Search the web
Welcome, Guest
[Sign Out, My Account]
EDGAR_Online

Quotes & Info
Enter Symbol(s):
e.g. YHOO, ^DJI
Symbol Lookup | Financial Search
BWLD > SEC Filings for BWLD > Form 10-K on 27-Feb-2014All Recent SEC Filings

Show all filings for BUFFALO WILD WINGS INC

Form 10-K for BUFFALO WILD WINGS INC


27-Feb-2014

Annual Report


ITEM 7. 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. This discussion and analysis contains certain statements that are not historical facts, including, among others, those relating to our anticipated financial performance for fiscal 2014, 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 Item 1A of this 10-K under "Risk Factors." 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® 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.

Overview

As of December 29, 2013, we owned and operated 434 company-owned and franchised an additional 558 Buffalo Wild Wings® restaurants in North America and we also franchised one International restaurant. We believe that we will grow the Buffalo Wild Wings brand to about 1,700 locations in North America, continuing the strategy of developing both company-owned and franchised restaurants.

We believe we will open 45 company-owned and 50 franchised restaurants in 2014 and have set an annual net earnings growth goal of 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 experience.

Our revenue is generated by:

• Sales at our company-owned restaurants, which represented 94% of total revenue in 2013. 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 volumes are traditional and boneless wings, each at 20% of total restaurant sales.

• Royalties and franchise fees received from our franchisees.

A second factor is our success in developing restaurants, including international locations. There are inherent risks in opening new restaurants, especially in new markets or countries, 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 our new restaurant opening procedures, along with our expanding North American and international 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 sales. The cost of sales is difficult to predict, as it ranged from 29.8% to 32.7% of restaurant sales per quarter in 2013 and 2012, mostly due to the price and yield fluctuation in chicken wings. We are focused on minimizing the impact of rising costs per wing, which includes both price increases and yield fluctuations. Our efforts include wings by portion, new purchasing strategies, menu price increases, reduced food waste, as well as marketing promotions, menu additions, and menu changes that affect the percent that chicken wings represent in terms of total restaurant sales. 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. Current month chicken wing prices are determined based on the average of the previous month's spot rates. The chart below illustrates the fluctuation in chicken wing prices from quarter to quarter in the last five years.


[[Image Removed]]

We generate cash from the operation of our 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." Our depreciation and amortization expense consists primarily of depreciation related to assets used by our company-owned restaurants and amortization of reacquired franchise rights. Preopening costs are those costs associated with opening new company-owned restaurants and will vary annually based on the number of new locations opening and under construction. Loss on asset disposals and impairment expense is related to company-owned restaurants and includes the costs associated with normal asset retirements, asset impairment charges, and closures of locations. General and administrative expenses are related to home office and field support provided to both company-owned restaurants and franchising operations.

We utilize a 52- or 53-week accounting period that ends on the last Sunday in December. Each of the fiscal years in the three years ended December 25, 2011 were comprised of 52 weeks. The fiscal year ended December 30, 2012 was a 53-week year, with the fourth quarter having 14 weeks. The fiscal year ended December 29, 2013 was a 52-week year. Our next 53-week year will occur in 2017.

Critical Accounting Estimates

Our significant accounting policies are described in Note 1 to the Consolidated Financial Statements, which were prepared in accordance with GAAP. Critical accounting policies are those that we believe are both important to the portrayal of our financial condition and results and require our most difficult, subjective or complex judgments, often as a result of the need to make estimates about the effect of matters that are inherently uncertain.

We believe that the following discussion represents our more critical accounting policies and estimates used in the preparation of our consolidated financial statements, although it is not all inclusive.

