UNITED
STATES


SECURITIES
AND EXCHANGE COMMISSION


Washington,
DC 20549







FORM
10-K





x      Annual Report
Pursuant to Section 13 or 15(d) of the Securities Exchange Act of
1934for the fiscal year ended December
27, 2009


or





 ̈      Transition Report
Under Section 13 or 15(d) of the Securities Exchange Act of 1934for the transition period from 
to .




Commission File Number:
000-24743







BUFFALO
WILD WINGS, INC.


(Exact name of registrant as
specified in its charter)








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





5500
Wayzata Boulevard, Suite 1600, Minneapolis, MN 55416


(Address
of Principal Executive Offices)





Registrant’s telephone number (952)
593-9943





Securities
registered pursuant to Section 12(b) of the Act:




Title
      of each class
            Name
      of each exchange on which registeredCommon
      Stock, no par value
            Nasdaq
      Global Market




Securities
registered pursuant to Section 12(g) of the Act: None








Indicate
by check mark if the registrant is a well-known seasoned issuer, as defined in
Rule 405 of the Securities Act. YES   ̈
     NO  x





Indicate
by check mark if the registrant is not required to file reports pursuant to
Section 13 or Section 15(d) of the Act.  YES   ̈
     NO  x





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





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





Indicate
by check mark if disclosure of delinquent filers pursuant to Item 405 of
Regulation S-K is not contained herein, and will not be contained, to the best
of registrant’s knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K.    ̈





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


Large Accelerated
Filer    ̈    Accelerated
Filer  x    Non-Accelerated
Filer    ̈    Smaller
Reporting Company    ̈





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





The
aggregate market value of the voting stock held by non-affiliates was $573
million based on the closing sale price of the Company’s Common Stock as
reported on the NASDAQ Stock Market on June 26, 2009.





The
number of shares outstanding of the registrant’s common stock as of February 17,
2010: 18,059,205 shares.





DOCUMENTS
INCORPORATED BY REFERENCE


Portions
of the Proxy Statement for the 2010 Annual Meeting of Shareholders are
incorporated by reference into Part III of this report.
  1


PART
      I
            PageItem 1.
            Business
            3Item 1A.
            Risk
      Factors
            10Item 1B.
            Unresolved
      Staff Comments
            17Item
      2.
            Properties
            18Item
      3.
            Legal
      Proceedings
            19Item
      4.
            Submission
      of Matters to a Vote of Security Holders
            19PART
      IIItem
      5.
            Market
      for Registrant’s Common Equity, Related Stockholder Matters and Issuer
      Purchases of Equity Securities
            20Item
      6.
            Selected
      Financial Data
            22Item
      7.
            Management’s
      Discussion and Analysis of Financial Condition and Results of
      Operations
            23Item 7A.
            Quantitative
      and Qualitative Disclosures About Market Risk
            34Item
      8.
            Consolidated
      Financial Statements and Supplementary Data
            35Item
      9.
            Changes
      in and Disagreements with Accountants on Accounting and Financial
      Disclosure
            59Item
      9A.
            Controls
      and Procedures
            59Item
      9B.
            Other
      Information
            60PART
      IIIItem
      10.
            Directors,
      Executive Officers and Corporate Governance
            61Item
      11.
            Executive
      Compensation
            61Item
      12.
            Security
      Ownership of Certain Beneficial Owners and Management and Related
      Stockholder Matters
            61Item
      13.
            Certain
      Relationships and Related Transactions, and Director
      Independence
            61Item
      14.
            Principal
      Accountant Fees and Services
            61PART
      IVItem
      15.
            Exhibits
      and Financial Statement Schedules
            62Signatures
            63





2


PART
I


ITEM
1. BUSINESS





General





References
in this document to “Buffalo Wild Wings,” “company,” “we,” “us” and “our” refer
to the business of Buffalo Wild Wings, Inc. and our subsidiaries. We maintain an
Internet website address at www.buffalowildwings.com. We
make available free of charge through our website our annual report on Form
10-K, quarterly reports on Form 10-Q, current reports on Form 8-K, and all
amendments to those reports as soon as they are reasonably available after these
materials are electronically filed with or furnished to the Securities and
Exchange Commission (“SEC”). These materials are also accessible on the SEC’s
web site at www.sec.gov. The public may read and copy any materials we file with
the SEC at the SEC’s Public Reference Room at 100 F Street, NE, Washington, DC
20549. The public may obtain information for the Public Reference Room by
calling the SEC at 1-800-SEC-0330.





We are an
established and growing owner, operator, and franchisor of restaurants featuring
a variety of boldly-flavored, cravable menu items including our Buffalo, New
York-style chicken wings spun in any of our 14 signature sauces. Our restaurants
create a welcoming neighborhood atmosphere that includes an extensive
multi-media system, a full bar and an open layout, which appeals to sports fans
and families alike. We differentiate our restaurants by the social environment
we create and the connection we make with our team members, guests and the local
community. Our guests have the option of watching sporting events or other
popular programs on our projection screens and approximately 40 additional
televisions, playing Buzztime®
Trivia or video games. The open layout of our restaurants offers dining and bar
areas that provide distinct seating choices for sports fans and families. Our
unique service model, which provides the flexibility of ordering at the counter
or table, allows our guests to customize their Buffalo Wild Wings®
experience to meet their time demands, service preferences or the experience
they are seeking of a workday lunch, a dine-in dinner, a take-out meal, an
afternoon or evening enjoying a sporting event or a late-night craving. Buffalo
Wild Wings®
restaurants are the place people want to be; where any excuse to get together is
a good one.





Buffalo
Wild Wings®
restaurants have widespread appeal and have won dozens of “Best Wings” and “Best
Sports Bar” awards across the country. Our menu, competitively priced between
the quick casual and casual dining segments, features traditional chicken wings,
boneless wings, and other items including chicken tenders, Wild FlatbreadsTM,
popcorn shrimp, specialty hamburgers and sandwiches, wraps, Buffalito® soft
tacos, appetizers and salads. Our made-to-order menu items are enhanced by the
bold flavor profile of our 14 signature sauces, ranging from Sweet BBQTM to
Blazin’®. Our
restaurants offer approximately 20 domestic and imported beers on tap, including
several local or regional micro-brews and a wide selection of bottled beers,
wines, and liquor. This award-winning food and memorable experience drives guest
visits and loyalty.





We have
established our brand through coordinated marketing and operational execution
that ensures brand recognition and quality and consistency throughout our
concept. These efforts include marketing programs and irreverent, award-winning
advertising to support both our company-owned and franchised restaurants. We
also prominently feature our trademark Buffalo insignias, yellow and black
colors, stylized buffalo images, sports memorabilia, dozens of televisions and
projection screens, and exterior trade dress at our restaurants and as branding
for our company materials. Our concept is further strengthened by our emphasis
on operational excellence supported by stringent operating guidelines and
comprehensive employee training in both company-owned and franchised
restaurants.





Buffalo
Wild Wings was founded in 1982 at a location near The Ohio State University. Our
original name was Buffalo Wild Wings & Weck® and
we became more popularly known as bw-3®. In
1991, we began our franchising program. In 2003, we completed an initial public
offering and became a publicly-held company. Today, we are popular throughout
the United States and widely recognized as Buffalo Wild Wings. As our tagline
shouts, and our guests attest, You Have To Be
HereTM.





Our
Concept and Business Strategy





Our goal
is to continue to grow and develop the Buffalo Wild Wings Grill & Bar®
concept into a leading nationally and internationally recognized restaurant
chain. To do so, we plan to execute the following strategies:





●
            Open restaurants in new and
      existing markets;





●
            Offer boldly-flavored menu
      items with broad appeal;





●
            Create an inviting,
      neighborhood atmosphere;





●
            Continue to strengthen the
      Buffalo Wild Wings®brand;





3


●
            Focus on operational
      excellence; and





●
            Increase same-store sales and
      average unit volumes.





Growth
Strategy





Our
growth strategy involves opening company-owned and franchised restaurants in
both new and existing markets. We believe that we have established and continue
to expand the necessary infrastructure and control systems to support our
disciplined growth strategy and that our concept can support over 1,000
restaurants in the United States. We have developed procedures for identifying
new market opportunities, determining our expansion strategy in those markets
and identifying sites for company-owned and franchised restaurants. Our growth
strategy is moving toward a mix of approximately 40% company-owned restaurants
and approximately 60% franchised restaurants. At the end of 2010, we anticipate
that approximately 36% of the restaurants will be company-owned.





We intend
to build additional company-owned restaurants in both new and existing markets.
In most of our existing markets, we plan to continue to develop new
company-owned restaurants until a market is penetrated to a point that will
enable us to gain marketing and cost efficiencies. We intend to enter new
markets by opening several restaurants within a one-year period to quickly build
our brand awareness. We intend to grow our franchise system through the
development of new restaurants by existing and new franchisees, focusing on
multiple-unit area development agreements.





The Buffalo Wild Wings®Menu





Our
restaurants feature a variety of menu items including our Buffalo, New
York-style chicken wings spun in one of our signature sauces from sweet to
screamin’ hot:  Sweet BBQTM,
TeriyakiTM,
MildTM,
Parmesan GarlicTM,
MediumTM,
Honey BBQTM,
Spicy GarlicTM,
Asian Zing®,
Caribbean JerkTM, Hot
BBQTM,
HotTM,
Mango HabaneroTM,
Wild® and
Blazin’®. Our chicken wings can be ordered in sizes ranging from six to 100
wings, with larger orders available for parties. Our sauces complement and
distinguish our wings to create a bold flavor profile for our guests. In
addition to traditional and boneless chicken wings, our menu features a wide
variety of food items including chicken tenders, Wild FlatbreadsTM, popcorn
shrimp, specialty hamburgers and sandwiches, wraps, Buffalito® soft
tacos, finger foods and salads. We also provide a 12 & Under Menu option for
kids.





Our
restaurants feature a full bar which offers an extensive selection of
approximately 20 domestic and imported beers on tap as well as bottled beers,
wine and liquor. Additionally, in order to continually improve our menu, our
research and development department continuously tests and implements new menu
items. Our goal is to balance the established menu offerings that appeal to our
loyal guests with new menu items that increase guest frequency and attract new
guests.





Restaurant
Atmosphere and Layout





Our
restaurants are sports grill and bars that provide a high-energy atmosphere
where friends gather for camaraderie and to celebrate competition, as well as
allow our guests the flexibility to customize their dining experience. The
inviting and energetic environment of our restaurants is created using
furnishings that can be easily rearranged to accommodate parties of various
sizes. Our restaurants also feature distinct dining and bar areas with many of
the restaurants having patio seating.





