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**UNITED STATES**

**SECURITIES AND EXCHANGE COMMISSION**

**Washington, DC 20549**

 

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**FORM 10-Q**

 

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**QUARTERLYREPORT PURSUANT TO SECTION 13 OR 15(d) OF**

**THESECURITIES EXCHANGE ACT OF 1934**

 

**For the quarterly period ended June 27, 2010**

 

**Commission File No. 000-24743**

 

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**BUFFALO WILD WINGS, INC.**

(Exact name of registrant as specified in itscharter)

 

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

Incorporation or Organization) |       | (IRS Employer

Identification No.) |

 

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

(Address of Principal Executive Offices) (ZipCode)

 

**(952) 593-9943**

(Registrant’s Telephone Number, IncludingArea Code)

 

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Indicateby check mark whether the registrant (1) has filed all reports required tobe filed by Section 13 or 15(d) of the Securities Exchange Act of1934 during the preceding 12 months (or for such shorter period that theregistrant was required to file such reports), and (2) has been subject tosuch filing requirements for the past 90 days.  YES x  NO o

 

Indicateby check mark whether the registrant has submitted electronically and posted onits corporate Web site, if any, every Interactive Data File required to besubmitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 ofthis chapter) during the preceding 12 months (or for such shorter period thatthe registrant was required to submit and post such files).  YES o  NO o

 

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

 

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

 

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

 

Thenumber of shares outstanding of the registrant’s common stock as of July 30,2010:  18,191,217 shares.

 

 

 

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Table ofContents

 

**TABLE OF CONTENTS**

 
| ** **                                   | ** **                                                                                  | **Page** |
|----------------------------------------------|---------------------------------------------------------------------------------------------|----------|
| **PART I — FINANCIAL INFORMATION** |                                                                                        |
|                                         |                                                                                        |     |
| Item 1.                                 | Financial Statements                                                                        | 3        |
|                                         |                                                                                        |     |
| Item 2.                                      | Management’s  Discussion and Analysis of Financial Condition and Results of Operations | 11       |
|                                         |                                                                                        |     |
| Item 3.                                      | Quantitative  and Qualitative Disclosures About Market Risk                                 | 19       |
|                                         |                                                                                        |     |
| Item 4.                                      | Controls and  Procedures                                                                    | 19       |
|                                         |                                                                                        |     |
| **PART II — OTHER INFORMATION**    |                                                                                        |
|                                         |                                                                                        |     |
| Item 1.                                      | Legal Proceedings                                                                           | 21       |
|                                         |                                                                                        |     |
| Item 6.                                      | Exhibits                                                                                    | 21       |
|                                         |                                                                                        |     |
| Signatures                                   | 22                                                                                          |
|                                         |                                                                                        |     |
| Exhibit Index                           | 23                                                                                          |

 

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**PART I. FINANCIAL INFORMATION**

 

**ITEM 1. FINANCIAL STATEMENTS**

 

**BUFFALO WILD WINGS, INC. AND SUBSIDIARIES**

 

**CONSOLIDATED BALANCE SHEETS**

 

**(Dollar amounts in thousands)**

 

**(unaudited)**

 
| ** **                                                                                                               | ** ** | **June 27,  2010** | ** ** | **December 27,  2009** | ** ** |
|--------------------------------------------------------------------------------------------------------------------------|------------|-------------------------|------------|-----------------------------|------------|
| **Assets**                                                                                                               |       |                    |       |                        |       |
| Current assets:                                                                                                          |       |                    |       |                        |       |
| Cash and cash equivalents                                                                                                |       | $                       | 9,711      |                        | 9,580      |   |
| Marketable securities                                                                                                    |       | 59,489                  |       | 43,632                      |       |
| Accounts receivable – franchisees, net of  allowance of $25                                                         |       | 1,150                   |       | 2,118                       |       |
| Accounts receivable – other                                                                                         |       | 7,946                   |       | 7,383                       |       |
| Inventory                                                                                                                |       | 3,400                   |       | 3,644                       |       |
| Prepaid expenses                                                                                                         |       | 2,005                   |       | 2,972                       |       |
| Refundable income taxes                                                                                                  |       | 974                     |       | 1,872                       |       |
| Deferred income taxes                                                                                                    |       | 2,555                   |       | 2,938                       |       |
| Restricted assets                                                                                                        |       | 24,505                  |       | 24,384                      |       |
| Total current assets                                                                                                     |       | 111,735                 |       | 98,523                      |       |
|                                                                                                                     |       |                    |       |                        |       |
| Property and equipment, net                                                                                              |       | 194,607                 |       | 189,639                     |       |
| Other assets                                                                                                             |       | 9,670                   |       | 9,665                       |       |
| Goodwill                                                                                                                 |       | 11,246                  |       | 11,246                      |       |
| Total assets                                                                                                             |       | $                       | 327,258    |                        | 309,073    |   |
|                                                                                                                     |       |                    |       |                        |       |
| **Liabilities  and Stockholders’ Equity**                                                                           |       |                    |       |                        |       |
| Current liabilities:                                                                                                     |       |                    |       |                        |       |
| Unearned franchise fees                                                                                                  |       | $                       | 2,359      |                        | 2,706      |   |
| Accounts payable                                                                                                         |       | 14,720                  |       | 13,436                      |       |
| Accrued compensation and benefits                                                                                        |       | 16,790                  |       | 19,554                      |       |
| Accrued expenses                                                                                                         |       | 5,191                   |       | 6,540                       |       |
| Current portion of deferred lease credits                                                                                |       | 76                      |       | 84                          |       |
| System-wide payables                                                                                                     |       | 24,505                  |       | 24,384                      |       |
| Total current liabilities                                                                                                |       | 63,641                  |       | 66,704                      |       |
|                                                                                                                     |       |                    |       |                        |       |
| Long-term liabilities:                                                                                                   |       |                    |       |                        |       |
| Other liabilities                                                                                                        |       | 1,582                   |       | 1,422                       |       |
| Deferred income taxes                                                                                                    |       | 12,434                  |       | 14,940                      |       |
| Deferred lease credits, net of current portion                                                                           |       | 16,830                  |       | 16,174                      |       |
| Total liabilities                                                                                                        |       | 94,487                  |       | 99,240                      |       |
|                                                                                                                     |       |                    |       |                        |       |
| Commitments and contingencies (note 11)                                                                                  |       |                    |       |                        |       |
| Stockholders’ equity:                                                                                               |       |                    |       |                        |       |
| Undesignated stock, 1,000,000 shares authorized;  none issued                                                            |       | —                  |       | —                      |       |
| Common stock, no par value. Authorized 44,000,000  shares; issued and outstanding 18,181,009 and 18,054,375 respectively |       | 97,098                  |       | 93,887                      |       |
| Retained earnings                                                                                                        |       | 135,673                 |       | 115,946                     |       |
| Total stockholders’ equity                                                                                          |       | 232,771                 |       | 209,833                     |       |
| Total liabilities and stockholders’ equity                                                                          |       | $                       | 327,258    |                        | 309,073    |   |

 

See accompanying notes to consolidated financial statements

 

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**BUFFALO WILD WINGS, INC. AND SUBSIDIARIES**

 

**CONSOLIDATED STATEMENTS OF EARNINGS**

 

**(Amounts in thousands except per share data)**

 

