Buffalo Wild Wings 2006 Annual Report Download - page 20

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 in a new market. These
factors may result in lower than anticipated sales and cash flow for new restaurants in new markets. In 2007, we plan to
develop company-owned restaurants primarily in markets where we currently have either company-owned or franchised
restaurants. We believe this development focus, together with our implementation of revised new restaurant opening
procedures, will help to 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, as evidenced by the implementation of our new choice service-style in company-owned and
franchised restaurants.
Our revenue is generated by:
• Sales at our company-owned restaurants, which represented 89% of total revenue in 2006. Food and nonalcoholic
beverages accounted for 72% of restaurant sales. The remaining 28% 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 from our franchisees.
We generate cash from the operation of our company-owned restaurants and also from franchise royalties and fees. We
highlight the specific costs associated with the on-going operation of our company-owned restaurants in the 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
annually based on the number of new locations opened. Restaurant closures and impairment expense is related to company-
owned restaurants, and includes the write-down of underperforming locations, 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.
As a growing company, we review our trend in general and administrative expenses, and are focused on reducing this
xpense as a percentage of revenue. e
We operate on a 52 or 53-week fiscal year ending on the last Sunday in December. Each of the fiscal years in the four
years ended December 25, 2005 were 52-week years. Our fiscal year ended December 31, 2006 was a 53-week year.
C
ritical Accounting Policies and Use of Estimates
Our significant accounting policies are described in Note 1 of 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
reparation of our consolidated financial statements, although it is not inclusive. p
Valuation of Long-Lived Assets and Store Closing Reserves
We review long-lived assets quarterly to determine if the carrying value 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
leasehold improvements, equipment and fixtures over its remaining lease term, 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 fiscal 2006, 2005, and 2004, we recognized $481,000, $1.7 million,
and $453,000 million, respectively, of asset impairment charges.
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