Tableof Contents

 

 

 

**UNITED STATES**

**SECURITIES AND EXCHANGE COMMISSION**

**Washington,DC 20549**

 

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**FORM 10-Q**

 

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**QUARTERLY REPORT PURSUANT TO SECTION 13OR 15(d) OF**

**THE SECURITIES EXCHANGE ACT OF 1934**

 

**For the quarterly period ended March 28,2010**

 

**Commission File No. 000-24743**

 

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**BUFFALOWILD WINGS, INC.**

(Exactname of registrant as specified in its charter)

 

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| **Minnesota**                                                     | ** ** | **No. 31-1455915**              |
|-------------------------------------------------------------------|------------|--------------------------------------|
| (State  or Other Jurisdiction of

Incorporation  or Organization) |       | (IRS  Employer

Identification  No.) |

 

**5500 Wayzata Boulevard, Suite 1600,Minneapolis, MN 55416**

(Addressof Principal Executive Offices) (Zip Code)

 

**(952) 593-9943**

(Registrant’sTelephone Number, Including Area Code)

 

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Indicate by check mark whether the registrant (1) hasfiled all reports required to be filed by Section 13 or 15(d) of theSecurities Exchange Act of 1934 during the preceding 12 months (or for suchshorter period that the registrant was required to file such reports), and (2) hasbeen subject to such filing requirements for the past 90days.  YES x  NO o

 

Indicate by check mark whether the registrant hassubmitted electronically and posted on its corporate Web site, if any, everyInteractive Data File required to be submitted and posted pursuant to Rule 405of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (orfor such shorter period that the registrant was required to submit and postsuch files).  YES o  NO o

 

Indicate by check mark whether the registrant is alarge accelerated filer, an accelerated filer, a non-accelerated filer, or asmaller reporting company. See the definitions of “large accelerated filer”, “acceleratedfiler”, and “smaller reporting company” in Rule 12b-2 of the Exchange Act.(Check one):

 

| Large accelerated filer o | Accelerated filer x |   | Non-accelerated  filer o | Smaller  reporting company o |
|---------------------------|---------------------|--------|--------------------------|------------------------------|

 

Indicate by check mark whether the registrant is ashell company (as defined in Rule 12b-2 of the Exchange Act).  YES o  NO x

 

The number of shares outstanding of the registrant’scommon stock as of April 30, 2010: 18,155,017 shares.

 

 

 

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**TABLE OF CONTENTS**

 
| ** **                                   | ** ** | ** **                                                                                  | ** ** | **Page** |
|----------------------------------------------|------------|---------------------------------------------------------------------------------------------|------------|----------|
| **PART I — FINANCIAL INFORMATION** |       |                                                                                        |
|                                         |       |                                                                                        |       |     |
| Item 1.                                 |       | Financial Statements                                                                        |       | 3        |
|                                         |       |                                                                                        |       |     |
| Item 2.                                      |       | Management’s Discussion and Analysis of  Financial Condition and Results of Operations |       | 11       |
|                                         |       |                                                                                        |       |     |
| Item 3.                                      |       | Quantitative  and Qualitative Disclosures About Market Risk                                 |       | 17       |
|                                         |       |                                                                                        |       |     |
| Item 4.                                      |       | Controls and  Procedures                                                                    |       | 18       |
|                                         |       |                                                                                        |       |     |
| **PART II — OTHER INFORMATION**    |       |                                                                                        |
|                                         |       |                                                                                        |       |     |
| Item 1.                                      |       | Legal Proceedings                                                                           |       | 19       |
|                                         |       |                                                                                        |       |     |
| Item 6.                                      |       | Exhibits                                                                                    |       | 19       |
|                                         |       |                                                                                        |       |     |
| Signatures                                   |       | 20                                                                                          |
|                                         |       |                                                                                        |       |     |
| Exhibit Index                           |       | 21                                                                                          |

 

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**PART I. FINANCIAL INFORMATION**

 

**ITEM 1. FINANCIAL STATEMENTS**

 

**BUFFALO WILD WINGS, INC. ANDSUBSIDIARIES**

 

**CONSOLIDATED BALANCE SHEETS**

 

**(Dollar amounts in thousands)**

 

**(unaudited)**

 
| ** **                                                                                                               | ** ** | **March 28,  2010** | ** ** | **December 27,  2009** | ** ** |
|--------------------------------------------------------------------------------------------------------------------------|------------|--------------------------|------------|-----------------------------|------------|
| **Assets**                                                                                                               |       |                     |       |                        |       |
| Current assets:                                                                                                          |       |                     |       |                        |       |
| Cash and cash equivalents                                                                                                |       | $                        | 14,873     |                        | 9,580      |   |
| Marketable securities                                                                                                    |       | 51,943                   |       | 43,632                      |       |
| Accounts receivable — franchisees, net of allowance  of $25                                                         |       | 1,182                    |       | 2,118                       |       |
| Accounts receivable — other                                                                                         |       | 9,191                    |       | 7,383                       |       |
| Inventory                                                                                                                |       | 3,602                    |       | 3,644                       |       |
| Prepaid expenses                                                                                                         |       | 2,901                    |       | 2,972                       |       |
| Refundable income taxes                                                                                                  |       | —                   |       | 1,872                       |       |
| Deferred income taxes                                                                                                    |       | 3,425                    |       | 2,938                       |       |
| Restricted assets                                                                                                        |       | 26,127                   |       | 24,384                      |       |
| Total current assets                                                                                                     |       | 113,244                  |       | 98,523                      |       |
|                                                                                                                     |       |                     |       |                        |       |
| Property and equipment, net                                                                                              |       | 190,142                  |       | 189,639                     |       |
| Other assets                                                                                                             |       | 9,557                    |       | 9,665                       |       |
| Goodwill                                                                                                                 |       | 11,246                   |       | 11,246                      |       |
| Total assets                                                                                                             |       | $                        | 324,189    |                        | 309,073    |   |
|                                                                                                                     |       |                     |       |                        |       |
| **Liabilities  and Stockholders’ Equity**                                                                           |       |                     |       |                        |       |
| Current liabilities:                                                                                                     |       |                     |       |                        |       |
| Unearned franchise fees                                                                                                  |       | $                        | 2,591      |                        | 2,706      |   |
| Income tax payable                                                                                                       |       | 4,155                    |       | —                      |       |
| Accounts payable                                                                                                         |       | 14,574                   |       | 13,436                      |       |
| Accrued compensation and benefits                                                                                        |       | 17,466                   |       | 19,554                      |       |
| Accrued expenses                                                                                                         |       | 6,196                    |       | 6,540                       |       |
| Current portion of deferred lease credits                                                                                |       | 365                      |       | 84                          |       |
| System-wide payables                                                                                                     |       | 26,127                   |       | 24,384                      |       |
| Total current liabilities                                                                                                |       | 71,474                   |       | 66,704                      |       |
|                                                                                                                     |       |                     |       |                        |       |
| Long-term liabilities:                                                                                                   |       |                     |       |                        |       |
| Other liabilities                                                                                                        |       | 1,500                    |       | 1,422                       |       |
| Deferred income taxes                                                                                                    |       | 14,291                   |       | 14,940                      |       |
| Deferred lease credits, net of current portion                                                                           |       | 16,349                   |       | 16,174                      |       |
| Total liabilities                                                                                                        |       | 103,614                  |       | 99,240                      |       |
|                                                                                                                     |       |                     |       |                        |       |
| Commitments and contingencies (note 11)                                                                                  |       |                     |       |                        |       |
| Stockholders’ equity:                                                                                               |       |                     |       |                        |       |
| Undesignated stock, 1,000,000 shares authorized                                                                          |       | —                   |       | —                      |       |
| Common stock, no par value. Authorized 44,000,000  shares; issued and outstanding 18,154,900 and 18,054,375 respectively |       | 94,068                   |       | 93,887                      |       |
| Retained earnings                                                                                                        |       | 126,507                  |       | 115,946                     |       |
| Total stockholders’ equity                                                                                          |       | 220,575                  |       | 209,833                     |       |
| Total liabilities and stockholders’ equity                                                                          |       | $                        | 324,189    |                        | 309,073    |   |