Valuation of Long-Lived Assets and Store Closing Reserves

We review long-lived assets quarterly to determine if triggering events have occurred which would require a test to determine if the carrying amount of these assets may not be recoverable based on estimated future cash flows. Assets are reviewed at the lowest level for which cash flows can be identified, which is at the individual restaurant level. In the absence of extraordinary circumstances, restaurants are included in the impairment analysis after they have been open for 15 months. We evaluate the recoverability of a restaurant's long-lived assets, including buildings, intangibles, leasehold improvements, equipment and fixtures over the remaining life of the primary asset in the asset group, after considering the potential impact of planned operational improvements, marketing programs, and anticipated changes in the trade area. In determining future cash flows, significant estimates are made by us with respect to future operating results of each restaurant over its remaining lease term. If assets are determined to be impaired, the impairment charge is measured by calculating the amount by which the asset carrying amount exceeds its fair value based on our estimate of discounted future cash flows. The determination of asset fair value is also subject to significant judgment. During 2013, we recorded restaurant impairments of $1,118,000. No impairments were recognized in fiscal 2012 or 2011. We are currently monitoring several restaurants in regards to the valuation of long-lived assets. Based on our current estimates of the future operating results of these restaurants, we believe that the assets at these restaurants are not impaired. As we periodically refine our estimated future operating results, changes in our estimates and assumptions may cause us to realize impairment charges in the future. We do not believe that these charges would be material.


In addition to the valuation of long-lived assets, we also record a store closing reserve when a restaurant is abandoned due to closure or relocation. The store closing reserve is subject to significant judgment as accruals are made for lease obligations on abandoned leased facilities. Many factors, including the local business environment, other available lease sites, the willingness of lessors to negotiate lease buyouts, and the ability to sublease our sites are considered in making the accruals. We estimate future lease obligations based on these factors and evaluate quarterly the adequacy of the estimated reserve based on current market conditions. During 2013, 2012, and 2011, we recorded expenses of $38,000, $413,000, and $205,000, respectively, for restaurants that closed.

Goodwill

We review goodwill for impairment annually, or whenever circumstances change in a way which could indicate that impairment may have occurred. Goodwill is tested at the reporting unit level.

We identify potential goodwill impairments by comparing the fair value of the reporting unit to its carrying amount, which includes goodwill and other intangible assets. The fair value of the reporting unit is calculated using a market approach.

If the carrying amount of the reporting unit exceeds the fair value, this is an indication that impairment may exist. We calculate the amount of the impairment by comparing the fair value of the assets and liabilities to the fair value of the reporting unit. The fair value of the reporting unit in excess of the value of the assets and liabilities is the implied fair value of the goodwill. If this amount is less than the carrying amount of goodwill, impairment is recognized for the difference. As of December 29, 2013, our estimate of the fair value of our goodwill substantially exceeded the carrying value and therefore we concluded that our goodwill was not impaired. No goodwill impairment charges were recognized during 2013, 2012, or 2011.

Vendor Allowances

Vendor allowances include allowances and other funds received from vendors. Certain of these funds are determined based on various quantitative contract terms. We also receive vendor allowances from certain manufacturers and distributors calculated based upon purchases made by franchisees. Amounts that represent a reimbursement of costs incurred, such as advertising, are recorded as a reduction of the related expense. Amounts that represent a reduction of inventory purchase costs are recorded as a reduction of inventoriable costs. We record an estimate of earned vendor allowances that are calculated based upon monthly purchases. We generally receive payment from vendors approximately 30 days after the end of a month for that month's purchases. During fiscal 2013, 2012, and 2011, vendor allowances were recorded as a reduction in inventoriable costs, and cost of sales was reduced by $8.5 million, $8.7 million, and $7.0 million, respectively.

Self-Insurance Liability

We are self-insured for a significant portion of our risks and associated liabilities with respect to workers' compensation, general liability, and employee health benefits. The accrued liabilities associated with these programs are based on our estimate of the ultimate costs to settle known claims as well as claims that may have arisen but have not yet been reported to us as of the balance sheet date. Our estimated liabilities are not discounted and are based on information provided by our insurance brokers and insurers, combined with our judgments regarding a number of assumptions and factors, including the frequency and severity of claims, and claims development history. We maintain stop-loss coverage with third-party insurers to limit our total exposure for each of these programs. Significant judgment is required to estimate claims incurred but not reported as parties have yet to assert such claims. If actual claims trends, including the frequency or severity of claims, differ from our estimates, our financial results could be impacted.