**(unaudited)**

 
| ** **                                         | ** ** | **Three months ended**  | ** ** | **Six months ended**    | ** ** |
|----------------------------------------------------|------------|-------------------------|------------|-------------------------|------------|
| ** **                                         | ** ** | **June 27,  2010** | ** ** | **June 28,  2009** | ** ** | **June 27,  2010** | ** ** | **June 28,  2009** | ** ** |
| Revenue:                                           |       |                    |       |                    |       |   |   |   |   |
| Restaurant sales                                   |       | $                       | 131,531    |                    | 117,763    |   | 269,493 |   | 237,187 |   |
| Franchise royalties and fees                       |       | 14,170                  |       | 11,859                  |       | 28,479 |   | 23,990 |   |
| Total revenue                                      |       | 145,701                 |       | 129,622                 |       | 297,972 |   | 261,177 |   |
|                                               |       |                    |       |                    |       |   |   |   |   |
| Costs and expenses:                                |       |                    |       |                    |       |   |   |   |   |
| Restaurant operating costs:                        |       |                    |       |                    |       |   |   |   |   |
| Cost of sales                                      |       | 37,601                  |       | 35,922                  |       | 79,825 |   | 72,130 |   |
| Labor                                              |       | 40,089                  |       | 36,056                  |       | 80,774 |   | 71,605 |   |
| Operating                                          |       | 21,173                  |       | 17,966                  |       | 42,628 |   | 35,953 |   |
| Occupancy                                          |       | 8,807                   |       | 7,924                   |       | 17,717 |   | 15,518 |   |
| Depreciation and amortization                      |       | 9,456                   |       | 7,888                   |       | 19,006 |   | 15,383 |   |
| General and administrative (1)                     |       | 12,929                  |       | 11,773                  |       | 24,955 |   | 23,193 |   |
| Preopening                                         |       | 1,197                   |       | 1,673                   |       | 2,312 |   | 4,082 |   |
| Loss on asset disposals and store closures         |       | 526                     |       | 272                     |       | 937 |   | 447 |   |
| Total costs and expenses                           |       | 131,778                 |       | 119,474                 |       | 268,154 |   | 238,311 |   |
| Income from operations                             |       | 13,923                  |       | 10,148                  |       | 29,818 |   | 22,866 |   |
| Investment income (loss)                           |       | (156                    | )          | 413                     |       | 29 |   | 489 |   |
| Earnings before income taxes                       |       | 13,767                  |       | 10,561                  |       | 29,847 |   | 23,355 |   |
| Income tax expense                                 |       | 4,601                   |       | 3,586                   |       | 10,120 |   | 7,894 |   |
| Net earnings                                       |       | $                       | 9,166      |                    | 6,975      |   | 19,727 |   | 15,461 |   |
| Earnings per common share – basic             |       | $                       | 0.50       |                    | 0.39       |   | 1.09 |   | 0.86 |   |
| Earnings per common share – diluted           |       | 0.50                    |       | 0.39                    |       | 1.08 |   | 0.86 |   |
| Weighted average shares outstanding – basic   |       | 18,167                  |       | 17,999                  |       | 18,157 |   | 17,990 |   |
| Weighted average shares outstanding – diluted |       | 18,234                  |       | 18,070                  |       | 18,230 |   | 18,052 |   |

 

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(1) Includesstock-based compensation of $1,313, $1,689, $2,538, and $2,490, respectively

 

See accompanying notes to consolidated financial statements

 

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**BUFFALO WILD WINGS, INC. AND SUBSIDIARIES**

 

**CONSOLIDATED STATEMENTS OF CASH FLOWS**

 

**(Dollar amounts in thousands)**

 

**(unaudited)**

 
| ** **                                                             | ** ** | **Six months ended**          | ** ** |
|------------------------------------------------------------------------|------------|-------------------------------|------------|
| ** **                                                             | ** ** | **June 27,********2010** | ** ** | **June 28,********2009** | ** ** |
| Cash flows from operating activities:                                  |       |                          |       |   |   |
| Net earnings                                                           |       | $                             | 19,727     |   | 15,461 |   |
| Adjustments to reconcile net earnings to cash  provided by operations: |       |                          |       |   |   |
| Depreciation                                                           |       | 18,699                        |       | 15,077 |   |
| Amortization                                                           |       | 307                           |       | 306 |   |
| Loss on asset disposals and store closures                             |       | 847                           |       | 447 |   |
| Deferred lease credits                                                 |       | 929                           |       | 840 |   |
| Deferred income taxes                                                  |       | (2,123                        | )          | 1,639 |   |
| Stock-based compensation                                               |       | 2,538                         |       | 2,490 |   |
| Excess tax benefit from stock issuance                                 |       | (116                          | )          | (31 | ) |
| Change in operating assets and liabilities:                            |       |                          |       |   |   |
| Trading securities                                                     |       | (748                          | )          | (1,204 | ) |
| Accounts receivable                                                    |       | 124                           |       | (734 | ) |
| Inventory                                                              |       | 244                           |       | (255 | ) |
| Prepaid expenses                                                       |       | 967                           |       | 1,389 |   |
| Other assets                                                           |       | (312                          | )          | (105 | ) |
| Unearned franchise fees                                                |       | (347                          | )          | 166 |   |
| Accounts payable                                                       |       | 2,472                         |       | (61 | ) |
| Income taxes                                                           |       | 1,014                         |       | 1,895 |   |
| Accrued expenses                                                       |       | (2,749                        | )          | 20 |   |
| Net cash provided by operating activities                              |       | 41,473                        |       | 37,340 |   |
|                                                                   |       |                          |       |   |   |
| Cash flows from investing activities:                                  |       |                          |       |   |   |
| Acquisition of property and equipment                                  |       | (25,506                       | )          | (33,115 | ) |
| Purchase of marketable securities                                      |       | (61,114                       | )          | (25,284 | ) |
| Proceeds of marketable securities                                      |       | 46,005                        |       | 24,778 |   |
| Net cash used in investing activities                                  |       | (40,615                       | )          | (33,621 | ) |
|                                                                   |       |                          |       |   |   |
| Cash flows from financing activities:                                  |       |                          |       |   |   |
| Issuance of common stock                                               |       | 782                           |       | 555 |   |
| Tax payments for restricted stock units                                |       | (1,625                        | )          | (1,513 | ) |
| Excess tax benefit from stock issuance                                 |       | 116                           |       | 31 |   |
| Net cash used in financing activities                                  |       | (727                          | )          | (927 | ) |
| Net increase in cash and cash equivalents                              |       | 131                           |       | 2,792 |   |
| Cash and cash equivalents at beginning of period                       |       | 9,580                         |       | 8,347 |   |
| Cash and cash equivalents at end of period                             |       | $                             | 9,711      |   | 11,139 |   |

 

See accompanying notes to consolidated financial statements

 

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**BUFFALO WILD WINGS, INC. AND SUBSIDIARIES**

 

**NOTES TO CONSOLIDATED FINANCIAL STATEMENTS**

 

**FOR THE THREE MONTHS AND SIX MONTHS ENDED JUNE 27,2010 AND JUNE 28, 2009**

**(Dollar amounts in thousands except share and pershare data)**

 

**(1)****                 ****Basis of Financial Statement Presentation**

 

Theconsolidated financial statements as of June 27, 2010 and December 27,2009, and for the three-month and six-month periods ended June 27, 2010 andJune 28, 2009 have been prepared by Buffalo Wild Wings, Inc. pursuantto the rules and regulations of the Securities and Exchange Commission(SEC). The financial information as of June 27, 2010 and December 27,2009 and for the three-month and six-month periods ended June 27, 2010 andJune 28, 2009 is unaudited, but, in the opinion of management, reflectsall adjustments and accruals necessary for a fair presentation of the financialposition, results of operations, and cash flows for the interim periods.

 

Referencesin 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.

 

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

 

Theresults of operations for the three-month and six-month periods ended June 27,2010 are not necessarily indicative of the results of operations that may beachieved for the entire year ending December 26, 2010.

 

**(2)****                 ****Summary of Significant Accounting Policies**

 

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

 

Inventoriesare stated at the lower of cost or market. Cost is determined by the first-in,first-out (FIFO) method.  Cash flowsrelated to inventory sales are classified in net cash provided by operatingactivities in the Consolidated Statements of Cash Flows.

 

Wepurchase our products from a number of suppliers and believe there arealternative suppliers. We have minimum purchase commitments from some of ourvendors, but the terms of the contracts and nature of the products are suchthat our purchase requirements do not create a market risk. The primary foodproduct used by our restaurants and our franchised restaurants is chickenwings. Chicken wings are purchased by us at market prices. Material increasesin chicken wing costs may adversely affect our operating results. For thethree-month periods ended June 27, 2010 and June 28, 2009, chickenwings were 23.6% and 25.5%, respectively, of restaurant cost of sales. For thesix-month periods ended June 27, 2010 and June 28, 2009, chickenwings were 26.0% and 24.5%, respectively, of restaurant cost of sales.

