UNITED
STATES


SECURITIES
AND EXCHANGE COMMISSION


Washington,
DC 20549







FORM
10-Q





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


THE
SECURITIES EXCHANGE ACT OF 1934




For
the quarterly period ended September 27, 2009




Commission
File No. 000-24743







BUFFALO
WILD WINGS, INC.


(Exact
name of registrant as specified in its charter)





Minnesota
              No.
      31-1455915(State
      or Other Jurisdiction of
                Incorporation
      or Organization)
              (IRS
      Employer
                Identification
      No.)




5500
Wayzata Boulevard, Suite 1600, Minneapolis, MN 55416


(Address
of Principal Executive Offices) (Zip Code)




(952)
593-9943


(Registrant’s
Telephone Number, Including Area Code)







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




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




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


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




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




The
number of shares outstanding of the registrant’s common stock as of October 30,
2009:  18,025,351 shares.




1




TABLE
OF CONTENTS




PagePART
      I – FINANCIAL INFORMATIONItem 1.
            Financial
      Statements
            3Item
      2.
            Management’s
      Discussion and Analysis of Financial Condition and Results of
      Operations
            12Item
      3.
            Quantitative
      and Qualitative Disclosures About Market Risk
            18Item
      4.
            Controls
      and Procedures
            19PART
      II – OTHER INFORMATIONItem
      1.
            Legal
      Proceedings
            20Item
      6.
            Exhibits
            20Signatures
            21Exhibit
      Index
            22






2




PART
I. FINANCIAL INFORMATION




ITEM
1. FINANCIAL STATEMENTS




BUFFALO
WILD WINGS, INC. AND SUBSIDIARIES


CONSOLIDATED
BALANCE SHEETS


(Dollar
amounts in thousands)


(unaudited)




September
      27,
                                                                  2009
                                                                
                                                                
                                                                December
      28,
                                                                  2008AssetsCurrent
      assets:Cash
      and cash equivalents
                                                                
                                                                $
                                                                12,083
                                                                
                                                                
                                                                
                                                                8,347Marketable
      securities
                                                                
                                                                
                                                                40,283
                                                                
                                                                
                                                                
                                                                36,157Accounts
      receivable – franchisees, net of allowance of $25
                                                                
                                                                
                                                                1,037
                                                                
                                                                
                                                                
                                                                895Accounts
      receivable – other
                                                                
                                                                
                                                                7,669
                                                                
                                                                
                                                                
                                                                5,759Inventory
                                                                
                                                                
                                                                3,227
                                                                
                                                                
                                                                
                                                                3,104Prepaid
      expenses
                                                                
                                                                
                                                                3,512
                                                                
                                                                
                                                                
                                                                3,294Refundable
      income taxes
                                                                
                                                                
                                                                1,510
                                                                
                                                                
                                                                
                                                                1,611Deferred
      income taxes
                                                                
                                                                
                                                                4,935
                                                                
                                                                
                                                                
                                                                1,731Total
      current assets
                                                                
                                                                
                                                                74,256
                                                                
                                                                
                                                                
                                                                60,898Property
      and equipment, net
                                                                
                                                                
                                                                181,186
                                                                
                                                                
                                                                
                                                                154,432Restricted
      cash
                                                                
                                                                
                                                                21,325
                                                                
                                                                
                                                                
                                                                7,670Other
      assets
                                                                
                                                                
                                                                9,439
                                                                
                                                                
                                                                
                                                                9,846Goodwill
                                                                
                                                                
                                                                11,246
                                                                
                                                                
                                                                
                                                                10,972Total
      assets
                                                                
                                                                $
                                                                297,452
                                                                
                                                                
                                                                
                                                                243,818Liabilities
      and Stockholders’ EquityCurrent
      liabilities:Unearned
      franchise fees
                                                                
                                                                $
                                                                2,769
                                                                
                                                                
                                                                
                                                                2,514Accounts
      payable
                                                                
                                                                
                                                                19,682
                                                                
                                                                
                                                                
                                                                16,691Accrued
      compensation and benefits
                                                                
                                                                
                                                                15,968
                                                                
                                                                
                                                                
                                                                14,155Accrued
      expenses
                                                                
                                                                
                                                                6,487
                                                                
                                                                
                                                                
                                                                7,116Current
      portion of deferred lease credits
                                                                
                                                                
                                                                76
                                                                
                                                                
                                                                
                                                                56Total
      current liabilities
                                                                
                                                                
                                                                44,982
                                                                
                                                                
                                                                
                                                                40,532Long-term
      liabilities:Other
      liabilities
                                                                
                                                                
                                                                1,388
                                                                
                                                                
                                                                
                                                                1,270System-wide
      payables
                                                                
                                                                
                                                                21,325
                                                                
                                                                
                                                                
                                                                7,670Deferred
      income taxes
                                                                
                                                                
                                                                15,119
                                                                
                                                                
                                                                
                                                                8,916Deferred
      lease credits, net of current portion
                                                                
                                                                
                                                                15,595
                                                                
                                                                
                                                                
                                                                13,837Total
      liabilities
                                                                
                                                                
                                                                98,409
                                                                
                                                                
                                                                
                                                                72,225Commitments
      and contingencies (note 10)Stockholders’
      equity:Undesignated
      stock, 1,000,000 shares authorized; none issued
                                                                
                                                                
                                                                —
                                                                
                                                                
                                                                
                                                                —Common
      stock, no par value. Authorized 44,000,000 shares; issued and outstanding
      18,025,351 and 17,887,271 respectively
                                                                
                                                                
                                                                91,435
                                                                
                                                                
                                                                
                                                                86,318Retained
      earnings
                                                                
                                                                
                                                                107,608
                                                                
                                                                
                                                                
                                                                85,275Total
      stockholders’ equity
                                                                
                                                                
                                                                199,043
                                                                
                                                                
                                                                
                                                                171,593Total
      liabilities and stockholders’ equity
                                                                
                                                                $
                                                                297,452
                                                                
                                                                
                                                                
                                                                243,818




See
accompanying notes to consolidated financial statements




3





BUFFALO
WILD WINGS, INC. AND SUBSIDIARIES


CONSOLIDATED
STATEMENTS OF EARNINGS


(Dollar
and share amounts in thousands except per share data)


(unaudited)




Three months
      ended
                                                        
                                                        
                                                        Nine months
      endedSeptember
      27,
                                                          2009
                                                        
                                                        
                                                        September
      28,
                                                          2008
                                                        
                                                        
                                                        September
      27,
                                                          2009
                                                        
                                                        
                                                        September
      28,
                                                          2008Revenue:Restaurant
      sales
                                                        
                                                        $
                                                        120,290
                                                        
                                                        
                                                        
                                                        95,492
                                                        
                                                        
                                                        
                                                        357,477
                                                        
                                                        
                                                        
                                                        269,850Franchise
      royalties and fees
                                                        
                                                        
                                                        12,451
                                                        
                                                        
                                                        
                                                        10,582
                                                        
                                                        
                                                        
                                                        36,441
                                                        
                                                        
                                                        
                                                        31,354Total
      revenue
                                                        
                                                        
                                                        132,741
                                                        
                                                        
                                                        
                                                        106,074
                                                        
                                                        
                                                        
                                                        393,918
                                                        
                                                        
                                                        
                                                        301,204Costs
      and expenses:Restaurant
      operating costs:Cost
      of sales
                                                        
                                                        
                                                        35,809
                                                        
                                                        
                                                        
                                                        28,422
                                                        
                                                        
                                                        
                                                        107,939
                                                        
                                                        
                                                        
                                                        81,085Labor
                                                        
                                                        
                                                        36,369
                                                        
                                                        
                                                        
                                                        29,289
                                                        
                                                        
                                                        
                                                        107,974
                                                        
                                                        
                                                        
                                                        82,167Operating
                                                        
                                                        
                                                        19,416
                                                        
                                                        
                                                        
                                                        15,675
                                                        
                                                        
                                                        
                                                        55,369
                                                        
                                                        
                                                        
                                                        42,807Occupancy
                                                        
                                                        
                                                        8,256
                                                        
                                                        
                                                        
                                                        6,273
                                                        
                                                        
                                                        
                                                        23,774
                                                        
                                                        
                                                        
                                                        17,872Depreciation
      and amortization
                                                        
                                                        
                                                        8,267
                                                        
                                                        
                                                        
                                                        5,971
                                                        
                                                        
                                                        
                                                        23,650
                                                        
                                                        
                                                        
                                                        16,720General
      and administrative (1)
                                                        
                                                        
                                                        12,943
                                                        
                                                        
                                                        
                                                        10,684
                                                        
                                                        
                                                        
                                                        36,136
                                                        
                                                        
                                                        