 

See accompanying notes to consolidated financialstatements

 

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**BUFFALO WILD WINGS, INC. ANDSUBSIDIARIES**

 

**CONSOLIDATED STATEMENTS OF EARNINGS**

 

**(Amounts in thousands except pershare data)**

 

**(unaudited)**

 
| ** **                                         | ** ** | **Three months  ended**  | ** ** |
|----------------------------------------------------|------------|--------------------------|------------|
| ** **                                         | ** ** | **March 28,  2010** | ** ** | **March 29,  2009** | ** ** |
| Revenue:                                           |       |                     |       |   |   |
| Restaurant sales                                   |       | $                        | 137,962    |   | 119,424 |   |
| Franchise royalties and fees                       |       | 14,309                   |       | 12,131 |   |
| Total revenue                                      |       | 152,271                  |       | 131,555 |   |
|                                               |       |                     |       |   |   |
| Costs and expenses:                                |       |                     |       |   |   |
| Restaurant operating costs:                        |       |                     |       |   |   |
| Cost of sales                                      |       | 42,224                   |       | 36,208 |   |
| Labor                                              |       | 40,685                   |       | 35,549 |   |
| Operating                                          |       | 21,455                   |       | 17,987 |   |
| Occupancy                                          |       | 8,910                    |       | 7,594 |   |
| Depreciation and amortization                      |       | 9,550                    |       | 7,495 |   |
| General and administrative (1)                     |       | 12,026                   |       | 11,420 |   |
| Preopening                                         |       | 1,115                    |       | 2,409 |   |
| Loss on asset disposals                            |       | 411                      |       | 175 |   |
| Total costs and expenses                           |       | 136,376                  |       | 118,837 |   |
| Income from operations                             |       | 15,895                   |       | 12,718 |   |
| Investment income                                  |       | 185                      |       | 76 |   |
| Earnings before income taxes                       |       | 16,080                   |       | 12,794 |   |
| Income tax expense                                 |       | 5,519                    |       | 4,308 |   |
| Net earnings                                       |       | $                        | 10,561     |   | 8,486 |   |
|                                               |       |                     |       |   |   |   |
| Earnings per common share — basic             |       | $                        | 0.58       |   | 0.47 |   |
| Earnings per common share — diluted           |       | 0.58                     |       | 0.47 |   |
| Weighted average shares outstanding — basic   |       | 18,147                   |       | 17,980 |   |
| Weighted average shares outstanding — diluted |       | 18,229                   |       | 18,041 |   |

 

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(1) Includes stock-based compensation of $1,225and $801, respectively

 

See accompanying notes to consolidated financialstatements

 

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**BUFFALO WILD WINGS, INC. ANDSUBSIDIARIES**

 

**CONSOLIDATED STATEMENTS OF CASH FLOWS**

 

**(Dollar amounts in thousands)**

 

**(unaudited)**

 
| ** **                                                             | ** ** | **Three  months ended**  | ** ** |
|------------------------------------------------------------------------|------------|--------------------------|------------|
| ** **                                                             | ** ** | **March 28,  2010** | ** ** | **March 29,  2009** | ** ** |
| Cash flows from operating activities:                                  |       |                     |       |   |   |
| Net earnings                                                           |       | $                        | 10,561     |   | 8,486 |   |
| Adjustments to reconcile net earnings to cash  provided by operations: |       |                     |       |   |   |
| Depreciation                                                           |       | 9,396                    |       | 7,342 |   |
| Amortization                                                           |       | 154                      |       | 153 |   |
| Loss on asset disposals                                                |       | 410                      |       | 175 |   |
| Deferred lease credits                                                 |       | 537                      |       | 620 |   |
| Deferred income taxes                                                  |       | (1,136                   | )          | 1,153 |   |
| Stock-based compensation                                               |       | 1,225                    |       | 801 |   |
| Excess tax benefit from stock issuance                                 |       | (74                      | )          | (2 | ) |
| Change in operating assets and liabilities:                            |       |                     |       |   |   |
| Trading securities                                                     |       | (205                     | )          | (691 | ) |
| Accounts receivable                                                    |       | (953                     | )          | (2,339 | ) |
| Inventory                                                              |       | 42                       |       | (411 | ) |
| Prepaid expenses                                                       |       | 71                       |       | 698 |   |
| Other assets                                                           |       | (46                      | )          | (78 | ) |
| Unearned franchise fees                                                |       | (115                     | )          | 171 |   |
| Accounts payable                                                       |       | 866                      |       | 784 |   |
| Income taxes                                                           |       | 6,101                    |       | 2,779 |   |
| Accrued expenses                                                       |       | (2,099                   | )          | (384 | ) |
| Net cash provided by operating activities                              |       | 24,735                   |       | 19,257 |   |
|                                                                   |       |                     |       |   |   |
| Cash flows from investing activities:                                  |       |                     |       |   |   |
| Acquisition of property and equipment                                  |       | (9,908                   | )          | (18,916 | ) |
| Purchase of marketable securities                                      |       | (17,960                  | )          | (13,070 | ) |
| Proceeds of marketable securities                                      |       | 9,854                    |       | 12,639 |   |
| Net cash used in investing activities                                  |       | (18,014                  | )          | (19,347 | ) |
|                                                                   |       |                     |       |   |   |
| Cash flows from financing activities:                                  |       |                     |       |   |   |
| Issuance of common stock                                               |       | 123                      |       | 3 |   |
| Excess tax benefit from stock issuance                                 |       | 74                       |       | 2 |   |
| Tax payments for restricted stock                                      |       | (1,625                   | )          | (1,517 | ) |
| Net cash used in financing activities                                  |       | (1,428                   | )          | (1,512 | ) |
| Net increase (decrease) in cash and cash equivalents                   |       | 5,293                    |       | (1,602 | ) |
| Cash and cash equivalents at beginning of period                       |       | 9,580                    |       | 8,347 |   |
| Cash and cash equivalents at end of period                             |       | $                        | 14,873     |   | 6,745 |   |

 

See accompanying notes to consolidated financialstatements

 

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**BUFFALO WILD WINGS, INC. ANDSUBSIDIARIES**

 

**NOTES TO CONSOLIDATED FINANCIALSTATEMENTS**

 

**FOR THE THREE MONTHS ENDED MARCH 28,2010 AND MARCH 29, 2009**

**(Dollar amounts in thousands exceptshare and per share data)**

 

**(1)****                 ****Basis of Financial StatementPresentation**

 

The consolidatedfinancial statements as of March 28, 2010 and December 27, 2009, andfor the three-month periods ended March 28, 2010 and March 29, 2009have been prepared by Buffalo Wild Wings, Inc. pursuant to the rules andregulations of the Securities and Exchange Commission (SEC). The financialinformation for the three-month periods ended March 28, 2010 and March 29,2009 is unaudited, but, in the opinion of management, reflects all adjustmentsand accruals necessary for a fair presentation of the financial position,results of operations, and cash flows for the interim periods.

 

References in theremainder of this document to “Buffalo Wild Wings,” “we,” “us” and “our” referto the business of Buffalo Wild Wings, Inc. and our subsidiaries.

 

The financial informationas of December 27, 2009 is derived from our audited consolidated financialstatements and notes thereto for the fiscal year ended December 27, 2009,which is included in Item 8 in the Fiscal 2009 Annual Report on Form 10-Kand should be read in conjunction with such financial statements.

 

The results of operationsfor the three-month period ended March 28, 2010 are not necessarilyindicative of the results of operations that may be achieved for the entireyear ending December 26, 2010.