 

***(b)***                 ***New Accounting Pronouncement***

 

InJanuary 2010, the Financial Accounting Standards Board (FASB) issuedAccounting Standards Update (ASU) 2010-06 “Fair Value Measurements andDisclosures (Topic 820): Improving Disclosures about Fair Value Measurements.” ASU2010-06 amends ASC 820 Fair Value Measurements and Disclosures to require newdisclosures related to transfers into and out of Levels 1 and 2 of the fairvalue hierarchy and additional disclosure requirements related to Level 3measurements. The guidance also clarifies existing fair value measurementdisclosures about the level of disaggregation and about inputs and valuationtechniques used to measure fair value. The additional disclosure requirements areeffective for the first reporting period beginning after December 15,2009, except for the additional disclosure requirements related to Level 3measurements which are effective for fiscal years beginning after December 15,2010. The additional disclosure requirements did not have any financialimpact on our consolidated financial statements.

 

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**(3)****                 ****Fair Value Measurements**

 

The guidance for fair valuemeasurements establishes the authoritative definition of fair value, sets out aframework for measuring fair value, and outlines the required disclosuresregarding fair value measurements.  Fairvalue is the price that would be received to sell an asset or paid to transfera liability (an exit price) in the principal or most advantageous market forthe asset or liability in an orderly transaction between market participants atthe measurement date. We use a three-tier fair value hierarchy based uponobservable and non-observable inputs as follows:

 

·                  Level 1 — Observable inputs such as quotedprices in active markets;

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

·                  Level 3 — Unobservable inputs in which thereis little or no market data, which require the reporting entity to develop itsown assumptions.

 

The following table summarizes the financialinstruments measured at fair value in our consolidated balance sheet as of June 27,2010:

 
| ** **             | ** ** | **Fair Value Measurements** | ** ** |
|------------------------|------------|-----------------------------|------------|
| ** **             | ** ** | **Level 1**                 | ** ** | **Level 2** | ** ** | **Level 3** | ** ** | **Total** | ** ** |
| **Assets**             |       |                        |       |   |   |   |   |   |   |
| Marketable  Securities |       | $                           | 4,366      |   | 17,850 |   | — |   | 22,216 |   |
| Derivatives            |       | —                      |       | 9 |   | — |   | 9 |   |
|                        |            |                             |            |  |  |  |  |  |  |  |

 

Weclassified a portion of our marketable securities as available-for-sale andtrading securities which were reported at fair market value, using the “marketapproach” valuation technique. The “market approach” valuation method usedprices and other relevant information observable in market transactions involvingidentical or comparable assets. Our trading securities are valued using theLevel 1 approach. Our available-for-sale marketable securities are valued usinga Level 2 approach. Our derivatives consist of natural gas commodity futurescontracts which are valued using a Level 2 approach.

 

Therewere no transfers between Level 1 and Level 2 of the fair value hierarchyduring the six-month period ended June 27, 2010.

 

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

 

Marketablesecurities were comprised of the following:

 
| ** **           | ** ** | **As of**               | ** ** |
|----------------------|------------|-------------------------|------------|
| ** **           | ** ** | **June 27,  2010** | ** ** | **December 27,  2009** | ** ** |
| Held-to-maturity     |       |                    |       |   |   |
| Municipal securities |       | $                       | 37,273     |   | 15,707 |   |
| Available-for-sale   |       |                    |       |   |   |
| Municipal securities |       | 17,850                  |       | 24,307 |   |
| Trading              |       |                    |       |   |   |
| Mutual funds         |       | 4,366                   |       | 3,618 |   |
| Total                |       | $                       | 59,489     |   | 43,632 |   |

 

Allheld-to-maturity debt securities mature within one year and had aggregate fairvalues of $37,256 and $15,712 as of June 27, 2010 and December 27,2009, respectively. Trading securities represent investments held for futureneeds of a non-qualified deferred compensation plan.

 

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**(5)**                  **Propertyand Equipment**

 

Propertyand equipment consisted of the following:

 
| ** **                         | ** ** | **As of**               | ** ** |
|------------------------------------|------------|-------------------------|------------|
| ** **                         | ** ** | **June 27,  2010** | ** ** | **December 27,  2009** | ** ** |
| Construction in-process            |       | $                       | 11,177     |   | 6,443 |   |
| Buildings                          |       | 19,653                  |       | 18,338 |   |
| Furniture, fixtures, and equipment |       | 124,346                 |       | 121,166 |   |
| Leasehold improvements             |       | 157,355                 |       | 152,108 |   |
|                               |       | 312,531                 |       | 298,055 |   |
| Less accumulated depreciation      |       | (117,924                | )          | (108,416 | ) |
|                               |       | $                       | 194,607    |   | 189,639 |   |

 

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

 

Weuse commodity derivatives to manage our exposure to price fluctuations. Weenter into options and future contracts to reduce our risk of natural gas pricefluctuations. These derivatives do not qualify for hedge accounting and changesin fair value are included in current net income. These changes are classifiedas a component of restaurant operating expenses. All changes in the fair valueof these contracts are recorded in earnings in the period in which they occur.Net losses of $39 and $253 were recognized in the first six months of 2010 and2009, respectively. The fair value of our derivative instruments as of June 27,2010 and December 27, 2009 was $9 and ($11), respectively, and is includedin accrued expenses in the accompanying consolidated balance sheets. As of June 27,2010, the maximum length of time over which we are hedging our exposure to thevariability in future cash flows related to the purchase of natural gas is ninemonths. As of June 27, 2010 and December 27, 2009, we were party tonatural gas swap contracts with notional values of $754 and $525, respectively.

 

**(7)**                  **IncomeTaxes**

 

Thetotal unrecognized tax benefits reflected on our consolidated balance sheet asof June 27, 2010 and December 27, 2009 were $702 and $566,respectively. The increase between the periods was due to accruals for taxpositions taken in the current year. We recognize potential accrued interestand penalties related to unrecognized tax benefits in income tax expense.Interest and penalties related to unrecognized tax benefits totaled $143 and$89 at June 27, 2010 and December 27, 2009, respectively. Included inthe balance at June 27, 2010 and December 27, 2009, are unrecognizedtax benefits of $457 and $368, respectively, which if recognized, would affectthe annual effective tax rate. We do not anticipate any significant change tothe total unrecognized tax benefits prior to June 26, 2011.

 

TheInternal Revenue Service is currently auditing our 2008 U.S. Income Tax Return.With few exceptions, we are no longer subject to state income tax examinationsfor years before 2005.

 

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

 

***(a)******                ******Stock Options***

 

Wehave 3.9 million shares of common stock reserved for issuance under the EquityIncentive Plan (Plan) for employees, officers, and directors. The option pricefor shares issued under the Plan is to be not less than the fair market valueon the date of grant with respect to incentive and nonqualified stock options.Incentive stock options become exercisable in four equal installments from thedate of the grant and have a contractual life of seven to ten years.Nonqualified stock options issued pursuant to the Plan have varying vestingperiods from immediately to four years and have a contractual life of seven toten years. Incentive stock options may be granted under this Plan until May 15,2018. We issue new shares of common stock upon exercise of stock options.Option activity is summarized for the six months ended June 27, 2010 asfollows:

 
| ** **                          | ** ** | **Number********of shares** | ** ** | **Weighted********average********exercise price** | ** ** | **Average remaining   contractual Life   (years)** | ** ** | **Aggregate intrinsic  value** | ** ** |
|-------------------------------------|------------|-----------------------------|------------|--------------------------------------------------------|------------|----------------------------------------------------|------------|--------------------------------|------------|
| Outstanding, December 27, 2009 |       | 179,134                     |       | $                                                      | 19.00      |                                               | 4.3        |                           | $          | 4,285 |   |
|                                |       |                        |       |                                                   |       |                                               |       |                           |       |
| Granted                             |       | 35,984                      |       | 48.41                                                  |       |                                               |       |                           |       |
| Exercised                           |       | (18,059                     | )          | 9.48                                                   |       |                                               |       |                           |       |
| Cancelled                           |       | (1,513                      | )          | 30.87                                                  |       |                                               |       |                           |       |
| Outstanding, June 27, 2010     |       | 195,546                     |       | $                                                      | 25.20      |                                               | 4.4        |                           | $          | 2,854 |   |
| Exercisable, June 27, 2010     |       | 97,549                      |       | 14.54                                                  |       | 3.2                                                |       | 2,274                          |       |

 

Theaggregate intrinsic value in the table above is before applicable income taxes,based on our closing stock price of $37.85 as of the last business day of thequarter ended June 27, 2010, which would have been received by theoptionees had all options been exercised on that date. As of June 27,2010, total unrecognized stock-based compensation expense related to nonvestedstock options was approximately $1,381, which is expected to be recognized overa weighted average period of approximately 2.7 years. During the six-monthperiods ended June 27, 2010 and June 28, 2009, the total intrinsicvalue of stock options exercised was $619 and $26, respectively. During thesix-month period ended June 28, 2009, the total fair value of optionsvested was $5.  No options vested duringthe six-month period ended June 27, 2010. During the six-month periods ended June 27, 2010 and June 28,2009, the weighted average grant date fair value of options granted was $48.41and $30.90, respectively.

