Buffalo Wild Wings 2007 Annual Report Download

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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
FORM 10-K
Annual Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934
for the fiscal year ended December 30, 2007
or
Transition Report Under Section 13 or 15(d) of the Securities Exchange Act of 1934
for the transition period from to .
Commission File Number: 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.)
5500 Wayzata Boulevard, Suite 1600, Minneapolis, MN 55416
(Address of Principal Executive Offices)
Registrant’s telephone number (952) 593-9943
Securities registered under Section 12(b) of the Exchange Act: Common Stock, no par value
Securities registered under Section 12(g) of the Exchange Act: None
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities
Act. YES NO
Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act.
YES NO
Indicate by check mark whether the registrant (1) has 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 NO
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained
herein, and will not be contained, to the best of registrant’ s knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K.
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or
a smaller reporting company. See the definitions of “large accelerated filer, ” “accelerated filer,” and “smaller reporting
company” in Rule 12b-2 of the Exchange Act.
Large Accelerated Filer Accelerated Filer Non-Accelerated Filer Smaller Reporting Company
Indicate by check mark whether the registrant is a shell company (as defined in Exchange Act Rule 12b-2 of the
Exchange Act). YES NO
The aggregate market value of the voting stock held by non-affiliates was $645 million based on the closing sale price
of the Company’ s Common Stock as reported on the NASDAQ Stock Market on June 29, 2007.
The number of shares outstanding of the registrant’ s common stock as of February 26, 2008: 17,678,016 shares.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the Proxy Statement for the 2008 Annual Meeting of Shareholders are incorporated by reference into Part
III of this report.

Table of contents

  • Page 1
    ... sale price of the Company' s Common Stock as reported on the NASDAQ Stock Market on June 29, 2007. The number of shares outstanding of the registrant' s common stock as of February 26, 2008: 17,678,016 shares. DOCUMENTS INCORPORATED BY REFERENCE Portions of the Proxy Statement for the 2008 Annual...

  • Page 2
    ... and Supplementary Data Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure Item 9A. Controls and Procedures Item 9B. Other Information PART III Item 10. Directors, Executive Officers and Corporate Governance Item 11. Executive Compensation Item 12. Security...

  • Page 3
    ... Concept and Business Strategy Our goal is to continue to grow and develop the Buffalo Wild Wings® Grill & Bar concept into a leading national restaurant chain. To do so, we plan to execute the following strategies Open restaurants in new and existing markets; Offer boldly-flavored menu items with...

  • Page 4
    ... • Continue to strengthen the Buffalo Wild Wings brand; Focus on operational excellence; and Increase same-store sales and average unit volumes. Growth Strategy Our growth strategy involves opening company-owned and franchised restaurants in both new and existing markets. We believe that we have...

  • Page 5
    ... visits by new guests, ii) increase margins, iii) increase average order size, and iv) support strong restaurant openings. Marketing Campaigns. Our primary marketing campaigns focus on our experience or a particular menu item, day or daypart in an attempt to drive traffic and build brand awareness...

  • Page 6
    ... thorough training for management and hourly Team Members at company-owned restaurants, with the goal of providing an excellent guest experience based on our service, food preparation and facilities maintenance. Further, we require each franchisee to send their general manager, assistant manager and...

  • Page 7
    ... the volatility of chicken wing prices, which can significantly change our cost of sales and cash flow, with the introduction of popular new menu items, effective marketing promotions, focused efforts on food costs and waste, and menu price increases. We also explore purchasing strategies to reduce...

  • Page 8
    ... trained in standardized operating procedures designed to assure compliance with all applicable codes and regulations. We and our franchisees are also subject to laws governing our relationships with employees, including laws and regulations relating to benefits, wages, hours, workers' compensation...

  • Page 9
    ..."could," "possible," "plan," "project," "will," "forecast" and similar words or expressions. Our forward-looking statements generally relate to our growth strategy, financial results, sales efforts, franchise expectations, store openings and related expense, and cash requirements. Although it is not...

  • Page 10
    ... related to chicken wing prices is included in Item 7 under "Results of Operations." If we are unable to successfully open new restaurants, our revenue growth rate and profits may be reduced. To successfully expand our business, we must open new Buffalo Wild Wings restaurants on schedule and in...

  • Page 11
    ... suitable restaurant sites at reasonable costs may reduce our growth rate. Our restaurants may not achieve market acceptance in the new geographic regions we enter. Our expansion plans depend on opening restaurants in new markets where we or our franchisees have little or no operating experience. We...