 

**(2)****                 ****Summary of Significant AccountingPolicies**

 

***(a)***                 ***Inventories***

 

Inventories are stated atthe lower of cost or market. Cost is determined by the first-in, first-out(FIFO) method.  Cash flows related toinventory sales are classified in net cash provided by operating activities inthe Consolidated Statements of Cash Flows.

 

We purchase our productsfrom a number of suppliers and believe there are alternative suppliers. We haveminimum purchase commitments from some of our vendors, but the terms of thecontracts and nature of the products are such that our purchase requirements donot create a market risk. The primary food product used by our restaurants andour franchised restaurants is chicken wings. Chicken wings are purchased by usat market prices. Material increases in chicken wing costs may adversely affectour operating results. For the three-month periods ended March 28, 2010and March 29, 2009, chicken wings were 28.1% and 23.6%, respectively, ofrestaurant cost of sales.

 

***(b)***                 ***New AccountingPronouncement***

 

In January 2010,the Financial Accounting Standards Board (FASB) issued Accounting StandardsUpdate (ASU) 2010-06 “Fair Value Measurements and Disclosures (Topic 820):Improving Disclosures about Fair Value Measurements.”  ASU 2010-06amends ASC 820 Fair Value Measurements and Disclosures to require newdisclosures related to transfers into and out of Levels 1 and 2 of the fairvalue hierarchy and additional disclosure requirements related to Level 3measurements.  The guidance also clarifies existing fair valuemeasurement disclosures about the level of disaggregation and about inputs andvaluation techniques used to measure fair value.  The additionaldisclosure requirements are effective for the first reporting periodbeginning after December 15, 2009, except for the additional disclosurerequirements related to Level 3 measurements which are effective for fiscalyears beginning after December 15, 2010.  The additionaldisclosure requirements did not have any financial impact on our consolidatedfinancial statements.

 

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**(3)****                 ****FairValue Measurements**

 

Theguidance for fairvalue measurements establishes the authoritative definition of fair value, setsout a framework for measuring fair value, and outlines the required disclosuresregarding fair value measurements.  Fair valueis the price that would be received to sell an asset or paid to transfer aliability (an exit price) in the principal or most advantageous market for theasset or liability in an orderly transaction between market participants at themeasurement date. We use a three-tier fair value hierarchy based uponobservable and non-observable inputs as follows:

 

·                  Level 1 — Observable inputs such asquoted prices in active markets;

·                  Level 2 — Inputs, other than the quotedprices in active markets, that are observable either directly or indirectly;and

·                  Level 3 — Unobservable inputs in whichthere is little or no market data, which require the reporting entity todevelop its own assumptions.

 

The followingtable summarizes the financial instruments measured at fair value in ourconsolidated balance sheet as of March 28, 2010:

 
| ** **                | ** **   | **Fair Value Measurements** | ** ** |
|---------------------------|--------------|-----------------------------|------------|
| ** **                | ** **   | **Level 1**                 | ** ** | **Level 2** | ** ** | **Level 3** | ** ** | **Total** | ** ** |
| **Assets**                | *** *** | *** ***                |       |   |   |   |   |   |   |
| Marketable  Securities(1) |         | $                           | 3,823      |   | 30,189 |   | — |   | 34,012 |   |
| Derivatives               |         | —                      |       | 88 |   | — |   | 88 |   |
|                           |              |                             |            |  |  |  |  |  |  |  |

 

(1)          We classified a portion of our marketable securitiesas available-for-sale and trading securities which were reported at fair marketvalue, using the “market approach” valuation technique. The “market approach”valuation method used prices and other relevant information observable inmarket transactions involving identical or comparable assets. Our tradingsecurities are valued using the Level 1 approach. Our available-for-sale marketable securities are valued usinga Level 2 approach.

 

There were no transfersbetween Level 1 and Level 2 of the fair value hierarchy during the three-monthperiod ended March 28, 2010.

 

**(4)****                 ****Marketable Securities**

 

Marketable securitieswere comprised as follows:

 
| ** **           | ** ** | **As of**                | ** ** |
|----------------------|------------|--------------------------|------------|
| ** **           | ** ** | **March 28,  2010** | ** ** | **December 27,  2009** | ** ** |
| Held-to-maturity     |       |                     |       |   |   |
| Municipal securities |       | $                        | 17,931     |   | 15,707 |   |
| Available-for-sale   |       |                     |       |   |   |
| Municipal securities |       | 30,189                   |       | 24,307 |   |
| Trading              |       |                     |       |   |   |
| Mutual funds         |       | 3,823                    |       | 3,618 |   |
| Total                |       | $                        | 51,943     |   | 43,632 |   |

 

Allheld-to-maturity debt securities mature within one year and had aggregate fairvalues of $17,928 and $15,712 as of March 28, 2010 and December 27, 2009, respectively.Trading securities represent investments held for future needs of anon-qualified deferred compensation plan.

 

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**(5)**                  **Property and Equipment**

 

Property and equipmentconsisted of the following:

 
| ** **                         | ** ** | **As of**                | ** ** |
|------------------------------------|------------|--------------------------|------------|
| ** **                         | ** ** | **March 28,  2010** | ** ** | **December 27,  2009** | ** ** |
| Construction in-process            |       | $                        | 7,309      |   | 6,443 |   |
| Buildings                          |       | 19,054                   |       | 18,338 |   |
| Furniture, fixtures, and equipment |       | 122,570                  |       | 121,166 |   |
| Leasehold improvements             |       | 155,876                  |       | 152,108 |   |
|                               |       | 304,809                  |       | 298,055 |   |
| Less accumulated depreciation      |       | (114,667                 | )          | (108,416 | ) |
|                               |       | $                        | 190,142    |   | 189,639 |   |

 

**(6)****                 ****Derivative Instruments**

 

We use commodityderivatives to manage our exposure to price fluctuations. We enter into optionsand future contracts to reduce our risk of natural gas price fluctuations.These derivatives do not qualify for hedge accounting and changes in fair valueare included in current net income. These changes are classified as a componentof restaurant operating expenses. All changes in the fair value of thesecontracts are recorded in earnings in the period in which they occur. Netlosses of $93 and $247 were recognized in the first three months of 2010 and2009, respectively. The fair value of our derivative instruments as of March 28,2010 and December 27, 2009 was $88 and $11, respectively, and is aliability in accrued expenses in the accompanying consolidated balance sheets.As of March 28, 2010, the maximum length of time over which we are hedgingour exposure to the variability in future cash flows related to the purchase ofnatural gas is 12 months. As of March 28, 2010 and December 27, 2009,we were party to natural gas swap contracts with notional values of $885 and$525, respectively.

 

**(7)**                  **Income Taxes**

 

The total unrecognizedtax benefits reflected on our consolidated balance sheet as of March 28,2010 and December 27,2009 were $629 and $566, respectively. The increase was due to additions basedon tax positions related to the current year. We recognize potential accruedinterest and penalties related to unrecognized tax benefits in income taxexpense. Interest and penalties related to unrecognized tax benefits totaled$116 and $89 at March 28, 2010 and December 27, 2009,respectively.Included in the balance at March 28, 2010 and December 27, 2009, areunrecognized tax benefits of $409 and $368, respectively, which if recognized,would affect the annual effective tax rate. We do not anticipate anysignificant change to the total unrecognized tax benefits prior to March 27,2011.

 

The Internal RevenueService completed their examination of our 2005 U.S. Income Tax Return in 2008.No changes to the tax return were reported. With few exceptions, we are nolonger subject to state income tax examinations for years before 2005.