                                                        29,072Preopening
                                                        
                                                        
                                                        1,149
                                                        
                                                        
                                                        
                                                        2,476
                                                        
                                                        
                                                        
                                                        5,231
                                                        
                                                        
                                                        
                                                        5,419Loss
      on asset disposals and impairment
                                                        
                                                        
                                                        842
                                                        
                                                        
                                                        
                                                        930
                                                        
                                                        
                                                        
                                                        1,289
                                                        
                                                        
                                                        
                                                        2,068Total
      costs and expenses
                                                        
                                                        
                                                        123,051
                                                        
                                                        
                                                        
                                                        99,720
                                                        
                                                        
                                                        
                                                        361,362
                                                        
                                                        
                                                        
                                                        277,210Income
      from operations
                                                        
                                                        
                                                        9,690
                                                        
                                                        
                                                        
                                                        6,354
                                                        
                                                        
                                                        
                                                        32,556
                                                        
                                                        
                                                        
                                                        23,994Investment
      income
                                                        
                                                        
                                                        379
                                                        
                                                        
                                                        
                                                        264
                                                        
                                                        
                                                        
                                                        868
                                                        
                                                        
                                                        
                                                        1,096Earnings
      before income taxes
                                                        
                                                        
                                                        10,069
                                                        
                                                        
                                                        
                                                        6,618
                                                        
                                                        
                                                        
                                                        33,424
                                                        
                                                        
                                                        
                                                        25,090Income
      tax expense
                                                        
                                                        
                                                        3,197
                                                        
                                                        
                                                        
                                                        2,050
                                                        
                                                        
                                                        
                                                        11,091
                                                        
                                                        
                                                        
                                                        8,382Net
      earnings
                                                        
                                                        $
                                                        6,872
                                                        
                                                        
                                                        
                                                        4,568
                                                        
                                                        
                                                        
                                                        22,333
                                                        
                                                        
                                                        
                                                        16,708Earnings per common share –
      basic
                                                        
                                                        $
                                                        0.38
                                                        
                                                        
                                                        
                                                        0.26
                                                        
                                                        
                                                        
                                                        1.24
                                                        
                                                        
                                                        
                                                        0.94Earnings
      per common share – diluted
                                                        
                                                        
                                                        0.38
                                                        
                                                        
                                                        
                                                        0.25
                                                        
                                                        
                                                        
                                                        1.24
                                                        
                                                        
                                                        
                                                        0.93Weighted
      average shares outstanding – basic
                                                        
                                                        
                                                        18,024
                                                        
                                                        
                                                        
                                                        17,823
                                                        
                                                        
                                                        
                                                        18,001
                                                        
                                                        
                                                        
                                                        17,800Weighted
      average shares outstanding – diluted
                                                        
                                                        
                                                        18,098
                                                        
                                                        
                                                        
                                                        17,920
                                                        
                                                        
                                                        
                                                        18,068
                                                        
                                                        
                                                        
                                                        17,903






(1)
Includes stock-based compensation of $1,788, $1,297, $4,278, and $3,221,
respectively




See
accompanying notes to consolidated financial statements




4








BUFFALO
WILD WINGS, INC. AND SUBSIDIARIES


CONSOLIDATED
STATEMENTS OF CASH FLOWS


(Dollar
amounts in thousands)


(unaudited)




Nine months
      endedSeptember
      27,
                                                          2009
                                                        
                                                        
                                                        September
      28,
                                                          2008Cash
      flows from operating activities:Net
      earnings
                                                        
                                                        $
                                                        22,333
                                                        
                                                        
                                                        
                                                        16,708Adjustments
      to reconcile net earnings to cash provided by operations:Depreciation
                                                        
                                                        
                                                        23,191
                                                        
                                                        
                                                        
                                                        16,720Amortization
                                                        
                                                        
                                                        459
                                                        
                                                        
                                                        
                                                        80Loss
      on asset disposals and impairment
                                                        
                                                        
                                                        1,289
                                                        
                                                        
                                                        
                                                        2,068Deferred
      lease credits
                                                        
                                                        
                                                        1,705
                                                        
                                                        
                                                        
                                                        1,426Deferred
      income taxes
                                                        
                                                        
                                                        2,999
                                                        
                                                        
                                                        
                                                        3,929Stock-based
      compensation
                                                        
                                                        
                                                        4,278
                                                        
                                                        
                                                        
                                                        3,221Excess
      tax benefit from the exercise of stock options
                                                        
                                                        
                                                        (418
                                                        )
                                                        
                                                        
                                                        (435
                                                        )Change
      in operating assets and liabilities, net of effect of
      acquisition:Trading
      securities
                                                        
                                                        
                                                        (1,731
                                                        )
                                                        
                                                        
                                                        (164
                                                        )Accounts
      receivable
                                                        
                                                        
                                                        (1,979
                                                        )
                                                        
                                                        
                                                        (62
                                                        )Inventory
                                                        
                                                        
                                                        (123
                                                        )
                                                        
                                                        
                                                        (327
                                                        )Prepaid
      expenses
                                                        
                                                        
                                                        (218
                                                        )
                                                        
                                                        
                                                        438Other
      assets
                                                        
                                                        
                                                        (52
                                                        )
                                                        
                                                        
                                                        (429
                                                        )Unearned
      franchise fees
                                                        
                                                        
                                                        255
                                                        
                                                        
                                                        
                                                        53Accounts
      payable
                                                        
                                                        
                                                        2,792
                                                        
                                                        
                                                        
                                                        2,519Refundable
      income taxes
                                                        
                                                        
                                                        519
                                                        
                                                        
                                                        
                                                        1,016Accrued
      expenses
                                                        
                                                        
                                                        2,662
                                                        
                                                        
                                                        
                                                        1,511Net
      cash provided by operating activities
                                                        
                                                        
                                                        57,961
                                                        
                                                        
                                                        
                                                        47,272Cash
      flows from investing activities:Acquisition
      of property and equipment
                                                        
                                                        
                                                        (51,309
                                                        )
                                                        
                                                        
                                                        (48,378
                                                        )Acquisition
      of franchised restaurants
                                                        
                                                        
                                                        —
                                                        
                                                        
                                                        
                                                        (23,071
                                                        )Purchase
      of marketable securities
                                                        
                                                        
                                                        (39,115
                                                        )
                                                        
                                                        
                                                        (98,984
                                                        )Proceeds
      of marketable securities
                                                        
                                                        
                                                        36,720
                                                        
                                                        
                                                        
                                                        125,156Net
      cash used in investing activities
                                                        
                                                        
                                                        (53,704
                                                        )
                                                        
                                                        
                                                        (45,277
                                                        )Cash
      flows from financing activities:Issuance
      of common stock
                                                        
                                                        
                                                        574
                                                        
                                                        
                                                        
                                                        569Tax
      payments for restricted stock units
                                                        
                                                        
                                                        (1,513
                                                        )
                                                        
                                                        
                                                        (989
                                                        )Excess
      tax benefit from the exercise of stock options
                                                        
                                                        
                                                        418
                                                        
                                                        
                                                        
                                                        435Net
      cash provided by (used in) financing activities
                                                        
                                                        
                                                        (521
                                                        )
                                                        
                                                        
                                                        15Net
      increase in cash and cash equivalents
                                                        
                                                        
                                                        3,736
                                                        
                                                        
                                                        
                                                        3,010Cash
      and cash equivalents at beginning of period
                                                        
                                                        
                                                        8,347
                                                        
                                                        
                                                        
                                                        1,521Cash
      and cash equivalents at end of period
                                                        
                                                        $
                                                        12,083
                                                        
                                                        
                                                        
                                                        4,531


See
accompanying notes to consolidated financial statements




5








BUFFALO
WILD WINGS, INC. AND SUBSIDIARIES


NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS


FOR
THE THREE MONTHS AND NINE MONTHS ENDED SEPTEMBER 27, 2009 AND SEPTEMBER 28,
2008


(Dollar
amounts in thousands except share and per share data)




(1)
            Basis
      of Financial Statement Presentation




The
consolidated financial statements as of September 27, 2009 and December 28,
2008, and for the three-month and nine-month periods ended September 27, 2009
and September 28, 2008, have been prepared by Buffalo Wild Wings, Inc. pursuant
to the rules and regulations of the Securities and Exchange Commission (the
“SEC”). The financial information for the three-month and nine-month periods
ended September 27, 2009 and September 28, 2008 is unaudited, but, in the
opinion of management, reflects all adjustments and accruals necessary for a
fair presentation of the financial position, results of operations, and cash
flows for the interim periods. In preparing the accompanying financial
statements, we have evaluated subsequent events through November 3, 2009, the
issuance date of this Quarterly Report on Form 10-Q. We have determined that no
events or transactions have occurred subsequent to September 27, 2009 which
require recognition or disclosure in the financial statements.




