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 25, 2011. This discussion and analysis contains certain statements that are not historical facts, including, among others, those relating to our anticipated financial performance for 2012, 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. Actual results are subject to various 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 2011 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 sales information is an important measure of our performance, and is useful in assessing consumer acceptance of the Buffalo Wild Wings® Grill & Bar concept and the overall health of the concept. Franchise information also provides an understanding of our revenues because franchise royalties and fees are based on the opening of franchised units and their sales. However, franchise 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 financial information as defined or used by other companies.

Critical Accounting Estimates

Our most critical accounting estimates, which are those that require significant judgment, include: valuation of long-lived assets and store closing reserves, goodwill, vendor allowances, self-insurance liabilities, 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 25, 2011. There have been no changes to those policies during this period.

Overview

As of June 24, 2012, we owned and operated 330 company-owned and franchised an additional 505 Buffalo Wild Wings® Grill & Bar restaurants in North America. We believe that we will grow the Buffalo Wild Wings brand to about 1,500 locations in North America, continuing the strategy of developing both company-owned and franchised restaurants.

We believe we will have 55 to 60 company-owned and 45 to 50 franchised restaurant openings in 2012. With commodity challenges ahead and assuming sales remain strong, we should achieve annual net earnings growth of between 15% and 20%. Our growth and success depend on several factors and trends. First, 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 represented 92% of total revenue in the second quarter of 2012. Food and nonalcoholic beverages accounted for 78% of restaurant sales. The remaining 22% of restaurant sales was from alcoholic beverages. The menu items with the highest sales volume are traditional and boneless wings at 20% and 19%, respectively, of total restaurant sales.

• Royalties and franchise fees received from our franchisees.

A second factor is our success in developing restaurants in new markets. There are inherent risks in opening new restaurants, especially in new markets, including the lack of experience, logistical support, and brand awareness. These factors may result in lower than anticipated sales and cash flow for restaurants in new markets along with higher preopening costs. We believe our focus on new restaurant opening procedures, along with our expanding North American presence, will help to mitigate the overall risk associated with opening restaurants in new markets.

Third, 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 27.2% to 31.6% of restaurant sales per quarter in our 2011 fiscal year and year-to-date in 2012, mostly due to price and yield fluctuations in chicken wings. We work to counteract the volatility of chicken wing prices with the introduction of new menu items, marketing promotions, focused efforts on food costs and waste, and menu price increases. We will continue to monitor the cost of chicken wings, as it can significantly change our cost of sales and cash flow from company-owned restaurants. We continue to explore purchasing strategies to lessen the severity of cost increases and fluctuations, and are reviewing menu additions and other strategies that may decrease the percentage that chicken wings represent in terms of total restaurant sales. We are currently purchasing chicken wings at market prices.

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 opening and under construction. Loss on asset disposals and store closures expense is related to company-owned restaurants and includes 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.

We operate on a 52 or 53-week fiscal year ending on the last Sunday in December. Both of the first quarters of 2012 and 2011 consisted of thirteen weeks. We have a 53-week fiscal year in 2012, 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 and six-month period is unaudited, and we have prepared it on the same basis as the audited financial statements. In the opinion of management, all necessary adjustments, consisting only of normal recurring adjustments, have been included to present fairly the unaudited quarterly results.

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

                                                  Three months ended               Six months ended
                                              June 24,         June 26,        June 24,        June 26,
                                                2012             2011            2012            2011
Revenue:
Restaurant sales                                    92.4 %           91.2 %          92.5 %          91.0 %
Franchising royalties and fees                       7.6              8.8             7.5             9.0
Total revenue                                      100.0            100.0           100.0           100.0
Costs and expenses:
Restaurant operating costs:
Cost of sales                                       31.6             27.2            31.3            27.6
Labor                                               30.2             30.6            29.8            30.0
Operating                                           14.7             14.9            14.4            14.9
Occupancy                                            5.9              6.3             5.7             6.3
Depreciation and amortization                        6.7              6.5             6.5             6.3
General and administrative                           8.8             10.2             8.2             9.6
Preopening                                           0.6              2.2             0.8             1.8
Loss on asset disposals and store closures           0.3              0.3             0.3             0.2
Total costs and expenses                            92.6             91.3            90.9            89.6
Income from operations                               7.4              8.7             9.1            10.4
Investment income (loss)                             0.0             (0.1 )           0.1             0.1
Earnings before income taxes                         7.3              8.6             9.1            10.5
Income tax expense                                   2.5              2.8             3.0             3.5
Net earnings                                         4.9              5.8             6.1             7.0