Stock-Based Compensation

We account for stock-based compensation in accordance with the fair value recognition provisions, under which we use the Black-Scholes-Merton pricing model, which requires the input of subjective assumptions. These assumptions include the expected life of the options, expected volatility over the expected term, the risk-free interest rate, and the expected forfeitures.

Compensation expense for restricted stock units is recognized for the expected number of shares vesting at the end of each annual period. Restricted stock units granted in 2013, 2012, and 2011 are subject to three-year cliff vesting and a cumulative three-year earnings target. The number of units that vest is based on performance against the target. Stock-based compensation is recognized for the expected number of shares vesting at the end of the three-year period and is expensed over that period. For these restricted stock unit grants, significant assumptions are made to estimate the expected net earnings levels for future years.


Results of Operations

Our operating results for 2013, 2012, and 2011, 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.

                                                    Fiscal Years Ended
                                          Dec. 29,       Dec. 30,       Dec. 25,
                                            2013           2012           2011
Revenue:
Restaurant sales                               93.6 %         92.6 %         91.4 %
Franchise royalties and fees                    6.4            7.4            8.6
Total revenue                                 100.0          100.0          100.0

Costs and expenses:
Restaurant operating costs:
Cost of sales                                  30.7           31.5           28.3
Labor                                          30.4           30.0           30.1
Operating                                      14.7           14.7           15.3
Occupancy                                       5.8            5.6            6.1
Depreciation and amortization                   6.7            6.5            6.4
General and administrative                      7.6            8.1            9.3
Preopening                                      1.2            1.4            1.9
Loss on asset disposals and impairment          0.3            0.3            0.2
Total costs and expenses                       92.0           92.1           90.7
Income from operations                          8.0            7.9            9.3
Investment income                               0.1            0.1              -
Earnings before income taxes                    8.0            8.0            9.3
Income tax expense                              2.4            2.5            2.9
Net earnings                                    5.6 %          5.5 %          6.4 %


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

                                            As of
                            Dec. 29,      Dec. 30,      Dec. 25,
                              2013          2012          2011
Company-owned restaurants         434           381           319
Franchised restaurants            559           510           498

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

                                             Fiscal Years Ended
                                  Dec. 29,        Dec. 30,        Dec. 25,
                                    2013            2012            2011
Company-owned restaurant sales   $ 1,185,351         963,963         717,395
Franchised restaurant sales        1,619,526       1,510,020       1,326,213

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

                                           Fiscal Years Ended
                                  Dec. 29,      Dec. 30,      Dec. 25,
                                    2013          2012          2011
Company-owned same-store sales          3.9 %         6.6 %         6.1 %
Franchised same-store sales             3.3           6.5           3.6

The annual average prices paid per pound for chicken wings for company-owned restaurants are as follows:

                                     Fiscal Years Ended
                           Dec. 29,       Dec. 30,       Dec. 25,
                             2013           2012           2011
Average price per pound   $     1.76           1.97           1.21

Fiscal Year 2013 Compared to Fiscal Year 2012

Restaurant sales increased by $221.4 million, or 23.0%, to $1.2 billion in 2013 from $964.0 million in 2012. The increase in restaurant sales was due to a $210.5 million increase associated with 55 new company-owned restaurants that opened or were acquired in 2013 and the company-owned restaurants opened before 2013 that did not meet the criteria for same-store sales for all or part of the year, and $33.2 million related to a 3.9% increase in same-store sales. The 53rd week of 2012 contributed an additional $22.3 million in sales.

Franchise royalties and fees increased by $4.8 million, or 6.3%, to $81.4 million in 2013 from $76.6 million in 2012. The increase was due primarily to additional sales at 49 more franchised restaurants in operation at the end of the period compared to prior year, and an increase in same-store sales for franchised restaurants of 3.3% in 2013.

Cost of sales increased by $60.1 million, or 19.8%, to $363.8 million in 2013 from $303.7 million in 2012 due primarily to more restaurants being operated in 2013. Cost of sales as a percentage of restaurant sales decreased to 30.7% in 2013 from 31.5% in 2012, primarily due to lower chicken wing prices and the rollout of Wings by Portion. In 2013, the cost of chicken wings averaged $1.76 per pound which was a 10.7% decrease compared to 2012.