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





The
financial information as of December 28, 2008 is derived from our audited
consolidated financial statements and notes thereto for the fiscal year ended
December 28, 2008, which is included in Item 8 in the Fiscal 2008 Annual Report
on Form 10-K and should be read in conjunction with such financial
statements.




The
results of operations for the three-month and nine-month periods ended September
27, 2009 are not necessarily indicative of the results of operations that may be
achieved for the entire year ending December 27, 2009.




(2)
            Summary
      of Significant Accounting Policies




(a)      
      Inventories





Inventories
are stated at the lower of cost or market. Cost is determined by the first-in,
first-out (FIFO) method.




We
purchase our products from a number of suppliers and believe there are
alternative suppliers. We have minimum purchase commitments from some of our
vendors, but the terms of the contracts and nature of the products are such that
our purchase requirements do not create a market risk. The primary food product
used by our restaurants and our franchised restaurants is traditional wings.
Traditional wings are purchased by us at market prices. Material increases in
traditional wing costs may adversely affect our operating results. For the
three-month periods ended September 27, 2009 and September 28, 2008, traditional
wings were 25.4% and 19.5%, respectively, of restaurant cost of sales. For the
nine-month periods ended September 27, 2009 and September 28, 2008, traditional
wings were 24.8% and 20.8%, respectively, of restaurant cost of
sales.


(b)      
      Fair
      Values of Financial
      Instruments





Fair value is defined as
the price at which an asset could be exchanged in a current transaction between
knowledgeable, willing parties or the amount that would be paid to transfer a
liability to a new obligor, not the amount that would be paid to settle the
liability with the creditor. Where available, fair value is based on
observable market prices or parameters or derived from such prices or
parameters. Where observable prices or inputs are not available, valuation
models are applied. These valuation techniques involve some level of management
estimation and judgment, the degree of which is dependent on the price
transparency for the instruments or market and the instruments’
complexity.




Assets
recorded at fair value in our consolidated balance sheets are categorized based
upon the level of judgment associated with the inputs used to measure their fair
value. Hierarchical levels are directly related to the amount of subjectivity
associated with the inputs to fair valuation of these assets and liabilities and
are as follows:




Level 1 –
Inputs were unadjusted, quoted prices in active markets for identical assets or
liabilities at the measurement date.




6





Level 2 –
Inputs (other than quoted prices included in Level 1) were either directly or
indirectly observable for the asset or liability through correlation with market
data at the measurement date and for the duration of the instrument’s
anticipated life.





Level 3 –
Inputs reflected management’s best estimate of what market participants would
use in pricing the asset or liability at the measurement date. Consideration was
given to the risk inherent in the valuation technique and the risk inherent in
the inputs to the model.




Determining
which hierarchical level an asset falls within requires significant
judgment. We will evaluate our hierarchy disclosures each quarter. The
following table summarizes the financial instruments measured at fair value in
our consolidated balance sheet as of September 27, 2009:




Fair
      Value MeasurementsLevel
      1
                            
                            Level
      2
                            
                            Level
      3
                            
                            TotalAssetsShort-term
      investments(1)
                            
                            $
                            3,298
                            
                            
                            $
                            23,707
                            
                            
                            $
                            -
                            
                            
                            $
                            27,005





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





As of
September 27, 2009, no assets or liabilities were measured at fair value on a
nonrecurring basis.




(c)      
      New
      Accounting
      Pronouncements


In
June 2009, the Financial Accounting Standards Board (FASB) issued SFAS No.
168, “The FASB Accounting Standards Codification and the Hierarchy of Generally
Accepted Accounting Principles.” SFAS No. 168 approved the FASB Accounting
Standards Codification (the Codification) as the single source of authoritative
nongovernmental GAAP. All existing accounting standard documents, such as FASB,
American Institute of Certified Public Accountants, Emerging Issues Task Force
and other related literature, excluding guidance from the Securities and
Exchange Commission, have been superseded by the Codification. All other
non-grandfathered, non-SEC accounting literature not included in the
Codification has become nonauthoritative. The Codification is effective for
interim or annual periods ending after September 15, 2009. There have been
no changes to the content of our financial statements or disclosures as a result
of implementing the Codification during the quarter ended September 27,
2009. However, as a result of implementation of the Codification, previous
references to new accounting standards and literature are no longer applicable.
In order to ease the transition to the Codification, we are providing the
Codification cross-reference alongside the references to the standards issued
and adopted prior to the adoption of the Codification.  All future
references to authoritative accounting literature in our consolidated financial
statements will be referenced in accordance with the Codification.





In
December 2007, the FASB issued SFAS No. 141R, “Business Combinations,” which is
incorporated in Accounting Standards Codification (ASC) Topic 805, Business Combinations. SFAS
No. 141R provides companies with principles and requirements on how an acquirer
recognizes and measures in its financial statements the identifiable assets
acquired, liabilities assumed, and any noncontrolling interest in the acquiree
as well as the recognition and measurement of goodwill acquired in a business
combination. SFAS No. 141R also requires certain disclosures to enable users of
the financial statements to evaluate the nature and financial effects of the
business combination. Acquisition costs associated with the business combination
will generally be expensed as incurred. SFAS No. 141R is effective for business
combinations occurring in fiscal years beginning after December 15, 2008. We
will apply SFAS No. 141R to all future business combinations.




7




(3)
              Marketable
      Securities


Marketable
securities were comprised of the following:




As
      ofSeptember
      27,
                                    2009
                                  
                                  
                                  December
      28,
                                    2008Held-to-maturity:Municipal
      securities
                                  
                                  $
                                  13,278
                                  
                                  
                                  $
                                  17,254Available-for-sale:Municipal
      securities
                                  
                                  
                                  23,707
                                  
                                  
                                  
                                  17,336Trading:Mutual
      funds
                                  
                                  
                                  3,298
                                  
                                  
                                  
                                  1,567Total
                                  
                                  $
                                  40,283
                                  
                                  
                                  $
                                  36,157





All
held-to-maturity debt securities are due within one year and had aggregate fair
values of $13,286 and $17,278 as of September 27, 2009 and December 28, 2008,
respectively. Trading securities represents investments held for future needs of
a non-qualified deferred compensation plan.





(4)
            Property and
      Equipment




Property
and equipment consisted of the following:




As
      ofSeptember
      27,
                                            2009
                                          
                                          
                                          December
      28,
                                            2008Construction
      in-process
                                          
                                          $
                                          11,113
                                          
                                          
                                          $
                                          10,703Buildings
                                          
                                          
                                          14,624
                                          
                                          
                                          
                                          6,639Furniture,
      fixtures, and equipment
                                          
                                          
                                          112,795
                                          
                                          
                                          
                                          95,460Leasehold
      improvements
                                          
                                          
                                          143,123
                                          
                                          
                                          
                                          122,796281,655
                                          
                                          
                                          
                                          235,598Less
      accumulated depreciation
                                          
                                          
                                          (100,469
                                          )
                                          
                                          
                                          (81,166
                                          )$
                                          181,186
                                          
                                          
                                          $
                                          154,432




(5)
            Derivative
      Instruments




We use
commodities derivatives to manage our exposure to commodity price fluctuations.
We enter into options and future contracts to reduce our risk of natural gas
price fluctuations. These derivatives do not qualify for hedge accounting and
changes in fair value are included in current net income. These changes are
classified as a component of restaurant operating expenses. All changes in the
fair value of these contracts are recorded in earnings in the period in which
they occur. Net losses of $365 and $257 were recognized in the first nine months
of 2009 and 2008, respectively. The fair value of our derivative instruments as
of September 27, 2009 and December 28, 2008 was $55 and $461, respectively, and
is a liability in accrued expenses in the accompanying consolidated balance
sheets. As of September 27, 2009, the maximum length of time over which we are
hedging our exposure to the variability in future cash flows related to the
purchase of natural gas is six months. As of September 27, 2009 and December 28,
2008 we were party to natural gas swap contracts with notional values of $1,388
and $5,797, respectively.




