Buffalo Wild Wings 2009 Annual Report Download - page 73

BUFFALO WILD WINGS, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
December 27, 2009 and December 28, 2008
(Dollar amounts in thousands, except per-share amounts)
(o) Franchise Operations
We enter into franchise agreements with unrelated third parties to build and operate restaurants using the Buffalo Wild Wings
brand within a defined geographical area. We believe that franchising is an effective and efficient means to expand the Buffalo Wild
Wings brand. The franchisee is required to operate their restaurants in compliance with their franchise agreement that includes
adherence to operating and quality control procedures established by us. We do not provide loans, leases, or guarantees to the
franchisee or the franchisee’s employees and vendors. If a franchisee becomes financially distressed, we do not provide any financial
assistance. If financial distress leads to a franchisee’s noncompliance with the franchise agreement and we elect to terminate the
franchise agreement, we have the right but not the obligation to acquire the assets of the franchisee at fair value as determined by an
independent appraiser. We receive a 5% royalty of gross sales as defined in the franchise agreement, and in 2009 allowances directly
from the franchisees’ vendors were approximately 0.4% of the franchisees’ gross sales. We have financial exposure for the collection
of the royalty payments. Franchisees generally remit royalty payments weekly for the prior week’s sales, which substantially
minimizes our financial exposure. Historically, we have experienced insignificant write-offs of franchisee royalties. Franchise and
area development fees are paid upon the signing of the related agreements.
(p) Advertising Costs
Contributions of franchise fees related to the national advertising fund constitute agency transactions and are not recognized as
revenues and expenses. Related advertising obligations are accrued and the costs expensed at the same time the related revenue is
recognized. These advertising fees are recorded as a liability against which specific costs are charged.
Contributions to the national advertising fund related to Company-owned restaurants are expensed as contributed and local
advertising costs for Company-owned restaurants are expensed as incurred. These costs aggregated $17,758, $13,503, and $10,548, in
fiscal years 2009, 2008, and 2007, respectively.
(q) Preopening Costs
Costs associated with the opening of new Company-owned restaurants are expensed as incurred.
(r) Payments Received from Vendors
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 recorded an estimate of earned vendor allowances that are calculated based upon monthly purchases. We
generally receive payment from vendors approximately 30 days from the end of a month for that month’s purchases. During fiscal
2009, 2008, and 2007, vendor allowances were recorded as a reduction in inventoriable costs, and cost of sales was reduced by
$5,985, $5,192, and $4,636, respectively.
(s) Restricted Assets and System-wide Payables
We have a system-wide marketing and advertising fund. Company-owned and franchised restaurants are required to remit a
designated portion of restaurant sales, to a separate advertising fund that is used for marketing and advertising efforts throughout the
system. That amount was 3% of restaurant sales in all years presented. Certain payments received from various vendors are deposited
into the National Advertising Fund. These funds are used for development and implementation of system-wide initiatives and
programs. As of December 27, 2009 and December 28, 2008, the national advertising fund liability was $16,084 and $7,670,
respectively. The current asset and current liability classification of the national advertising fund as of December 28, 2008 has been
Source: BUFFALO WILD WINGS INC, 10-K, February 26, 2010 Powered by Morningstar® Document Research℠