 

ThePlan has 494,187 shares available for grant as of June 27, 2010.

 

***(b)******                ******Restricted Stock Units***

 

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

 

In2009 and 2010, we granted restricted stock units subject to three-year cliffvesting and a cumulative three-year earnings target. The number of units whichvest at the end of the three-year period is based on performance against thetarget. These restricted stock units are subject to forfeiture if they have notvested at the end of the three-year period. Stock-based compensation isrecognized for the expected number of units vesting at the end of the periodand is expensed over the three-year period.

 

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

 

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

 
| ** **                          | ** ** | **Number********of shares** | ** ** | **Weighted********average********grant date********fair value** | ** ** |
|-------------------------------------|------------|-----------------------------|------------|-----------------------------------------------------------------|------------|
| Outstanding, December 27, 2009 |       | 450,869                     |       | $                                                               | 28.43      |   |
|                                |       |                        |       |                                                            |       |
| Granted                             |       | 210,019                     |       | 40.82                                                           |       |
| Vested                              |       | (9,408                      | )          | 38.25                                                           |       |
| Cancelled                           |       | (9,853                      | )          | 31.42                                                           |       |
| Outstanding, June 27, 2010     |       | 641,627                     |       | $                                                               | 32.30      |   |

 

Asof June 27, 2010, the total stock-based compensation expense related tononvested awards not yet recognized was $4,245, which is expected to berecognized over a weighted average period of 1.4 years. The weighted averagegrant date fair value of restricted stock units granted during the six monthsended June 28, 2009 was $33.34. During the six-month period ended June 27,2010, we recognized $1,871 of stock-based compensation expense related torestricted stock units.

 

***(c)******                 ******Employee Stock Purchase Plan***

 

Wehave reserved 600,000 shares of common stock for issuance under the EmployeeStock Purchase Plan (ESPP). The ESPP is available to substantially allemployees subject to employment eligibility requirements. Participants maypurchase our common stock at 85% of the beginning or ending closing price,whichever is lower, for each six-month period ending in May and November.During the first six months of 2010 and 2009, we issued 18,634 and 29,183shares of common stock under the plan. As of June 27, 2010, we have322,204 shares available for future issuance under the ESPP.

 

**(9)**                  **EarningsPer Share**

 

Thefollowing is a reconciliation of basic and fully diluted earnings per commonshare for the three-month and six-month periods ended June 27, 2010 and June 28,2009:

 
| ** **                                         | ** ** | **Three months ended June 27, 2010** | ** ** |
|----------------------------------------------------|------------|-------------------------------------------|------------|
| ** **                                         | ** ** | **Earnings  (numerator)**                 | ** ** | **Shares  (denominator)** | ** ** | **Per-share  amount** | ** ** |
| Net earnings                                       |       | $                                         | 9,166      |   |   |   |   |   |
| Earnings per common share                          |       | 9,166                                     |       | 18,167,239 |   | $ | 0.50 |   |
| Effect of dilutive securities – stock options |       | —                                    |       | 67,187 |   |   |   |
| Earnings per common share – assuming dilution |       | $                                         | 9,166      |   | 18,234,426 |   | 0.50 |   |
|                                                    |            |                                           |            |  |  |  |  |  |  |

 
| ** **                                         | ** ** | **Three months ended June 28, 2009** | ** ** |
|----------------------------------------------------|------------|-------------------------------------------|------------|
| ** **                                         | ** ** | **Earnings  (numerator)**                 | ** ** | **Shares  (denominator)** | ** ** | **Per-share  amount** | ** ** |
| Net earnings                                       |       | $                                         | 6,975      |   |   |   |   |   |
| Earnings per common share                          |       | 6,975                                     |       | 17,999,324 |   | $ | 0.39 |   |
| Effect of dilutive securities – stock options |       | —                                    |       | 70,487 |   |   |   |
| Earnings per common share – assuming dilution |       | $                                         | 6,975      |   | 18,069,811 |   | 0.39 |   |
|                                                    |            |                                           |            |  |  |  |  |  |  |

 

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| ** **                                         | ** ** | **Six months ended June 27, 2010** | ** ** |
|----------------------------------------------------|------------|-----------------------------------------|------------|
| ** **                                         | ** ** | **Earnings  (numerator)**               | ** ** | **Shares  (denominator)** | ** ** | **Per-share  amount** | ** ** |
| Net earnings                                       |       | $                                       | 19,727     |   |   |   |   |   |
| Earnings per common share                          |       | 19,727                                  |       | 18,157,314 |   | $ | 1.09 |   |
| Effect of dilutive securities – stock options |       | —                                  |       | 72,888 |   |   |   |
| Earnings per common share – assuming dilution |       | $                                       | 19,727     |   | 18,230,202 |   | 1.08 |   |
|                                                    |            |                                         |            |  |  |  |  |  |  |

 
| ** **                                         | ** ** | **Six months ended June 28, 2009** | ** ** |
|----------------------------------------------------|------------|-----------------------------------------|------------|
| ** **                                         | ** ** | **Earnings  (numerator)**               | ** ** | **Shares  (denominator)** | ** ** | **Per-share  amount** | ** ** |
| Net earnings                                       |       | $                                       | 15,461     |   |   |   |   |   |
| Earnings per common share                          |       | 15,461                                  |       | 17,989,591 |   | $ | 0.86 |   |
| Effect of dilutive securities – stock options |       | —                                  |       | 62,758 |   |   |   |
| Earnings per common share – assuming dilution |       | $                                       | 15,461     |   | 18,052,349 |   | 0.86 |   |
|                                                    |            |                                         |            |  |  |  |  |  |  |

 

Thefollowing is a summary of those securities outstanding at the end of therespective periods, which have been excluded from the fully dilutedcalculations because the effect on net earnings per common share would havebeen antidilutive or were performance-contingent shares for which theperformance criteria had not yet been met:

 
| ** **             | ** ** | **Three months ended**        | ** ** | **Six months ended**          | ** ** |
|------------------------|------------|-------------------------------|------------|-------------------------------|------------|
| ** **             | ** ** | **June 27,********2010** | ** ** | **June 28,********2009** | ** ** | **June 27,********2010** | ** ** | **June 28,********2009** | ** ** |
| Stock options          |       | 22,987                        |       | 46,302                        |       | 19,917 |   | 93,516 |   |
| Restricted stock units |       | 641,627                       |       | 612,143                       |       | 641,627 |   | 612,143 |   |

 

**(10)**           **Supplemental Disclosures of CashFlow Information**

 
| ** **                                    | ** ** | **Six months ended**    | ** ** |
|-----------------------------------------------|------------|-------------------------|------------|
| ** **                                    | ** ** | **June 27,  2010** | ** ** | **June 28,  2009** | ** ** |
| Cash paid during the period for:              |       |                    |       |   |   |
| Income taxes                                  |       | $                       | 11,187     |   | 4,434 |   |
| Noncash financing and investing transactions: |       |                    |       |   |   |
| Property and equipment not yet paid for       |       | (1,188                  | )          | (3,852 | ) |
|                                               |            |                         |            |  |  |  |

 

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

 

Weare involved in various legal actions arising in the ordinary course ofbusiness. In the opinion of management, the ultimate disposition of thesematters will not have a material adverse effect on our consolidated financialposition, results of operations, or cash flows.