(6)
            Stockholders’
      Equity




(a)
            Stock
      Options




We have
3.9 million shares of common stock reserved for issuance under the Equity
Incentive Plan (the plan) for employees, officers, and directors. The option
price for shares issued under this plan is to be not less than the fair market
value on the date of grant with respect to incentive and nonqualified stock
options. Incentive stock options become exercisable in four equal installments
from the date of the grant and have a contractual life of seven to ten years.
Nonqualified stock options issued pursuant to the plan have varying vesting
periods from immediately to four years and have a contractual life of seven to
ten years. In 2008, our shareholders approved amendments to the plan which
extended the plan to 2018. We issue new shares of common stock upon exercise of
stock options. Option activity is summarized for the nine months ended September
27, 2009 as follows:




8




Number
                                of
      shares
                              
                              
                              Weighted
                                average
                                exercise price
                              
                              
                              Average
                                Remaining
      ContractualLife (years)
                              
                              
                              Aggregate
                                Intrinsic
      ValueOutstanding,
      December 28, 2008
                              
                              
                              146,548
                              
                              
                              $
                              13.71
                              
                              
                              
                              4.5
                              
                              
                              $
                              1,627Granted
                              
                              
                              56,302
                              
                              
                              
                              30.90Exercised
                              
                              
                              (3,050
                              )
                              
                              
                              11.61Cancelled
                              
                              
                              (3,962
                              )
                              
                              
                              23.22Outstanding,
      September 27, 2009
                              
                              
                              195,838
                              
                              
                              $
                              18.49
                              
                              
                              
                              4.4
                              
                              
                              $
                              4,509Exercisable,
      September 27, 2009
                              
                              
                              99,994
                              
                              
                              
                              9.04
                              
                              
                              
                              3.1
                              
                              
                              
                              3,248




The
aggregate intrinsic value in the table above is before applicable income taxes,
based on our closing stock price of $41.52 as of the last business day of the
quarter ended September 27, 2009, which would have been received by the
optionees had all options been exercised on that date. As of September 27, 2009,
total unrecognized stock-based compensation expense related to nonvested stock
options was approximately $1,031, which is expected to be recognized over a
weighted average period of approximately 1.5 years. During the nine-month
periods ended September 27, 2009 and September 28, 2008, the total intrinsic
value of stock options exercised was $79 and $880, respectively. During the
nine-month periods ended September 27, 2009 and September 28, 2008, the total
fair value of options vested was $7 and $70, respectively.





The plan
has 823,564 shares available for grant as of September 27, 2009.




(b)
            Restricted
      Stock Units




We have a
stock-based performance plan under which restricted stock units are granted
annually at the discretion of the Board of Directors. For restricted stock units
granted prior to 2008, units vest annually if performance targets are achieved.
The performance targets for these restricted stock units are annual income
targets set by our Board of Directors at the beginning of the year. We record
compensation expense for these restricted stock units if vesting is probable,
based on the achievement of the performance targets. These restricted stock
units may vest one-third annually over a ten-year period as determined by
meeting performance targets. However, the second one-third of the restricted
stock units is not subject to vesting until the first one-third has vested and
the final one-third is not subject to vesting until the first two-thirds of the
award have vested.





In 2008,
we granted restricted stock units subject to cumulative one-year, two-year, and
three-year net earnings targets. The number of units that vest each year is
based on performance against those cumulative targets. These restricted stock
units are subject to forfeiture if they have not vested at the end of the
three-year period. Stock-based compensation is recognized for the expected
number of units vesting at the end of each annual period. Restricted stock units
expected to vest at the end of the first year are fully expensed in the first
year. Restricted stock units expected to vest at the end of the second year are
expensed during the first and second years. Restricted stock units expected to
vest at the end of the third year are expensed over all three
years.





In 2009,
we granted restricted stock units subject to three-year cliff vesting and a
cumulative three-year earnings target. The number of units which vest at the end
of the three-year period is based on performance against the target. These
restricted stock units are subject to forfeiture if they have not vested at the
end of the three-year period. Stock-based compensation is recognized for the
expected number of units vesting at the end of the period and is expensed over
the three-year period.





For each
grant, restricted stock units meeting the performance criteria will vest as of
the end of our fiscal year. The distribution of vested restricted stock units as
common stock typically occurs in March of the following year. The common stock
is issued to participants net of the number of shares needed for the required
minimum employee withholding taxes. We issue new shares of common stock upon the
disbursement of restricted stock units. Restricted stock units are contingently
issuable shares, and the activity for fiscal 2009 is as follows:




9








Number
                            of
      shares
                          
                          
                          Weighted
                            average
                            grant
      date
                            fair
      valueOutstanding,
      December 28, 2008
                          
                          
                          284,852
                          
                          
                          $
                          20.19Granted
                          
                          
                          341,802
                          
                          
                          
                          33.30Vested
                          
                          
                          (10,440
                          )
                          
                          
                          34.48Cancelled
                          
                          
                          (38,954
                          )
                          
                          
                          27.00Outstanding,
      September 27, 2009
                          
                          
                          577,260
                          
                          
                          $
                          27.23





As of
September 27, 2009, the total stock-based compensation expense related to
nonvested awards not yet recognized was $8,218, which is expected to be
recognized over a weighted average period of 1.4 years. During the nine-month
periods ended September 27, 2009 and September 28, 2008, the total fair value of
shares vested was $360 and $420, respectively. The weighted average grant date
fair value of restricted stock units granted during the nine months ended
September 28, 2008 was $23.21.




(c)
            Employee
      Stock Purchase Plan




We have
reserved 600,000 shares of common stock for issuance under the Employee Stock
Purchase Plan (ESPP). The ESPP is available to substantially all employees
subject to employment eligibility requirements. Participants may purchase 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
nine months of 2009 and 2008, we issued 29,269 and 18,071 shares of common stock
under the plan. As of September 27, 2009, we have 359,806 shares available for
future issuance under the ESPP.





(7)
            Earnings Per
      Share




The
following is a reconciliation of basic and fully diluted earnings per share for
the three-month and nine-month periods ended September 27, 2009 and September
28, 2008:




Three
      months ended September 27, 2009Earnings
                                              (numerator)
                                            
                                            
                                            Shares
                                              (denominator)
                                            
                                            
                                            Per-share
                                              amountNet
      earnings
                                            
                                            $
                                            6,872Earnings
      per common share – basic
                                            
                                            
                                            
                                            
                                            
                                            
                                            18,024,346
                                            
                                            
                                            $
                                            0.38Effect
      of dilutive securities – stock options
                                            
                                            
                                            —
                                            
                                            
                                            
                                            73,856Earnings
      per common share – diluted
                                            
                                            $
                                            6,872
                                            
                                            
                                            
                                            18,098,202
                                            
                                            
                                            
                                            0.38





Three
      months ended September 28, 2008Earnings
                                            (numerator)
                                          
                                          
                                          Shares
                                            (denominator)
                                          
                                          
                                          Per-share
                                            amountNet
      earnings
                                          
                                          $
                                          4,568Earnings
      per common share – basic
                                          
                                          
                                          
                                          
                                          
                                          
                                          17,822,536
                                          
                                          
                                          $
                                          0.26Effect
      of dilutive securities – stock options
                                          
                                          
                                          —
                                          
                                          
                                          
                                          97,327Earnings
      per common share – diluted
                                          
                                          $
                                          4,568
                                          
                                          
                                          
                                          17,919,863
                                          
                                          
                                          
                                          0.25




Nine
      months ended September 27, 2009Earnings
                                            (numerator)
                                          
                                          
                                          Shares
                                            (denominator)
                                          
                                          
                                          Per-share
                                            amountNet
      earnings
                                          
                                          $
                                          22,333Earnings
      per common share – basic
                                          
                                          
                                          
                                          
                                          
                                          
                                          18,001,176
                                          
                                          
                                          $
                                          1.24Effect
      of dilutive securities – stock options
                                          
                                          
                                          —
                                          
                                          
                                          
                                          66,643Earnings
      per common share – diluted
                                          
                                          $
                                          22,333
                                          
                                          
                                          
                                          18,067,819
                                          
                                          
                                          
                                          1.24




10




Nine
      months ended September 28, 2008Earnings
                                                (numerator)
                                              
                                              
                                              Shares
                                                (denominator)
                                              
                                              
                                              Per-share
                                                amountNet
      earnings
                                              
                                              $
                                              16,708Earnings
      per common share – basic
                                              
                                              
                                              
                                              
                                              
                                              
                                              17,799,752
                                              
                                              
                                              $
                                              0.94Effect
      of dilutive securities – stock options
                                              
                                              
                                              —
                                              
                                              
                                              
                                              102,772Earnings
      per common share – diluted
                                              
                                              $
                                              16,708
                                              
                                              
                                              
                                              17,902,524
                                              
                                              
                                              
                                              0.93




Shares
were excluded from the fully diluted calculation because the effect on net
earnings per share would have been antidilutive or were performance-granted
shares for which the performance criteria had not yet been met. Excluded shares
were 632,230 and 505,997 for the three-month periods ended September 27, 2009
and September 28, 2008, respectively, and 620,282 and 495,965 for the nine-month
periods ended September 27, 2009 and September 28, 2008,
respectively.




