0% in 2004. Our effective tax rate reflects the full federal and state statutory rates on taxable income. For 2005, we believe our effective tax rate will be between 38% and 39%.

 

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 an initial public offering in November 2003. The cash and marketable securities balance at June 26, 2005 was $51.0 million. We invest our cash balances in short-term investment instruments with the focus on protection of principal, adequate liquidity and maximization of after-tax returns. These investments can 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 six months ended June 26, 2005, net cash provided by operating activities was $9.9 million. Net cash provided by operating activities consisted primarily of net earnings adjusted for non-cash expenses, a decrease in prepaid expenses, partially offset by an increase in accounts receivable and a decrease in accrued expenses. The decrease in prepaid expenses was due primarily to the timing of insurance payments. The increase in accounts receivable was due to higher credit card receivables. The decrease in accrued expenses was primarily due to lower gift card sales and the payout of incentive compensation in March.

 

For the six months ended June 27, 2004, net cash provided by operating activities was $7.1 million. Net cash provided by operating activities consisted primarily of net earnings adjusted for non-cash expenses, increases in accounts receivable and decreases in accounts payable and accrued expenses. The decrease in accounts payable is due to the timing of payments, decreased level of construction activity, and purchases due to lower seasonal sales at June 27, 2004 as compared to December 28, 2003. The increase in accounts receivable was due to higher credit card and vendor related receivables. The decrease in accrued expenses is due to the payout of incentive compensation in March.

 

For the six months ended June 26, 2005 and June 27, 2004, net cash used in investing activities was $18.3 million and $44.4 million, respectively. Investing activities consisted of purchases of property and equipment related to the opening of new company-owned restaurants and restaurants under construction, purchases of marketable securities, and sales or maturities of those securities. During the first six months of 2005 and 2004, we opened seven and eight restaurants, respectively. We expect capital expenditures for the entire year of 2005 to approximate $23 to 24 million for the addition of about 20 new company-owned restaurants and the renovation and maintenance of existing restaurants. For the first six months of 2005, the Company purchased $47.1 million of marketable securities and received proceeds of $37.1 million as these investments matured or were sold. For the first six months of 2004, the Company purchased $57.8 million of marketable securities and received proceeds of $24.2 million as these investments matured or were sold.

 

 

14


Table of Contents

For the six months ended June 26, 2005 and June 27, 2004, net cash provided by financing activities was $391,000 and $976,000, respectively. Net cash provided by financing activities for 2005 resulted from the issuance of common stock from the exercise of stock options and the employee stock purchase plan of $717,000. No additional funding from the issuance of common stock (other than from the exercise of options and employee stock purchases) is anticipated for the remainder of 2005. Net cash provided by financing activities for 2004 consisted of the issuance of common stock from the exercise of warrants and stock options and employee stock purchase plan of $976,000.

 

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. We do not currently own any of the properties on which our restaurants operate and, therefore, do not have the ability to enter into sale-leaseback transactions as a potential source of cash.

 

The following table presents a summary of our contractual operating lease obligations and commitments as of June 26, 2005:

 

          Payments Due By Period

     Total

   Less than
One year


   1-3 years

   3-5 years

   After 5
years


Operating lease obligations

   $ 108,816    12,150    23,955    20,928    51,783

Lease commitments for restaurants under development

     21,658    1,376    3,608    3,629    13,045
    

  
  
  
  

Total

   $ 130,474    13,526    27,563    24,557    64,828
    

  
  
  
  

 

We believe the cash flows from our operating activities and our balance of cash and marketable securities will be sufficient to fund our operations, building commitments, and to 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. The Company’s forward-looking statements generally relate to our long-term goal of 1,000 stores, expected annual unit growth of 20-25%, plans for entry into new markets, expansion and improving existing markets, focus on reducing general and administrative expenses, and cash requirements. Although it is not possible to foresee all of the factors that may cause actual results to differ from the Company’s 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 26, 2004):

 

    Fluctuations in chicken wing prices could reduce our operating income.

 

    We may be unable to successfully open new restaurants and our revenue growth rate and profits may be reduced.

 

    We may be unable to identify and obtain a sufficient number of suitable new restaurant sites for us to sustain our revenue growth rate.

 

    Our restaurants may not achieve market acceptance in the new geographic regions we enter.

 

    New restaurants added to our existing markets may take sales from existing restaurants.

 

    Implementing our expansion strategy may strain our resources.

 

    We are dependent on franchisees and their success.

 

    We may not be able to attract and retain qualified personnel to operate and manage our restaurants.

 

    Our franchisees may take actions that could harm our business.

 

    Changes in consumer preferences or discretionary consumer spending could harm our performance.

 

    Implementation of local smoking bans could harm our business.

 

Investors are cautioned that all forward-looking statements involve risks and uncertainties.