 

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**(8)****                 ****Stockholders’ Equity**

 

***(a)******                ******StockOptions***

 

We have 3.9 millionshares of common stock reserved for issuance under the Equity Incentive Plan(Plan) for employees, officers, and directors. The option price for sharesissued under the Plan is to be not less than the fair market value on the dateof grant with respect to incentive and nonqualified stock options. Incentivestock options become exercisable in four equal installments from the date ofthe grant and have a contractual life of seven to ten years. Nonqualified stockoptions issued pursuant to the Plan have varying vesting periods fromimmediately to four years and have a contractual life of seven to ten years.Incentive stock options may be granted under this Plan until May 15, 2018.We issue new shares of common stock upon exercise of stock options. Optionactivity is summarized for the three months ended March 28, 2010 asfollows:

 
| ** **                          | ** ** | **Number********of shares** | ** ** | **Weighted********average********exercise price** | ** ** | **Average remaining  contractual Life  (years)** | ** ** | **Aggregate intrinsic  value** | ** ** |
|-------------------------------------|------------|-----------------------------|------------|--------------------------------------------------------|------------|-------------------------------------------------------|------------|-------------------------------------|------------|
| Outstanding, December 27, 2009 |       | 179,134                     |       | $                                                      | 19.00      |                                                  | 4.3        |                                | $          | 4,285 |   |
|                                |       |                        |       |                                                   |       |                                                  |       |                                |       |
| Granted                             |       | —                      |       | —                                                 |       |                                                  |       |                                |       |
| Exercised                           |       | (10,584                     | )          | 11.63                                                  |       |                                                  |       |                                |       |
| Cancelled                           |       | (1,605                      | )          | 29.74                                                  |       |                                                  |       |                                |       |
| Outstanding, March 28, 2010    |       | 166,945                     |       | $                                                      | 19.37      |                                                  | 4.1        |                                | $          | 4,929 |   |
| Exercisable, March 28, 2010    |       | 104,932                     |       | 13.97                                                  |       | 3.3                                                   |       | 3,665                               |       |

 

The aggregate intrinsicvalue in the table above is before applicable income taxes, based on ourclosing stock price of $48.89 as of the last business day of the quarter ended March 28,2010, which would have been received by the optionees had all options beenexercised on that date. As of March 28, 2010, total unrecognized stock-basedcompensation expense related to nonvested stock options was approximately $725,which is expected to be recognized over a weighted average period ofapproximately 2.4 years. During the three-month periods ended March 28,2010 and March 29, 2009, the total intrinsic value of stock optionsexercised was $357 and $6, respectively. During the three-month period ended March 29,2009, the total fair value of options vested was $8. During the three-monthperiod ended March 29, 2009, the weighted average grant date fair value ofoptions granted was $15.96. No shares were granted or vested during thethree-month period ended March 28, 2010.

 

The plan has 838,926shares available for grant as of March 28, 2010.

 

***(b)******                ******RestrictedStock Units***

 

Wehave a stock-based performance plan under which restricted stock units aregranted annually at the discretion of the Board of Directors. In 2008, wegranted restricted stock units subject to cumulative one-year, two-year, andthree-year net earnings targets. The number of units that vest each year isbased on performance against those cumulative targets. These restricted stockunits are subject to forfeiture if they have not vested at the end of thethree-year period. Stock-based compensation is recognized for the expected numberof units vesting at the end of each annual period. Restricted stock unitsexpected to vest at the end of the first year are fully expensed in the firstyear. Restricted stock units expected to vest at the end of the second year areexpensed during the first and second years. Restricted stock units expected tovest at the end of the third year are expensed over all three years.

 

In2009, we granted restricted stock units subject to three-year cliff vesting anda cumulative three-year earnings target. The number of units which vest at theend of the three-year period is based on performance against the target. Theserestricted stock units are subject to forfeiture if they have not vested at theend of the three-year period. Stock-based compensation is recognized for theexpected number of units vesting at the end of the period and is expensed overthe three-year period.

 

Foreach grant, restricted stock units meeting the performance criteria will vestas of the end of our fiscal year. The distribution of vested restricted stockunits as common stock typically occurs in March of the following year. Thecommon stock is issued to participants net of the number of shares needed forthe required minimum employee withholding taxes. We issue new shares of commonstock upon the disbursement of restricted stock

 

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units.Restricted stock units are contingently issuable shares, and the activity forthe first quarter of fiscal 2010 is as follows:

 
| ** **                          | ** ** | **Number********of shares** | ** ** | **Weighted********average********grant date********fair value** | ** ** |
|-------------------------------------|------------|-----------------------------|------------|-----------------------------------------------------------------|------------|
| Outstanding, December 27, 2009 |       | 450,869                     |       | $                                                               | 28.43      |   |
|                                |       |                        |       |                                                            |       |
| Granted                             |       | —                      |       | —                                                          |       |
| Vested                              |       | —                      |       | —                                                          |       |
| Cancelled                           |       | (5,179                      | )          | 32.00                                                           |       |
| Outstanding, March 28, 2010    |       | 445,690                     |       | $                                                               | 28.39      |   |

 

Asof March 28,2010, the total stock-based compensation expense related to nonvestedawards not yet recognized was $5,560, which is expected to be recognized over aweighted average period of 1.3 years. No shares vested during the three-monthperiods ended March 28,2010 and March 29, 2009. The weighted average grant date fair valueof restricted stock units granted during the three months ended March 29, 2009 was$30.90.  During the three-month period ended March 28,2010, we recognized $707 of stock-based compensation expense related torestricted stock units.

 

***(c)******                 ******EmployeeStock Purchase Plan***

 

Wehave reserved 600,000 shares of common stock for issuance under the EmployeeStock Purchase Plan (ESPP). The ESPP is available to substantially allemployees subject to employment eligibility requirements. Participants maypurchase our common stock at 85% of the beginning or ending closing price,whichever is lower, for each six-month period ending in May and November.During the first quarters of 2010 and 2009, we issued no shares of common stockunder the plan. As of March 28,2010, we have 340,838 shares available for future issuance under the ESPP.

 

**(9)**                  **Earnings Per Share**

 

Thefollowing is a reconciliation of basic and fully diluted earnings per commonshare for the three-month periods ended March 28, 2010 and March 29, 2009:

 
| ** **                                         | ** ** | **Three  months ended March 28, 2010** | ** ** |
|----------------------------------------------------|------------|---------------------------------------------|------------|
| ** **                                         | ** ** | **Earnings  (numerator)**                   | ** ** | **Shares  (denominator)** | ** ** | **Per-share  amount** | ** ** |
| Net earnings                                       |       | $                                           | 10,561     |   |   |   |   |   |
| Earnings per common share                          |       |                                        |       | 18,147,388 |   | $ | 0.58 |   |
| Effect of dilutive securities — stock options |       | —                                      |       | 81,472 |   |   |   |
| Earnings per common share — assuming dilution |       | $                                           | 10,561     |   | 18,228,860 |   | 0.58 |   |
|                                                    |            |                                             |            |  |  |  |  |  |  |

 
| ** **                                         | ** ** | **Three  months ended March 29, 2009** | ** ** |
|----------------------------------------------------|------------|---------------------------------------------|------------|
| ** **                                         | ** ** | **Earnings  (numerator)**                   | ** ** | **Shares  (denominator)** | ** ** | **Per-share  amount** | ** ** |
| Net earnings                                       |       | $                                           | 8,486      |   |   |   |   |   |
| Earnings per common share                          |       |                                        |       | 17,979,858 |   | $ | 0.47 |   |
| Effect of dilutive securities — stock options |       | —                                      |       | 60,693 |   |   |   |
| Earnings per common share — assuming dilution |       | $                                           | 8,486      |   | 18,040,551 |   | 0.47 |   |
|                                                    |            |                                             |            |  |  |  |  |  |  |

 

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The following is a summary of those securitiesoutstanding at the end of the respective periods, which have been excluded fromthe fully diluted calculations because the effect on net earnings per commonshare would have been antidilutive or were performance-granted shares for whichthe performance criteria had not yet been met:

 
| ** **              | ** ** | **March 28,********2010** | ** ** | **March 29,********2009** | ** ** |
|-------------------------|------------|--------------------------------|------------|--------------------------------|------------|
| Stock  options          |       | —                         |       | 74,261                         |       |
| Restricted  stock units |       | 445,690                        |       | 451,858                        |       |

 

**(10)**           **Supplemental Disclosures of Cash FlowInformation**

 
| ** **                                     | ** ** | **Three months ended**   | ** ** |
|------------------------------------------------|------------|--------------------------|------------|
| ** **                                     | ** ** | **March 28,  2010** | ** ** | **March 29,  2009** | ** ** |
| Cash  paid during the period for:              |       |                     |       |   |   |
| Income  taxes                                  |       | $                        | 533        |   | 437 |   |
| Noncash  financing and investing transactions: |       |                     |       |   |   |
| Property  and equipment not yet paid for       |       | 272                      |       | (2,760 | ) |
|                                                |            |                          |            |  |  |  |

 

**(11)**           **Contingencies**

 

We are involved in various legal actions arising inthe ordinary course of business. In the opinion of management, the ultimatedisposition of these matters will not have a material adverse effect on ourconsolidated financial position, results of operations, or cash flows.