  • Page 12
    ... costs and initially higher restaurant level operating expense ratios; Labor availability and costs for hourly and management personnel; Changes in competitive factors; Disruption in supplies; General economic conditions and consumer confidence; Claims experience for self-insurance programs...

  • Page 13
    ...New York-style chicken wings, our other menu items, sports bars and casual dining restaurant styles. We also depend on trends toward consumers eating away from home more often. Shifts in these consumer preferences could negatively affect our future profitability. Such shifts could be based on health...

  • Page 14
    ... There are health risks associated with eating contaminated or improperly handled or prepared food items. Negative publicity over illness caused by improper handling or preparation of food items could harm our future revenue and profitability. While we currently maintain insurance for these types of...

  • Page 15
    ... event of default under the lease or franchise agreement. The following table sets forth the 37 states in which Buffalo Wild Wings restaurants are located and the number of restaurants in each state as of December 30, 2007: Number of Restaurants Open Company-owned Franchised Total Alabama Arizona...

  • Page 16
    ..., 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...

  • Page 17
    ...name and/or street name brokerage accounts. Dividends We have never declared or paid cash dividends on our Common Stock. It is our policy to preserve cash for development and other working capital needs and, therefore, do not currently have plans to pay any cash dividends. Our future dividend policy...

  • Page 18
    ... OF 4 YEAR CUMULATIVE TOTAL RETURN Among Buffalo Wild Wings, Inc., The NASDAQ Composite Index And The S&P 600 Restaurants Index $350 $300 $250 $200 $150 $100 $50 $0 11/21/03 12/31/03 12/31/04 12/31/05 12/31/06 12/31/07 Buffalo Wild Wings, Inc. NASDAQ Composite S&P 600 Restaurants 11/21...

  • Page 19
    ... Form 10-K. Fiscal Years Ended (1) Dec. 30, 2007 Consolidated Statements of Earnings Data: Revenue: Restaurant sales Franchising royalties and fees Total revenue Costs and expenses: Restaurant operating costs: Cost of sales Labor Operating Occupancy Depreciation General and administrative Preopening...

  • Page 20
    ... 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...

  • Page 21
    ...% of total revenue in 2007. Food and nonalcoholic beverages accounted for 73% of restaurant sales. The remaining 27% of restaurant sales was from alcoholic beverages. The menu item with the highest sales volume is chicken wings at 23% of total restaurant sales. Royalties and franchise fees received...

  • Page 22
    ... based on reported franchisees' sales. 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...

  • Page 23
    ... are expressed as a percentage of restaurant sales. Fiscal Years Ended Dec. 30, 2007 Dec. 31, 2006 Dec. 25, 2005 Revenue: Restaurant sales Franchising royalties and fees Total revenue Costs and expenses: Restaurant operating costs: Cost of sales Labor Operating Occupancy Depreciation General and...

  • Page 24
    ... 27 company-owned restaurants opened before 2007 that did not meet the criteria for same-store sales and $15.7 million related to a 6.9% increase in same-store sales. The 53rd week of 2006 resulted in sales of $5.7 million and contributed approximately $0.08 of earnings per diluted share. Franchise...

  • Page 25
    ... of restaurant sales was primarily due to the reduction of chicken wing prices and the leverage of food costs related to menu price increases. Fresh chicken wings were 24% of cost of goods sold in 2006 compared to 27% in 2005. This decrease was primarily due to the decrease in average wing costs to...

  • Page 26
    ...compensation costs partially offset by lower health insurance costs. The increase in income taxes payable and decrease in accounts payable was due to timing of payments. The increase in accounts receivable was due to higher credit card sales and tenant allowances compared to prior year. The purchase...

  • Page 27
    ... 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...

  • Page 28
    ... per share amounts, are expressed in thousands. 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...

  • Page 29
    .... 1, 2007 Jul. 1, 2007 Sep. 30, 2007 Dec. 30, 2007 Revenue: Restaurant sales Franchise royalties and fees Total revenue Costs and expenses: Restaurant operating costs: Cost of sales Labor Operating Occupancy Depreciation General and administrative Preopening Loss on asset disposals and impairment...

  • Page 30
    ...Revenue: Restaurant sales Franchise royalties and fees Total revenue Costs and expenses: Restaurant operating costs: Cost of sales Labor Operating Occupancy Depreciation General... We utilize a thirteen-week quarterly accounting period. However, fiscal 2006 was a 53-week year, with the quarter ended...

