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 28, 2008. This discussion and analysis contains certain statements that are not historical facts, including, among others, those relating to our anticipated financial performance for 2009, cash requirements, and our expected store openings and preopening costs. Such statements are forward-looking and speak only as of the date on which they are made. There are risks and uncertainties including, but not limited to, those discussed in this Form 10-Q under Item 2 of Part I as well as in Item 1A of Part I of the fiscal 2008 Form 10-K.

Critical Accounting Policies and Use of Estimates

Our most critical accounting policies, which are those that require significant judgment, include: valuation of long-lived assets and store closing reserves, goodwill, vendor allowances, revenue recognition from franchise operations, self-insurance liability, and stock-based compensation. An in-depth description of these can be found in our Annual Report on Form 10-K for the fiscal year ended December 28, 2008. There have been no changes to those policies during this period.

Overview

As of September 27, 2009, we owned and operated 220 company-owned and franchised an additional 400 Buffalo Wild Wings® Grill & Bar restaurants in 41 states. Of the 620 system-wide restaurants, 86 are located in Ohio. Our long-term focus is to grow to a national chain of over 1,000 locations in the United States, continuing the strategy of developing both company-owned and franchised restaurants.

Our growth targets for 2009 are 15% unit growth, 25% revenue growth, and 20% to 25% net earnings growth, with net earnings likely to be at the high end of our targeted goal for the year. Our growth and success depend on several factors and trends. First, we continue to monitor and react to changes in our cost of goods sold. The cost of goods sold is difficult to predict, as it has ranged from 29.3% to 30.5% of restaurant sales per quarter in our 2008 fiscal year and year-to-date in 2009. We are working to counteract the volatility of traditional wing prices with the introduction of popular new menu items, effective marketing promotions, focused efforts on food costs and waste, and menu price increases. We will continue to monitor the cost of traditional wings, as it can affect our cost of sales and cash flow from company-owned restaurants. We are exploring purchasing strategies to lessen the severity of cost increases and fluctuations for this commodity. We are currently purchasing traditional wings at market prices. If a satisfactory long-term price agreement for traditional wings were to arise, we would consider locking in prices to reduce our price volatility.

A second factor is our success in new markets. There are inherent risks in opening new restaurants, especially in new markets, for various reasons, including the lack of experience, logistical support, and brand awareness. These factors may result in lower than anticipated sales and cash flow for new restaurants in new markets. In 2009, we plan to develop the majority of our company-owned restaurants primarily in markets where we currently have either company-owned or franchised restaurants. We believe this development focus, together with our focus on our new restaurant opening procedures, will help mitigate the overall risk associated with opening restaurants in new markets.

Third, we will continue our focus on trends in company-owned and franchised same-store sales as an indicator of the continued acceptance of our concept by consumers. We also review the overall trend in average weekly sales as an indicator of our ability to increase the sales volume and, therefore, cash flow per location. We remain committed to high quality operations and guest hospitality.

Our revenue is generated by:

• Sales at our company-owned restaurants, which were 91% of total revenue in the third quarter of 2009. Food and nonalcoholic beverages accounted for 77% of restaurant sales. The remaining 23% of restaurant sales was from alcoholic beverages. The menu item with the highest sales volume is traditional wings at 21% of total restaurant sales.

• Royalties and franchise fees received from our franchisees.

We generate cash from the operation of company-owned restaurants and from franchise royalties and fees. We highlight the specific costs associated with the on-going operation of our company-owned restaurants in the consolidated statement of earnings under "Restaurant operating costs." Nearly all of our depreciation expense relates to assets used by our company-owned restaurants. Preopening costs are those costs associated with opening new company-owned restaurants and will vary quarterly based on the number of new locations opened and under construction. Loss on asset disposals and impairment expense is related to company-owned restaurants and includes the impairment of assets due to a relocation and the write-down of miscellaneous assets. Certain other expenses, such as general and administrative, relate to both company-owned and franchised operations.

We operate on a 52 or 53-week fiscal year ending on the last Sunday in December. Both of the third quarters of 2009 and 2008 consisted of thirteen weeks.