 

**ITEM 2. MANAGEMENT’S DISCUSSIONAND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS**

 

The following discussionand analysis of our financial condition and results of operations should beread in conjunction with our consolidated financial statements and relatednotes included in Item 1 of Part 1 of this Quarterly Report and theaudited consolidated financial statements and related notes and Management’sDiscussion and Analysis of Financial Condition and Results of Operationscontained in our Annual Report on Form 10-K for the fiscal year ended December 27,2009. This discussion and analysis contains certain statements that are nothistorical facts, including, among others, those relating to our anticipatedfinancial performance for 2010, cash requirements, and our expected storeopenings and preopening costs. Such statements are forward-looking and speakonly as of the date on which they are made. There are risks and uncertaintiesincluding, but not limited to, those discussed in this Form 10-Q underItem 2 of Part I as well as in Item 1A of Part I of the fiscal 2009 Form 10-K.Information included in this discussion and analysis includes commentary oncompany-owned and franchised restaurant units, restaurant sales, same-storesales, and average weekly sales volumes. Management believes such salesinformation is an important measure of our performance, and is useful inassessing consumer acceptance of the Buffalo Wild Wings® Grill &Bar concept and the overall health of the concept. Franchise information alsoprovides an understanding of our revenues because franchise royalties and feesare based on the opening of franchised units and their sales. However, franchisesales and same-store sales information does not represent sales in accordancewith U. S. generally accepted accounting principles (GAAP), should not beconsidered in isolation or as a substitute for other measures of performanceprepared in accordance with GAAP and may not be comparable to financialinformation as defined or used by other companies.

 

**CriticalAccounting Policies and Use of Estimates**

 

Our most criticalaccounting policies, which are those that require significant judgment,include: valuation of long-lived assets and store closing reserves, goodwill,vendor allowances, revenue recognition from franchise operations,self-insurance liability, and stock-based compensation. An in-depth descriptionof these can be found in our Annual Report on Form 10-K for the fiscalyear ended December 27, 2009. There have been no changes to those policiesduring this period.

 

**Overview**

 

As of March 28,2010, we owned andoperated 235 company-owned and franchised an additional 430 Buffalo Wild Wings® Grill &Bar restaurants in 42 states. Our long-term focus is to grow to a nationalchain of over 1,000 locations in the United States, continuing the strategy ofdeveloping both company-owned and franchised restaurants.

 

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Our unit growth targetfor 2010 is 13% to 15%. We had previously announced a net earnings growth goalfor 2010 of 20%.  This goal may beachievable, however, key to meeting this goal will be improvement in same-storesales and moderate wing costs. Our growth and success depend on several factorsand trends. First, we continue to monitor and react to changes in our cost ofgoods sold. The cost of goods sold is difficult to predict, as it has rangedfrom 29.8% to 30.6% of restaurant sales per quarter in our 2009 fiscal year andyear-to-date in 2010. We are working to counteract the volatility of chickenwing prices with the introduction of popular new menu items, effectivemarketing promotions, focused efforts on food costs and waste, and menu priceincreases. We will continue to monitor the cost of chicken wings, as it cansignificantly change our cost of sales and cash flow from company-ownedrestaurants. We are exploring purchasing strategies to lessen the severity ofcost increases and fluctuations, and are reviewing menu additions and otherstrategies that may decrease the percentage that chicken wings represent interms of total restaurant sales. We are currently purchasing chicken wings atmarket prices. If a satisfactory long-term price agreement for chicken wingswere to arise, we would consider locking in prices to reduce our pricevolatility.

 

A second factor is oursuccess in developing new markets. There are inherent risks in opening newrestaurants, especially in new markets, including the lack of experience,logistical support, and brand awareness in a new market. These factors mayresult in lower than anticipated sales and cash flow for new restaurants in newmarkets. In 2010, we plan to develop company-owned restaurants primarily inmarkets where we currently have either company-owned or franchised restaurants.We believe this development focus, together with our focus on our newrestaurant opening procedures, will help to mitigate the overall riskassociated with opening restaurants in new markets.

 

Third, we will continueour focus on trends in company-owned and franchised same-store sales as anindicator of the continued acceptance of our concept by consumers. We alsoreview the overall trend in average weekly sales as an indicator of our abilityto increase the sales volume and, therefore, cash flow per location. We remaincommitted to high quality operations and guest hospitality.

 

Our revenue is generatedby:

 

·                  Sales at our company-owned restaurants, which were 91%of total revenue in the first quarter of 2010. Food and nonalcoholic beveragesaccounted for 76% of restaurant sales. The remaining 24% of restaurant saleswas from alcoholic beverages. The menu items with the highest sales volume aretraditional and boneless wings at 20% and 19%, respectively, of totalrestaurant sales.

 

·                  Royalties and franchise fees received from ourfranchisees.

 

We generate cash from theoperation of company-owned restaurants and from franchise royalties and fees.We highlight the specific costs associated with the on-going operation of ourcompany-owned restaurants in the consolidated statement of earnings under “Restaurantoperating costs.” Nearly all of our depreciation expense relates to assets usedby our company-owned restaurants. Preopening costs are those costs associatedwith opening new company-owned restaurants and will vary quarterly based on thenumber of new locations opening and under construction. Loss on asset disposalsexpense is related to company-owned restaurants and includes the costsassociated with closures of locations and normal asset retirements. Certainother expenses, such as general and administrative, relate to bothcompany-owned restaurant and franchising operations.

 

Weoperate on a 52 or 53-week fiscal year ending on the last Sunday in December.Both of the first quarters of 2010 and 2009 consisted of thirteen weeks.

 

**QuarterlyResults of Operations**

 

Our operating results forthe periods indicated are expressed below as a percentage of total revenue,except for the components of restaurant operating costs, which are expressed asa percentage of restaurant sales. The information for each three-month periodis unaudited, and we have prepared it on the same basis as the auditedfinancial statements. In the opinion of management, all necessary adjustments,consisting only of normal recurring adjustments, have been included to presentfairly the unaudited quarterly results.

 

Quarterly and annualoperating results may fluctuate significantly as a result of a variety offactors, including increases or decreases in same-store sales, changes incommodity prices, the timing and number of new restaurant openings and relatedexpenses, asset impairment charges, store closing charges, general economicconditions, stock-based compensation, and seasonal fluctuations. As a result,our quarterly results of operations are not necessarily indicative of theresults that may be achieved for any future period.