 

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

 

Thefollowing discussion and analysis of our financial condition and results ofoperations should be read in conjunction with our consolidated financialstatements and related notes included in Item 1 of Part 1 of thisQuarterly Report and the audited consolidated financial statements and relatednotes and Management’s Discussion and Analysis of Financial Condition andResults of Operations contained in our Annual Report on Form 10-K for thefiscal year ended December 27, 2009. This discussion and analysis containscertain statements that are not historical facts, including, among others,those relating to our anticipated financial performance for 2010, cashrequirements, and our expected store openings and preopening costs. Suchstatements are forward-looking and speak only as of the date on which they aremade. There are risks and uncertainties including, but not limited to, thosediscussed in this Form 10-Q under Item 2 of Part I as well as in Item1A of Part I of the fiscal 2009 Form 10-K. Information included inthis discussion and analysis includes commentary on company-owned andfranchised restaurant units, restaurant sales, same-store sales, and averageweekly sales volumes. Management believes such sales information is animportant measure of our performance, and is useful in assessing consumeracceptance of the Buffalo 

 

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WildWings® Grill & Bar concept and the overallhealth of the concept. Franchise information also provides an understanding ofour revenues because franchise royalties and fees are based on the opening offranchised units and their sales. However, franchise sales and same-store salesinformation does not represent sales in accordance with U. S. generallyaccepted accounting principles (GAAP), should not be considered in isolation oras a substitute for other measures of performance prepared in accordance withGAAP and may not be comparable to financial information as defined or used byother companies.

 

**Critical Accounting Policies and Use of Estimates**

 

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

 

**Overview**

 

Asof June 27, 2010, we owned and operated 234 company-owned and franchisedan additional 447 Buffalo Wild Wings® Grill &Bar restaurants in 43 states. Our long-term focus is to grow to a nationalchain of over 1,000 locations in the United States, continuing the strategy ofdeveloping both company-owned and franchised restaurants.

 

Wehave stated that our 2010 growth goals are 13 to 15% unit growth and 20% netearnings growth. Based on the anticipated new restaurants opening in the thirdand fourth quarters, we are on track for 13% unit growth in 2010. We havegrowing confidence that our 20% annual net earnings growth goal is achievablegiven the recent improvement in same-store sales and the moderation of wingcosts.

 

Ourgrowth and success depend on several factors and trends. First, we continue tomonitor and react to changes in our cost of goods sold. The cost of goods soldis difficult to predict, as it has ranged from 28.6% to 30.6% of restaurantsales per quarter in our 2009 fiscal year and year-to-date in 2010. We areworking to counteract the volatility of chicken wing prices with the introductionof popular new menu items, effective marketing promotions, focused efforts onfood costs and waste, and menu price increases. We will continue to monitor thecost of chicken wings, as it can significantly change our cost of sales andcash flow from company-owned restaurants. We are exploring purchasingstrategies to lessen the severity of cost increases and fluctuations, and arereviewing menu additions and other strategies that may decrease the percentagethat chicken wings represent in terms of total restaurant sales. We arecurrently purchasing chicken wings at market prices. If a satisfactorylong-term price agreement for chicken wings were to arise, we would considerlocking in prices to reduce our price volatility.

 

Asecond factor is our success in developing new markets. There are inherentrisks in opening new restaurants, especially in new markets, including the lackof experience, logistical support, and brand awareness in a new market. Thesefactors may result in lower than anticipated sales and cash flow for newrestaurants in new markets. In 2010, we plan to develop company-ownedrestaurants primarily in markets where we currently have either company-ownedor franchised restaurants. We believe this development focus, together with ourfocus on our new restaurant opening procedures, will help to mitigate theoverall risk associated with opening restaurants in new markets.

 

Third,we will continue our focus on trends in company-owned and franchised same-storesales 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 ourability to increase the sales volume and, therefore, cash flow per location. Weremain committed to high quality operations and guest hospitality.

 

Ourrevenue is generated by:

 

·                  Sales at ourcompany-owned restaurants, which were 90% of total revenue in the secondquarter of 2010. Food and nonalcoholic beverages accounted for 78% ofrestaurant sales. The remaining 22% of restaurant sales was from alcoholicbeverages. The menu items with the highest sales volume are traditional andboneless wings at 20% and 19%, respectively, of total restaurant sales.

 

·                  Royalties andfranchise fees received from our franchisees.

 

Wegenerate cash from the operation of company-owned restaurants and fromfranchise royalties and fees. We highlight the specific costs associated withthe on-going operation of our company-owned restaurants in the consolidatedstatement of earnings under “Restaurant operating costs.” Nearly all of ourdepreciation expense relates to assets used by our company-

 

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ownedrestaurants. Preopening costs are those costs associated with opening newcompany-owned restaurants and will vary quarterly based on the number of newlocations opening and under construction. Loss on asset disposals and storeclosures is related to company-owned restaurants and includes the costsassociated with closures of locations and normal asset retirements. Certainother expenses, such as general and administrative, relate to bothcompany-owned restaurant and franchising operations.

 

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

 

**Quarterly Results of Operations**

 

Ouroperating results for the periods indicated are expressed below as a percentageof total revenue, except for the components of restaurant operating costs,which are expressed as a percentage of restaurant sales. The information foreach three-month and six-month period is unaudited, and we have prepared it onthe same basis as the audited financial statements. In the opinion ofmanagement, all necessary adjustments, consisting only of normal recurringadjustments, have been included to present fairly the unaudited quarterlyresults.

 

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

 
| ** **                                 | ** ** | **Three months ended** | ** ** | **Six months ended** | ** ** |
|--------------------------------------------|------------|-----------------------------|------------|---------------------------|------------|
| ** **                                 | ** ** | **June 27,  2010**     | ** ** | **June 28,  2009**   | ** ** | **June 27,  2010** | ** ** | **June 28,  2009** | ** ** |
| Revenue:                                   |       |                        |       |                      |       |   |   |   |   |
| Restaurant sales                           |       | 90.3                        | %          | 90.9                      | %          | 90.4 | % | 90.8 | % |
| Franchising royalties and fees             |       | 9.7                         |       | 9.1                       |       | 9.6 |   | 9.2 |   |
| Total revenue                              |       | 100.0                       |       | 100.0                     |       | 100.0 |   | 100.0 |   |
| Costs and expenses:                        |       |                        |       |                      |       |   |   |   |   |
| Restaurant operating costs:                |       |                        |       |                      |       |   |   |   |   |
| Cost of sales                              |       | 28.6                        |       | 30.5                      |       | 29.6 |   | 30.4 |   |
| Labor                                      |       | 30.5                        |       | 30.6                      |       | 30.0 |   | 30.2 |   |
| Operating                                  |       | 16.1                        |       | 15.3                      |       | 15.8 |   | 15.2 |   |
| Occupancy                                  |       | 6.7                         |       | 6.7                       |       | 6.6 |   | 6.5 |   |
| Depreciation and amortization              |       | 6.5                         |       | 6.1                       |       | 6.4 |   | 5.9 |   |
| General and administrative                 |       | 8.9                         |       | 9.1                       |       | 8.4 |   | 8.9 |   |
| Preopening                                 |       | 0.8                         |       | 1.3                       |       | 0.8 |   | 1.6 |   |
| Loss on asset disposals and store closures |       | 0.4                         |       | 0.2                       |       | 0.3 |   | 0.2 |   |
| Total costs and expenses                   |       | 90.4                        |       | 92.2                      |       | 90.0 |   | 91.2 |   |
| Income from operations                     |       | 9.6                         |       | 7.8                       |       | 10.0 |   | 8.8 |   |
| Investment income (loss)                   |       | (0.1                        | )          | 0.3                       |       | 0.0 |   | 0.2 |   |
| Earnings before income taxes               |       | 9.4                         |       | 8.1                       |       | 10.0 |   | 8.9 |   |
| Income tax expense                         |       | 3.2                         |       | 2.8                       |       | 3.4 |   | 3.0 |   |
| Net earnings                               |       | 6.3                         |       | 5.4                       |       | 6.6 |   | 5.9 |   |

 

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

 
| ** **                | ** ** | **As of**               | ** ** |
|---------------------------|------------|-------------------------|------------|
| ** **                | ** ** | **June 27,  2010** | ** ** | **June 28,  2009** | ** ** |
| Company-owned restaurants |       | 234                     |       | 215 |   |
| Franchised restaurants    |       | 447                     |       | 383 |   |

 

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

 
| ** **                     | ** ** | **Three months ended**  | ** ** | **Six months ended**    | ** ** |
|--------------------------------|------------|-------------------------|------------|-------------------------|------------|
| ** **                     | ** ** | **June 27,  2010** | ** ** | **June 28,  2009** | ** ** | **June 27,  2010** | ** ** | **June 28,  2009** | ** ** |
| Company-owned restaurant sales |       | $                       | 131,531    |                    | $          | 117,763 |   | $ | 269,493 |   | $ | 237,187 |   |
| Franchised restaurant sales    |       | 278,422                 |       | 238,490                 |       | 561,866 |   | 480,607 |   |
|                                |            |                         |            |                         |            |  |  |  |  |  |  |  |  |