We
strategically place approximately 50 HD flat-screen monitors and up to 10
projection screens throughout the restaurant to allow for easy viewing. These
televisions, combined with our sound system, Buzztime®
Trivia and assorted video games, provide a source of entertainment for our
guests and reinforce the energetic nature of our concept. We tailor the content
and volume of our video and audio programming to reflect our guests’ tastes. We
believe the design of our restaurants enhances our guests’ experiences, drives
repeat visits and solidifies the broad appeal of our concept.





All of
our menu items are made-to-order and are available for take-out, which
approximated 13% of restaurant sales for company-owned restaurants in 2009. Many
of our restaurants have separate parking spots for our take-out
guests.





Current
Restaurant Locations





As of
December 27, 2009, we owned or franchised 652 Buffalo Wild Wings restaurants in
42 states, of which 232 were company-owned and 420 were franchised. In 2010, our
goal is to achieve 13 to 15% unit growth and open a net of approximately 88 new
company-owned and franchised restaurants.





Our
company-owned restaurants range in size from 3,900 to 9,700 square feet, with an
average of approximately 5,700 square feet for restaurants that have opened in
the last three years. We anticipate that future restaurants will range in size
from 4,500 square feet to 6,500 square feet with an average cash investment per
restaurant of approximately $1.75 million, excluding preopening expenses of
approximately $225,000. From time to time, we expect that our restaurants may be
smaller or larger or cost more or less than our targeted range, depending on the
particular circumstances of the selected site or market. Also, from time to
time, we expect to purchase the building or the land and building for certain
restaurants, in which case the cash investment would be significantly higher. In
2008, we acquired eight restaurants from Avado Brands which are larger than our
typical restaurant, ranging from 6,500 square feet to 9,800 square
feet.




4


Our
restaurants are typically open on a daily basis from 11 a.m. to 2 a.m., although
closing times vary depending on the day of the week and city and state
regulations governing the sale of alcoholic beverages. Our franchise agreements
require franchisees to operate their restaurants for a minimum of 12 hours a
day.





Site
Selection and Development





Our site
selection process is integral to the successful execution of our growth
strategy. We have processes for identifying, analyzing and assigning undeveloped
markets for both company-owned and franchise development. Once a market is
assigned, we use a trade area and site selection evaluation system, which has
been customized for the requirements of the Buffalo Wild Wings®
system, to assist in identifying suitable trade areas within that market and
suitable sites within identified trade areas. Criteria examined to determine
appropriate trade areas include the presence of a casual dining corridor,
projected growth within the trade area, the locations of key big box retailers,
key demographics and population density, drive time and trade area analysis and
other quantitative and qualitative measures. Once a suitable trade area is
identified, we examine site-specific details including visibility, signage,
access, ability to get trade dress, and parking. Final approval by one or more
members of our executive management team is required for each company-owned
site. At least one senior franchise executive reviews each franchise
site.





Marketing
and Advertising





We have
developed a unique marketing program designed to communicate a distinct and
consistent brand that differentiates Buffalo Wild Wings®
restaurants from our competitors and that showcases our food and our brand in a
fun and energetic atmosphere. These efforts include national marketing campaigns
and irreverent, award-winning advertising to support both our company-owned and
franchised restaurants. The primary goal of these efforts is to build brand
awareness throughout the United States. In addition, advertising campaigns are
also designed to: i) drive positive same-store sales through additional visits
by our existing guests and visits by new guests, ii) increase margins, iii)
increase average order size, and iv) support strong restaurant
openings.





Marketing Campaigns. Our
primary marketing campaigns focus on our experience or a particular menu item,
day or daypart in an attempt to drive traffic and build brand awareness. For
example, in 2009 we promoted Wing Tuesdays, Boneless Thursdays, late night, and
football. Our secondary marketing campaigns focus on reaching beyond the core
Buffalo Wild Wings®
guest. Given our strategy to be a neighborhood destination, community marketing
is also a key to driving sales and developing brand awareness in each market.
Our restaurants actively sponsor local sporting teams and sporting events to
drive guest traffic associated with those activities.





Advertising. Our media
advertising focuses on positioning the Buffalo Wild Wings® brand
as an inviting neighborhood dining location. Our commercials, print
advertisements and radio spots are irreverent by design and have been recognized
in the restaurant and advertising industries for their creativity.





Franchise Involvement.
System-wide campaigns and promotions are developed and implemented with input
from the Buffalo Wild Wings National Advertising Advisory Board. This volunteer
board includes six franchisees, elected annually by their peers, and meets
regularly to review marketing strategies, provide input on advertising messages
and vendor co-op programs, and discuss marketing objectives.





Operations





Our
management team strives for operational excellence by recruiting, developing and
supporting our highly qualified management teams and employees and implementing
operational standards and best practices within our restaurants.





Restaurant Management. Our
management structure consists of a General Manager, an Assistant General Manager
and up to four other managers depending on sales volume of the restaurant. We
utilize Regional Managers to oversee our General Managers in our company-owned
locations, ensuring that they receive the training and support necessary to
effectively operate their restaurants. Currently, we have 36 Regional Managers
who oversee 4 to 8 restaurants each. As we expand geographically, we expect to
add additional Regional Managers. Similarly, our franchised restaurants receive
operational guidance from our 12 Franchise Consultants, who oversee 25 to 42
restaurants each. We have three Divisional Directors of Operations who have
responsibility for all company and franchise operations and seven Directors of
Operations who provide leadership to the Regional Managers and Franchise
Consultants.





5


Kitchen Operations. An
important aspect of our concept is the efficient design, layout and execution of
our kitchen operations. Due to the relatively simple preparation of our menu
items, the kitchen consists of fryers, grill and food prep stations that are
arranged assembly-line style for maximum productivity. Given our menu and
kitchen design, we are able to staff our kitchen with hourly Team Members who
require only basic training before reaching full productivity. Additionally, we
do not require the added expense of an on-site chef. The ease and simplicity of
our kitchen operations allows us to achieve our goal of preparing casual dining
quality food with minimal wait times. We also believe the ease of our kitchen
operations creates a competitive advantage for our concept.





Training. We provide thorough
training for management and hourly Team Members, with the goal of providing an
excellent guest experience based on our service, food quality and engaging
environment.





Our
managers are trained using a hands-on education process during a seven-week
period at one of our Certified Training Restaurants. During this training
period, our manager trainees work in every aspect of the business, including
both hourly and management functions. In addition, our General Managers and
high-potential Assistant General Managers attend an off-site management skills
class.





Our
hourly Team Members complete a comprehensive position certification process.
Station certification requires 16 to 20 hours of hands-on training. Team Members
must also successfully pass position validations, menu certifications,
responsible alcohol service training, and training on the safe handling of
food.





Team
Members who have demonstrated outstanding performance are provided opportunities
for career advancement. Those with a high level of knowledge in one or more
positions within the restaurant are encouraged to apply to enter the Wing
Certified Trainer (WCT) program. The WCT candidate completes a training plan,
which includes developing and evaluating his/her ability to train and influence
the performance of Team Members. Our objective is to have at least four WCTs in
each restaurant. Team Members who have performed successfully as Wing Certified
Trainers in three or more station areas can apply to become All-Star Trainers.
Our All-Star Trainers have the opportunity to travel around the country to
assist with training at new restaurant openings.





Further,
Team Members with management potential can participate in the Shift Leader
program, which is a developmental program that provides hourly Team Members with
the opportunity to build and demonstrate leadership capabilities while providing
the restaurants with leaders who are trained to support management. The Shift
Leader program helps us to identify talent and build bench strength throughout
the organization – through the selection and training of those who have
demonstrated the initiative, desire, behaviors and competencies necessary for
success in restaurant management, or other positions of leadership.





Career Opportunities. Through
our dynamic and progressive training programs, we are able to motivate and
retain our field operations team by providing them with opportunities for
increased responsibilities and advancement. In addition, we offer
performance-based cash incentives tied to sales, profitability and qualitative
measures such as guest and team-related metrics. We strive for a balance of
internal promotion and external hiring. This provides us with the ability to
retain and grow our Team Members and to infuse our organization with talented
individuals from outside of Buffalo Wild Wings.





Recruiting. We actively
recruit and select individuals who demonstrate enthusiasm and dedication and who
share our passion for high quality guest service delivered through teamwork and
commitment. To attract high caliber managers, we have developed a competitive
compensation plan that includes a base salary and an attractive benefits
package, including participation in a management incentive plan that rewards
managers for achieving restaurant performance objectives.





Food
Preparation, Quality Control and Purchasing





We strive
to maintain high quality standards. Our systems are designed to protect our food
supply at all times, from procurement through the preparation process. We
provide detailed specifications to suppliers for our food ingredients, products
and supplies. Our restaurant managers are certified in a comprehensive food
safety and sanitation course, ServSafe®, developed by the National Restaurant
Association Educational Foundation.





We
negotiate directly with independent suppliers for our supply of food and paper
products. We use members of UniPro Food Services, Inc., a national cooperative
of independent food distributors, to distribute these products to our
restaurants. To maximize our purchasing efficiencies and obtain the lowest
possible prices for our ingredients, products and supplies, our purchasing team
negotiates prices based on the system-wide usage of both company-owned and
franchised restaurants. We believe that competitively priced, high quality
alternative manufacturers, suppliers, growers and distributors are available
should the need arise.





6


T.
Marzetti Company produces our signature sauces, and they maintain sufficient
inventory levels to ensure consistent supply to our restaurants. We have a
confidentiality agreement with Marzetti which prevents our sauces from being
supplied to, or manufactured for, anyone else.





Chicken
wings are an important component of our cost of sales. We work to counteract the
effect of the volatility of chicken wing prices, which can affect our cost of
sales and cash flow, with the introduction of new menu items, effective
marketing promotions, focused efforts on food costs and waste, and menu price
increases. We also explore purchasing strategies to reduce the severity of cost
increases and fluctuations. We currently purchase our chicken wings at market
price. If a satisfactory long-term pricing agreement for chicken wings were to
arise, we would consider locking in prices to reduce our price
volatility.





Restaurant
Franchise Operations





Our
concept continues to attract a strong group of franchisees, many of whom have
substantial prior restaurant operations experience. Our franchisees execute a
separate franchise agreement for each restaurant opened, typically providing for
a 20-year initial term, with an opportunity to enter into a renewal franchise
agreement subject to certain conditions. The initial franchise fee for a single
restaurant is $42,500.  If a franchisee signs an area development
agreement, the initial franchise fee is $42,500 for the first restaurant and
$30,000 for each subsequent restaurant. If the franchisee is an existing
franchisee who has operated a restaurant for a minimum of one year and is
signing an area development agreement, the initial franchise fee is $30,000 for
the first restaurant and $25,000 for each subsequent restaurant. If the
franchisee signs a franchise agreement for a restaurant whose trade area is
wholly within the designated area of another restaurant they own, the franchisee
will only reimburse the costs incurred by us in assisting with the restaurant
opening, and need not pay an initial franchise fee.