 

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| ** **                      | ** ** | **Three months ended**             | ** ** |
|---------------------------------|------------|------------------------------------|------------|
| ** **                      | ** ** | **March 28,  2010**** ** | ** ** | **March 29,  2009** | ** ** |
| Revenue:                        |       |                               |       |   |   |
| Restaurant  sales               |       | 90.6                               | %          | 90.8 | % |
| Franchising  royalties and fees |       | 9.4                                |       | 9.2 |   |
| Total  revenue                  |       | 100.0                              |       | 100.0 |   |
|                            |       |                               |       |   |   |
| Costs  and expenses:            |       |                               |       |   |   |
| Restaurant  operating costs:    |       |                               |       |   |   |
| Cost  of sales                  |       | 30.6                               |       | 30.3 |   |
| Labor                           |       | 29.5                               |       | 29.8 |   |
| Operating                       |       | 15.6                               |       | 15.1 |   |
| Occupancy                       |       | 6.5                                |       | 6.4 |   |
| Depreciation  and amortization  |       | 6.3                                |       | 5.7 |   |
| General  and administrative     |       | 7.9                                |       | 8.7 |   |
| Preopening                      |       | 0.7                                |       | 1.8 |   |
| Loss  on asset disposals        |       | 0.3                                |       | 0.1 |   |
| Total  costs and expenses       |       | 89.6                               |       | 90.3 |   |
|                            |       |                               |       |   |   |
| Income  from operations         |       | 10.4                               |       | 9.7 |   |
| Investment  income              |       | 0.1                                |       | 0.1 |   |
| Earnings  before income taxes   |       | 10.6                               |       | 9.7 |   |
| Income  tax expense             |       | 3.6                                |       | 3.3 |   |
| Net  earnings                   |       | 6.9                                | %          | 6.5 | % |

 

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

 
| ** **                 | ** ** | **As of**                          | ** ** |
|----------------------------|------------|------------------------------------|------------|
| ** **                 | ** ** | **March 28,  2010**** ** | ** ** | **March 29,  2009** | ** ** |
| Company-owned  restaurants |       | 235                                |       | 206 |   |
| Franchised  restaurants    |       | 430                                |       | 373 |   |

 

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

 
| ** **                      | ** ** | **Three months ended**   | ** ** |
|---------------------------------|------------|--------------------------|------------|
| ** **                      | ** ** | **March 28,  2010** | ** ** | **March 29,  2009** | ** ** |
| Company-owned  restaurant sales |       | $                        | 137,962    |   | 119,424 |   |
| Franchised  restaurant sales    |       | 283,447                  |       | 242,120 |   |
|                                 |            |                          |            |  |  |  |

 

Increases in comparablesame-store sales are as follows (based on restaurants operating at least 15months):

 
| ** **                      | ** ** | **Three months ended**   | ** ** |
|---------------------------------|------------|--------------------------|------------|
| ** **                      | ** ** | **March 28,  2010** | ** ** | **March 29,  2009** | ** ** |
| Company-owned  same-store sales |       | 0.1                      | %          | 6.4 | % |
| Franchised  same-store sales    |       | 0.7                      | %          | 6.0 | % |

 

The quarterly averageprices paid per pound for chicken wings are as follows:

 
| ** **               | ** ** | **Three months ended**   | ** ** |
|--------------------------|------------|--------------------------|------------|
| ** **               | ** ** | **March 28,  2010** | ** ** | **March 29,  2009** | ** ** |
| Average  price per pound |       | $                        | 1.91       |   | 1.63 |   |
|                          |            |                          |            |  |  |  |

 

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**Resultsof Operations for the Three Months Ended March 28, 2010 and March 29,2009**

 

Restaurant salesincreased by $18.5 million, or 15.5%, to $138.0 million in 2010 from $119.4million in 2009. The increase in restaurant sales was due to a $18.4 millionincrease associated with 5 new company-owned restaurants that opened in 2010and 47 company-owned restaurants opened before 2010 that did not meet thecriteria for same-store sales for all or part of the three-month period, and$119,000 related to a 0.1% increase in same-store sales.

 

Franchise royalties andfees increased by $2.2 million, or 18.0%, to $14.3 million in 2010 from $12.1 million in 2009. The increase was primarily dueto additional royalties collected from 11 new franchised restaurants thatopened in 2010 and 48 franchised restaurants that opened in the last ninemonths of 2009. Same-store sales for franchised restaurants increased 0.7% in2010.

 

Cost of sales increasedby $6.0 million, or 16.6%, to $42.2 million in 2010 from $36.2 million in 2009due primarily to more restaurants being operated in 2010. Cost of sales as apercentage of restaurant sales increased to 30.6% in 2010 from 30.3% in 2009.Cost of sales as a percentage of restaurant sales increased primarily due tohigher chicken wing prices which were partially offset by menu mix changes, theleverage of price increases, and production efficiencies. Traditional wingsales decreased slightly to approximately 20.3% of our restaurant sales in 2010from 20.4% in 2009. However, boneless wings, which are a better margin itemthan traditional wings, increased to 19.1% of sales, from 18.5% in 2009. Forthe first quarter of 2010, the cost of chicken wings averaged $1.91 per poundwhich was a 17.1% increase over the same period in 2009.

 

Labor expensesincreased by $5.1 million, or 14.4%, to $40.7 million in 2010 from $35.5million in 2009 due primarily to more restaurants being operated in 2010. Laborexpenses as a percentage of restaurant sales decreased to 29.5% in 2010 from29.8% in 2009. The decrease in labor expenses as a percentage of restaurantsales was primarily due to lower medical costs and hourly labor costs,partially offset by an increase in workers’ compensation costs due to a benefitrecognized in the first quarter of 2009.

 

Operating expensesincreased by $3.5 million, or 19.3%, to $21.5 million in 2010 from $18.0million in 2009 due primarily to more restaurants being operated in 2010. Operatingexpenses as a percentage of restaurant sales increased to 15.6% in 2010 from15.1% in 2009. The increase in operating expenses as a percentage of restaurantsales is primarily due to higher general liability insurance costs due to abenefit recognized in the first quarter of 2009.

 

Occupancy expensesincreased by $1.3 million, or 17.3%, to $8.9 million in 2010 from $7.6 millionin 2009 due primarily to more restaurants being operated in 2010. Occupancyexpenses as a percentage of restaurant sales increased to 6.5% in 2010 from6.4% in 2009 due to reduced leverage from lower sales volume increases.

 

Depreciation andamortization increased by $2.1 million, or 27.4%, to $9.6 million in 2010 from$7.5 million in 2009. The increase was primarily due to the additionaldepreciation on five new restaurants opened in 2010 and the 26 new restaurantsthat opened in the last nine months of 2009.

 

General andadministrative expenses increased by $606,000, or 5.3%, to $12.0 million in2010 from $11.4 million in 2009 primarily due to additional headcount andhigher professional fees. General and administrative expenses as a percentageof total revenue decreased to 7.9% in 2010 from 8.7% in 2009. Exclusive ofstock-based compensation, we reduced our general and administrative expenses asa percentage of revenue to 7.1% from 8.1% due to leverage of our wage-relatedexpenses against higher revenue and lower cash incentive plan expenses.

 

Preopening costsdecreased by $1.3 million, to $1.1 million in 2010 from $2.4 million in 2009.In 2010, we incurred costs of $832,000 for five new company-owned restaurantsopened in the first quarter of 2010 and costs of $275,000 for restaurants thatwill open in the second quarter of 2010 or later. In 2009, we incurred costs of$1.9 million for 10 new company-owned restaurants opened in the first quarterof 2009, and incurred $511,000 for restaurants that opened in the second orthird quarters of 2009. In 2010, we expect average preopening costs perrestaurant to be approximately $220,000.

 

Loss on assetdisposals increased by $236,000 to $411,000 in 2010 from $175,000 in 2009. In2010, the loss was related to store closing costs related to two store closuresof $140,000 and the write-off of miscellaneous equipment. In 2009, the loss wasdue to the write-off of miscellaneous equipment.

 

Investment incomeincreased by $109,000 to $185,000 in 2010 from $76,000 in 2009. The increasewas primarily due to gains on investments held for a deferred compensation planpartially offset by reductions in interest income due to lower interest rateson our investment portfolio. Cash and marketable securities balances at the endof the first quarter totaled $66.8 million in 2010 compared to $44.0 million atthe end of the first quarter of 2009.