 

Increasesin comparable same-store sales are as follows (based on restaurants operatingat least fifteen months):

 
|                           |       |                             |       |                           |       |                    |       |                    |       |   |   |   |   |
|--------------------------------|------------|----------------------------------|------------|--------------------------------|------------|-------------------------|------------|-------------------------|------------|--------|--------|--------|--------|
| ** **                     | ** ** | **Three months ended** | ** ** | **Six months ended** | ** ** |
| ** **                     | ** ** | **June 27,  2010**          | ** ** | **June 28,  2009**        | ** ** | **June 27,  2010** | ** ** | **June 28,  2009** | ** ** |
| Company-owned same-store sales |       | (0.1                             | )%         |                           | 2.8        | %                       |       | 0.0                     | %          |   | 4.6    | %      |   |
| Franchised same-store sales    |       | (0.7                             | )          |                           | 3.7        |                    |       | 0.0                     |       |   | 4.9    |   |   |
|                                |            |                                  |            |                                |            |                         |            |                         |            |        |        |        |        |  |  |  |  |

 

Theaverage prices paid per pound for chicken wings are as follows:

 
|                    |       |                             |       |                           |       |                    |       |                    |       |   |   |   |   |
|-------------------------|------------|----------------------------------|------------|--------------------------------|------------|-------------------------|------------|-------------------------|------------|--------|--------|--------|--------|
| ** **              | ** ** | **Three months ended** | ** ** | **Six months ended** | ** ** |
| ** **              | ** ** | **June 27,  2010**          | ** ** | **June 28,  2009**        | ** ** | **June 27,  2010** | ** ** | **June 28,  2009** | ** ** |
| Average price per pound |       | $                                | 1.51       |                           | 1.69       |                    | 1.72       |                    | 1.66       |   |

 

**Results of Operations for the Three Months Ended June 27,2010 and June 28, 2009**

 

Restaurantsales increased by $13.8 million, or 11.7%, to $131.5 million in 2010 from$117.8 million in 2009. The increase in restaurant sales was due to a $13.8million increase associated with 9 new company-owned restaurants that opened in2010 and 41 company-owned restaurants opened before 2010 that did not meet thecriteria for same-store sales for all or part of the three-month periodpartially offset by a $70,000 decrease related to a 0.1% decrease in same-storesales.

 

Franchiseroyalties and fees increased by $2.3 million, or 19.5%, to $14.2 million in2010 from $11.9 million in 2009. The increase was primarily due to additionalroyalties collected from 28 new franchised restaurants that opened in 2010 and37 franchised restaurants that opened in the last six months of 2009.Same-store sales for franchised restaurants decreased 0.7% in the secondquarter of 2010.

 

Costof sales increased by $1.7 million, or 4.7%, to $37.6 million in 2010 from$35.9 million in 2009 due primarily to more restaurants being operated in 2010.Cost of sales as a percentage of restaurant sales decreased to 28.6% in 2010from 30.5% in 2009. Cost of sales as a percentage of restaurant sales decreasedprimarily due to lower chicken wing prices. For the second quarter of 2010, thecost of chicken wings averaged $1.51 per pound which was a 10.7% decrease overthe same period in 2009.  Traditional andboneless wing sales both remained consistent segments of our menu mix.  Traditional and boneless wings wereapproximately 20% and 19% , respectively, of our restaurant sales in both 2010and 2009.

 

Labor expenses increased by $4.0 million, or 11.2%, to $40.1 million in2010 from $36.1 million in 2009 due primarily to more restaurants beingoperated in 2010. Labor expenses as a percentage of restaurant sales decreasedto 30.5% in 2010 from 30.6% in 2009. The decrease in labor expenses as apercentage of restaurant sales was primarily due to lower medical costs andhourly labor costs partially offset by higher management labor costs.

 

Operating expenses increased by $3.2 million, or 17.9%, to $21.2million in 2010 from $18.0 million in 2009 due primarily to more restaurantsbeing operated in 2010. Operating expenses as a percentage of restaurant salesincreased to 16.1% in 2010 from 15.3% in 2009. The increase in operatingexpenses as a percentage of restaurant sales is primarily due to additionalcosts related to pay-per-view sporting events and local marketing costs.

 

Occupancyexpenses increased by $883,000, or 11.1%, to $8.8 million in 2010 from $7.9million in 2009 due primarily to more restaurants being operated in 2010.Occupancy expenses as a percentage of restaurant sales remained consistent at6.7% in 2010 and 2009.

 

Depreciationand amortization increased by $1.6 million, or 19.9%, to $9.5 million in 2010from $7.9 million in 2009. The increase was primarily due to the additionaldepreciation on 9 new restaurants opened in 2010 and the 17 new restaurantsthat opened in the last six months of 2009.

 

Generaland administrative expenses increased by $1.2 million, or 9.8%, to $12.9million in 2010 from $11.8 million in 2009 primarily due to additionalheadcount and higher professional fees. General and administrative expenses asa percentage of 

 

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totalrevenue decreased to 8.9% in 2010 from 9.1% in 2009. Exclusive of stock-basedcompensation, our general and administrative expenses as a percentage ofrevenue increased to 8.0% from 7.8% due primarily to higher professional feespartially offset by lower cash incentive expense.

 

Preopeningcosts decreased by $476,000, to $1.2 million in 2010 from $1.7 million in 2009.In 2010, we incurred costs of $734,000 for four new company-owned restaurantsopened in the second quarter of 2010 and costs of $428,000 for restaurants thatwill open in the third quarter of 2010 or later. In 2009, we incurred costs of$1.5 million for 9 new company-owned restaurants opened in the second quarterof 2009, and incurred $143,000 for restaurants that opened in the second halfof 2009. In 2010, we expect average preopening costs per restaurant to beapproximately $220,000.

 

Loss on asset disposals and store closures increased by $254,000 to$526,000 in 2010 from $272,000 in 2009. In 2010, the loss was related to storeclosing costs related to five store closures of $155,000 and the write-off ofmiscellaneous equipment. In 2009, the loss was due to the write-off ofmiscellaneous equipment.

 

Investmentincome (loss) decreased by $569,000 to ($156,000) in 2010 from $413,000 in2009. The decrease was primarily due to losses on investments held for adeferred compensation plan and reductions in interest income due to lowerinterest rates on our investment portfolio. Cash and marketable securitiesbalances at the end of the second quarter totaled $69.2 million in 2010compared to $49.0 million at the end of the second quarter of 2009.

 

Provision for income taxes increased $1.0 million to $4.6 million in2010 from $3.6 million in 2009. The effective tax rate as a percentage ofincome before taxes decreased to 33.4% in 2010 from 34.0% in 2009. For 2010, webelieve our effective annual tax rate will be between 33.5-34.5%.

 

**Results of Operations for the Six Months Ended June 27,2010 and June 28, 2009**

 

Restaurantsales increased by $32.3 million, or 13.6%, to $269.5 million in 2010 from$237.2 million in 2009. The increase in restaurant sales was due to a $32.2million increase associated with 9 new company-owned restaurants that opened in2010 and 52 company-owned restaurants opened before 2010 that did not meet thecriteria for same-store sales for all or part of the six-month period, and$49,000 related to a slight increase in same-store sales.

 

Franchiseroyalties and fees increased by $4.5 million, or 18.7%, to $28.5 million in2010 from $24.0 million in 2009. The increase was primarily due to additionalroyalties collected from 28 new franchised restaurants that opened in 2010 and37 franchised restaurants that opened in the last six months of 2009.Same-store sales for franchised restaurants was flat in 2010.

 

Costof sales increased by $7.7 million, or 10.7%, to $79.8 million in 2010 from$72.1 million in 2009 due primarily to more restaurants being operated in 2010.Cost of sales as a percentage of restaurant sales decreased to 29.6% in 2010from 30.4% in 2009. Cost of sales as a percentage of restaurant sales decreasedprimarily due to the leverage of food and alcohol costs  as a result of menu price increases,partially offset by higher chicken wing prices. For the first half of 2010, thecost of chicken wings averaged $1.72 per pound which was a 3.6% increase overthe same period in 2009.  Traditional andboneless wing sales both remained consistent segments of our menu mix.  Traditional and boneless wings wereapproximately 20% and 19%, respectively, of our restaurant sales in both 2010and 2009.