Labor expenses increased by $71.1 million, or 24.6%, to $360.3 million in 2013 from $289.2 million in 2012 due primarily to more restaurants being operated in 2013. Labor expenses as a percentage of restaurant sales increased to 30.4% in 2013 from 30.0% in 2012. Cost of labor as a percentage of restaurant sales increased primarily due to higher costs associated with our Guest Experience Business Model.

Operating expenses increased by $32.9 million, or 23.3%, to $174.3 million in 2013 from $141.4 million in 2012 due primarily to more restaurants being operated in 2013. Operating expenses as a percentage of restaurant sales remained consistent at 14.7% in 2013 and 2012. Repair and maintenance cost increases were offset by decreases in supplies and insurance costs.

Occupancy expenses increased by $14.2 million, or 26.3%, to $68.4 million in 2013 from $54.1 million in 2012 due primarily to more restaurants being operated in 2013. Occupancy expenses as a percentage of restaurant sales increased to 5.8% in 2013 from 5.6% in 2012 due primarily to deleveraging rent costs associated with the lower same-store sales increase.


Depreciation and amortization increased by $17.5 million, or 26.0%, to $85.0 million in 2013 from $67.5 million in 2012. The increase was primarily due to the additional depreciation on 52 new restaurants that opened in 2013 and 3 franchised locations that were acquired in 2013. Depreciation and amortization expense as a percentage of total revenue increased to 6.7% in 2013 from 6.5% in 2012 due primarily to higher depreciation on company-owned buildings and amortization related to reacquired franchise rights.

General and administrative expenses increased by $12.0 million, or 14.3%, to $96.2 million in 2013 from $84.1 million in 2012. General and administrative expenses as a percentage of total revenue decreased to 7.6% in 2013 from 8.1% in 2012. Exclusive of stock-based compensation, our general and administrative expenses decreased to 6.7% of total revenue in 2013 from 7.3% in 2012. This decrease was primarily due to leveraging of salaries against higher total revenues and lower travel costs.

Preopening costs remained consistent at $14.6 million in 2013 and 2012. In 2013, we incurred costs of $13.7 million for 52 new company-owned restaurants and costs of $943,000 for restaurants that will open in 2014. In 2012, we incurred costs of $13.4 million for 51 new company-owned restaurants and costs of $1.2 million for restaurants that opened in 2013. Average preopening cost per restaurant in 2013 and 2012 was $290,000 and $281,000, respectively.

Loss on asset disposals and impairment remained consistent at $3.3 million in 2013 and 2012. The expense in 2013 represented the impairment of the assets of two restaurants of $1.1 million and the write-off of miscellaneous equipment and disposals due to remodels. The expense in 2012 represented the closures costs for seven closed or relocated restaurants of $413,000, the write-off of equipment related to the rollout of new point-of-sale and back-office systems of $1.3 million, and the write-off of miscellaneous equipment and disposals due to remodels.

Investment income decreased by $80,000 to $674,000 in 2013 from $754,000 in 2012. As of the end of 2013, our marketable securities balance consisted of deferred compensation investments which were primarily mutual funds. The income in both 2013 and 2012 was primarily related to investments held for our deferred compensation plan. Cash and marketable securities balances at the end of the year were $65.1 million in 2013 compared to $30.9 million in 2012.

Provision for income taxes increased $3.9 million to $30.0 million in 2013 from $26.1 million in 2012. The effective tax rate as a percentage of income before taxes decreased to 29.5% in 2013 from 31.3% in 2012. The rate decrease was primarily due the favorable impact of the American Taxpayer Relief Act of 2012 that was enacted in 2013. We estimate our effective tax rate in 2014 will be about 33% based on current tax law, and would decrease to 31.5% if Congress renews the employment credits.

Fiscal Year 2012 Compared to Fiscal Year 2011

Restaurant sales increased by $246.6 million, or 34.4%, to $964.0 million in 2012 from $717.4 million in 2011. The increase in restaurant sales was due to a $182.7 million increase associated with 69 company-owned restaurants that opened or were acquired in 2012 and the 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 year. The 53rd week of 2012 contributed an additional $22.3 million. A same-store sales increase of 6.6% accounted for $41.6 million of the increase in restaurant sales.