Franchisees
also pay us a royalty fee of 5.0% of their restaurant sales. Franchise
agreements typically allow us to assess franchisees an advertising fee in the
amount of 3.5% of their restaurant sales, of which 3.0% was contributed to our
Advertising Fund in 2009 and the remaining 0.5% was spent directly by the
franchisee in the applicable local market. Our current form of franchise
agreement permits us to increase the required contribution to the Advertising
Fund by 0.5% once every three years. The amount contributed to the Advertising
Fund increased from 2.5% to 3.0% on December 26, 2005 and is not expected to
increase in 2010.





All of
our franchise agreements require that each franchised restaurant be operated in
accordance with our defined operating procedures, adhere to the menu established
by us, meet applicable quality, service, health and cleanliness standards and
comply with all applicable laws. We ensure these high standards are being
followed through a variety of means including mystery shoppers and announced and
unannounced quality assurance inspections by our franchise consultants. We may
terminate the franchise rights of any franchisee who does not comply with our
standards and requirements. We believe that maintaining superior food quality,
an inviting and energetic atmosphere and excellent guest service are critical to
the reputation and success of our concept; therefore, we aggressively enforce
the contractual requirements of our franchise agreements.





The area
development agreement establishes the number of restaurants that must be
developed in a defined geographic area and the deadlines by which these
restaurants must open. For area development agreements covering three to seven
restaurants, restaurants are often required to open in approximately 12-month
intervals. For larger development agreements, the interval is typically shorter.
The area development agreement can be terminated by us if, among other reasons,
the area developer fails to open restaurants on schedule.





We work
hard to maintain positive and productive relationships with our franchisees. In
2005, we formed the Buffalo Wild Wings Leadership Council, which is an advisory
board made up of six franchisees elected by their peers that meets three times a
year with our senior leaders.





Information
Technology





We
utilize a standard point-of-sale system in all of our company-owned restaurants
which is integrated to our central offices through a secure, high-speed
connection. Visibility to sales, cost of sales, labor and other operating
metrics is provided to restaurant management through web-based decision support
and analysis tools. Franchisees are required to report sales on a daily basis
through an on-line reporting network and submit their restaurant-level financial
statements on a quarterly and annual basis. Based on custom-developed software
as well as industry-specific applications, this technology allows us to monitor
business performance and optimizes food and labor costs.





7


We are
currently implementing an automated kitchen management system that provides
automation and reporting of cook line performance, including speed-of-service
and order accuracy. Beginning in 2010, we will pilot test a new generation of
restaurant technology focused on further optimizing costs and simplifying
restaurant operations.





Competition





The
restaurant industry is intensely competitive. We compete on the basis of the
taste, quality and price of food offered, guest service, ambience, location, and
overall dining experience. We believe that our attractive price-value
relationship, the atmosphere of our restaurant, our flexible service model and
the quality and distinctive flavor of our food enable us to differentiate
ourselves from our competitors. We believe we compete primarily with local and
regional sports bars and casual dining and quick casual establishments, and to a
lesser extent with quick service restaurants such as wing-based take-out
concepts. Many of our direct and indirect competitors are well-established
national, regional or local chains and some have substantially greater financial
and marketing resources than we do. We also compete with other restaurant and
retail establishments for site locations and restaurant team
members.





Proprietary
Rights





We own
the rights to the “Buffalo Wild Wings®”
service mark and to certain other service marks and trademarks used in our
system. We attempt to protect our sauce recipes as trade secrets by, among other
things, requiring a confidentiality agreement with our sauce supplier and
executive officers. It is possible that competitors could develop recipes and
procedures that duplicate or closely resemble our recipes and procedures. We
believe that our trademarks, service marks and other proprietary rights have
significant value and are important to our brand-building efforts and the
marketing of our restaurant concept. We vigorously protect our proprietary
rights. We cannot predict, however, whether steps taken by us to protect our
proprietary rights will be adequate to prevent misappropriation of these rights
or the use by others of restaurant features based upon, or otherwise similar to,
our concept. It may be difficult for us to prevent others from copying elements
of our concept and any litigation to enforce our rights will likely be costly
and may not be successful. Although we believe that we have sufficient rights to
all of our trademarks and service marks, we may face claims of infringement that
could interfere with our ability to market our restaurants and promote our
brand. Any such litigation may be costly and divert resources from our business.
Moreover, if we are unable to successfully defend against such claims, we may be
prevented from using our trademarks or service marks in the future and may be
liable for damages.





Government
Regulation





The
restaurant industry is subject to numerous federal, state and local governmental
regulations, including those relating to the preparation and sale of food and
alcoholic beverages, sanitation, public health, fire codes, zoning and building
requirements. Each restaurant requires appropriate licenses from regulatory
authorities allowing it to sell liquor, beer and wine, and each restaurant
requires food service licenses from local health authorities. Our licenses to
sell alcoholic beverages must be renewed annually and may be suspended or
revoked at any time for cause, including violation by us or our employees of any
law or regulation pertaining to alcoholic beverage control, such as those
regulating the minimum age of employees or patrons who may serve or be served
alcoholic beverages, the serving of alcoholic beverages to visibly intoxicated
patrons, advertising, wholesale purchasing and inventory control. The failure of
a restaurant to retain liquor or food service licenses could have a material
adverse effect on our operations. In order to reduce this risk, restaurant
employees are trained in standardized operating procedures designed to assure
compliance with all applicable codes and regulations.





We and
our franchisees are also subject to laws governing our relationships with
employees, including laws and regulations relating to benefits, wages, hours,
workers’ compensation insurance, unemployment and other taxes, working and
safety conditions and citizenship or immigration status. We may also be subject
in certain states to “dram-shop” statutes, which generally allow a person
injured by an intoxicated person to recover damages from an establishment that
wrongfully served alcoholic beverages to the intoxicated person. In addition, we
are subject to various state and federal laws relating to the offer and sale of
franchises and the franchisor-franchisee relationship. In general, these laws
and regulations impose specific disclosure and registration requirements prior
to the sale and marketing of franchises and regulate certain aspects of the
relationship between franchisor and franchisee.





Because
of gaming operations in our Nevada facilities, the ownership and operation of
those facilities are subject to the Nevada Gaming Control Act and the
regulations promulgated thereunder, as well as various local regulations related
to gaming. Our gaming operations are also subject to the licensing and
regulatory control of the Nevada Gaming Commission, the Nevada State Gaming
Control Board and various county and city licensing agencies.  These
gaming laws, regulations, and supervisory procedures are based upon declarations
of public policy that are concerned with, among other things:





●
            the
      prevention of unsavory or unsuitable persons from having a direct or
      indirect involvement with gaming at any time or in any
      capacity;




8


●
            the
      establishment and maintenance of responsible accounting
      practices;




●
            the
      maintenance of effective controls over the financial practices of
      licensees, including the establishment of minimum procedures for internal
      fiscal affairs and the safeguarding of assets and
  revenues;




●
            providing
      reliable record keeping and requiring the filing of periodic reports with
      the gaming authorities;




●
            the
      prevention of cheating and fraudulent practices;
  and




●
            providing
      a source of state and local revenues through taxation and licensing
      fees.




Any
change in such laws, regulations, and procedures could have an adverse effect on
the gaming operations in our Nevada facilities.  Additional
information regarding regulation related to gaming in our Nevada facilities can
be found in Exhibit 99.1 to this Form 10-K.




Employees





As of
December 27, 2009, we employed approximately 14,000 employees. We have 1,000
full-time and 12,800 part-time employees working in our company-owned
restaurants and 200 employees based out of our home office or field support
management positions. Our employees are not covered by any collective bargaining
agreement, and we have never experienced an organized work stoppage or strike.
We believe that our working conditions and compensation packages are competitive
and consider our relations with our employees to be good.





Executive
Officers





The
following sets forth certain information about our executive
officers:





Sally J.
Smith, 52, has served as our Chief Executive Officer and President since July
1996 and as a director since August 1996. She served as our Chief Financial
Officer from 1994 to 1996. Prior to joining Buffalo Wild Wings, she was the
Chief Financial Officer of Dahlberg, Inc., the manufacturer and franchisor of
Miracle-Ear hearing aids, from 1983 to 1994. Ms. Smith began her career with
KPMG LLP, an international accounting and auditing firm. Ms. Smith holds an
inactive CPA license. She serves on the boards of the National Restaurant
Association and Alerus Financial Corporation.





Mary J.
Twinem, 49, has served as our Executive Vice President, Chief Financial Officer
and Treasurer since July 1996. She served as our Controller from January 1995 to
July 1996. Ms. Twinem also served as a director on our Board from June 2002 to
September 2003. Prior to joining Buffalo Wild Wings, she served as the Director
of Finance/Controller of Dahlberg, Inc. from 1989 to December 1994. Ms. Twinem
began her career in public accounting and holds an inactive CPA
license.





Kathleen
M. Benning, 47, has served as our Executive Vice President, Global Marketing and
Brand Development since January 2010. She joined us in March 1997 as Vice
President of Marketing and served as Senior Vice President, Marketing and Brand
Development from January 2002 until December 2009. From 1992 to 1997, Ms.
Benning was employed by Nemer, Fieger & Associates, an advertising agency,
where she was a partner from 1994 to 1997.





Mounir N.
Sawda, 52, has served as our Senior Vice President, Franchise and Development
since August 2007. Prior to joining us, Mr. Sawda managed his own consulting
company from 2005 to 2007. From 1998 to 2005, Mr. Sawda served in various
executive positions at Denny’s Corporation, most recently as Vice President
Development, Property Management, Construction and Facilities. From 1984 to 1993
and from 1996 to 1997, Mr. Sawda held several positions with Burger King
Corporation. From 1993 to 1996, Mr. Sawda worked with Hanna International in
Saudi Arabia.





James M.
Schmidt, 50, has served as our Executive Vice President since December 2006 and
as General Counsel since April 2002. He served as either Vice President or
Senior Vice President from April 2002 until December 2006. Mr. Schmidt has also
served as our Secretary since September 2002, and he served as a director on our
Board from 1994 to September 2003. From 1985 to 2002, Mr. Schmidt was an
attorney with the law firm of Robbins, Kelly, Patterson & Tucker, which
provides legal services to us from time to time.





Judith A.
Shoulak, 50, has served as our Executive Vice President, Global Operations and
Human Resources since January 2010. She served as our Senior Vice President,
Operations, from March 2004 to December 2009, Senior Vice President, Human
Resources from January 2003 to February 2004 and Vice President of Human
Resources from October 2001 to January 2003. From 1993 to 2001, Ms. Shoulak
served as Vice President of Field Human Resources of OfficeMax
Incorporated.