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

                                                      As of
                                             June 24,      June 26,
                                               2012          2011
                 Company-owned restaurants         330           277
                 Franchised restaurants            505           492

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

                                   Three months ended           Six months ended
                                 June 24,      June 26,      June 24,      June 26,
                                   2012          2011          2012          2011
Company-owned restaurant sales   $ 220,550     $ 167,896     $ 452,866     $ 333,423
Franchised restaurant sales        359,296       321,667       731,630       649,749

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

                                    Three months ended              Six months ended
                                 June 24,        June 26,      June 24,         June 26,
                                   2012            2011          2012             2011
Company-owned same-store sales         5.3 %           5.9 %         7.3 %            4.9 %
Franchised same-store sales            5.5             2.7           6.4              2.1

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

                              Three months ended             Six months ended
                          June 24,         June 26,      June 24,        June 26,
                            2012             2011          2012            2011
Average price per pound   $    1.90             1.02          1.91            1.12

Results of Operations for the Three Months Ended June 24, 2012 and June 26, 2011

Restaurant sales increased by $52.7 million, or 31.4%, to $220.6 million in 2012 from $167.9 million in 2011. The increase in restaurant sales was due to a $44.7 million increase associated with 14 new company-owned restaurants that opened in 2012 and 77 company-owned restaurants that opened or were acquired before 2012 that did not meet the criteria for same-store sales for all or part of the three-month period, and $8.0 million related to a 5.3% increase in same-store sales.

Franchise royalties and fees increased by $2.0 million, or 12.1%, to $18.2 million in 2012 from $16.2 million in 2011. The increase was primarily due to royalties related to additional sales due to 13 more franchised restaurants in operation at the end of the period compared to prior year, and an increase in same-store sales at franchised restaurants of 5.5% in the second quarter 2012.

Cost of sales increased by $24.1 million, or 52.6%, to $69.8 million in 2012 from $45.7 million in 2011 due primarily to more restaurants being operated in 2012. Cost of sales as a percentage of restaurant sales increased to 31.6% in 2012 from 27.2% in 2011. Cost of sales as a percentage of restaurant sales increased primarily due to higher chicken wing prices and a lower wing-per-pound yield. For the second quarter of 2012, the cost of chicken wings averaged $1.90 per pound which was an 86.3% increase over the same period in 2011.

Labor expenses increased by $15.3 million, or 29.9%, to $66.6 million in 2012 from $51.3 million in 2011 due primarily to more restaurants being operated in 2012. Labor expenses as a percentage of restaurant sales decreased to 30.2% in 2012 from 30.6% in 2011. Cost of labor as a percentage of restaurant sales decreased primarily due to lower hourly labor costs partially offset by higher health insurance costs.

Operating expenses increased by $7.3 million, or 29.1%, to $32.3 million in 2012 from $25.0 million in 2011 due primarily to more restaurants being operated in 2012. Operating expenses as a percentage of restaurant sales decreased to 14.7% in 2012 from 14.9% in 2011. The decrease in operating expenses as a percentage of restaurant sales is primarily due to lower natural gas utility costs and debit card fees.

Occupancy expenses increased by $2.4 million, or 22.8%, to $13.1 million in 2012 from $10.7 million in 2011 due primarily to more restaurants being operated in 2012. Occupancy expenses as a percentage of restaurant sales decreased to 5.9% in 2012 from 6.3% in 2011 due primarily to leveraging rent cost with higher sales and a shift toward more company-owned buildings.

Depreciation and amortization increased by $4.2 million, or 34.9%, to $16.1 million in 2012 from $11.9 million in 2011. The increase was primarily due to the additional depreciation related to the 53 additional restaurants compared to second quarter of 2011 and incremental amortization related to the acquisition of franchised restaurants.

General and administrative expenses increased by $2.2 million, or 11.8%, to $21.0 million in 2012 from $18.8 million in 2011 primarily due to additional headcount. General and administrative expenses as a percentage of total revenue decreased to 8.8% in 2012 from 10.2% in 2011. Exclusive of stock-based compensation, our general and administrative expenses as a percentage of revenue decreased to 7.7% in 2012 from 8.3% in 2011 due primarily to leveraging expenses against higher sales and lower travel-related expenses.

Preopening costs decreased by $2.6 million, to $1.5 million in 2012 from $4.1 million in 2011. In 2012, we incurred costs of $598,000 for four new company-owned restaurants opened in the second quarter of 2012 and costs of $951,000 for restaurants that will open in the third quarter of 2012 or later. In 2011, we incurred costs of $3.2 million for 17 new company-owned restaurants opened in the second quarter of 2011 and costs of $950,000 for restaurants that opened in the third quarter of 2011 or later.