 

Labor expenses increased by $9.2 million, or 12.8%, to $80.8 million in2010 from $71.6 million in 2009 due primarily to more restaurants beingoperated in 2010. Labor expenses as a percentage of restaurant sales decreasedto 30.0% in 2010 from 30.2% in 2009. The decrease in labor expenses as apercentage of restaurant sales was primarily due to lower medical costs andhourly labor costs partially offset by higher management labor costs.

 

Operating expenses increased by $6.7 million, or 18.6%, to $42.6million in 2010 from $36.0 million in 2009 due primarily to more restaurantsbeing operated in 2010. Operating expenses as a percentage of restaurant salesincreased to 15.8% in 2010 from 15.2% in 2009. The increase in operatingexpenses as a percentage of restaurant sales is primarily due to higheradditional costs related to pay-per-view sporting events and higherself-insurance costs.

 

Occupancyexpenses increased by $2.2 million, or 14.2%, to $17.7 million in 2010 from$15.5 million in 2009 due primarily to more restaurants being operated in 2010.Occupancy expenses as a percentage of restaurant sales increased to 6.6% in2010 from 6.5% in 2009 due to reduced leverage from lower sales volumeincreases.

 

Depreciationand amortization increased by $3.6 million, or 23.6%, to $19.0 million in 2010from $15.4 million in 2009. The increase was primarily due to the additionaldepreciation on 9 new restaurants opened in 2010 and the 17 new restaurantsthat opened in the last six months of 2009.

 

Generaland administrative expenses increased by $1.8 million, or 7.6%, to $25.0million in 2010 from $23.2 million in 2009 primarily due to additionalheadcount and higher professional fees. General and administrative expenses asa percentage of 

 

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totalrevenue decreased to 8.4% in 2010 from 8.9% in 2009. Exclusive of stock-basedcompensation, we reduced our general and administrative expenses as apercentage of revenue to 7.5% from 7.9% due to leverage of our wage-relatedexpenses against higher revenue and lower cash incentive plan expenses,partially offset by higher professional fees.

 

Preopeningcosts decreased by $1.8 million, to $2.3 million in 2010 from $4.1 million in2009. In 2010, we incurred costs of $1.8 million for nine new company-ownedrestaurants opened in the first six months of 2010 and costs of $477,000 forrestaurants that will open in the third quarter of 2010 or later. In 2009, weincurred costs of $3.9 million for 19 new company-owned restaurants opened inthe first six months of 2009, and incurred $144,000 for restaurants that openedin the second half of 2009.

 

Loss on asset disposals and store closures increased by $490,000 to$937,000 in 2010 from $447,000 in 2009. In 2010, the loss was related to storeclosing costs related to seven store closures of $286,000 and the write-off ofmiscellaneous equipment. In 2009, the loss was due to the write-off ofmiscellaneous equipment.

 

Investmentincome (loss) decreased by $460,000 to $29,000 in 2010 from $489,000 in 2009.The decrease was primarily due to losses on investments held for a deferredcompensation plan and reductions in interest income due to lower interest rateson our investment portfolio. Cash and marketable securities balances at the endof the second quarter totaled $69.2 million in 2010 compared to $49.0 millionat the end of the second quarter of 2009.

 

Provision for income taxes increased $2.2 million to $10.1 million in2010 from $7.9 million in 2009. The effective tax rate as a percentage ofincome before taxes increased to 33.9% in 2010 from 33.8% in 2009. The increasein the effective tax rate was due to the effects of increased stock-basedcompensation expenses partially offset by increased employment tax credits.

 

**Liquidity and Capital Resources**

 

Ourprimary liquidity and capital requirements have been for new restaurantconstruction, remodeling and maintaining our existing company-ownedrestaurants, working capital, acquisitions, and other general business needs.We fund these expenses, except for acquisitions, primarily with cash fromoperations. Depending on the size of the transaction, acquisitions wouldgenerally be funded from cash and marketable securities balances.  The cash and marketable securities balance atJune 27, 2010 was $69.2 million. We invest our cash balances in debtsecurities with the focus on protection of principal, adequate liquidity, andreturn on investment based on risk. As of June 27, 2010, nearly all excesscash was invested in high quality municipal securities.

 

Forthe six months ended June 27, 2010, net cash provided by operatingactivities was $41.5 million. Net cash provided by operating activitiesconsisted primarily of net earnings adjusted for non-cash expenses, an increasein accounts payable,  and a decrease inrefundable income taxes, partially offset by a decrease in accrued expenses.The increase in accounts payable was due to an increase in the number ofrestaurants and the timing of payments. The decrease in refundable income taxeswas due to the timing of income tax payments. The decrease in accrued expenseswas primarily due to the payout of annual bonuses.

 

Forthe six months ended June 28, 2009, net cash provided by operatingactivities was $37.3 million. Net cash provided by operating activitiesconsisted primarily of net earnings adjusted for non-cash expenses anddecreases in prepaid expenses and refundable income taxes. The change inprepaid expenses was due to the timing of insurance payments. The change inincome taxes was due to the timing of income tax payments.

 

Forthe six months ended June 27, 2010 and June 28, 2009, net cash usedin investing activities was $40.6 million and $33.6 million, respectively.Investing activities included purchases of property and equipment related tothe opening of new company-owned restaurants and restaurants under constructionin both periods. During the first six months of 2010 and 2009, we opened 9 and19 restaurants, respectively. For the full year of 2010, we expect capitalexpenditures for approximately 36 to 40 new company-owned restaurants to costapproximately $1.8 million per location and expenditures to be approximately$20.1 million for the maintenance and remodel of existing restaurants. In thefirst six months of 2010, we purchased $61.1 million of marketable securitiesand received proceeds of $46.0 million as these investments matured or weresold. In the first six months of 2009, we purchased $25.3 million of marketablesecurities and received proceeds of $24.8 million as these investments maturedor were sold.

 

Forthe six months ended June 27, 2010 and June 28, 2009, net cash usedin financing activities was $727,000 and $927,000, respectively. Net cash usedin financing activities for 2010 resulted primarily from tax payments forrestricted stock units of $1.6 million, partially offset by proceeds from theexercise of stock options of $782,000 and the excess tax benefit from stock issuanceof $116,000. Net cash used in financing activities for 2009 resulted primarilyfrom tax payments for restricted stock units of $1.5 million, partially offsetby proceeds from the exercise of stock options of $555,000. No additionalfunding from 

 

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theissuance of common stock (other than from the exercise of options and purchaseof stock under the employee stock purchase plan) is anticipated for theremainder of 2010.

 

Ourliquidity is impacted by minimum cash payment commitments resulting fromoperating lease obligations for our restaurants and our corporate offices.Lease terms are generally 10 to 15 years with renewal options and generallyrequire us to pay a proportionate share of real estate taxes, insurance, commonarea maintenance, and other operating costs. Some restaurant leases provide forcontingent rental payments based on sales thresholds. We own the buildings inwhich 33 of our restaurants operate and therefore have very limited ability toenter into sale-leaseback transactions as a potential source of cash.

 

Thefollowing table presents a summary of our contractual operating leaseobligations and commitments as of June 27, 2010:

 
| ** **                                           | ** ** | ** ** | ** ** | **Payments Due By Period (in thousands)** | ** ** |
|------------------------------------------------------|------------|------------|------------|-------------------------------------------|------------|
| ** **                                           | ** ** | **Total**  | ** ** | **Less than********One year**        | ** ** | **1-3 years** | ** ** | **3-5 years** | ** ** | **After 5********years** | ** ** |
| Operating lease obligations                          |       | $          | 243,630    |                                      | 29,485     |   | 55,772 |   | 50,170 |   | 108,203 |   |
| Lease commitments for restaurants under  development |       | 53,226     |       | 2,649                                     |       | 7,473 |   | 7,509 |   | 35,595 |   |
| Total                                                |       | $          | 296,856    |                                      | 32,134     |   | 63,245 |   | 57,679 |   | 143,798 |   |

 

Webelieve the cash flows from our operating activities and our balance of cashand marketable securities will be sufficient to fund our operations andbuilding commitments and meet our obligations for the foreseeable future. Ourfuture cash outflows related to income tax uncertainties amounted to $702,000as of June 27, 2010. These amounts are excluded from the contractualobligations table due to the high degree of uncertainty regarding the timing ofthese liabilities.