9


ITEM
1A. RISK FACTORS





The
foregoing discussion and the discussion contained in Item 7 of this Form 10-K
contain various “forward-looking statements” within the meaning of Section 27A
of the Securities Act of 1933, as amended, and Section 21E of the Securities
Exchange Act of 1934, as amended. Forward-looking statements are based on
current expectations or beliefs concerning future events. Such statements can be
identified by the use of terminology such as “anticipate,” “believe,”
“estimate,” “expect,” “intend,” “may,” “could,” “possible,” “plan,” “project,”
“will,” “forecast” and similar words or expressions. Our forward-looking
statements generally relate to our growth strategy, financial results, sales
efforts, franchise expectations, store openings and related expense, and cash
requirements. Although it is not possible to foresee all of the factors that may
cause actual results to differ from our forward-looking statements, such factors
include, among others, the risk factors that follow. Investors are cautioned
that all forward-looking statements involve risks and uncertainties and speak
only as of the date on which they are made. We believe that all material risk
factors have been discussed below.





Fluctuations
in chicken wing prices could reduce our operating income.





The
primary food product used by our company-owned and franchised restaurants is
chicken wings. We work to counteract the effect of the volatility of chicken
wing prices, which can significantly change our cost of sales and cash flow,
with the introduction of new menu items, effective marketing promotions, focused
efforts on food costs and waste, and menu price increases. We also explore
purchasing strategies to reduce the severity of cost increases and fluctuations.
We currently purchase our chicken wings at market price. If a satisfactory
long-term pricing agreement for chicken wings were to arise, we would consider
locking in prices to reduce our price volatility. Chicken wing prices in 2009
averaged 39.3% higher than 2008 as the average price per pound increased to
$1.70 in 2009 from $1.22 in 2008. If there is a significant rise in the price of
chicken wings, and we are unable to successfully adjust menu prices or menu mix
or otherwise make operational adjustments to account for the higher wing prices,
our operating results could be adversely affected. For example, chicken wings
accounted for approximately 25%, 21%, and 24% of our cost of sales in 2009,
2008, and 2007, respectively, with an annual average price per pound of $1.70,
$1.22, and $1.28, respectively. A 10% increase in the chicken wing costs for
2009 would have increased restaurant cost of sales by approximately $3.8
million. If the avian flu were to affect our supply of chicken wings, our
operations may be negatively impacted, as prices may rise due to limited supply.
Additional information related to chicken wing prices is included in Item 7
under “Results of Operations.”





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





To
successfully expand our business, we must open new Buffalo Wild Wings®
restaurants on schedule and in a profitable manner. In the past, we and our
franchisees have experienced delays in restaurant openings and we may experience
similar delays in the future. Delays or failures in opening new restaurants
could hurt our ability to meet our growth objectives, which may affect our
results of operations, the expectations of securities analysts and shareholders
and thus our stock price. We cannot guarantee that we or our franchisees will be
able to achieve our expansion goals. Further, any restaurants that we, or our
franchisees, open may not achieve operating results similar or better than our
existing restaurants. If we are unable to generate positive cash flow from a new
restaurant, we may be required to recognize an impairment loss with respect to
the assets for that restaurant. Our ability to expand successfully will depend
on a number of factors, many of which are beyond our control. These factors
include:





•
            Locating
      suitable restaurant sites in new and existing
  markets;





•
            Having
      adequate restaurant sites due to tightening credit
  markets;





•
            Negotiating
      acceptable lease or purchase terms for new
  restaurants;





•
            Recruiting,
      training and retaining qualified home office, field and restaurant team
      members;





•
            Attracting
      and retaining qualified
franchisees;





•
            Cost
      effective and timely planning, design and build-out of
      restaurants;





•
            Obtaining
      building materials and hiring satisfactory construction
      contractors;





•
            Obtaining
      and maintaining required local, state and federal governmental approvals
      and permits related to the construction of the sites and the sale of food
      and alcoholic beverages;





10


•
            Creating
      guest awareness of our restaurants in new
  markets;





•
            Competition
      in new and existing markets; and





•
            General
      economic conditions.





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





We
require that all proposed restaurant sites, whether for company-owned or
franchised restaurants, meet our site selection criteria. We may make errors in
selecting these criteria or applying these criteria to a particular site, or
there may be an insignificant number of new restaurant sites meeting these
criteria that would enable us to achieve our planned expansion in future
periods. We face significant competition from other restaurant companies and
retailers for sites that meet our criteria and the supply of sites may be
limited in some markets. Further, we may be precluded from acquiring an
otherwise suitable site due to an exclusivity restriction held by another
tenant. As a result of these factors, our costs to obtain and lease sites may
increase, or we may not be able to obtain certain sites due to unacceptable
costs. Our inability to obtain suitable restaurant sites at reasonable costs may
reduce our growth rate.





Shortages
or interruptions in the availability and delivery of food and other supplies may
increase costs or reduce revenues.





Possible
shortages or interruptions in the supply of food items and other supplies to our
restaurants caused by inclement weather, terrorist attacks, natural disasters
such as floods, drought and hurricanes, pandemics, the inability of our vendors
to obtain credit in a tightened credit market, food safety warnings or
advisories or the prospect of such pronouncements, or other conditions beyond
our control could adversely affect the availability, quality and cost of items
we buy and the operations of our restaurants. Our inability to effectively
manage supply chain risk could increase our costs and limit the availability of
products critical to our restaurant operations.





We
may experience higher-than-anticipated costs associated with the opening of new
restaurants or with the closing, relocating, and remodeling of existing
restaurants, which may adversely affect our results of operations.





Our
revenues and expenses can be impacted significantly by the number and timing of
the opening of new restaurants and the closing, relocating, and remodeling of
existing restaurants. We incur substantial pre-opening expenses each time we
open a new restaurant and other expenses when we close, relocate, or remodel
existing restaurants. The expenses of opening, closing, relocating or remodeling
any of our restaurants may be higher than anticipated. An increase in such
expenses could have an adverse effect on our results of operations.





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





Our
expansion plans depend on opening restaurants in new markets where we or our
franchisees have little or no operating experience. We may not be successful in
operating our restaurants in new markets on a profitable basis. The success of
these new restaurants will be affected by the different competitive conditions,
consumer tastes, and discretionary spending patterns of the new markets as well
as our ability to generate market awareness of the Buffalo Wild Wings®
brand. Sales at restaurants opening in new markets may take longer to reach
average annual restaurant sales, if at all, thereby affecting their
profitability.





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





We and
our franchisees intend to open new restaurants in our existing markets, which
may reduce sales performance and guest visits for existing restaurants in those
markets. In addition, new restaurants added in existing markets may not achieve
sales and operating performance at the same level as established restaurants in
the market.





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





11


Goodwill
represents the difference between the purchase price of acquired companies and
the related fair values of net assets acquired. We test goodwill for impairment
annually and whenever events or changes in circumstances indicate that
impairment may have occurred. We compare the carrying value of a reporting unit,
including goodwill, to the fair value of the unit. Carrying value is based on
the assets and liabilities associated with the operations of that reporting
unit. If the carrying value is less than the fair value, no impairment exists.
If the carrying value is higher than the fair value, there is an indication of
impairment. A significant amount of judgment is involved in determining if an
indication of impairment exists. Factors may include, among others: a
significant decline in our expected future cash flows; a sustained, significant
decline in our stock price and market capitalization; a significant adverse
change in legal factors or in the business climate; unanticipated competition:
the testing for recoverability of a significant asset group within a reporting
unit; and slower growth rates. Any adverse change in these factors would have a
significant impact on the recoverability of these assets and negatively affect
our financial condition and consolidated results of operations. We compute the
amount of impairment by comparing the implied fair value of reporting unit
goodwill with the carrying amount of that goodwill. We are required to record a
non-cash impairment charge if the testing performed indicates that goodwill has
been impaired.





We evaluate the useful
lives of our intangible assetsto determine if they are definite- or
indefinite-lived. Reaching a determination on useful life requires significant
judgments and assumptions regarding the future effects of obsolescence, demand,
competition, other economic factors (such as the stability of the industry,
legislative action that results in an uncertain or changing regulatory
environment, and expected changes in distribution channels), the level of
required maintenance expenditures, and the expected lives of other related
groups of assets.





We cannot
accurately predict the amount and timing of any impairment of assets. Should the
value of goodwill or other intangible assets become impaired, there could be an
adverse effect on our financial condition and consolidated results of
operations.





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





Our
management is responsible for establishing and maintaining effective internal
control over financial reporting. Internal control over financial reporting is a
process to provide reasonable assurance regarding the reliability of financial
reporting for external purposes in accordance with accounting principles
generally accepted in the United States. Because of its inherent limitations,
internal control over financial reporting is not intended to provide absolute
assurance that we would prevent or detect a misstatement of our financial
statements or fraud.  Any failure to maintain an
effective system of internal control over financial reporting could limit our
ability to report our financial results accurately and timely or to detect and
prevent fraud. A significant financial reportingfailure or material
weakness in internal control over financial reporting could cause a loss of
investor confidence and decline inthemarket price of our
stock.





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





If the
recession continues or increases in severity, our landlords may be unable to
obtain financing or remain in good standing under their existing financing
arrangements, resulting in failures to pay required construction contributions
or satisfy other lease covenants to us. In addition other tenants at retail
centers in which we or our franchisees are located or have executed leases may
fail to open or may cease operations. If our landlords fail to satisfy required
co-tenancies, such failures may result in us or our franchisees terminating
leases or delaying openings in these locations. Also, decreases in total tenant
occupancy in retail centers in which we are located may affect guest traffic at
our restaurants. All of these factors could have a material adverse impact on
our operations.





We
are dependent on franchisees and their success.





Currently,
approximately 64% of our restaurants are franchised. Franchising royalties and
fees represented approximately 9.3%, 10.1%, and 11.2% of our revenues during
fiscal 2009, 2008, and 2007, respectively. Our performance depends upon (i) our
ability to attract and retain qualified franchisees, (ii) the franchisees’
ability to execute our concept and capitalize upon our brand recognition and
marketing, and (iii) franchisees’ ability to timely develop restaurants. We may
not be able to recruit franchisees who have the business abilities or financial
resources necessary to open restaurants on schedule, or who will conduct
operations in a manner consistent with our concept and standards. Also, our
franchisees may not be able to operate restaurants in a profitable
manner.





Franchisees
may take actions that could harm our business.





Franchisees
are independent contractors and are not our employees. We provide training and
support to franchisees, but the quality of franchised restaurant operations may
be diminished if franchisees do not operate restaurants in a manner consistent
with our standards and requirements, or if they do not hire and train qualified
managers and other restaurant personnel. If franchisees do not adequately manage
their restaurants, our image and reputation, and the image and reputation of
other franchisees, may suffer materially and system-wide sales could
significantly decline. In addition, we may also face potential claims and
liabilities due to the acts of our franchisees based on agency or vicarious
liability theories.