Quarterly Results of Operations

Our operating results for the periods indicated are expressed below as a percentage of total revenue, except for the components of restaurant operating costs, which are expressed as a percentage of restaurant sales. The information for each three-month and nine-month period is unaudited, and we have prepared it on the same basis as the audited financial statements. In the opinion of management, all necessary adjustments, consisting only of normal recurring adjustments, have been included to present fairly the unaudited quarterly results.

Quarterly and annual operating results may fluctuate significantly as a result of a variety of factors, including increases or decreases in same-store sales, changes in commodity prices, the timing and number of new restaurant openings and related expenses, asset impairment charges, store closing charges, general economic conditions, stock-based compensation, and seasonal fluctuations. As a result, our quarterly results of operations are not necessarily indicative of the results that may be achieved for any future period.

                                                    Three months ended                       Nine months ended
                                            September 27,        September 28,       September 27,       September 28,
                                                2009                 2008                2009                2008
Revenue:
Restaurant sales                                      90.6 %               90.0 %              90.7 %              89.6 %
Franchising royalties and fees                         9.4                 10.0                 9.3                10.4
Total revenue                                        100.0                100.0               100.0               100.0

Costs and expenses:
Restaurant operating costs:
Cost of sales                                         29.8                 29.8                30.2                30.0
Labor                                                 30.2                 30.7                30.2                30.4
Operating                                             16.1                 16.4                15.5                15.9
Occupancy                                              6.9                  6.6                 6.7                 6.6
Depreciation and amortization                          6.2                  5.6                 6.0                 5.6
General and administrative                             9.8                 10.1                 9.2                 9.7
Preopening                                             0.9                  2.3                 1.3                 1.8
Loss on asset disposals and impairment                 0.6                  0.9                 0.3                 0.7
Total costs and expenses                              92.7                 94.0                91.7                92.0
Income from operations                                 7.3                  6.0                 8.3                 8.0
Investment income                                      0.3                  0.2                 0.2                 0.4
Earnings before income taxes                           7.6                  6.2                 8.5                 8.3
Income tax expense                                     2.4                  1.9                 2.8                 2.8
Net earnings                                           5.2                  4.3                 5.7                 5.5

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

                                                      As of
                                        September 27,       September 28,
                                            2009                2008
           Company-owned restaurants               220                 187
           Franchised restaurants                  400                 348

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

                                                   Three months ended                       Nine months ended
                                            September 27,       September 28,       September 27,       September 28,
                                                2009                2008                2009                2008
Company-owned restaurant sales             $       120,290              95,492             357,477             269,850
Franchised restaurant sales                        244,470             212,408             725,071             626,018

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

                                                    Three months ended                         Nine months ended
                                            September 27,         September 28,       September 27,         September 28,
                                                2009                  2008                2009                  2008
Company-owned same-store sales                         0.8 %                 6.8 %               3.3 %                 6.4 %
Franchised same-store sales                            1.9                   2.1                 3.8                   2.9

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

                                                    Three months ended                         Nine months ended
                                            September 27,         September 28,       September 27,         September 28,
                                                2009                  2008                2009                  2008
Average price per pound                    $          1.67                  1.17                1.66                  1.21

Results of Operations for the Three Months Ended September 27, 2009 and September 28, 2008

Restaurant sales increased by $24.8 million, or 26.0%, to $120.3 million in 2009 from $95.5 million in 2008. The increase in restaurant sales was due to a $24.0 million increase associated with 24 new company-owned restaurants that opened in 2009, 9 stores acquired from our franchisee in Nevada in 2008, and 33 company-owned restaurants opened before 2009 that did not meet the criteria for same-store sales for all or part of the three-month period, and $731,000 related to a 0.8% increase in same-store sales.

Franchise royalties and fees increased by $1.9 million, or 17.7%, to $12.5 million in 2009 from $10.6 million in 2008. The increase was primarily due to additional royalties collected from 39 new franchised restaurants that opened in 2009 and 17 franchised restaurants that opened in the last three months of 2008. Same-store sales for franchised restaurants increased 1.9% in 2009.