 

15


Table of Contents

ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

 

We are exposed to market risk related to our cash and cash equivalents. 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, 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 no minimum purchase commitments from our vendors. The primary food product used by company-owned and franchised restaurants is fresh chicken wings. We purchase fresh chicken wings based on current market prices, which are subject to fluctuation.

 

A material increase in fresh chicken wing costs may adversely affect our operating results. Fresh chicken wing prices during the second quarter of 2005 averaged 22% lower than the average per pound price in the second quarter of 2004. If there is a significant rise in the price of fresh chicken wings, or we are unable to successfully adjust menu prices or menu mix or otherwise make operational adjustments to account for these changes, our operating results could be adversely affected. Fresh chicken wings accounted for approximately 36.8% and 26.5% of our cost of sales in the second quarter of 2004 and 2005, respectively, with an average price per pound of $1.46 and $1.14, respectively. Fresh chicken wings accounted for approximately 37.6% and 29.0% of our cost of sales in the six-month periods ended 2004 and 2005, respectively, with an average price per pound of $1.47 and $1.29 respectively. If we had experienced a 10% change in fresh chicken wing costs during the second quarter and six months ended June 26, 2005, restaurant cost of sales would have changed by approximately $350,000 and $825,000, respectively.

 

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. Except as described in the paragraph above, we believe inflation has not had a material impact on our results of operations in recent years.

 

Financial Instruments

 

Financial instruments that potentially subject the Company to concentrations of credit risk consist principally of investments. The counterparties to the instruments consist of government agencies and various major corporations of investment grade credit standing. The Company does not believe there is significant risk of non-performance by these counterparties because of Company limitations 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 control over financial reporting during our most recently completed fiscal quarter that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.

 

PART II—OTHER INFORMATION

 

ITEM 1. LEGAL PROCEEDINGS

 

Occasionally, we are a defendant in litigation arising in the ordinary course of our business, including claims arising from personal injuries, contract claims, franchise-related claims, dram shop claims, employment-related claims and claims from guests or employees alleging injury, illness or other food quality, health or operational concerns. To date, none of these types of litigation, most of which are typically covered by insurance, has had a material effect on us. We have insured and continue

 

16


Table of Contents

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 the Company’s financial condition or results of operations.

 

ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS

 

We completed an initial public offering (“IPO”) of 3,450,000 shares of common stock, of which 3,250,000 shares were offered by us and 200,000 were offered by selling shareholders, at an aggregate offering price of $58.7 million, or $17.00 per share, pursuant to registration statement No. 333-108695, which was declared effective on November 20, 2003. The managing underwriters for the IPO were RBC Capital Markets, SG Cowen and McDonald Investments Inc.

 

We received net proceeds, after expenses, from the IPO of $49.7 million. Offering expenses related to the IPO included an underwriting discount of $3.9 million and other offering expenses of $1.6 million. We used $10.6 million of the net proceeds for the repayment of capital leases and bank notes. The remaining proceeds are expected to be used for general corporate purposes, including opening new restaurants and renovation and maintenance of existing restaurants, acquiring existing restaurants from franchisees, research and development, working capital, and capital expenditures. 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 exclusive of, high quality money market funds, commercial paper, U.S. government-backed instruments, repurchase agreements, municipal securities, and asset-backed securities.

 

ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS

 

At the Annual Shareholders meeting held on May 12, 2005, the Company submitted to a vote of security-holders the following matters, which received the indicated votes:

 

1. Approving setting the number of members of the Board of Directors at six (6):

 

For: 7,359,401   Against: 11,311   Abstain: 2,393    Broker Non-Vote: 0

 

2. Election of Directors:

 

     For:

   Withhold:

Sally J. Smith

   7,164,209    208,896

Kenneth H. Dahlberg

   7,086,009    287,096

Dale M. Applequist

   7,090,032    283,073

Robert W. MacDonald

   7,091,503    281,602

Warren E. Mack

   7,077,468    295,637

J. Oliver Maggard

   7,165,624    207,481

 

 

17


Table of Contents

ITEM 6. EXHIBITS

 

       Exhibits.

 

See Exhibit Index following signature page of this Report.

 

 

18


Table of Contents

SIGNATURES

 

In accordance with the requirements of the Exchange Act, the registrant caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.

 

Date: August 3, 2005   BUFFALO WILD WINGS, INC.
    By:  

Sally J. Smith


        Sally J. Smith, President and Chief Executive Officer (principal executive officer)
    By:  

Mary J. Twinem


       

Mary J. Twinem, Executive Vice President, Chief

Financial Officer and Treasurer (principal financial and accounting officer)

 

19


Table of Contents

EXHIBIT INDEX

 

BUFFALO WILD WINGS, INC.

FORM 10-Q FOR QUARTER ENDED JUNE 26, 2005

 

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

 

 

20

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