(8)
            Supplemental Disclosures of
      Cash Flow Information




Nine months
      endedSeptember
      27,
                                2009
                              
                              
                              September
      28,
                                2008Cash
      paid during the period for:Income
      taxes
                              
                              $
                              7,692
                              
                              
                              
                              3,498Noncash
      financing and investing transactions:Property
      and equipment not yet paid for
                              
                              
                              199
                              
                              
                              
                              5,122Purchase
      price allocated to goodwill reducing fixed assets
                              
                              
                              274
                              
                              
                              
                              —




(9)
            Income Taxes




The total
unrecognized tax benefits reflected on our consolidated balance sheet as of
September 27, 2009, and December 28, 2008 were $537 and $442 respectively. The
increase was due to additions based on tax positions related to the current
year. We recognize potential accrued interest and penalties related to
unrecognized tax benefits in income tax expense. Interest and penalties related
to unrecognized tax benefits totaled $83 at September 27, 2009. Included in the
balance at September 27, 2009 and December 28, 2008, are unrecognized tax
benefits of $349 and $287, respectively, which if recognized, would affect the
annual effective tax rate. We do not anticipate any significant change to the
total unrecognized tax benefits prior to September 26, 2010.





The
Internal Revenue Service 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 no longer subject to state income tax examinations for years before
2005.




(10)
            Contingencies




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




11





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




The
following discussion and analysis of our financial condition and results of
operations should be read in conjunction with our consolidated financial
statements and related notes included in Item 1 of Part 1 of this Quarterly
Report and the audited consolidated financial statements and related notes and
Management’s Discussion and Analysis of Financial Condition and Results of
Operations contained in our Annual Report on Form 10-K for the fiscal year ended
December 28, 2008. This discussion and analysis contains certain statements that
are not historical facts, including, among others, those relating to our
anticipated financial performance for 2009, cash requirements, and our expected
store openings and preopening costs. Such statements are forward-looking and
speak only as of the date on which they are made. There are risks and
uncertainties including, but not limited to, those discussed in this Form 10-Q
under Item 2 of Part I as well as in Item 1A of Part I of the fiscal 2008 Form
10-K.




Critical
Accounting Policies and Use of Estimates




Our most
critical accounting 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 description of these can be
found in our Annual Report on Form 10-K for the fiscal year ended December 28,
2008. There have been no changes to those policies during this
period.




Overview




As of
September 27, 2009, we owned and operated 220 company-owned and franchised an
additional 400 Buffalo Wild Wings® Grill
& Bar restaurants in 41 states. Of the 620 system-wide restaurants, 86 are
located in Ohio. Our long-term focus is to grow to a national chain of over
1,000 locations in the United States, continuing the strategy of developing both
company-owned and franchised restaurants.




Our
growth targets for 2009 are 15% unit growth, 25% revenue growth, and 20% to 25%
net earnings growth, with net earnings likely to be at the high end of our
targeted goal for the year. Our growth and success depend on several factors and
trends. First, we continue to monitor and react to changes in our cost of goods
sold. The cost of goods sold is difficult to predict, as it has ranged from
29.3% to 30.5% of restaurant sales per quarter in our 2008 fiscal year and
year-to-date in 2009. We are working to counteract the volatility of traditional
wing prices with the introduction of popular new menu items, effective marketing
promotions, focused efforts on food costs and waste, and menu price increases.
We will continue to monitor the cost of traditional wings, as it can affect our
cost of sales and cash flow from company-owned restaurants. We are exploring
purchasing strategies to lessen the severity of cost increases and fluctuations
for this commodity. We are currently purchasing traditional wings at market
prices. If a satisfactory long-term price agreement for traditional wings were
to arise, we would consider locking in prices to reduce our price
volatility.




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. These factors may result
in lower than anticipated sales and cash flow for new restaurants in new
markets. In 2009, we plan to develop the majority of our company-owned
restaurants primarily in markets where we currently have either company-owned or
franchised restaurants. We believe this development focus, together with our
focus on our new restaurant opening procedures, will help 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.





Our
revenue is generated by:





•
            Sales
      at our company-owned restaurants, which were 91% of total revenue in the
      third quarter of 2009. Food and nonalcoholic beverages accounted for 77%
      of restaurant sales. The remaining 23% of restaurant sales was from
      alcoholic beverages. The menu item with the highest sales volume is
      traditional wings at 21% of total restaurant
  sales.




•
            Royalties
      and franchise fees received from our
  franchisees.




We
generate cash from the operation of company-owned restaurants and from franchise
royalties and fees. We highlight the specific costs associated with the on-going
operation of our company-owned restaurants in the consolidated 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 quarterly based on the number of new locations opened and under
construction. Loss on asset disposals and impairment expense is related to
company-owned restaurants and includes the impairment of assets due to a
relocation and the write-down of miscellaneous assets. Certain other expenses,
such as general and administrative, relate to both company-owned and franchised
operations.




We
operate on a 52 or 53-week fiscal year ending on the last Sunday in December.
Both of the third quarters of 2009 and 2008 consisted of thirteen
weeks.




12




Quarterly
Results of Operations




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




Quarterly
and annual operating results may fluctuate significantly as a result of a
variety of factors, including increases or decreases in same-store sales,
changes in commodity prices, the timing and number of new restaurant openings
and related expenses, asset impairment charges, store closing charges, general
economic conditions, stock-based compensation, and seasonal fluctuations. As a
result, our quarterly results of operations are not necessarily indicative of
the results that may be achieved for any future period.




Three
      months ended
                                                  
                                                  
                                                  Nine
      months endedSeptember
      27,
                                                    2009
                                                  
                                                  
                                                  September
      28,
                                                    2008
                                                  
                                                  
                                                  September
      27,
                                                    2009
                                                  
                                                  
                                                  September
      28,
                                                    2008Revenue:Restaurant
      sales
                                                  
                                                  
                                                  90.6
                                                  %
                                                  
                                                  
                                                  90.0
                                                  %
                                                  
                                                  
                                                  90.7
                                                  %
                                                  
                                                  
                                                  89.6
                                                  %Franchising
      royalties and fees
                                                  
                                                  
                                                  9.4
                                                  
                                                  
                                                  
                                                  10.0
                                                  
                                                  
                                                  
                                                  9.3
                                                  
                                                  
                                                  
                                                  10.4Total
      revenue
                                                  
                                                  
                                                  100.0
                                                  
                                                  
                                                  
                                                  100.0
                                                  
                                                  
                                                  
                                                  100.0
                                                  
                                                  
                                                  
                                                  100.0Costs
      and expenses:Restaurant
      operating costs:Cost
      of sales
                                                  
                                                  
                                                  29.8
                                                  
                                                  
                                                  
                                                  29.8
                                                  
                                                  
                                                  
                                                  30.2
                                                  
                                                  
                                                  
                                                  30.0Labor
                                                  
                                                  
                                                  30.2
                                                  
                                                  
                                                  
                                                  30.7
                                                  
                                                  
                                                  
                                                  30.2
                                                  
                                                  
                                                  
                                                  30.4Operating
                                                  
                                                  
                                                  16.1
                                                  
                                                  
                                                  
                                                  16.4
                                                  
                                                  
                                                  
                                                  15.5
                                                  
                                                  
                                                  
                                                  15.9Occupancy
                                                  
                                                  
                                                  6.9
                                                  
                                                  
                                                  
                                                  6.6
                                                  
                                                  
                                                  
                                                  6.7
                                                  
                                                  
                                                  
                                                  6.6Depreciation
      and amortization
                                                  
                                                  
                                                  6.2
                                                  
                                                  
                                                  
                                                  5.6
                                                  
                                                  
                                                  
                                                  6.0
                                                  
                                                  
                                                  
                                                  5.6General
      and administrative
                                                  
                                                  
                                                  9.8
                                                  
                                                  
                                                  
                                                  10.1
                                                  
                                                  
                                                  
                                                  9.2
                                                  
                                                  
                                                  
                                                  9.7Preopening
                                                  
                                                  
                                                  0.9
                                                  
                                                  
                                                  
                                                  2.3
                                                  
                                                  
                                                  
                                                  1.3
                                                  
                                                  
                                                  
                                                  1.8Loss
      on asset disposals and impairment
                                                  
                                                  
                                                  0.6
                                                  
                                                  
                                                  
                                                  0.9
                                                  
                                                  
                                                  
                                                  0.3
                                                  
                                                  
                                                  
                                                  0.7Total
      costs and expenses
                                                  
                                                  
                                                  92.7
                                                  
                                                  
                                                  
                                                  94.0
                                                  
                                                  
                                                  
                                                  91.7
                                                  
                                                  
                                                  
                                                  92.0Income
      from operations
                                                  
                                                  
                                                  7.3
                                                  
                                                  
                                                  
                                                  6.0
                                                  
                                                  
                                                  
                                                  8.3
                                                  
                                                  
                                                  