Loss on asset disposals and store closures increased by $105,000 to $597,000 in 2012 from $492,000 in 2011. In 2012, the loss was related to the write-off of equipment related to the rollout of new point-of-sale and back-office systems of $276,000 and the write-off of miscellaneous equipment. In 2011, the loss was related to the write-off of miscellaneous equipment and disposals due to remodels.

Investment loss was essentially flat at $115,000 in 2012 and $152,000 in 2011. The loss was related to investments held for our deferred compensation plan. Cash and marketable securities balances at the end of the second quarter totaled $76.2 million in 2012 compared to $86.1 million at the end of the second quarter of 2011.

Provision for income taxes increased $650,000 to $5.9 million in 2012 from $5.2 million in 2011. The effective tax rate as a percentage of income before taxes increased to 33.5% in 2012 from 32.8% in 2011. For 2012, we believe our effective annual tax rate will be about 33.0% to 33.5%.

Results of Operations for the Six Months Ended June 24, 2012 and June 26, 2011

Restaurant sales increased by $119.4 million, or 35.8%, to $452.9 million in 2012 from $333.4 million in 2011. The increase in restaurant sales was due to a $97.8 million increase associated with 14 new company-owned restaurants that opened in 2012 and 98 company-owned restaurants that opened or were acquired before 2012 that did not meet the criteria for same-store sales for all or part of the six-month period, and $21.6 million related to a 7.3% increase in same-store sales.

Franchise royalties and fees increased by $4.2 million, or 12.6%, to $37.0 million in 2012 from $32.8 million in 2011. The increase was primarily due to royalties related to additional sales due to 13 more franchised restaurants in operation at the end of the period compared to prior year, and an increase in same-store sales at franchised restaurants of 6.4% in the first six months of 2012.

Cost of sales increased by $50.0 million, or 54.3%, to $142.0 million in 2012 from $92.0 million in 2011 due primarily to more restaurants being operated in 2012. Cost of sales as a percentage of restaurant sales increased to 31.3% in 2012 from 27.6% in 2011. Cost of sales as a percentage of restaurant sales increased primarily due to higher chicken wing prices and a lower wing per pound yield. For the first six months of 2012, the cost of chicken wings averaged $1.91 per pound which was a 70.5% increase over the same period in 2011.

Labor expenses increased by $34.7 million, or 34.7%, to $134.9 million in 2012 from $100.2 million in 2011 due primarily to more restaurants being operated in 2012. Labor expenses as a percentage of restaurant sales decreased to 29.8% in 2012 from 30.0% in 2011. Cost of labor as a percentage of restaurant sales decreased primarily due to leveraging of management salaries against higher sales and lower hourly labor costs partially offset by higher health insurance costs.

Operating expenses increased by $15.5 million, or 31.4%, to $65.1 million in 2012 from $49.6 million in 2011 due primarily to more restaurants being operated in 2012. Operating expenses as a percentage of restaurant sales decreased to 14.4% in 2012 from 14.9% in 2011. The decrease in operating expenses as a percentage of restaurant sales is primarily due to lower natural gas utility cost and debit card fees.

Occupancy expenses increased by $5.0 million, or 24.0%, to $25.9 million in 2012 from $20.9 million in 2011 due primarily to more restaurants being operated in 2012. Occupancy expenses as a percentage of restaurant sales decreased to 5.7% in 2012 from 6.3% in 2011 due primarily to leveraging rent cost with higher sales and a shift toward more company-owned buildings.

Depreciation and amortization increased by $8.7 million, or 37.8%, to $31.6 million in 2012 from $23.0 million in 2011. The increase was primarily due to the additional depreciation related to the 53 additional restaurants compared to second quarter of 2011 and incremental amortization related to the acquisition of franchised restaurants.

General and administrative expenses increased by $5.3 million, or 15.2%, to $40.4 million in 2012 from $35.1 million in 2011 primarily due to additional headcount. General and administrative expenses as a percentage of total revenue decreased to 8.2% in 2012 from 9.6% in 2011. Exclusive of stock-based compensation, our general and administrative expenses as a percentage of revenue decreased to 7.4% in 2012 from 7.9% in 2011 due primarily to leveraging of salary and incentive compensation expenses against higher sales.