Cost of sales increased by $7.4 million, or 26.0%, to $35.8 million in 2009 from $28.4 million in 2008 due primarily to more restaurants being operated in 2009. Cost of sales as a percentage of restaurant sales remained consistent at 29.8% in 2009 and 2008. Cost of sales as a percentage of restaurant sales remained flat primarily due to higher traditional wing prices being offset by menu mix changes, the leverage of price increases, and production efficiencies. An increase in boneless wing sales also lowered our cost of goods percentage. Traditional wing sales remained flat at approximately 21.4% of our restaurant sales. However, boneless wings, which are a better margin item than traditional wings, increased to 19.5% of sales, from 17.1% in 2008. For the third quarter of 2009, the cost of traditional wings averaged $1.67 per pound which was a 42.7% increase over the same period in 2008.

Labor expenses increased by $7.1 million, or 24.2%, to $36.4 million in 2009 from $29.3 million in 2008 due primarily to more restaurants being operated in 2009. Labor expenses as a percentage of restaurant sales decreased to 30.2% in 2009 from 30.7% in 2008. The decrease in labor expenses as a percentage of restaurant sales was primarily due to lower hourly labor costs caused by efficiencies from our labor management program.

Operating expenses increased by $3.7 million, or 23.9%, to $19.4 million in 2009 from $15.7 million in 2008 due primarily to more restaurants being operated in 2009. Operating expenses as a percentage of restaurant sales decreased to 16.1% in 2009 from 16.4% in 2008. The decrease in operating expenses as a percentage of restaurant sales is primarily due to reduced utility and natural gas charges.

Occupancy expenses increased by $2.0 million, or 31.6%, to $8.3 million in 2009 from $6.3 million in 2008 due primarily to more restaurants being operated in 2009. Occupancy expenses as a percentage of restaurant sales increased to 6.9% in 2009 from 6.6% in 2008 due to reduced leverage from lower sales volume increases.

Depreciation and amortization increased by $2.3 million, or 38.5%, to $8.3 million in 2009 from $6.0 million in 2008. The increase was primarily due to the additional depreciation on 24 new restaurants opened in 2009 and the 10 new restaurants that opened in the last three months of 2008.

General and administrative expenses increased by $2.3 million, or 21.1%, to $12.9 million in 2009 from $10.7 million in 2008 primarily due to additional headcount and higher professional fees partially offset by lower travel costs. General and administrative expenses as a percentage of total revenue decreased to 9.8% in 2009 from 10.1% in 2008. Exclusive of stock-based compensation, we reduced our general and administrative expenses as a percentage of revenue to 8.4% from 8.9% due to better leverage of our wage-related expenses and travel costs against higher revenue.

Preopening costs decreased by $1.3 million, to $1.1 million in 2009 from $2.5 million in 2008. In 2009, we incurred costs of $811,000 for five new company-owned restaurants opened in the third quarter of 2009 and costs of $320,000 for restaurants that will open in the fourth quarter of 2009 or later. In 2008, we incurred costs of $1.7 million for 12 new company-owned restaurants opened in the third quarter of 2008, $77,000 related to the purchase of nine franchise restaurants, and $516,000 for restaurants that opened in the fourth quarter of 2008 or later. In 2009, we expect average preopening costs per restaurant to be $220,000.

Loss on asset disposals and impairment decreased by $88,000 to $842,000 in 2009 from $930,000 in 2008. In 2009, the loss was related to the write-off of miscellaneous equipment and disposals due to remodels. In 2008, the loss was related to the asset impairment of one underperforming restaurant of $110,000, store closing reserves of $184,000 for one restaurant relocated during the quarter, and the write-off of miscellaneous equipment.

Investment income increased by $115,000 to $379,000 in 2009 from $264,000 in 2008. The increase was primarily due to gains on investments held for a deferred compensation plan partially offset by reductions in interest income due to lower interest rates on our investment portfolio. Cash and marketable securities balances at the end of the third quarter totaled $52.4 million in 2009 compared to $45.0 million at the end of the third quarter of 2008.

Provision for income taxes increased $1.1 million to $3.2 million in 2009 from $2.1 million in 2008. The effective tax rate as a percentage of income before taxes increased to 31.8% in 2009 from 31.0% in 2008. The 2009 income tax rate was higher due to a decrease in tax exempt interest income which was partially offset by an increase in employer tax credits. For 2009, we believe our effective tax rate will be approximately 33.5%.