 

Provision forincome taxes increased $1.2 million to $5.5 million in 2010 from $4.3 millionin 2009. The effective tax rate as a percentage of income before taxesincreased to 34.3% in 2010 from 33.7% in 2009. The 2009 income tax rate washigher 

 

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due to a decreasein tax exempt interest and the effects of increased stock-based compensationexpenses. For 2010, we believe our effective annual tax rate will be between33.5-34.5%.

 

**Liquidityand Capital Resources**

 

Our primary liquidity andcapital requirements have been for new restaurant construction, remodeling andmaintaining our existing company-owned restaurants, working capital,acquisitions, and other general business needs. We fund these expenses, exceptfor acquisitions, primarily with cash from operations. Depending on the size ofthe transaction, acquisitions would generally be funded from cash andmarketable securities balances.  The cashand marketable securities balance at March 28, 2010 was $66.8 million. We invest our cash balances indebt securities with the focus on protection of principal, adequate liquidity,and return on investment based on risk. As of March 28, 2010, nearly allexcess cash was invested in high quality municipal securities.

 

For the three monthsended March 28, 2010, net cash provided by operating activities was $24.7million. Net cash provided by operating activities consisted primarily of net earningsadjusted for non-cash expenses, and an increase in income taxes payable and adecrease in accrued expenses. The increase in income taxes payable was due tothe timing of income tax payments.  Thedecrease in accrued expenses was primarily due to the payout of annual bonusesduring the quarter.

 

For the three monthsended March 29, 2009, net cash provided by operating activities was $19.3million. Net cash provided by operating activities consisted primarily of netearnings adjusted for non-cash expenses and increases in accounts payable andaccrued expenses offset by an increase in accounts receivable. The increase inaccounts payable was due to an increase in the number of restaurants and thetiming of payments. The increase in accrued expenses was due to higher deferredcompensation costs and higher wage-related costs.  The increase in accounts receivable was dueto higher credit card balances.

 

For the three monthsended March 28, 2010 and March 29, 2009, net cash used in investingactivities was $18.0 million and $19.3 million, respectively. Investingactivities included purchases of property and equipment related to the openingof new company-owned restaurants and restaurants under construction in bothperiods. During the first three months of 2010, we opened five restaurants.During the first three months of 2009, we opened 10 new restaurants. In 2010,we expect capital expenditures for approximately 42 new company-ownedrestaurants to cost approximately $1.8 million per location and expenditures tobe approximately $20.1 million for the maintenance and remodel of existingrestaurants. In 2010, we purchased $18.0 million of marketable securities andreceived proceeds of $9.9 million as these investments matured or were sold. In2009, we purchased $13.1 million of marketable securities and received proceedsof $12.6 million as these investments matured or were sold.

 

For the three monthsended March 28, 2010 and March 29, 2009, net cash used in financingactivities was $1.4 million and $1.5 million, respectively. Net cash used infinancing activities for 2010 resulted primarily from tax payments forrestricted stock units of $1.6 million, offset by proceeds from the exercise ofstock options of $123,000 and the excess tax benefit from stock issuance of$74,000. Net cash used in financing activities for 2009 resulted primarily fromtax payments for restricted stock units of $1.5 million. No additional fundingfrom the issuance of common stock (other than from the exercise of options andpurchase of stock under the employee stock purchase plan) is anticipated forthe remainder of 2010.

 

Our liquidity is impactedby minimum cash payment commitments resulting from operating lease obligationsfor our restaurants and our corporate offices. Lease terms are generally 10 to15 years with renewal options and generally require us to pay a proportionateshare of real estate taxes, insurance, common area maintenance, and otheroperating costs. Some restaurant leases provide for contingent rental paymentsbased on sales thresholds. We own the buildings in which 32 of our restaurantsoperate and therefore have very limited ability to enter into sale-leasebacktransactions as a potential source of cash.

 

The following tablepresents a summary of our contractual operating lease obligations andcommitments as of March 28, 2010:

 
| ** **                                           | ** ** | ** ** | ** ** | **Payments Due By Period (in thousands)** | ** ** |
|------------------------------------------------------|------------|------------|------------|-------------------------------------------|------------|
| ** **                                           | ** ** | **Total**  | ** ** | **Less than  One year**** **    | ** ** | **1-3 years** | ** ** | **3-5 years** | ** ** | **After 5  years** | ** ** |
| Operating  lease obligations                         |       | $          | 244,188    |                                      | 29,172     |   | 55,013 |   | 49,579 |   | 110,424 |   |
| Lease  commitments for restaurants under development |       | 33,833     |       | 1,607                                     |       | 5,275 |   | 5,307 |   | 21,644 |   |
| Total                                                |       | $          | 278,021    |                                      | 30,779     |   | 60,288 |   | 54,886 |   | 132,068 |   |

 

We believe the cash flowsfrom our operating activities and our balance of cash and marketable securitieswill be sufficient to fund our operations and building commitments and meet ourobligations for the foreseeable future. Our future cash outflows

 

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related to income taxuncertainties amounted to $629,000 as of March 28, 2010. These amounts areexcluded from the contractual obligations table due to the high degree ofuncertainty regarding the timing of these liabilities.

 

**Off-BalanceSheet Arrangements**

 

As of March 28,2010, we had no off-balance sheet arrangements or transactions.

 

**Risk Factors/Forward-LookingStatements**

 

The foregoing discussionand other statements in this report contain various “forward-looking statements”within the meaning of Section 27A of the Securities Act of 1933, asamended, and Section 21E of the Securities Exchange Act of 1934, asamended. Forward-looking statements are based on current expectations orbeliefs concerning future events. Such statements can be identified by the useof terminology such as “anticipate,” “believe,” “continue,” “could,” “estimate,”“expect,” “intend,” “may,” “plan,” “potential,” “should,” “will,” “project,” “will,”“forecast” or the negative of these terms or other comparable terminology. Ourforward-looking statements generally relate our future financial and storeperformance measures and growth goals for 2010 and beyond, including but notlimited to projected annual unit and net earnings growth rates; beliefsregarding future sales performance; benefits of menu price increases; theeffect of key initiatives, promotional activities, and advertising andmarketing campaigns; the number and timing of projected store openings and thenature of our expansion activities; expected 2010 tax rates; adequacy ofcapital resources and other future events. Although it is not possible toforesee all of the factors that may cause actual results to differ from ourforward-looking statements, such factors include, among others, the followingrisk factors (each of which is discussed in greater detail in our Annual Reporton Form 10-K for the fiscal year ended December 27, 2009):

 

·                  Fluctuations in chicken wing prices couldreduce our operating income.

 

·                  If we are unable to successfully open newrestaurants, our revenue growth rate and profits may be reduced.

 

·                  We must identify and obtain a sufficientnumber of suitable new restaurant sites for us to sustain our revenue growthrate.

 

·                  Shortages or interruptions in theavailability and delivery of food and other supplies may increase costs orreduce revenues.

 

·                  We may experience higher-than-anticipatedcosts associated with the opening of new restaurants or with the closing,relocating, and remodeling of existing restaurants, which may adversely affectour results of operations.

 

·                  Our restaurants may not achieve marketacceptance in the new geographic regions we enter.

 

·                  New restaurants added to our existingmarkets may take sales from existing restaurants.

 

·                  An impairment in the carrying value ofour goodwill or other intangible assets could adversely affect our financialcondition and consolidated results of operations.

 

·                  Failure of our internal controls overfinancial reporting could harm our business and financial results.

 

·                  The current economic crisis could have amaterial adverse impact on our landlords or other tenants in retail centers inwhich we or our franchisees are located, which in turn could negatively affectour financial results.

 

·                  We are dependent on franchisees and theirsuccess.

 

·                  Franchisees may take actions that couldharm our business.

 

·                  We could face liability from ourfranchisees.

 

·                  We may be unable to compete effectivelyin the restaurant industry.

 

·                  Our success depends substantially on thevalue of our brands and our reputation for offering guests an unparalleledtotal experience.