12


We
could face liability from our franchisees.





A
franchisee or government agency may bring legal action against us based on the
franchisee/franchisor relationships. Various state and federal laws govern our
relationship with our franchisees and our potential sale of a franchise. If we
fail to comply with these laws, we could be liable for damages to franchisees
and fines or other penalties. Expensive litigation with our franchisees or
government agencies may adversely affect both our profits and our important
relations with our franchisees.





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





The
restaurant industry is intensely competitive. We believe we compete primarily
with regional and local sports bars, casual dining and quick casual
establishments, and to a lesser extent, quick service wing-based take-out
concepts. Many of our direct and indirect competitors are well-established
national, regional, or local chains with a greater market presence than us.
Further, some competitors have substantially greater financial, marketing, and
other resources than us. In addition, independent owners of local or regional
establishments may enter the wing-based restaurant business without significant
barriers to entry and such establishments may provide price competition for our
restaurants. Competition in the casual dining, quick casual and quick service
segments of the restaurant industry is expected to remain intense with respect
to price, service, location, concept and the type and quality of food. We also
face intense competition for real estate sites, qualified management personnel,
and hourly restaurant staff.





Our
success depends substantially on the value of our brands and our reputation for
offering guests an unparalleled total experience.





We
believe we have built a strong reputation for the quality and breadth of our
menu items as part of the total experience that guests enjoy in our
restaurants.  We believe we must protect and grow the value of our
brand to continue to be successful in the future.  Any incident that erodes
consumer trust in or affinity for our brand could significantly reduce its
value.  If consumers perceive or experience a reduction in food quality,
service, ambiance or in any way believes we failed to deliver a consistently
positive experience, our brand value could suffer.





Our
inability to successfully and sufficiently raise menu prices could result in a
decline in profitability.





We
utilize menu price increases to help offset cost increases, including increased
cost for commodities, minimum wages, employee benefits, insurance arrangements,
construction, utilities, and other key operating costs.  If our selection
and amount of menu price increases are not accepted by consumers and reduce
guest traffic, or are insufficient to counter increased costs, our financial
results could be harmed.





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





During
fiscal 2009, 2008, and 2007, vendor allowances were recorded as a reduction in
inventoriable costs, and cost of sales was reduced by $6.0 million, $5.2
million, and $4.6 million, respectively. If the amount of vendor allowances is
reduced, inventoriable costs may increase, as may the cost of
sales.





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





Our
quarterly operating results depend, in part, on special events, such as the
Super Bowl® and
other popular sporting events, and thus are subject to fluctuations based on the
dates for such events. Historically, sales in most of our restaurants have been
higher during fall and winter months based on the relative popularity of
national, regional and local sporting and other events. Further, our quarterly
operating results may fluctuate significantly because of other factors,
including:





•
            Increases
      or decreases in same-store sales;





•
            Fluctuations
      in food costs, particularly chicken
wings;




•
            The
      timing of new restaurant openings, which may impact margins due to the
      related preopening costs and initially higher restaurant level operating
      expense ratios;





13
 
  •
              Labor
      availability and costs for hourly and management
  personnel;
  •
              Changes
      in competitive factors;
  •
              Disruption
      in supplies;
  •
              General
      economic conditions, consumer confidence, and fluctuations in
      discretionary spending;
  •
              Claims
      experience for self-insurance
programs;
  •
              Increases
      or decreases in labor or other variable
  expenses;
  •
              The
      impact from natural disasters;
  •
              Fluctuations
      in interest rates; and
  •
              The
      timing and amount of asset impairment loss and restaurant closing
      charges.





As a
result of the factors discussed above, our quarterly and annual operating
results may fluctuate significantly. Accordingly, results for any one quarter
are not necessarily indicative of results to be expected for any other quarter
or for any year. These fluctuations may cause future operating results to fall
below the expectations of securities analysts and shareholders. In that event,
the price of our common stock would likely decrease.





We
may not be able to attract and retain qualified team members to operate and
manage our restaurants.





Our
success and the success of our individual restaurants depends on our ability to
attract, motivate, develop and retain a sufficient number of qualified
restaurant employees, including restaurant managers, kitchen staff and wait
staff. The inability to recruit, develop and retain these individuals may delay
the planned openings of new restaurants or result in high employee turnover in
existing restaurants, thus increasing the cost to efficiently operate our
restaurants. This could inhibit our expansion plans and business performance
and, to the extent that a labor shortage may force us to pay higher wages, harm
our profitability.




The loss of key executives or
difficulties recruiting and retaining qualified personnel could jeopardize our
ability to meet our financial targets.






Our
success depends substantially on the contributions and abilities of key
executives and other employees, and on our ability to recruit and retain high
quality employees. We must continue to recruit, retain, and motivate management
and other employees sufficient to maintain our current business and support our
projected growth.  The loss of any of our executive officers and
senior leaders could jeopardize our ability to meet our financial
targets.





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





The
restaurant industry is subject to various federal, state, and local government
regulations, including those relating to the sale of food and alcoholic
beverages. In addition, we are subject to gaming regulations with respect to our
gaming operations within our nine company-owned stores in Las Vegas. The failure
to obtain and maintain these licenses, permits and approvals, including food,
liquor and gaming licenses, could adversely affect our operating results.
Difficulties or failure to obtain the required licenses and approvals could
delay or result in our decision to cancel the opening of new restaurants. Local
authorities may revoke, suspend, or deny renewal of our food and liquor licenses
if they determine that our conduct violates applicable regulations.





The
sale of alcoholic beverages at our restaurants subjects us to additional
regulations and potential liability.





Because
our restaurants sell alcoholic beverages, we are required to comply with the
alcohol licensing requirements of the federal government, states and
municipalities where our restaurants are located. Alcoholic beverage control
regulations require applications to state authorities and, in certain locations,
county and municipal authorities for a license and permit to sell alcoholic
beverages on the premises and to provide service for extended hours and on
Sundays. Typically, the licenses are renewed annually and may be revoked or
suspended for cause at any time. Alcoholic beverage control regulations relate
to numerous aspects of the daily operations of the restaurants, including
minimum age of guests and employees, hours of operation, advertising, wholesale
purchasing, inventory control and handling, storage and dispensing of alcoholic
beverages. If we fail to comply with federal, state or local regulations, our
licenses may be revoked and we may be forced to terminate the sale of alcoholic
beverages at one or more of our restaurants.





14


In
certain states we are subject to “dram shop” statutes, which generally allow a
person injured by an intoxicated person the right to recover damages from an
establishment that wrongfully served alcoholic beverages to the intoxicated
person. Some dram shop litigation against restaurant companies has resulted in
significant judgments, including punitive damages.





Changes
in employment laws or regulation could harm our performance.





Various
federal and state labor laws govern our relationship with our employees and
affect operating costs. These laws include minimum wage requirements, overtime
pay, unemployment tax rates, workers’ compensation rates, citizenship
requirements, and sales taxes. A number of factors could adversely affect our
operating results, including additional government-imposed increases in minimum
wages, overtime pay, paid leaves of absence and mandated health benefits,
mandated training for employees, increased tax reporting and tax payment
requirements for employees who receive tips, a reduction in the number of states
that allow tips to be credited toward minimum wage requirements, and increased
employee litigation including claims relating to the Fair Labor Standards
Act.





The
Americans with Disabilities Act is a federal law that prohibits discrimination
on the basis of disability in public accommodations and employment. Although our
restaurants are designed to be accessible to the disabled, we could be required
to make modifications to our restaurants to provide service to, or make
reasonable accommodations for disabled persons.





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





Our
success depends, in part, upon the continued popularity of Buffalo, New
York-style chicken wings, our other menu items, sports bars and casual dining
restaurant styles. We also depend on trends toward consumers eating away from
home more often. Shifts in these consumer preferences could negatively affect
our future profitability. Such shifts could be based on health concerns related
to the cholesterol, carbohydrate, or fat content of certain food items,
including items featured on our menu. Negative publicity over the health aspects
of such food items may adversely affect consumer demand for our menu items and
could result in a decrease in guest traffic to our restaurants, which could
materially harm our business. Smoking bans imposed by state or local laws could
also adversely impact our restaurants’ performance. In addition, our success
depends to a significant extent on numerous factors affecting discretionary
consumer spending, including economic conditions, disposable consumer income and
consumer confidence. A decline in consumer spending or in economic conditions
could reduce guest traffic or impose practical limits on pricing, either of
which could harm our business, financial condition, operating results or cash
flow.





Changes
in public health concerns may impact our performance.





Changes
in public health concerns may affect consumer preferences for our products. For
example, if incidents of the avian flu occur in the United States, consumer
preferences for poultry products may be negatively impacted, resulting in a
decline in demand for our products. Similarly, public health concerns over
smoking have seen a rise in smoking bans. Such smoking bans may adversely affect
our operations to the extent that such bans are imposed in specific locations,
rather than state-wide, or that exceptions to the ban are given to bars or other
establishments, giving patrons the ability to choose nearby locations that have
no such ban. Further, growing movements to change laws relating to alcohol may
result in a decline in alcohol consumption at our stores or increase the number
of dram shop claims made against us, either of which may negatively impact
operations or result in the loss of liquor licenses. We are carefully monitoring
new laws regulating the use of transfats and requiring nutritional fact
disclosures.




A regional or global health pandemic
could severely affect our business.






A health
pandemic is a disease outbreak that spreads rapidly and widely by infection and
affects many individuals in an area or population at the same time. If a
regional or global health pandemic were to occur, depending upon its duration
and severity, our business could be severely affected. We have positioned our
brand as a place where people can gather together.  Customers might
avoid public gathering places in the event of a health pandemic, and local,
regional or national governments might limit or ban public gatherings to halt or
delay the spread of disease. A regional or global health pandemic might also
adversely impact our business by disrupting or delaying production and delivery
of materials and products in its supply chain and by causing staffing shortages
in our stores. The impact of a health pandemic might be disproportionately
greater than on other companies that depend less on the gathering of people
together for the sale or use of their products and services.





15


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





Some of
our restaurants are located near high activity areas such as retail centers, big
box shopping centers and entertainment centers. We depend on high visitor rates
at these businesses to attract guests to our restaurants. If visitors to these
centers decline due to economic conditions, closure of big-box retailers, road
construction, changes in consumer preferences or shopping patterns, changes in
discretionary consumer spending or otherwise, our restaurant sales could decline
significantly and adversely affect our results of operations.





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





We may
seek to selectively acquire existing restaurants from our franchisees. To do so,
we would need to identify suitable acquisition candidates, negotiate acceptable
acquisition terms and obtain appropriate financing. Any acquisition that we
pursue, whether or not successfully completed, may involve risks,
including:




•
            material
      adverse effects on our operating results, particularly in the fiscal
      quarters immediately following the acquisition as the acquired restaurants
      are integrated into our operations;




•
            risks
      associated with entering into markets or conducting operations where we
      have no or limited prior experience;
and




•
            diversion
      of management’s attention from other business
  concerns.