  • Page 31
    ... a market risk. The primary food product used by company-owned and franchised restaurants is fresh chicken wings. We work to counteract the effect of the volatility of chicken wing prices, which can significantly change our cost of sales and cash flow, with the introduction of popular new menu items...

  • Page 32
    ... DATA For supplemental information regarding quarterly results of operations, refer to Item 7, "Quarterly Results of Operations." BUFFALO WILD WINGS, INC. Index to Consolidated Financial Statements Report of Independent Registered Public Accounting Firm Consolidated Balance Sheets as of December 30...

  • Page 33
    ... 123R, "Share-Based Payment," on December 26, 2005. We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), Buffalo Wild Wings, Inc.' s internal control over financial reporting as of December 30, 2007, based on criteria established in...

  • Page 34
    ... and equipment, net Restricted cash Other assets Goodwill Total assets Liabilities and Stockholders' Equity Current liabilities: Unearned franchise fees Accounts payable Income taxes payable Accrued compensation and benefits Accrued expenses Current portion of deferred lease credits Total current...

  • Page 35
    ... thousands except share and per share data) Fiscal years ended December 30, 2007 December 31, 2006 December 25, 2005 Revenue: Restaurant sales Franchise royalties and fees Total revenue Costs and expenses: Restaurant operating costs: Cost of sales Labor Operating Occupancy Depreciation General and...

  • Page 36
    BUFFALO WILD WINGS, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY Fiscal years ended December 30, 2007, December 31, 2006, and December 25, 2005 (Dollar amounts in thousands) Common Stock Shares Amount Deferred Compensation Retained Earnings Total Balance at December 26, ...

  • Page 37
    ...Excess tax benefit from stock issuance Change in operating assets and liabilities: Purchase of marketable securities Accounts receivable Inventory Prepaid expenses Other assets Unearned franchise fees Accounts payable Income taxes Accrued expenses Net cash provided by operating activities Cash flows...

  • Page 38
    ... Buffalo Wild Wings restaurant franchises. In exchange for the initial and continuing franchise fees received, we give franchisees the right to use the name Buffalo Wild Wings. At December 30, 2007, December 31, 2006, and December 25, 2005, we operated 161, 139, and 122 Company-owned restaurants...

  • Page 39
    ... suppliers. We have minimum purchase commitments from some of our vendors but the terms of the contracts and nature of the products are such that purchase requirements do not create a market risk. The primary food product used by Company-owned and franchised restaurants is fresh chicken wings...

  • Page 40
    ... terms and if certain conditions are met. We provide the use of the Buffalo Wild Wings trademarks, system, training, preopening assistance, and restaurant operating assistance in exchange for area development fees, franchise fees, and royalties of 5% of a restaurant' s sales. Franchise fee revenue...

  • Page 41
    .... Company-owned and franchised restaurants are required to remit a designated portion of sales, to a separate advertising fund that is used for marketing and advertising efforts throughout the system. In 2007, 2006, and 2005 that amount was 3%, 3%, and 2.5%, respectively. Certain payments received...

  • Page 42
    ... the stock option grant price equaled the market price on the date of grant, and any purchase discounts under our stock purchase plan were within statutory limits, no compensation expense was recognized for stock-based compensation related to stock options or ESPP shares. Restricted stock units...

  • Page 43
    ... compensation cost been recognized based upon the estimated fair value on the grant date of stock options and ESPP. Fiscal Year Ended December 25, 2005 Net earnings, as reported Add: Total stock-based compensation expense included in reported earnings, net of related tax effects Deduct: Total stock...

  • Page 44
    ... per-share amounts) The expected term of the options represents the estimated period of time until exercise and is based on historical experience of similar awards, giving consideration to the contractual terms, vesting schedules and expectations of future employee behavior. Expected stock price...

  • Page 45
    ... corporate offices under operating leases that have various expiration dates. In addition to base rents, leases typically require us to pay our share of maintenance and real estate taxes and certain leases include provisions for contingent rentals based upon sales. Future minimum rental payments due...

  • Page 46
    ... require payment of percentage rents based upon sales levels. Rent expense, excluding our proportionate share of real estate taxes and building operating expenses, was as follows: Fiscal Years Ended December 30, 2007 December 31, 2006 December 25, 2005 Minimum rents Percentage rents Total Equipment...