                                                  8.0Investment
      income
                                                  
                                                  
                                                  0.3
                                                  
                                                  
                                                  
                                                  0.2
                                                  
                                                  
                                                  
                                                  0.2
                                                  
                                                  
                                                  
                                                  0.4Earnings
      before income taxes
                                                  
                                                  
                                                  7.6
                                                  
                                                  
                                                  
                                                  6.2
                                                  
                                                  
                                                  
                                                  8.5
                                                  
                                                  
                                                  
                                                  8.3Income
      tax expense
                                                  
                                                  
                                                  2.4
                                                  
                                                  
                                                  
                                                  1.9
                                                  
                                                  
                                                  
                                                  2.8
                                                  
                                                  
                                                  
                                                  2.8Net
      earnings
                                                  
                                                  
                                                  5.2
                                                  
                                                  
                                                  
                                                  4.3
                                                  
                                                  
                                                  
                                                  5.7
                                                  
                                                  
                                                  
                                                  5.5




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




As
      ofSeptember
      27,
                        2009
                      
                      
                      September
      28,
                        2008Company-owned
      restaurants
                      
                      
                      220
                      
                      
                      
                      187Franchised
      restaurants
                      
                      
                      400
                      
                      
                      
                      348




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




Three months
      ended
                      
                      
                      Nine months
      endedSeptember
      27,
                        2009
                      
                      
                      September
      28,
                        2008
                      
                      
                      September
      27,
                        2009
                      
                      
                      September
      28,
                        2008Company-owned
      restaurant sales
                      
                      $
                      120,290
                      
                      
                      
                      95,492
                      
                      
                      
                      357,477
                      
                      
                      
                      269,850Franchised
      restaurant sales
                      
                      
                      244,470
                      
                      
                      
                      212,408
                      
                      
                      
                      725,071
                      
                      
                      
                      626,018




13




Increases
in comparable same-store sales are as follows (based on restaurants operating at
least fifteen months):




Three months ended
                      
                      
                      Nine months endedSeptember
      27,
                        2009
                      
                      
                      September
      28,
                        2008
                      
                      
                      September
      27,
                        2009
                      
                      
                      September
      28,
                        2008Company-owned
      same-store sales
                      
                      
                      0.8
                      %
                      
                      
                      6.8
                      %
                      
                      
                      3.3
                      %
                      
                      
                      6.4
                      %Franchised
      same-store sales
                      
                      
                      1.9
                      
                      
                      
                      2.1
                      
                      
                      
                      3.8
                      
                      
                      
                      2.9




The quarterly average prices paid per
pound for traditional wings are as follows:





Three months ended
                              
                              
                              Nine months endedSeptember
      27,
                                2009
                              
                              
                              September
      28,
                                2008
                              
                              
                              September
      27,
                                2009
                              
                              
                              September
      28,
                                2008Average
      price per pound
                              
                              $
                              1.67
                              
                              
                              
                              1.17
                              
                              
                              
                              1.66
                              
                              
                              
                              1.21




Results
of Operations for the Three Months Ended September 27, 2009 and September 28,
2008




Restaurant
sales increased by $24.8 million, or 26.0%, to $120.3 million in 2009 from $95.5
million in 2008. The increase in restaurant sales was due to a $24.0 million
increase associated with 24 new company-owned restaurants that opened in 2009, 9
stores acquired from our franchisee in Nevada in 2008, and 33 company-owned
restaurants opened before 2009 that did not meet the criteria for same-store
sales for all or part of the three-month period, and $731,000 related to a 0.8%
increase in same-store sales.




Franchise
royalties and fees increased by $1.9 million, or 17.7%, to $12.5 million in 2009
from $10.6 million in 2008. The increase was primarily due to additional
royalties collected from 39 new franchised restaurants that opened in 2009 and
17 franchised restaurants that opened in the last three months of 2008.
Same-store sales for franchised restaurants increased 1.9% in 2009.




Cost of
sales increased by $7.4 million, or 26.0%, to $35.8 million in 2009 from $28.4
million in 2008 due primarily to more restaurants being operated in 2009. Cost
of sales as a percentage of restaurant sales remained consistent at 29.8% in
2009 and 2008. Cost of sales as a percentage of restaurant sales remained flat
primarily due to higher traditional wing prices being offset by menu mix
changes, the leverage of price increases, and production efficiencies. An
increase in boneless wing sales also lowered our cost of goods percentage.
Traditional wing sales remained flat at approximately 21.4% of our restaurant
sales. However, boneless wings, which are a better margin item than traditional
wings, increased to 19.5% of sales, from 17.1% in 2008. For the third quarter of
2009, the cost of traditional wings averaged $1.67 per pound which was a 42.7%
increase over the same period in 2008.




Labor
expenses increased by $7.1 million, or 24.2%, to $36.4 million in 2009 from
$29.3 million in 2008 due primarily to more restaurants being operated in 2009.
Labor expenses as a percentage of restaurant sales decreased to 30.2% in 2009
from 30.7% in 2008. The decrease in labor expenses as a percentage of restaurant
sales was primarily due to lower hourly labor costs caused by efficiencies from
our labor management program.




Operating
expenses increased by $3.7 million, or 23.9%, to $19.4 million in 2009 from
$15.7 million in 2008 due primarily to more restaurants being operated in 2009.
Operating expenses as a percentage of restaurant sales decreased to 16.1% in
2009 from 16.4% in 2008. The decrease in operating expenses as a percentage of
restaurant sales is primarily due to reduced utility and natural gas
charges.




Occupancy
expenses increased by $2.0 million, or 31.6%, to $8.3 million in 2009 from $6.3
million in 2008 due primarily to more restaurants being operated in 2009.
Occupancy expenses as a percentage of restaurant sales increased to 6.9% in 2009
from 6.6% in 2008 due to reduced leverage from lower sales volume
increases.




Depreciation
and amortization increased by $2.3 million, or 38.5%, to $8.3 million in 2009
from $6.0 million in 2008. The increase was primarily due to the additional
depreciation on 24 new restaurants opened in 2009 and the 10 new restaurants
that opened in the last three months of 2008.




General
and administrative expenses increased by $2.3 million, or 21.1%, to $12.9
million in 2009 from $10.7 million in 2008 primarily due to additional headcount
and higher professional fees partially offset by lower travel costs. General and
administrative expenses as a percentage of total revenue decreased to 9.8% in
2009 from 10.1% in 2008. Exclusive of stock-based compensation, we reduced our
general and administrative expenses as a percentage of revenue to 8.4% from 8.9%
due to better leverage of our wage-related expenses and travel costs against
higher revenue.




14




Preopening
costs decreased by $1.3 million, to $1.1 million in 2009 from $2.5 million in
2008. In 2009, we incurred costs of $811,000 for five new company-owned
restaurants opened in the third quarter of 2009 and costs of $320,000 for
restaurants that will open in the fourth quarter of 2009 or later. In 2008, we
incurred costs of $1.7 million for 12 new company-owned restaurants opened in
the third quarter of 2008, $77,000 related to the purchase of nine franchise
restaurants, and $516,000 for restaurants that opened in the fourth quarter of
2008 or later. In 2009, we expect average preopening costs per restaurant to be
$220,000.




Loss on
asset disposals and impairment decreased by $88,000 to $842,000 in 2009 from
$930,000 in 2008. In 2009, the loss was related to the write-off of
miscellaneous equipment and disposals due to remodels. In 2008, the loss was
related to the asset impairment of one underperforming restaurant of $110,000,
store closing reserves of $184,000 for one restaurant relocated during the
quarter, and the write-off of miscellaneous equipment.




Investment
income increased by $115,000 to $379,000 in 2009 from $264,000 in 2008. The
increase was primarily due to gains on investments held for a deferred
compensation plan partially offset by reductions in interest income due to lower
interest rates on our investment portfolio. Cash and marketable securities
balances at the end of the third quarter totaled $52.4 million in 2009 compared
to $45.0 million at the end of the third quarter of 2008.




Provision
for income taxes increased $1.1 million to $3.2 million in 2009 from $2.1
million in 2008. The effective tax rate as a percentage of income before taxes
increased to 31.8% in 2009 from 31.0% in 2008. The 2009 income tax rate was
higher due to a decrease in tax exempt interest income which was partially
offset by an increase in employer tax credits. For 2009, we believe our
effective tax rate will be approximately 33.5%.




Results
of Operations for the Nine Months Ended September 27, 2009 and September 28,
2008




Restaurant
sales increased by $87.6 million, or 32.5%, to $357.5 million in 2009 from
$269.9 million in 2008. The increase in restaurant sales was due to a $79.1
million increase associated with 24 new company-owned restaurants that opened in
2009, 9 stores acquired from our franchisee in Nevada in 2008, and 51
company-owned restaurants opened before 2009 that did not meet the criteria for
same-store sales for all or part of the nine-month period, and $8.5 million
related to a 3.3% increase in same-store sales.