Future
acquisitions of existing restaurants from our franchisees or other acquisitions,
which may be accomplished through a cash purchase transaction, the issuance of
our equity securities or a combination of both, could result in potentially
dilutive issuances of our equity securities, the incurrence of debt and
contingent liabilities and impairment charges related to goodwill and other
intangible assets, any of which could harm our business and financial
condition.





Unfavorable
publicity could harm our business.





Multi-unit
restaurant businesses such as ours can be adversely affected by publicity
resulting from complaints or litigation or general publicity regarding poor food
quality, food-borne illness, personal injury, food tampering, adverse health
effects of consumption of various food products or high-calorie foods (including
obesity), or other concerns. Negative publicity may also result from actual or
alleged violations by our restaurants of "dram shop" laws which generally
provide an injured party with recourse against an establishment that serves
alcoholic beverages to an intoxicated party who then causes injury to himself or
to a third party. Regardless of whether the allegations or complaints are valid,
unfavorable publicity relating to a limited number of our restaurants, or only
to a single restaurant, could adversely affect public perception of the entire
brand. Adverse publicity and its effect on overall consumer perceptions of food
safety, or our failure to respond effectively to adverse publicity, could have a
material adverse effect on our business.





There
is volatility in our stock price.





The
market for our stock has, from time to time, experienced extreme price and
volume fluctuations. Factors such as announcements of variations in our
quarterly financial results and fluctuations in revenue could cause the market
price of our stock to fluctuate significantly. In addition, the stock market in
general, and the market prices for restaurant companies in particular, have
experienced volatility that often has been unrelated to the operating
performance of such companies. These broad market and industry fluctuations may
adversely affect the price of our stock, regardless of our operating
performance. Additionally, volatility or a lack of positive performance in our
stock price may adversely affect our ability to retain key employees, many of
whom have been granted equity compensation.





The
market price of our stock can be influenced by stockholders' expectations about
the ability of our business to grow and to achieve certain profitability
targets. If our financial performance in a particular quarter does not meet the
expectations of our stockholders, it may adversely affect their views concerning
our growth potential and future financial performance. In addition, if the
securities analysts who regularly follow our stock lower their ratings of our
stock, the market price of our stock is likely to drop
significantly.





16


We
may be subject to increased labor and insurance costs.





Our
restaurant operations are subject to federal and state laws governing such
matters as minimum wages, working conditions, overtime, and tip credits. As
federal and state minimum wage rates increase, we may need to increase not only
the wages of our minimum wage employees but also the wages paid to employees at
wage rates that are above minimum wage. Labor shortages, increased employee
turnover, and health care mandates could also increase our labor costs. This in
turn could lead us to increase prices which could impact our sales. Conversely,
if competitive pressures or other factors prevent us from offsetting increased
labor costs by increases in prices, our profitability may decline. In addition,
the current premiums that we pay for our insurance (including workers'
compensation, general liability, property, health, and directors' and officers'
liability) may increase at any time, thereby further increasing our costs. The
dollar amount of claims that we actually experience under our workers'
compensation and general liability insurance, for which we carry high per-claim
deductibles, may also increase at any time, thereby further increasing our
costs. Further, the decreased availability of property and liability insurance
has the potential to negatively impact the cost of premiums and the magnitude of
uninsured losses.





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





We
currently maintain insurance customary for businesses of our size and type.
However, there are types of losses we may incur that cannot be insured against
or that we believe are not economically reasonable to insure, such as losses due
to natural disasters. Such damages could have a material adverse effect on our
business and results of operations.





We
are dependent on information technology and any material failure of that
technology could impair our ability to efficiently operate our
business.





We rely
on information systems across our operations, including, for example,
point-of-sale processing in our restaurants, management of our supply chain,
collection of cash, payment of obligations, and various other processes and
procedures. Our ability to efficiently manage our business depends significantly
on the reliability and capacity of these systems. The failure of these systems
to operate effectively, problems with maintenance, upgrading or transitioning to
replacement systems, or a breach in security of these systems could cause delays
in customer service and reduce efficiency in our operations. Significant capital
investments might be required to remediate any problems.





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





We rely
on certain technology licensed from third parties, and may be required to
license additional technology in the future for use in managing our Internet
sites and providing related services to users and advertising
customers.  These third-party technology licenses may not continue to
be available to us on acceptable commercial terms or at all. The inability to
enter into and maintain any of these technology licenses could significantly
harm our business, financial condition and operating results.





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





We place
considerable value on our trademarks, service marks and trade secrets. We intend
to actively enforce and defend our marks and if violations are identified, to
take appropriate action to preserve and protect our goodwill in our marks. We
attempt to protect our sauce recipes as trade secrets by, among other things,
requiring confidentiality agreements with our sauce suppliers and executive
officers. However, we cannot be sure that we will be able to successfully
enforce our rights under our marks or prevent competitors from misappropriating
our sauce recipes. We can also not be sure that: (i) our marks are valuable,
(ii) using our marks does not, or will not, violate others’ marks, (iii) the
registrations of our marks would be upheld if challenged, or (iv) we would not
be prevented from using our marks in areas of the country where others might
have already established rights to them. Any of these uncertainties could have
an adverse effect on us and our expansion strategy.





ITEM
1B. UNRESOLVED STAFF COMMENTS





Not
applicable.





17


ITEM
2. PROPERTIES





We are
headquartered in Minneapolis, Minnesota. Our home office has approximately
44,000 square feet of office space. We occupy this facility under a lease that
terminates on November 30, 2017, with an option to renew for one five-year term.
As of December 27, 2009, we owned and operated 232 restaurants. We lease the
land and building for most of these sites. The majority of our existing leases
are for 10 or 15-year terms, generally including options to extend the terms. We
typically lease our restaurant facilities under “triple net” leases that require
us to pay minimum rent, real estate taxes, maintenance costs and insurance
premiums and, in some instances, percentage rent based on sales in excess of
specified amounts. Most of our leases include “exclusive use” provisions
prohibiting our landlords from leasing space to other restaurants that fall
within certain specified criteria. Under our franchise agreements, we have
certain rights to gain control of a restaurant site in the event of default
under the lease or franchise agreement. The following table sets forth the 42
states in which Buffalo Wild Wings restaurants are located and the number of
restaurants in each state as of December 27, 2009:





Number of
      Restaurants OpenCompany-owned
            
            Franchised
            
            TotalAlabama
            1
            
            9
            
            10Arizona
            2
            
            13
            
            15Arkansas
            —
            
            4
            
            4California
            —
            
            12
            
            12Colorado
            12
            
            2
            
            14Connecticut
            —
            
            4
            
            4Delaware
            —
            
            5
            
            5Florida
            1
            
            21
            
            22Georgia
            8
            
            1
            
            9Hawaii
            —
            
            1
            
            1Idaho
            —
            
            2
            
            2Illinois
            11
            
            40
            
            51Indiana
            3
            
            41
            
            44Iowa
            11
            
            —
            
            11Kansas
            9
            
            —
            
            9Kentucky
            12
            
            5
            
            17Louisiana
            —
            
            8
            
            8Maryland
            —
            
            8
            
            8Massachusetts
            —
            
            1
            
            1Michigan
            —
            
            38
            
            38Minnesota
            20
            
            3
            
            23Mississippi
            2
            
            4
            
            6Missouri
            6
            
            17
            
            23Montana
            —
            
            2
            
            2Nebraska
            6
            
            2
            
            8Nevada
            9
            
            1
            
            10New
      Jersey
            —
            
            1
            
            1New
      Mexico
            —
            
            2
            
            2New
      York
            7
            
            8
            
            15North
      Carolina
            13
            
            3
            
            16North
      Dakota
            —
            
            5
            
            5Ohio
            26
            
            62
            
            88Oklahoma
            —
            
            10
            
            10Oregon
            —
            
            4
            
            4Pennsylvania
            4
            
            1
            
            5South
      Carolina
            —
            
            4
            
            4South
      Dakota
            —
            
            1
            
            1Tennessee
            16
            
            —
            
            16Texas
            31
            
            42
            
            73Virginia
            8
            
            18
            
            26West
      Virginia
            —
            
            7
            
            7Wisconsin
            14
            
            8
            
            22Total
            232
            
            420
            
            652





18


ITEM
3. LEGAL PROCEEDINGS





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





ITEM
4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS





Not
applicable.




19


PART
II





ITEM
5. MARKET FOR REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER
PURCHASES OF EQUITY SECURITIES





Market
Information





Our
Common Stock trades on the NASDAQ Global Market under the symbol “BWLD”. The
following table sets forth the high and low closing sale prices of our Common
Stock.





2009
            
            
            2008High
            
            
            Low
            
            
            High
            
            
            LowFirst
      Quarter
            
            $
            38.45
            
            
            
            21.77
            
            
            $
            26.25
            
            
            
            19.41Second
      Quarter
            
            
            42.98
            
            
            
            32.34
            
            
            
            34.61
            
            
            
            23.23Third
      Quarter
            
            
            44.23
            
            
            
            31.40
            
            
            
            43.21
            
            
            
            24.72Fourth
      Quarter
            
            
            43.62
            
            
            
            39.14
            
            
            
            40.76
            
            
            
            15.52





Holders





As of
February 17, 2010, there were approximately 162 record holders of our Common
Stock, excluding shareholders whose stock is held either in nominee name and/or
street name brokerage accounts. Based on information which we have obtained from
our transfer agent, there are approximately 30,000 holders of our Common Stock
whose stock is held either in nominee name and/or street name brokerage
accounts.





Dividends





We have
never declared or paid cash dividends on our Common Stock. It is our policy to
preserve cash for development and other working capital needs and, therefore, do
not currently have plans to pay any cash dividends. Our future dividend policy
will be determined by our Board of Directors and will depend on various factors,
including our results of operations, financial condition, anticipated cash needs
and plans for expansion.




20


Stock
Performance Chart





The
following graph compares the yearly percentage change in the cumulative total
shareholder return on our Common Stock for the five-year period ended December
27, 2009 with the cumulative total return on the Nasdaq Composite and the
S&P 600 Restaurants Index. The comparison assumes $100 was invested in
Buffalo Wild Wings Common Stock on December 26, 2004, and in each of the
foregoing indices on December 26, 2004 and assumes reinvestment of
dividends.











12/26/04
            
            
            12/25/05
            
            
            12/31/06
            
            
            12/30/07
            
            
            12/28/08
            
            
            12/27/09Buffalo
      Wild Wings, Inc.
            