 

**Off-BalanceSheet Arrangements**

 

Asof June 27, 2010, we had no off-balance sheet arrangements ortransactions.

 

**Risk Factors/Forward-Looking Statements**

 

Theforegoing discussion and other statements in this report contain various “forward-lookingstatements” within the meaning of Section 27A of the Securities Act of1933, as amended, and Section 21E of the Securities Exchange Act of 1934,as amended. Forward-looking statements are based on current expectations orbeliefs concerning future events. Such statements can be identified by the useof terminology such as “anticipate,” “believe,” “continue,” “could,” “estimate,”“expect,” “intend,” “may,” “plan,” “potential,” “should,” “will,” “project,” “will,”“forecast” or the negative of these terms or other comparable terminology. Ourforward-looking statements generally relate our future financial and storeperformance measures and growth goals for 2010 and beyond, including but notlimited to projected annual unit and net earnings growth rates; beliefsregarding future sales performance; benefits of menu price increases; theeffect of key initiatives, promotional activities, and advertising andmarketing campaigns; the number and timing of projected store openings and thenature of our expansion activities; expected 2010 tax rates; adequacy ofcapital resources and other future events. Although it is not possible toforesee all of the factors that may cause actual results to differ from our forward-lookingstatements, such factors include, among others, the following risk factors(each of which is discussed in greater detail in our Annual Report on Form 10-Kfor the fiscal year ended December 27, 2009):

 

·                  Fluctuations in chicken wing prices couldimpact our operating income.

 

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

 

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

 

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

 

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

 

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

 

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·                  New restaurants added to our existing marketsmay take sales from existing restaurants.

 

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

 

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

 

·                  The current economic crisis could have a materialadverse impact on our landlords or other tenants in retail centers in which weor our franchisees are located, which in turn could negatively affect ourfinancial results.

 

·                  We are dependent on franchisees and theirsuccess.

 

·                  Franchisees may take actions that could harmour business.

 

·                  We could face liability from our franchisees.

 

·                  We may be unable to compete effectively inthe restaurant industry.

 

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

 

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

 

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

 

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

 

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

 

·                  The loss of key executives, or difficultiesrecruiting and retaining qualified team members, could jeopardize our abilityto meet our financial targets.

 

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

 

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

 

·                  Changes in employment laws or regulationcould harm our performance.

 

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

 

·                  Changes in public health concerns may impactour performance.

 

·                  A regional or global health pandemic couldseverely affect our business.

 

·                  A decline in visitors to any of the businessdistricts near the locations of our restaurants could negatively affect ourrestaurant sales.

 

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

 

·                  Unfavorable publicity could harm ourbusiness.

 

·                  There is volatility in our stock price.

 

·                  We may be subject to increased labor andinsurance costs.

 

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

 

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·                  We are dependent on information technologyand any material failure of that technology could impair our ability toefficiently operate our business.

 

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

 

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

 

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

 

**ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUTMARKET RISK**

 

Weare exposed to market risk related to our cash and cash equivalents andmarketable securities. We invest our excess cash in highly liquid short-terminvestments with maturities of less than one year. These investments are notheld for trading or other speculative purposes. Changes in interest ratesaffect the investment income we earn on our cash and cash equivalents andmarketable securities and, therefore, impact our cash flows and results ofoperations. We also have trading securities, which are held to generate returnsthat seek to offset changes in liabilities related to the equity market risk ofour deferred compensation arrangements.

 

*Financial Instruments*

 

Financialinstruments that potentially subject us to concentrations of credit riskconsist principally of municipal securities. We do not believe there is asignificant risk of non-performance by these municipalities because of ourinvestment policy restrictions as to acceptable investment vehicles.

 

*Inflation*

 

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

 

*Commodity Price Risk*

 

Manyof the food products purchased by us are affected by weather, production,availability, and other factors outside our control. We believe that almost allof our food and supplies are available from several sources, which helps tocontrol food product risks. We negotiate directly with independent suppliersfor our supply of food and paper products. We use members of UniPro FoodServices, Inc., a national cooperative of independent food distributors,to distribute these products from the suppliers to our restaurants. We haveminimum purchase requirements with some of our vendors, but the terms of thecontracts and nature of the products are such that our purchase requirements donot create a market risk. The primary food product used by company-owned andfranchised restaurants is chicken wings. We work to counteract the effect ofthe volatility of chicken wing prices, which can significantly affect our costof sales and cash flow, with the introduction of new menu items, effectivemarketing promotions, focused efforts on food costs and waste, and menu priceincreases. We also explore purchasing strategies to reduce the severity of costincreases and fluctuations. We currently purchase our chicken wings at marketprices. If a satisfactory long-term price agreement for chicken wings were toarise, we would consider locking in prices to reduce our price volatility. Ifthere is a significant rise in the price of chicken wings, and we are unable tosuccessfully adjust menu prices or menu mix or otherwise make operationaladjustments to account for the higher wing prices, our operating results couldbe adversely affected. Chicken wings accounted for approximately 23.6% and25.5% of our cost of sales in the second quarters of 2010 and 2009,respectively, with a quarterly average price per pound of $1.51 and $1.69, respectively.

 

**ITEM 4. CONTROLS AND PROCEDURES**

 

*Management’sReport on Internal Control Over Financial Reporting*

 

Asof the end of the period covered by this report, we conducted an evaluation,under the supervision and with the participation of our principal executiveofficer and principal financial officer, of our disclosure controls andprocedures as defined in Rules 13a-15(e) and 15d-15(e) under theSecurities Exchange Act of 1934 (“the Exchange Act”). Based on this evaluation,the principal executive officer and principal financial officer concluded thatour disclosure controls and procedures are effective to ensure that informationrequired to be disclosed by us in the reports we file or submit under the 

 

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ExchangeAct is accumulated and communicated to our management, including our principalexecutive officer and principal financial officer, as appropriate to allowtimely decisions regarding required disclosure and recorded, processed,summarized and reported within the time periods specified in Securities andExchange Commission rules and forms.

 

*Changesin Internal Control Over Financial Reporting*

 

Therewere no changes in our internal controls over financial reporting during ourmost recently completed fiscal quarter that have materially affected, or arereasonably likely to materially affect, our internal controls over financialreporting.

 

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**PART II— OTHER INFORMATION**

 

**ITEM 1. LEGAL PROCEEDINGS**

 

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

 

**ITEM 6. EXHIBITS**

 

SeeExhibit Index following the signature page of this report.

 

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**SIGNATURES**

 

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

 
| **Date: August 4, 2010** | **BUFFALO WILD WINGS, INC.** |
|-------------------------------|-----------------------------------|
|                          |                              |   |
|                          | By:                               | /s/  Sally J. Smith |
|                          |                              | Sally  J. Smith, President and Chief Executive Officer 

(principal  executive officer) |
|                          |                              |   |
|                          | By:                               | /s/  Mary J. Twinem |
|                          |                              | Mary  J. Twinem, Executive Vice President, Chief 

Financial  Officer and Treasurer (principal financial and 

accounting  officer) |

 

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**EXHIBIT INDEX**

 

**BUFFALO WILD WINGS, INC.**

**FORM 10-Q FOR QUARTER ENDED JUNE 27, 2010**

 
| **Exhibit  Number** | ** ** | **Description** |
|---------------------|------------|-----------------|
| 3.1                 |       |            | Restated  Articles of Incorporation, as amended (Incorporated by reference to  Exhibit 3.1 to our Form 10-Q for the fiscal quarter ended  June 29, 2008). |
|                |       |            |   |
| 3.2                 |       |            | Amended  and Restated Bylaws, as amended (Incorporated by reference to  Exhibit 3.1 to our current report on Form 8-K filed May 27,  2009). |
|                |       |            |   |
| 31.1                |       |            | Certification  of Chief Executive Officer Pursuant to Section 302 of the Sarbanes-Oxley  Act |
|                |       |            |   |
| 31.2                |       |            | Certification  of Chief Financial Officer Pursuant to Section 302 of the Sarbanes-Oxley  Act |
|                |       |            |   |
| 32.1                |       |            | Certification  of Chief Executive Officer Pursuant to Section 906 of the Sarbanes-Oxley  Act |
|                |       |            |   |
| 32.2                |       |            | Certification  of Chief Financial Officer Pursuant to Section 906 of the Sarbanes-Oxley  Act |

 

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