Results of Operations for the Nine Months Ended September 27, 2009 and September 28, 2008

Restaurant sales increased by $87.6 million, or 32.5%, to $357.5 million in 2009 from $269.9 million in 2008. The increase in restaurant sales was due to a $79.1 million increase associated with 24 new company-owned restaurants that opened in 2009, 9 stores acquired from our franchisee in Nevada in 2008, and 51 company-owned restaurants opened before 2009 that did not meet the criteria for same-store sales for all or part of the nine-month period, and $8.5 million related to a 3.3% increase in same-store sales.

Franchise royalties and fees increased by $5.1 million, or 16.2%, to $36.4 million in 2009 from $31.4 million in 2008. The increase was primarily due to additional royalties collected from 39 new franchised restaurants that opened in 2009 and 17 franchised restaurants that opened in the last three months of 2008. Same-store sales for franchised restaurants increased 3.8% in 2009.

Cost of sales increased by $26.9 million, or 33.1%, to $107.9 million in 2009 from $81.1 million in 2008 due primarily to more restaurants being operated in 2009. Cost of sales as a percentage of restaurant sales increased to 30.2% in 2009 from 30.0% in 2008. The increase in cost of sales as a percentage of restaurant sales was primarily due to higher traditional wing prices partially offset by menu mix changes, the leverage of price increases, and production efficiencies. The steady shift from traditional wings to boneless wings also lowered our cost of goods percentage. Traditional wings accounted for 20.8% of our restaurant sales for the first nine months of 2009, down from 21.9% in the first nine months of 2008. Boneless wings, which are a better margin item than traditional wings, increased to 18.9% of sales in 2009, from 16.0% in 2008. For the first nine months of 2009, the cost of traditional wings averaged $1.66 per pound which was a 37.2% increase over the same period in 2008.

Labor expenses increased by $25.8 million, or 31.4%, to $108.0 million in 2009 from $82.2 million in 2008 due primarily to more restaurants being operated in 2009. Labor expenses as a percentage of restaurant sales decreased to 30.2% in 2009 from 30.4% in 2008. The decrease in labor expenses as a percentage of restaurant sales was primarily due to lower hourly labor costs caused by efficiencies from our labor management program partially offset by higher health insurance costs.

Operating expenses increased by $12.6 million, or 29.3%, to $55.4 million in 2009 from $42.8 million in 2008 due primarily to more restaurants being operated in 2009. Operating expenses as a percentage of restaurant sales decreased to 15.5% in 2009 from 15.9% in 2008. The decrease in operating expenses as a percentage of restaurant sales is primarily due to lower utility and natural gas charges.

Occupancy expenses increased by $5.9 million, or 33.0%, to $23.8 million in 2009 from $17.9 million in 2008 due primarily to more restaurants being operated in 2009. Occupancy expenses as a percentage of restaurant sales increased to 6.7% in 2009 from 6.6% in 2008 due to reduced leverage from lower sales volume increases.

Depreciation and amortization increased by $6.9 million, or 41.4%, to $23.7 million in 2009 from $16.7 million in 2008. The increase was primarily due to the additional depreciation on 24 new restaurants opened in 2009 and the 10 new restaurants that opened in the last three months of 2008.

General and administrative expenses increased by $7.1 million, or 24.3%, to $36.1 million in 2009 from $29.1 million in 2008 primarily due to additional headcount. General and administrative expenses as a percentage of total revenue decreased to 9.2% in 2009 from 9.7% in 2008. Exclusive of stock-based compensation, we reduced our general and administrative expenses as a percentage of revenue to 8.1% from 8.6% due to better leverage of our wage-related expenses and travel costs against higher revenue.

Preopening costs decreased by $188,000, to $5.2 million in 2009 from $5.4 million in 2008. In 2009, we incurred costs of $4.8 million for 24 new company-owned restaurants opened in the first nine months of 2009 and costs of $345,000 for restaurants that will open in the fourth quarter of 2009 or later. In 2008, we incurred costs of $4.6 million for 21 new company-owned restaurants opened in the first nine months of 2008, $77,000 related to the purchase of nine franchise restaurants, and $709,000 for restaurants that opened in the fourth quarter of 2008 or later. In 2009, we expect average preopening costs per restaurant to be $220,000.