            
            100.00
            
            
            
            97.52
            
            
            
            153.49
            
            
            
            133.53
            
            
            
            142.64
            
            
            
            247.66NASDAQ
      Composite
            
            
            100.00
            
            
            
            101.33
            
            
            
            114.01
            
            
            
            123.71
            
            
            
            73.11
            
            
            
            105.61S&P
      600 Restaurants
            
            
            100.00
            
            
            
            101.26
            
            
            
            112.34
            
            
            
            82.11
            
            
            
            52.81
            
            
            
            78.06








The preceding stock performance chart
is not deemed filed with the Securities and Exchange Commission. Notwithstanding
anything to the contrary set forth in any of our previous filings made under the
Securities Act of 1933 or the Securities Exchange Act of 1934 that incorporate
future filings made by us under those statutes, the above stock performance
chart is not to be incorporated by reference in any prior filings, nor shall it
be incorporated by reference into any future filings made by us under those
statutes.





21


ITEM
6. SELECTED FINANCIAL DATA





The
following summary information should be read in conjunction with the
Consolidated Financial Statements and related notes thereto set forth in Item 8
of this Form 10-K.





Fiscal Years
      Ended (1)Dec.
      27,
                2009
              
              
              Dec.
      28,
                2008
              
              
              Dec.
      30,
                2007
              
              
              Dec.
      31,
                2006
              
              
              Dec.
      25,
                2005(in
      thousands, except share and per share data)Consolidated
      Statements of Earnings Data:Revenue:Restaurant
      sales
              
              $
              488,702
              
              
              
              379,686
              
              
              
              292,824
              
              
              
              247,150
              
              
              
              185,823Franchising
      royalties and fees
              
              
              50,222
              
              
              
              42,731
              
              
              
              36,828
              
              
              
              31,033
              
              
              
              23,877Total
      revenue
              
              
              538,924
              
              
              
              422,417
              
              
              
              329,652
              
              
              
              278,183
              
              
              
              209,700Costs
      and expenses:Restaurant
      operating costs:Cost
      of sales
              
              
              147,659
              
              
              
              113,266
              
              
              
              90,065
              
              
              
              76,087
              
              
              
              58,771Labor
              
              
              146,555
              
              
              
              114,609
              
              
              
              87,784
              
              
              
              73,030
              
              
              
              55,403Operating
              
              
              76,358
              
              
              
              60,205
              
              
              
              47,974
              
              
              
              41,087
              
              
              
              29,717Occupancy
              
              
              32,362
              
              
              
              25,157
              
              
              
              19,986
              
              
              
              17,529
              
              
              
              14,172Depreciation
      and amortization
              
              
              32,605
              
              
              
              23,622
              
              
              
              16,987
              
              
              
              14,492
              
              
              
              11,765General
      and administrative
              
              
              49,404
              
              
              
              40,151
              
              
              
              35,740
              
              
              
              30,374
              
              
              
              22,303Preopening
              
              
              7,702
              
              
              
              7,930
              
              
              
              4,520
              
              
              
              3,077
              
              
              
              2,599Loss
      on asset disposals and impairment
              
              
              1,928
              
              
              
              2,083
              
              
              
              987
              
              
              
              1,008
              
              
              
              1,991Total
      costs and expenses
              
              
              494,573
              
              
              
              387,023
              
              
              
              304,043
              
              
              
              256,684
              
              
              
              196,721Income
      from operations
              
              
              44,351
              
              
              
              35,394
              
              
              
              25,609
              
              
              
              21,499
              
              
              
              12,979Investment
      income
              
              
              1,077
              
              
              
              970
              
              
              
              2,909
              
              
              
              2,339
              
              
              
              1,340Earnings
      before income taxes
              
              
              45,428
              
              
              
              36,364
              
              
              
              28,518
              
              
              
              23,838
              
              
              
              14,319Income
      tax expense
              
              
              14,757
              
              
              
              11,929
              
              
              
              8,864
              
              
              
              7,565
              
              
              
              5,439Net
      earnings
              
              $
              30,671
              
              
              
              24,435
              
              
              
              19,654
              
              
              
              16,273
              
              
              
              8,880Earnings
      per common share – basic
              
              $
              1.70
              
              
              
              1.37
              
              
              
              1.12
              
              
              
              0.95
              
              
              
              0.53Earnings
      per common share – diluted
              
              
              1.69
              
              
              
              1.36
              
              
              
              1.10
              
              
              
              0.92
              
              
              
              0.51Weighted
      average shares outstanding – basic
              
              
              18,010,000
              
              
              
              17,813,000
              
              
              
              17,554,000
              
              
              
              17,157,000
              
              
              
              16,892,000Weighted
      average shares outstanding – diluted
              
              
              18,177,000
              
              
              
              17,995,000
              
              
              
              17,833,000
              
              
              
              17,629,000
              
              
              
              17,417,000Consolidated
      Statements of Cash Flow Data:Net
      cash provided by operating activities
              
              $
              79,286
              
              
              
              66,107
              
              
              
              43,579
              
              
              
              33,031
              
              
              
              24,618Net
      cash used in investing activities
              
              
              (79,172
              )
              
              
              (60,134
              )
              
              
              (54,687
              )
              
              
              (26,829
              )
              
              
              (33,919
              )Net
      cash provided by financing activities
              
              
              1,119
              
              
              
              853
              
              
              
              873
              
              
              
              1,568
              
              
              
              730
  As Of
      (1)Dec.
      27,
                2009
              
              
              Dec.
      28,
                2008
              
              
              Dec.
      30,
                2007
              
              
              Dec.
      31,
                2006
              
              
              Dec.
      25,
                2005(in
      thousands)Consolidated
      Balance Sheets Data:Total
      current assets
              
              $
              98,523
              
              
              
              68,568
              
              
              
              84,506
              
              
              
              74,950
              
              
              
              61,079Total
      assets
              
              
              309,073
              
              
              
              243,818
              
              
              
              197,098
              
              
              
              161,183
              
              
              
              133,123Total
      current liabilities
              
              
              66,704
              
              
              
              48,202
              
              
              
              32,490
              
              
              
              25,780
              
              
              
              20,203Total
      liabilities
              
              
              99,240
              
              
              
              72,225
              
              
              
              55,433
              
              
              
              44,967
              
              
              
              36,275Retained
      earnings
              
              
              115,946
              
              
              
              85,275
              
              
              
              60,840
              
              
              
              41,186
              
              
              
              24,913Total
      stockholders’ equity
              
              
              209,833
              
              
              
              171,593
              
              
              
              141,665
              
              
              
              116,216
              
              
              
              96,848





(1)
            We
      utilize a 52- or 53-week accounting period that ends on the last Sunday in
      December. The fiscal years ended December 27, 2009, December 28, 2008,
      December 30, 2007, and December 25, 2005, were comprised of 52 weeks. The
      fiscal year ended December 31, 2006 was a 53-week
  year.




22
 
 ITEM
7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS





The
following discussion and analysis of our financial condition and results of
operations should be read in conjunction with our consolidated financial
statements and related notes. This discussion and analysis contains certain
statements that are not historical facts, including, among others, those
relating to our anticipated financial performance for fiscal 2010, cash
requirements, and our expected store openings. Such statements are
forward-looking and speak only as of the date on which they are made. There are
risks and uncertainties including those discussed in Item 1A of this 10-K under
“Risk Factors.” Information included in this discussion and analysis includes
commentary on company-owned and franchised restaurant units, restaurant sales,
same-store sales, and average weekly sales volumes. Management believes such
sales information is an important measure of our performance, and is useful in
assessing consumer acceptance of the Buffalo Wild Wings® Grill
& Bar concept and the overall health of the concept. Franchise information
also provides an understanding of our revenues because franchise royalties and
fees are based on the opening of franchised units and their sales. However,
franchise sales and same-store sales information does not represent sales in
accordance with U. S. Generally Accepted Accounting Principles (GAAP), should
not be considered in isolation or as a substitute for other measures of
performance prepared in accordance with GAAP and may not be comparable to
financial information as defined or used by other companies.





Overview





As of
December 27, 2009, we owned and operated 232 and franchised an additional 420
Buffalo Wild Wings Grill & Bar®
restaurants in 42 states. The restaurants have elements of both the quick casual
and casual dining styles, both of which are part of a growing industry. Our
long-term focus is to grow to a national chain of over 1,000 locations,
continuing the strategy of developing both company-owned and franchised
restaurants.





Our
growth targets for 2010 are 13 to 15% unit growth and 20% net earnings growth.
Our growth and success depend on several factors and trends. First, we continue
to monitor and react to changes in our cost of goods sold. The costs of goods
sold is difficult to predict, as it ranged from 29.3% to 30.5% of restaurant
sales per quarter in 2009 and 2008, mostly due to the price fluctuation in
chicken wings. We are working to counteract the volatility of chicken wing
prices with the introduction of new menu items, effective marketing promotions,
focused efforts on food costs and waste, and menu price increases. We will
continue to monitor the cost of chicken wings, as it can significantly change
our cost of sales and cash flow from company-owned restaurants. We are also
exploring purchasing strategies to lessen the severity of cost increases and
fluctuations, and are reviewing menu additions and other strategies that may
decrease the percentage that chicken wings represent in terms of total
restaurant sales. The chart below illustrates the fluctuation in chicken wing
prices from quarter to quarter in the last five years.









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


23





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





Our
revenue is generated by:





•
            Sales
      at our company-owned restaurants, which represented 91% of total revenue
      in 2009. Food and nonalcoholic beverages accounted for 76% of restaurant
      sales. The remaining 24% of restaurant sales was from alcoholic beverages.
      The menu item with the highest sales volume is chicken wings at 21% of
      total restaurant sales.





•
            Royalties
      and franchise fees received from our
  franchisees.





We
generate cash from the operation of our company-owned restaurants and also from
franchise royalties and fees. We highlight the specific costs associated with
the on-going operation of our company-owned restaurants in the statement of
earnings under “Restaurant operating costs.” Nearly all of our depreciation
expense relates to assets used by our company-owned restaurants. Preopening
costs are those costs associated with opening new company-owned restaurants and
will vary annually based on the number of new locations opening. Loss on asset
disposals and impairment expense is related to company-owned restaurants, and
includes the write-down of underperforming locations, the costs associated with
closures of locations and normal asset retirements. Certain other expenses, such
as general and administrative, relate to both company-owned restaurant and
franchising operations.





We
operate on a 52 or 53-week fiscal year ending on the last Sunday in December.
Each of the fiscal years in the five years ended December 27, 2009 were 52-week
years except for the fiscal year ended December 31, 2006, which was a 53-week
year.





Critical
Accounting Policies and Use of Estimates





Our
significant accounting policies are described in Note 1 to the Consolidated
Financial Statements, which were prepared in accordance with GAAP. Critical
accounting policies are those that we believe are both important to the
portrayal of our financial condition and results and require our most difficult,
subjective or complex judgments, often as a result of the need to make estimates
about the effect of matters that are inherently uncertain.