Franchise
royalties and fees increased by $5.1 million, or 16.2%, to $36.4 million in 2009
from $31.4 million in 2008. The increase was primarily due to additional
royalties collected from 39 new franchised restaurants that opened in 2009 and
17 franchised restaurants that opened in the last three months of 2008.
Same-store sales for franchised restaurants increased 3.8% in 2009.




Cost of
sales increased by $26.9 million, or 33.1%, to $107.9 million in 2009 from $81.1
million in 2008 due primarily to more restaurants being operated in 2009. Cost
of sales as a percentage of restaurant sales increased to 30.2% in 2009 from
30.0% in 2008. The increase in cost of sales as a percentage of restaurant sales
was primarily due to higher traditional wing prices partially offset by menu mix
changes, the leverage of price increases, and production efficiencies. The
steady shift from traditional wings to boneless wings also lowered our cost of
goods percentage. Traditional wings accounted for 20.8% of our restaurant sales
for the first nine months of 2009, down from 21.9% in the first nine months of
2008. Boneless wings, which are a better margin item than traditional wings,
increased to 18.9% of sales in 2009, from 16.0% in 2008. For the first nine
months of 2009, the cost of traditional wings averaged $1.66 per pound which was
a 37.2% increase over the same period in 2008.




Labor
expenses increased by $25.8 million, or 31.4%, to $108.0 million in 2009 from
$82.2 million in 2008 due primarily to more restaurants being operated in 2009.
Labor expenses as a percentage of restaurant sales decreased to 30.2% in 2009
from 30.4% in 2008. The decrease in labor expenses as a percentage of restaurant
sales was primarily due to lower hourly labor costs caused by efficiencies from
our labor management program partially offset by higher health insurance
costs.




Operating
expenses increased by $12.6 million, or 29.3%, to $55.4 million in 2009 from
$42.8 million in 2008 due primarily to more restaurants being operated in 2009.
Operating expenses as a percentage of restaurant sales decreased to 15.5% in
2009 from 15.9% in 2008. The decrease in operating expenses as a percentage of
restaurant sales is primarily due to lower utility and natural gas
charges.




Occupancy
expenses increased by $5.9 million, or 33.0%, to $23.8 million in 2009 from
$17.9 million in 2008 due primarily to more restaurants being operated in 2009.
Occupancy expenses as a percentage of restaurant sales increased to 6.7% in 2009
from 6.6% in 2008 due to reduced leverage from lower sales volume
increases.




15




Depreciation
and amortization increased by $6.9 million, or 41.4%, to $23.7 million in 2009
from $16.7 million in 2008. The increase was primarily due to the additional
depreciation on 24 new restaurants opened in 2009 and the 10 new restaurants
that opened in the last three months of 2008.




General
and administrative expenses increased by $7.1 million, or 24.3%, to $36.1
million in 2009 from $29.1 million in 2008 primarily due to additional
headcount. General and administrative expenses as a percentage of total revenue
decreased to 9.2% in 2009 from 9.7% in 2008. Exclusive of stock-based
compensation, we reduced our general and administrative expenses as a percentage
of revenue to 8.1% from 8.6% due to better leverage of our wage-related expenses
and travel costs against higher revenue.




Preopening
costs decreased by $188,000, to $5.2 million in 2009 from $5.4 million in 2008.
In 2009, we incurred costs of $4.8 million for 24 new company-owned restaurants
opened in the first nine months of 2009 and costs of $345,000 for restaurants
that will open in the fourth quarter of 2009 or later. In 2008, we incurred
costs of $4.6 million for 21 new company-owned restaurants opened in the first
nine months of 2008, $77,000 related to the purchase of nine franchise
restaurants, and $709,000 for restaurants that opened in the fourth quarter of
2008 or later. In 2009, we expect average preopening costs per restaurant to be
$220,000.




Loss on
asset disposals and impairment decreased by $779,000 to $1.3 million in 2009
from $2.1 million in 2008. In 2009, the loss was related to the write-off of
miscellaneous equipment and disposals due to remodels. In 2008, we impaired the
assets of two restaurants for $506,000 and incurred store closing costs of
$184,000 for one restaurant being relocated. The remaining loss was related to
HDTV upgrades and the write-off of miscellaneous equipment.




Investment
income decreased by $228,000 to $868,000 in 2009 from $1.1 million in 2008. The
decrease was primarily due to lower interest rates on our investment portfolio
partially offset by gains on investments held for a deferred compensation plan.
Cash and marketable securities balances at the end of the quarter totaled $52.4
million in 2009 compared to $45.0 million at the end of the third quarter of
2008.




Provision
for income taxes increased $2.7 million to $11.1 million in 2009 from $8.4
million in 2008. The effective tax rate as a percentage of income before taxes
decreased to 33.2% in 2009 from 33.4% in 2008. The 2009 income tax rate was
lower due to an increase in employer tax credits and a decrease in state taxes
which were partially offset by a decrease in tax exempt interest income. For
2009, we believe our effective tax rate will be approximately
33.5%.




Liquidity
and Capital Resources




Our
primary liquidity and capital requirements have been for new restaurant
construction, remodeling and maintaining our existing company-owned restaurants,
working capital, and other general business needs. We fund these expenses
primarily with cash from operations. The cash and marketable securities balance
at September 27, 2009 was $52.4 million. We invest our cash balances in debt
securities with the focus on protection of principal, adequate liquidity, and
return on investment based on risk. As of September 27, 2009, nearly all excess
cash was invested in high-quality municipal securities.




For the
nine months ended September 27, 2009, net cash provided by operating activities
was $58.0 million. Net cash provided by operating activities consisted primarily
of net earnings adjusted for non-cash expenses and increases in accounts
payable, and accrued expenses offset by an increase in accounts receivable. The
increase in accounts payable was due to an increase in the number of restaurants
and the timing of payments. The increase in accrued expenses was due to higher
deferred compensation costs and higher wage-related costs.  The
increase in accounts receivable was due to higher credit card
balances.




For the
nine months ended September 28, 2008, net cash provided by operating activities
was $47.3 million. Net cash provided by operating activities consisted primarily
of net earnings adjusted for non-cash expenses, and an increase in accounts
payable, accrued expenses, and refundable income taxes. The increase in accounts
payable was due to an increase in the number of restaurants and the timing of
payments. The increase in income taxes was due to the timing of income tax
payments. The increase in accrued expenses was due to accruals for fuel hedges
that were settled in future quarters as well as activity related to additional
restaurants.




For the
nine months ended September 27, 2009 and September 28, 2008, net cash used in
investing activities was $53.7 million and $45.3 million, respectively.
Investing activities included purchases of property and equipment related to the
opening of new company-owned restaurants and restaurants under construction in
both periods. During the first nine months of 2009, we opened 24 restaurants.
During the first nine months of 2008, we purchased nine Nevada franchised
locations for $23.1 million and opened 21 new restaurants.  In 2009,
we expect capital expenditures for approximately 36 new company-owned
restaurants to cost approximately $1.7 million per location and expenditures to
be approximately $20.3 million for the maintenance and remodel of existing
restaurants. In 2009, we purchased $39.1 million of marketable securities and
received proceeds of $36.7 million as these investments matured or were sold. In
2008, we purchased $99.0 million of marketable securities and received proceeds
of $125.2 million as these investments matured or were sold.




16




For the
nine months ended September 27, 2009 and September 28, 2008, net cash provided
by (used in) financing activities was ($521,000) and $15,000, respectively. Net
cash used in financing activities for 2009 resulted primarily from tax payments
for restricted stock units of $1.5 million partially offset by proceeds from the
exercise of stock options of $574,000 and the excess tax benefit from stock
issuance of $418,000. No additional funding from the issuance of common stock
(other than from the exercise of options and purchase of stock under the
employee stock purchase plan) is anticipated for the remainder of 2009. Net cash
used in financing activities for 2008 resulted primarily from tax payments for
restricted stock units of $989,000, offset by proceeds from the exercise of
stock options of $569,000 and the excess tax benefit from stock issuance of
$435,000.




Our
liquidity is impacted by minimum cash payment commitments resulting from
operating lease obligations for our restaurants and our corporate offices. Lease
terms are generally 10 to 15 years with renewal options and generally require us
to pay a proportionate share of real estate taxes, insurance, common area
maintenance, and other operating costs. Some restaurant leases provide for
contingent rental payments based on sales thresholds. We own the buildings in
which 25 of our restaurants operate and, therefore, have very limited ability to
enter into sale-leaseback transactions as a potential source of
cash.