Loss on asset disposals and impairment decreased by $779,000 to $1.3 million in 2009 from $2.1 million in 2008. In 2009, the loss was related to the write-off of miscellaneous equipment and disposals due to remodels. In 2008, we impaired the assets of two restaurants for $506,000 and incurred store closing costs of $184,000 for one restaurant being relocated. The remaining loss was related to HDTV upgrades and the write-off of miscellaneous equipment.

Investment income decreased by $228,000 to $868,000 in 2009 from $1.1 million in 2008. The decrease was primarily due to lower interest rates on our investment portfolio partially offset by gains on investments held for a deferred compensation plan. Cash and marketable securities balances at the end of the quarter totaled $52.4 million in 2009 compared to $45.0 million at the end of the third quarter of 2008.

Provision for income taxes increased $2.7 million to $11.1 million in 2009 from $8.4 million in 2008. The effective tax rate as a percentage of income before taxes decreased to 33.2% in 2009 from 33.4% in 2008. The 2009 income tax rate was lower due to an increase in employer tax credits and a decrease in state taxes which were partially offset by a decrease in tax exempt interest income. For 2009, we believe our effective tax rate will be approximately 33.5%.

Liquidity and Capital Resources

Our primary liquidity and capital requirements have been for new restaurant construction, remodeling and maintaining our existing company-owned restaurants, working capital, and other general business needs. We fund these expenses primarily with cash from operations. The cash and marketable securities balance at September 27, 2009 was $52.4 million. We invest our cash balances in debt securities with the focus on protection of principal, adequate liquidity, and return on investment based on risk. As of September 27, 2009, nearly all excess cash was invested in high-quality municipal securities.

For the nine months ended September 27, 2009, net cash provided by operating activities was $58.0 million. Net cash provided by operating activities consisted primarily of net earnings adjusted for non-cash expenses and increases in accounts payable, and accrued expenses offset by an increase in accounts receivable. The increase in accounts payable was due to an increase in the number of restaurants and the timing of payments. The increase in accrued expenses was due to higher deferred compensation costs and higher wage-related costs. The increase in accounts receivable was due to higher credit card balances.

For the nine months ended September 28, 2008, net cash provided by operating activities was $47.3 million. Net cash provided by operating activities consisted primarily of net earnings adjusted for non-cash expenses, and an increase in accounts payable, accrued expenses, and refundable income taxes. The increase in accounts payable was due to an increase in the number of restaurants and the timing of payments. The increase in income taxes was due to the timing of income tax payments. The increase in accrued expenses was due to accruals for fuel hedges that were settled in future quarters as well as activity related to additional restaurants.

For the nine months ended September 27, 2009 and September 28, 2008, net cash used in investing activities was $53.7 million and $45.3 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 nine months of 2009, we opened 24 restaurants. During the first nine months of 2008, we purchased nine Nevada franchised locations for $23.1 million and opened 21 new restaurants. In 2009, we expect capital expenditures for approximately 36 new company-owned restaurants to cost approximately $1.7 million per location and expenditures to be approximately $20.3 million for the maintenance and remodel of existing restaurants. In 2009, we purchased $39.1 million of marketable securities and received proceeds of $36.7 million as these investments matured or were sold. In 2008, we purchased $99.0 million of marketable securities and received proceeds of $125.2 million as these investments matured or were sold.

For the nine months ended September 27, 2009 and September 28, 2008, net cash provided by (used in) financing activities was ($521,000) and $15,000, respectively. Net cash used in financing activities for 2009 resulted primarily from tax payments for restricted stock units of $1.5 million partially offset by proceeds from the exercise of stock options of $574,000 and the excess tax benefit from stock issuance of $418,000. No additional funding from the issuance of common stock (other than from the exercise of options and purchase of stock under the employee stock purchase plan) is anticipated for the remainder of 2009. Net cash used in financing activities for 2008 resulted primarily from tax payments for restricted stock units of $989,000, offset by proceeds from the exercise of stock options of $569,000 and the excess tax benefit from stock issuance of $435,000.

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 own the buildings in which 25 of our restaurants operate and, therefore, have very limited ability to . . .