 

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·                  Our inability to successfully andsufficiently raise menu prices could result in a decline in profitability.

 

·                  A reduction in vendor allowancescurrently received could affect our costs of goods sold.

 

·                  Our quarterly operating results mayfluctuate due to the timing of special events and other factors, including therecognition of impairment losses.

 

·                  We may not be able to attract and retainqualified team members to operate and manage our restaurants.

 

·                  The loss of key executives, ordifficulties recruiting and retaining qualified team members, could jeopardizeour ability to meet our financial targets.

 

·                  We may not be able to obtain and maintainlicenses and permits necessary to operate our restaurants.

 

·                  The sale of alcoholic beverages at ourrestaurants subjects us to additional regulations and potential liability.

 

·                  Changes in employment laws or regulationcould harm our performance.

 

·                  Changes in consumer preferences ordiscretionary consumer spending could harm our performance.

 

·                  Changes in public health concerns mayimpact our performance.

 

·                  A regional or global health pandemiccould severely affect our business.

 

·                  A decline in visitors to any of thebusiness districts near the locations of our restaurants could negativelyaffect our restaurant sales.

 

·                  The acquisition of existing restaurantsfrom our franchisees or other acquisitions may have unanticipated consequencesthat could harm our business and our financial condition.

 

·                  Unfavorable publicity could harm ourbusiness.

 

·                  There is volatility in our stock price.

 

·                  We may be subject to increased labor andinsurance costs.

 

·                  Our current insurance may not provideadequate levels of coverage against claims.

 

·                  We are dependent on informationtechnology and any material failure of that technology could impair our abilityto efficiently operate our business.

 

·                  If we are unable to maintain our rightsto use key technologies of third parties, our business may be harmed.

 

·                  We may not be able to protect ourtrademarks, service marks or trade secrets.

 

Investors are cautionedthat all forward-looking statements involve risk and uncertainties and speakonly as of the date on which they are made.

 

**ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKETRISK**

 

We are exposed to marketrisk related to our cash and cash equivalents and marketable securities. Weinvest our excess cash in highly liquid short-term investments with maturitiesof less than one year. These investments are not held for trading or otherspeculative purposes. Changes in interest rates affect the investment income weearn on our cash and cash equivalents and marketable securities and, therefore,impact our cash flows and results of operations. We also have tradingsecurities, which are held to generate returns that seek to offset changes inliabilities related to the equity market risk of our deferred compensationarrangements.

 

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*FinancialInstruments*

 

Financial instrumentsthat potentially subject us to concentrations of credit risk consistprincipally of municipal securities. We do not believe there is a significantrisk of non-performance by these municipalities because of our investmentpolicy restrictions as to acceptable investment vehicles.

 

*Inflation*

 

The primary inflationaryfactors affecting our operations are food, labor, and restaurant operatingcosts. Substantial increases in these costs could impact operating results tothe extent that such increases cannot be passed along through higher menuprices. A large number of our restaurant personnel are paid at rates based onthe applicable federal and state minimum wages, and increases in the minimumwage 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.

 

*CommodityPrice Risk*

 

Many of the food productspurchased by us are affected by weather, production, availability, and otherfactors outside our control. We believe that almost all of our food andsupplies are available from several sources, which helps to control foodproduct risks. We negotiate directly with independent suppliers for our supplyof food and paper products. We use members of UniPro Food Services, Inc.,a national cooperative of independent food distributors, to distribute theseproducts from the suppliers to our restaurants. We have minimum purchaserequirements with some of our vendors, but the terms of the contracts andnature of the products are such that our purchase requirements do not create amarket risk. The primary food product used by company-owned and franchisedrestaurants is chicken wings. We work to counteract the effect of thevolatility of chicken wing prices, which can significantly affect our cost ofsales and cash flow, with the introduction of new menu items, effectivemarketing promotions, focused efforts on food costs and waste, and menu priceincreases. We also explore purchasing strategies to reduce the severity of costincreases and fluctuations. We currently purchase our chicken wings at marketprices. If a satisfactory long-term price agreement for chicken wings were toarise, we would consider locking in prices to reduce our price volatility. Ifthere is a significant rise in the price of chicken wings, and we are unable tosuccessfully adjust menu prices or menu mix or otherwise make operationaladjustments to account for the higher wing prices, our operating results couldbe adversely affected. Chicken wings accounted for approximately 28.1% and23.6% of our cost of sales in the first quarters of 2010 and 2009,respectively, with a quarterly average price per pound of $1.91 and $1.63,respectively.

 

**ITEM 4. CONTROLS AND PROCEDURES**

 

*Management’sReport on Internal Control Over Financial Reporting*

 

As of the end of theperiod covered by this report, we conducted an evaluation, under thesupervision and with the participation of our principal executive officer andprincipal financial officer, of our disclosure controls and procedures asdefined in Rules 13a-15(e) and 15d-15(e) under the SecuritiesExchange Act of 1934 (“the Exchange Act”). Based on this evaluation, theprincipal executive officer and principal financial officer concluded that ourdisclosure controls and procedures are effective to ensure that informationrequired to be disclosed by us in the reports we file or submit under theExchange Act is accumulated and communicated to our management, including ourprincipal executive officer and principal financial officer, as appropriate toallow timely decisions regarding required disclosure and recorded, processed,summarized and reported within the time periods specified in Securities andExchange Commission rules and forms.

 

*Changesin Internal Control Over Financial Reporting*

 

There were no changes inour internal controls over financial reporting during our most recentlycompleted fiscal quarter that have materially affected, or are reasonablylikely to materially affect, our internal controls over financial reporting.

 

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**PART II — OTHER INFORMATION**

 

**ITEM 1. LEGAL PROCEEDINGS**

 

Occasionally, we are adefendant in litigation arising in the ordinary course of our business,including claims arising from personal injuries, contract claims,franchise-related claims, dram shop claims, employment-related claims andclaims from guests or employees alleging injury, illness or other food quality,health or operational concerns. To date, none of these types of litigation, mostof which are typically covered by insurance, has had a material effect on us.We have insured and continue to insure against most of these types of claims. Ajudgment on any claim not covered by or in excess of our insurance coveragecould adversely affect our financial condition or results of operations.

 

**ITEM 6. EXHIBITS**

 

See Exhibit Indexfollowing the signature page of this report.

 

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**SIGNATURES**

 

Pursuantto the requirements of the Securities Exchange Act of 1934, the registrant hasduly caused this report to be signed on its behalf by the undersigned,thereunto duly authorized.

 
| **Date:  May 7, 2010** | **BUFFALO  WILD WINGS, INC.** |
|-----------------------------|-------------------------------|
|                        |                          |   |
|                        | By:                           | /s/ Sally J. Smith |
|                        |                          | Sally J. Smith,  President and Chief Executive Officer

(principal executive  officer) |
|                        |                          |   |
|                        | By:                           | /s/ Mary J. Twinem |
|                        |                          | Mary J. Twinem,  Executive Vice President, Chief  Financial Officer and Treasurer (principal financial and

accounting officer) |

 

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** **

**EXHIBIT INDEX**

 

**BUFFALO WILD WINGS, INC.**

**FORM 10-Q FOR QUARTER ENDED MARCH 28,2010**

 
| **Exhibit  Number** | ** ** | **Description**                                                                                  |
|---------------------|------------|--------------------------------------------------------------------------------------------------|
| 31.1                |       | Certification of Chief  Executive Officer Pursuant to Section 302 of the Sarbanes-Oxley Act |
|                |       |                                                                                             |
| 31.2                |       | Certification of Chief  Financial Officer Pursuant to Section 302 of the Sarbanes-Oxley Act |
|                |       |                                                                                             |
| 32.1                |       | Certification of Chief  Executive Officer Pursuant to Section 906 of the Sarbanes-Oxley Act |
|                |       |                                                                                             |
| 32.2                |       | Certification of Chief  Financial Officer Pursuant to Section 906 of the Sarbanes-Oxley Act |

 

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