Preopening costs decreased by $2.4 million, to $4.1 million in 2012 from $6.5 million in 2011. In 2012, we incurred costs of $3.0 million for 14 new company-owned restaurants opened in the first six months of 2012 and costs of $1.2 million for restaurants that will open in the second half of 2012. In 2011, we incurred costs of $5.4 million for 22 new company-owned restaurants opened in the first six months of 2011 and costs of $1.0 million for restaurants that opened in the third quarter of 2011 or later. Preopening costs per restaurant averaged $279,000 and $263,000 in the first six months of 2012 and 2011, respectively. The higher per restaurant costs are due to additional costs related to expansion into new markets both domestically and internationally.

Loss on asset disposals and store closures increased by $431,000, to $1.3 million in 2012 from $903,000 in 2011. In 2012, the loss was related to store closing costs related to three store closures of $347,000, write-offs related to the rollout of new point-of-sale and back-office systems of $276,000, and the write-off of miscellaneous equipment. In 2011, the loss was related to store closing costs related to five store closures of $72,000 and the write-off of miscellaneous equipment.

Investment income increased by $91,000 to $295,000 in 2012 from $204,000 in 2011. The increase in the gain was primarily related to investments held for our deferred compensation plan. Cash and marketable securities balances at the end of the second quarter totaled $76.2 million in 2012 compared to $86.1 million at the end of the second quarter of 2011.

Provision for income taxes increased $2.0 million to $14.9 million in 2012 from $12.8 million in 2011. The effective tax rate as a percentage of income before taxes decreased to 33.2% in 2012 from 33.5% in 2011.

Liquidity and Capital Resources

Our primary liquidity and capital requirements have been for constructing, remodeling and maintaining our new and existing company-owned restaurants; working capital; acquisitions; and other general business needs. We fund these expenses, except for acquisitions, primarily with cash from operations. Depending on the size of the transaction, acquisitions would generally be funded from cash and marketable securities balances. The cash and marketable securities balance at June 24, 2012 was $76.2 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 June 24, 2012, nearly all excess cash was invested in high quality municipal securities.

For the six months ended June 24, 2012, net cash provided by operating activities was $66.7 million. Net cash provided by operating activities consisted primarily of net earnings adjusted for non-cash expenses, and a decrease in refundable income taxes, partially offset by an increase in accounts receivable. The decrease in refundable income taxes was due to timing of tax payments. The increase in accounts receivable was due to higher credit card sales at the end of the quarter.

For the six months ended June 26, 2011, net cash provided by operating activities was $70.2 million. Net cash provided by operating activities consisted primarily of net earnings adjusted for non-cash expenses, and an increase in accounts payable and accrued expenses, a decrease in refundable income taxes, partially offset by an increase in accounts receivable. The increase in accounts payable was primarily due to an increase in amounts due related to restaurants under construction at the end of the quarter, as well as an increase in the number of restaurants. The increase in accrued expenses was primarily due to higher cash incentive costs. The decrease in refundable income taxes was due to timing of tax payments. The increase in accounts receivable was due to higher credit card sales at the end of the quarter.

For the six months ended June 24, 2012 and June 26, 2011, net cash used in investing activities was $56.9 million and $46.4 million, respectively. Investing activities included acquisitions of property and equipment related to the additional company-owned restaurants and restaurants under construction in both periods. During the first six months of 2012 and 2011, we opened 14 and 23 restaurants, respectively. In 2012, we expect capital expenditures to be approximately $150.0 million for an estimated 60 new or relocated company-owned restaurants, technology improvements on our restaurant and corporate systems, and capital expenditures at existing restaurants. In 2012, we purchased $52.5 million of marketable securities and received proceeds of $40.0 million as these investments matured or were sold. In 2011, we purchased $54.8 million of marketable securities and received proceeds of $63.6 million as these investments matured or were sold.

For the six months ended June 24, 2012 and June 26, 2011, net cash used in financing activities was $7.0 million and $1.4 million, respectively. Net cash used in financing activities for 2012 resulted primarily from tax payments for restricted stock units of $8.4 million, offset by proceeds from the exercise of stock options of $1.1 million and the excess tax benefit from stock issuance of $289,000. Net cash used in financing activities for 2011 resulted primarily from tax payments for restricted stock units of $2.5 million, offset by proceeds from the exercise of stock options of $867,000 and the excess tax benefit from stock issuance of $211,000. 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 2012.

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 53 of our restaurants operate and therefore have a limited 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 24, 2012:

                                                         Payments Due By Period (in thousands)
                                                Less than                                       After 5
                                    Total        One year       1-3 years       3-5 years        years
Operating lease obligations       $ 378,520         41,570          80,694          73,837       182,419
Lease commitments for
restaurants under development       100,184          5,005          13,612          13,621        67,946
Total                             $ 478,704         46,575          94,306          87,458       250,365

. . .