The
following table presents a summary of our contractual operating lease
obligations and commitments as of September 27, 2009:




Payments Due
      By Period (in thousands)Total
                                
                                
                                Less than
                                  One
      year
                                
                                
                                1-3 years
                                
                                
                                3-5 years
                                
                                
                                After 5
                                  yearsOperating
      lease obligations
                                
                                $
                                227,873
                                
                                
                                
                                27,203
                                
                                
                                
                                51,344
                                
                                
                                
                                46,188
                                
                                
                                
                                103,138Lease
      commitments for restaurants under development
                                
                                
                                37,139
                                
                                
                                
                                1,768
                                
                                
                                
                                5,302
                                
                                
                                
                                5,366
                                
                                
                                
                                24,703Total
                                
                                $
                                265,012
                                
                                
                                
                                28,971
                                
                                
                                
                                56,646
                                
                                
                                
                                51,554
                                
                                
                                
                                127,841




We
believe the cash flows from our operating activities and our balance of cash and
marketable securities will be sufficient to fund our operations and building
commitments and meet our obligations for the foreseeable future. Our future cash
outflows related to income tax uncertainties amount to $537,000. These amounts
are excluded from the contractual obligations table due to the high degree of
uncertainty regarding the timing of these liabilities.





Off-Balance
Sheet Arrangements





As of
September 27, 2009, we had no off-balance sheet arrangements or
transactions.





Risk
Factors/Forward-Looking Statements




The
foregoing discussion and other statements in this report contain various
“forward-looking statements” within the meaning of Section 27A of the Securities
Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934,
as amended. Forward-looking statements are based on current expectations or
beliefs concerning future events. Such statements can be identified by the use
of terminology such as “anticipate,” “believe,” “estimate,” “expect,” “intend,”
“may,” “could,” “possible,” “plan,” “project,” “will,” “forecast” and similar
words or expressions. Our forward-looking statements generally relate to our
expected restaurant openings for 2009 and beyond, our efforts to manage the cost
of traditional wings and other costs of sales, our growth strategy in new and
existing markets, our expectations and beliefs with respect to the impact of
certain accounting pronouncements on our financial statements, our estimated tax
rates for 2009, our anticipated capital expenditures, our expectations regarding
pre-opening costs, sources of funding and cash requirements, our expectations
and beliefs regarding various legal actions arising in the ordinary course of
business, and our beliefs relating to commodity price and investment risks.
Although it is not possible to foresee all of the factors that may cause actual
results to differ from our forward-looking statements, such factors include,
among others, the following risk factors (each of which is discussed in greater
detail in our Annual Report on Form 10-K for the fiscal year ended December 28,
2008):





·
            Fluctuations
      in traditional wing prices could reduce our operating
    income.




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




·
            We
      must identify and obtain a sufficient number of suitable new restaurant
      sites for us to sustain our revenue growth
rate.




17




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




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




·
            Implementing
      our expansion strategy may strain our
resources.




·
            We
      are dependent on franchisees and their
success.




·
            Franchisees
      may take actions that could harm our
business.




·
            We
      could face liability from our
franchisees.




·
            We
      may be unable to compete effectively in the restaurant
      industry.




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




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




·
            We
      may not be able to attract and retain qualified personnel to operate and
      manage our restaurants.




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




·
            Changes
      in employment laws or regulation could harm our
    performance.




·
            Changes
      in consumer preferences, consumer confidence, or discretionary consumer
      spending could harm our
performance.




·
            We
      are susceptible to adverse trends in
Ohio.




·
            Changes
      in public health concerns may impact our
  performance.




·
            A
      decline in visitors to any of the business districts near the locations of
      our restaurants could negatively affect our restaurant
    sales.




·
            The
      acquisition of existing restaurants from our franchisees or other
      acquisitions may have unanticipated consequences that could harm our
      business and our financial
condition.




·
            Improper
      food handling may affect our business
adversely.




·
            Complaints
      or litigation may hurt us.




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




·
            Natural
      disasters and other events could harm our
  performance.




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




Investors
are cautioned that all forward-looking statements involve risk and uncertainties
and speak only as of the date on which they are made.




ITEM
3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK




We are
exposed to market risk related to our cash and cash equivalents and marketable
securities. We invest our excess cash in highly liquid short-term investments
with maturities of less than one year. These investments are not held for
trading or other speculative purposes. Changes in interest rates affect the
investment income we earn on our cash and cash equivalents and marketable
securities and, therefore, impact our cash flows and results of operations. We
also hold investments in mutual funds for the future needs of a non-qualified
deferred compensation plan.




18




Financial
Instruments




Financial
instruments that potentially subject us to concentrations of credit risk consist
principally of municipal securities. We do not believe there is a significant
risk of non-performance by these municipalities because of our investment policy
restrictions as to acceptable investment vehicles.




Inflation




The
primary inflationary factors affecting our operations are food, labor, and
restaurant operating costs. Substantial increases in these costs could impact
operating results to the extent that such increases cannot be passed along
through higher menu prices. A large number of our restaurant personnel are paid
at rates based on the applicable federal and state minimum wages, and increases
in the minimum wage rates and tip-credit wage rates could directly affect our
labor costs. Many of our leases require us to pay taxes, maintenance, repairs,
insurance, and utilities, all of which are generally subject to inflationary
increases.




Commodity
Price Risk




Many of
the food products purchased by us are affected by weather, production,
availability, and other factors outside our control. We believe that almost all
of our food and supplies are available from several sources, which helps to
control food product risks. We negotiate directly with independent suppliers for
our supply of food and paper products. We use members of UniPro Food Services,
Inc., a national cooperative of independent food distributors, to distribute
these products from the suppliers to our restaurants. We have minimum purchase
requirements with some of our vendors, but the terms of the contracts and nature
of the products are such that our purchase requirements do not create a market
risk. The primary food product used by company-owned and franchised restaurants
is traditional wings. We work to counteract the effect of the volatility of
traditional wing prices, which can significantly affect our cost of sales and
cash flow, with the introduction of popular new menu items, effective marketing
promotions, focused efforts on food costs and waste, and menu price increases.
We also explore purchasing strategies to reduce the severity of cost increases
and fluctuations. We currently purchase traditional wings at market prices. If a
satisfactory long-term price agreement for traditional wings were to arise, we
would consider locking in prices to reduce our price volatility. If there is a
significant rise in the price of traditional wings, and we are unable to
successfully adjust menu prices or menu mix or otherwise make operational
adjustments to account for the higher wing prices, our operating results could
be adversely affected. Traditional wings accounted for approximately 25.4% and
19.5% of our cost of sales in the third quarter of 2009 and 2008, respectively,
with a quarterly average price per pound of $1.67 and $1.17,
respectively.




ITEM
4. CONTROLS AND PROCEDURES




Management’s
Report on Internal Control Over Financial Reporting





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





Changes
in Internal Control Over Financial Reporting





There
were no changes in our internal controls over financial reporting during our
most recently completed fiscal quarter that have materially affected, or are
reasonably likely to materially affect, our internal controls over financial
reporting.




19




PART
II – OTHER INFORMATION




ITEM
1. LEGAL PROCEEDINGS




Occasionally,
we are a defendant 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 and claims
from guests or employees alleging injury, illness or other food quality, health
or operational concerns. To date, none of these types of litigation, most of
which are typically covered by insurance, has had a material effect on us. We
have insured and continue to insure against most of these types of claims. A
judgment significantly in excess of our insurance coverage or involving punitive
damages, which may not be covered by insurance, could materially adversely
affect our financial condition or results of operations.





ITEM 6. EXHIBITS




See
Exhibit Index following the signature page of this report.




20




SIGNATURES




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




Date:
      November 3, 2009
                        BUFFALO
      WILD WINGS, INC.By:
                        /s/
      Sally J. SmithSally
      J. Smith, President and Chief Executive Officer
                          (principal
      executive officer)By:
                        /s/
      Mary J. TwinemMary
      J. Twinem, Executive Vice President, Chief
                          Financial
      Officer and Treasurer (principal financial and
                          accounting
      officer)




21




EXHIBIT
INDEX




BUFFALO
WILD WINGS, INC.


FORM
10-Q FOR QUARTER ENDED SEPTEMBER 27, 2009




Exhibit
                        Number
                      
                      Description31.1
                      
                      Certification
      of Chief Executive Officer Pursuant to Section 302 of the Sarbanes-Oxley
      Act31.2
                      
                      Certification
      of Chief Financial Officer Pursuant to Section 302 of the Sarbanes-Oxley
      Act32.1
                      
                      Certification
      of Chief Executive Officer Pursuant to Section 906 of the Sarbanes-Oxley
      Act32.2
                      
                      Certification
      of Chief Financial Officer Pursuant to Section 906 of the Sarbanes-Oxley
      Act






22