Franchise royalties and fees increased by $9.5 million, or 14.1%, to $76.6 million in 2012 from $67.1 million in 2011. The increase was primarily due to royalties related to additional sales at 12 more franchised restaurants in operation at the end of the period compared to prior year, and an increase in same-store sales for franchised restaurants of 6.5% in 2012. In the 53rd week of fiscal 2012, we recognized $1.5 million in franchise royalties and fees.

Cost of sales increased by $100.4 million, or 49.4%, to $303.7 million in 2012 from $203.3 million in 2011 due primarily to more restaurants being operated in 2012. Cost of sales as a percentage of restaurant sales increased to 31.5% in 2012 from 28.3% 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. In 2012, chicken wings averaged $1.97 per pound which was a 62.8% increase compared to 2011.

Labor expenses increased by $73.5 million, or 34.1%, to $289.2 million in 2012 from $215.6 million in 2011 due primarily to more restaurants being operated in 2012. Labor expenses as a percentage of restaurant sales decreased slightly to 30.0% in 2012 compared to 30.1% in 2011. The decrease in labor expenses as a percentage of restaurant sales is primarily due to lower management costs and payroll related taxes partially offset by higher hourly labor costs and health insurance costs.

Operating expenses increased by $31.8 million, or 29.0%, to $141.4 million in 2012 from $109.7 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 15.3% in 2011. The decrease in operating expenses as a percentage of restaurant sales was primarily due to lower utility costs and credit card fees.


Occupancy expenses increased by $10.1 million, or 23.0%, to $54.1 million in 2012 from $44.0 million in 2011 due primarily to more restaurants being operated in 2012. Occupancy expenses as a percentage of restaurant sales decreased to 5.6% in 2012 from 6.1% in 2011 due primarily to leveraging rent costs with higher sales and a shift toward more company-owned buildings.

Depreciation and amortization increased by $17.5 million, or 35.2%, to $67.5 million in 2012 from $49.9 million in 2011. The increase was primarily due to the additional depreciation related to the 62 additional company-owned restaurants compared to 2011 and incremental amortization related to the acquisition of franchised restaurants.

General and administrative expenses increased by $11.5 million, or 15.8%, to $84.1 million in 2012 from $72.7 million in 2011 primarily due to additional headcount partially offset by lower stock-based compensation expense. General and administrative expenses as a percentage of total revenue decreased to 8.1% in 2012 from 9.3% in 2011. Exclusive of stock-based compensation, our general and administrative expenses decreased to 7.3% of total revenue in 2012 from 7.8% in 2011. This decrease was primarily due to the leveraging of salaried costs due to higher sales volumes and lower cash incentive expense.

Preopening costs increased by $66,000 to $14.6 million in 2012 from $14.6 million in 2011. In 2012, we incurred costs of $13.4 million for 51 new company-owned restaurants and costs of $1.2 million for restaurants that opened in 2013. In 2011, we incurred costs of $13.4 million for 50 new company-owned restaurants and costs of $1.1 million for restaurants that opened in 2012. Average preopening cost per restaurant in 2012 and 2011 was $281,000 and $275,000, respectively.

Loss on asset disposals and impairment increased by $1.4 million to $3.3 million in 2012 from $1.9 million in 2011. The expense in 2012 represented the closures costs for seven closed or relocated restaurants of $413,000, the write-off of equipment related to the rollout of new point-of-sale and back-office systems of . . .

  Add BWLD to Portfolio     Set Alert         Email to a Friend  
Get SEC Filings for Another Symbol: Symbol Lookup
Quotes & Info for BWLD - All Recent SEC Filings
Copyright © 2014 Yahoo! Inc. All rights reserved. Privacy Policy - Terms of Service
SEC Filing data and information provided by EDGAR Online, Inc. (1-800-416-6651). All information provided "as is" for informational purposes only, not intended for trading purposes or advice. Neither Yahoo! nor any of independent providers is liable for any informational errors, incompleteness, or delays, or for any actions taken in reliance on information contained herein. By accessing the Yahoo! site, you agree not to redistribute the information found therein.