Buffalo Wild Wings 2009 Annual Report Download - page 58

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ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
We are exposed to market risk related to our cash and cash equivalents and marketable securities. We invest our excess cash
in highly liquid short-term investments with maturities of less than one year. These investments are not held for trading or other
speculative purposes. Changes in interest rates affect the investment income we earn on our cash and cash equivalents and marketable
securities and, therefore, impact our cash flows and results of operations. We also have trading securities, which are held to generate
returns that seek to offset changes in liabilities related to the equity market risk of our deferred compensation arrangements.
Financial Instruments
Financial instruments that potentially subject us to concentrations of credit risk consist principally of municipal securities.
We do not believe there is a significant risk of non-performance by these municipalities because of our investment policy restrictions
as to acceptable investment vehicles.
Inflation
The primary inflationary factors affecting our operations are food, labor, and restaurant operating costs. Substantial increases
in these costs could impact operating results to the extent that such increases cannot be passed along through higher menu prices. A
large number of our restaurant personnel are paid at rates based on the applicable federal and state minimum wages, and increases in
the minimum wage rates and tip-credit wage rates could directly affect our labor costs. Many of our leases require us to pay taxes,
maintenance, repairs, insurance and utilities, all of which are generally subject to inflationary increases.
Commodity Price Risk
Many of the food products purchased by us are affected by weather, production, availability and other factors outside our
control. We believe that almost all of our food and supplies are available from several sources, which helps to control food product
risks. We negotiate directly with independent suppliers for our supply of food and paper products. We use members of UniPro Food
Services, Inc., a national cooperative of independent food distributors, to distribute these products from the suppliers to our
restaurants. We have minimum purchase requirements with some of our vendors, but the terms of the contracts and nature of the
products are such that our purchase requirements do not create a market risk. The primary food product used by company-owned and
franchised restaurants is 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 new menu items, effective marketing promotions,
focused efforts on food costs and waste, and menu price increases. We also explore purchasing strategies to reduce the severity of cost
increases and fluctuations. We currently purchase our chicken wings at market prices. If a satisfactory long-term price agreement for
chicken wings were to arise, we would consider locking in prices to reduce our price volatility. Chicken wing prices in 2009 averaged
39.3% higher than 2008 as the average price per pound increased to $1.70 in 2009 from $1.22 in 2008. If there is a significant rise in
the price of chicken wings, and we are unable to successfully adjust menu prices or menu mix or otherwise make operational
adjustments to account for the higher wing prices, our operating results could be adversely affected. Chicken wings accounted for
approximately 25%, 21%, and 24% of our cost of sales in 2009, 2008, and 2007, respectively, with an annual average price per pound
of $1.70, $1.22, and $1.28, respectively. A 10% increase in chicken wing costs during 2009, would have increased restaurant cost of
sales by approximately $3.8 million for fiscal 2009. Additional information related to chicken wing prices and our approaches to
managing the volatility thereof is included in Item 7 under “Results of Operations.”
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Source: BUFFALO WILD WINGS INC, 10-K, February 26, 2010 Powered by Morningstar® Document Research℠