  • Page 47
    ... Plan (the plan) for employees, officers, and directors. The option price for shares issued under this plan is to be not less than the fair market value on the date of grant with respect to incentive stock options, or 85% of fair market value for nonqualified stock options. Incentive stock options...

  • Page 48
    ... two-thirds of the award has vested. We issue new shares of common stock upon the disbursement of restricted stock units. Restricted stock activity is summarized for fiscal year 2007: Weighted average grant date fair value Number of shares Outstanding, December 31, 2006 Granted Vested Cancelled...

  • Page 49
    ...139. The weighted average grant date fair value of restricted stock units granted during 2006 and 2005 was $16.99 and $17.42, respectively. During 2007, we recognized $399 of expense and paid $1,066 for liability classified share-based compensation. (c) Employee Stock Purchase Plan We have reserved...

  • Page 50
    ... value on grant date Adjustment of restricted stock units to fair value Capitalization of preopening rent expense (9) Loss on Asset Disposals and Impairment $ 10,783 1,135 1,100 - - - 8,803 1,130 2,267 2,568 - - 4,801 82 578 - 2,451 463 In 2007, 2006 and 2003, we closed restaurants. As a result...

  • Page 51
    .... Under our Management Deferred Compensation Plan, our executive officers and other named officers are entitled to receive an amount equal to a percentage of an officer' s base salary which is credited on a monthly basis to that officer' s deferred compensation account. The maximum deferral...

  • Page 52
    ... the assets of nine Buffalo Wild Wings franchised restaurants in the Las Vegas, Nevada area. We expect the acquisition, if completed, to close in 2008. The purchase price is approximately $26,000 and will be funded with available cash and proceeds from marketable securities. The acquisition is...

  • Page 53
    ... evaluating the cost-benefit relationship of possible controls and procedures. We carried out an evaluation, under the supervision and with the participation of our management, including our chief executive officer and chief financial officer, of the effectiveness of the design and operation of our...

  • Page 54
    ... Reporting There were no changes in the our internal control over financial reporting that occurred during our last fiscal quarter that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting. ITEM 9B. OTHER INFORMATION Not applicable...

  • Page 55
    ...of Independent Registered Public Accounting Firm The Board of Directors and Stockholders Buffalo Wild Wings, Inc.: We have audited Buffalo Wild Wings, Inc. and subsidiaries' (the Company) internal control over financial reporting as of December 30, 2007, based on the criteria established in Internal...

  • Page 56
    ... in connection with the 2008 Annual Meeting of Shareholders. Such information is incorporated herein by reference. Our Board of Directors has adopted a Code of Ethics & Business Conduct for all employees and directors. A copy of this document is available on our website at www.buffalowildwings.com...

  • Page 57
    ... IV ITEM 15. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES (a) Financial Statements. The following consolidated financial statements of ours are filed with this report and can be found at Item 8 of this Form 10-K. Report of Independent Registered Public Accounting Firm dated March 5, 2008 Consolidated...

  • Page 58
    SIGNATURES In accordance with Section 13 or 15(d) of the Exchange Act, the registrant caused this report to be signed on its behalf by the undersigned, thereunto duly authorized. Date: March 5, 2008 BUFFALO WILD WINGS, INC. By /s/ SALLY J. SMITH Sally J. Smith Chief Executive Officer and President...

  • Page 59
    Buffalo Wild Wings, Inc. SCHEDULE II - VALUATION AND QUALIFYING ACCOUNTS Balance at Beginning of Period Additions Charged to Costs and Expenses Description Deductions From Reserves Balance at End of Period Allowance for doubtful accounts 2007 2006 2005 2007 2006 2005 $ 47 25 25 54 - 136 - 51...

  • Page 60
    ... by reference to Exhibit 3.1 to our current report on Form 8-K filed February 28, 2007) Form of specimen certificate representing Buffalo Wild Wings, Inc.' s common stock (1) 2003 Equity Incentive Plan forms of stock option agreements (1)(2) Employment Agreement, dated as of December 1, 1999 with...

  • Page 61
    ... February 22, 2008) (2) List of Subsidiaries (incorporated by reference to Exhibit 21.1 to our Form 10-K for the fiscal year ended December 26, 2004) 23.1* Consent of KPMG LLP, Independent Registered Public Accounting Firm 24.1* Power of Attorney (included on the signature page) 31.1* Certification...