We
believe that the following discussion represents our more critical accounting
policies and estimates used in the preparation of our consolidated financial
statements, although it is not inclusive.





Valuation
of Long-Lived Assets and Store Closing Reserves





We review
long-lived assets quarterly to determine if triggering events have occurred
which would require a test to determine if the carrying amount of these assets
may not be recoverable based on estimated future cash flows. Assets are reviewed
at the lowest level for which cash flows can be identified, which is at the
individual restaurant level. In the absence of extraordinary circumstances,
restaurants are included in the impairment analysis after they have been open
for 15 months. We evaluate the recoverability of a restaurant’s long-lived
assets, including leasehold improvements, equipment and fixtures over its
remaining lease term, after considering the potential impact of planned
operational improvements, marketing programs, and anticipated changes in the
trade area. In determining future cash flows, significant estimates are made by
us with respect to future operating results of each restaurant over its
remaining lease term. If assets are determined to be impaired, the impairment
charge is measured by calculating the amount by which the asset carrying amount
exceeds its fair value based on our estimate of discounted future cash flows.
The determination of asset fair value is also subject to significant judgment.
During fiscal 2009 and 2008, we recognized $237,000 and $549,000, respectively,
of asset impairment charges. No asset impairment charges were recognized during
2007.





In
addition to the valuation of long-lived assets, we also record a store closing
reserve when a restaurant is abandoned due to closure or relocation. The store
closing reserve is subject to significant judgment as accruals are made for
lease payments on abandoned leased facilities. Many factors, including the local
business environment, other available lease sites, the willingness of lessors to
negotiate lease buyouts, and the ability to sublease our sites are considered in
making the accruals. We estimate future lease obligations based on these factors
and evaluate quarterly the adequacy of the estimated reserve based on current
market conditions. During 2009, 2008, and 2007, we recorded reserves of $31,000,
$85,000, and $85,000, respectively, for restaurants that closed.





24


Goodwill





We review
goodwill for impairment annually, or whenever circumstances change in a way
which could indicate that impairment may have occurred. Goodwill is associated
with a reporting unit, which we define as a number of locations within a
geographic market which experience similar economic
characteristics.





We
identify potential goodwill impairments by using both an income and market
approach, which involves comparing the fair value of the reporting unit to its
carrying amount, which includes goodwill and other intangible assets. Fair value
is calculated as the present value of expected future cash flows. In determining
future cash flows, significant estimates are made by us with respect to future
operating results of each restaurant.





If the
carrying amount of the market exceeds the fair value, this is an indication that
impairment may exist. We calculate the amount of the impairment by comparing the
implied fair value of the assets and liabilities of the reporting unit with the
carrying amount. The fair value of the reporting unit in excess of the value of
the assets and liabilities is the implied fair value of the goodwill. If this
amount is less than the carrying amount of goodwill, impairment is recognized
for the difference. As of December 27, 2009, our analysis of the fair value of
our goodwill substantially exceeded the carrying value and therefore we
concluded that our goodwill was not impaired. Our analysis is based on
improvement in the Las Vegas economic conditions. If such improvement does not
occur, goodwill impairment could occur. No goodwill impairment charges were
recognized during 2009, 2008, or 2007.





Vendor
Allowances





Vendor
allowances include allowances and other funds received from vendors. Certain of
these funds are determined based on various quantitative contract terms. We also
receive vendor allowances from certain manufacturers and distributors calculated
based upon purchases made by franchisees. Amounts that represent a reimbursement
of costs incurred, such as advertising, are recorded as a reduction of the
related expense. Amounts that represent a reduction of inventory purchase costs
are recorded as a reduction of inventoriable costs. We record an estimate of
earned vendor allowances that are calculated based upon monthly purchases. We
generally receive payment from vendors approximately 30 days after the end of a
month for that month’s purchases. During fiscal 2009, 2008, and 2007, vendor
allowances were recorded as a reduction in inventoriable costs, and cost of
sales was reduced by $6.0 million, $5.2 million, and $4.6 million,
respectively.





Revenue
Recognition — Franchise Operations





Our
franchise agreements have terms ranging from 10 to 20 years. These agreements
also convey extension terms of 5 or 10
years depending on contract terms and if certain conditions are met. We provide
training, preopening assistance and restaurant operating assistance in exchange
for area development fees, franchise fees and royalties of 5% of the franchised
restaurant’s sales. Franchise fee revenue from individual franchise sales is
recognized upon the opening of the restaurant when we have performed all of our
material obligations and initial services. Area development fees are dependent
upon the number of restaurants granted in the agreement as are our obligations
under the area development agreement. Consequently, as our obligations are met,
area development fees are recognized in relation to the expenses incurred with
the opening of each new restaurant and any royalty-free periods. Royalties are
accrued as earned and are calculated each period based on reported franchisees’
sales.





Self-Insurance
Liability





We are
self-insured for a significant portion of our risks and associated liabilities
with respect to workers’ compensation, general liability, and employee health
benefits. The accrued liabilities associated with these programs are based on
our estimate of the ultimate costs to settle known claims as well as claims that
may have arisen but have not yet been reported to us as of the balance sheet
date. Our estimated liabilities are not discounted and are based on information
provided by our insurance brokers and insurers, combined with our judgments
regarding a number of assumptions and factors, including the frequency and
severity of claims, and claims development history. We maintain stop-loss
coverage with third-party insurers to limit our total exposure for each of these
programs. Significant judgment is required to estimate claims incurred but not
reported as parties have yet to assert such claims. If actual claims trends,
including the frequency or severity of claims, differ from our estimates, our
financial results could be impacted.





Stock-Based
Compensation





We
account for stock-based compensation in accordance with the fair value
recognition provisions, under which we use the Black-Scholes-Merton pricing
model, which requires the input of subjective assumptions. These assumptions
include the expected life of the options, expected volatility over the expected
term, the risk-free interest rate, and the expected forfeitures.





25


Compensation
expense for restricted stock units is recognized for the expected number of
shares vesting at the end of each annual period. Restricted stock units granted
in 2008 are subject to cumulative one-year, two-year, and three-year net
earnings targets. The number of units that vest each year is based on
performance against those targets. The expense recognized in the first year
includes the full expense for units vesting at the end of the first year, half
of the expense for units vesting at the end of the second year, and a third of
the expense for units vesting at the end of the third year. Restricted stock
units granted in 2009 are subject to three-year cliff vesting and a cumulative
three-year earnings target. For both of these restricted stock unit grants,
significant assumptions are made to estimate the expected net earnings levels
for future years.





Results
of Operations





Our
operating results for 2009, 2008, and 2007 are expressed below as a percentage
of total revenue, except for the components of restaurant operating costs, which
are expressed as a percentage of restaurant sales.





Fiscal Years
      EndedDec. 27,
              2009
            
            
            Dec. 28,
              2008
            
            
            Dec. 30,
              2007Revenue:Restaurant
      sales
            
            
            90.7
            %
            
            
            89.9
            %
            
            
            88.8
            %Franchising
      royalties and fees
            
            
            9.3
            
            
            
            10.1
            
            
            
            11.2Total
      revenue
            
            
            100.0
            
            
            
            100.0
            
            
            
            100.0Costs
      and expenses:Restaurant
      operating costs:Cost
      of sales
            
            
            30.2
            
            
            
            29.8
            
            
            
            30.8Labor
            
            
            30.0
            
            
            
            30.2
            
            
            
            30.0Operating
            
            
            15.6
            
            
            
            15.9
            
            
            
            16.4Occupancy
            
            
            6.6
            
            
            
            6.6
            
            
            
            6.8Depreciation
      and amortization
            
            
            6.1
            
            
            
            5.6
            
            
            
            5.2General
      and administrative
            
            
            9.2
            
            
            
            9.5
            
            
            
            10.8Preopening
            
            
            1.4
            
            
            
            1.9
            
            
            
            1.4Loss
      on asset disposals and impairment
            
            
            0.4
            
            
            
            0.5
            
            
            
            0.3Total
      costs and expenses
            
            
            91.8
            
            
            
            91.6
            
            
            
            92.2Income
      from operations
            
            
            8.2
            
            
            
            8.4
            
            
            
            7.8Investment
      income
            
            
            0.2
            
            
            
            0.2
            
            
            
            0.9Earnings
      before income taxes
            
            
            8.4
            
            
            
            8.6
            
            
            
            8.7Income
      tax expense
            
            
            2.7
            
            
            
            2.8
            
            
            
            2.7Net
      earnings
            
            
            5.7
            %
            
            
            5.8
            %
            
            
            6.0
            %





26


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





As
      ofDec. 27,
              2009
            
            
            Dec. 28,
              2008
            
            
            Dec. 30,
              2007Company-owned
      restaurants
            
            
            232
            
            
            
            197
            
            
            
            161Franchised
      restaurants
            
            
            420
            
            
            
            363
            
            
            
            332





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





Fiscal Years
      EndedDec. 27,
              2009
            
            
            Dec. 28,
              2008
            
            
            Dec. 30,
              2007Company-owned
      restaurant sales
            
            $
            488,702
            
            
            
            379,686
            
            
            
            292,824Franchised
      restaurant sales
            
            
            992,043
            
            
            
            849,753
            
            
            
            724,486





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





Fiscal Years
      EndedDec. 27,
              2009
            
            
            Dec. 28,
              2008
            
            
            Dec. 30,
              2007Company-owned
      same-store sales
            
            
            3.1
            %
            
            
            5.9
            %
            
            
            6.9
            %Franchised
      same-store sales
            
            
            3.4
            
            
            
            2.8
            
            
            
            3.9





The
annual average price paid per pound for chicken wings for company-owned
restaurants is as follows:





Fiscal Years
      EndedDec. 27,
              2009
            
            
            Dec. 28,
              2008
            
            
            Dec. 30,
              2007Annual
      average price per pound
            
            $
            1.70
            
            
            
            1.22
            
            
            
            1.28





Fiscal
Year 2009 Compared to Fiscal Year 2008





Restaurant
sales increased by $109.0 million, or 28.7%, to $488.7 million in 2009 from
$379.7 million in 2008. The increase in restaurant sales was due to a $97.9
million increase associated with the opening of 36 new company-owned restaurants
in 2009, nine restaurants acquired from our franchisee in Nevada in 2008, and
the 52 company-owned restaurants opened before 2009 that did not meet the
criteria for same-store sales for all, or part, of the year and $11.1 million
related to a 3.1% increase in same-store sales.





Franchise
royalties and fees increased by $7.5 million, or 17.5%, to $50.2 million in 2009
from $42.7 million in 2008. The increase was due primarily to additional
royalties collected from the 59 new franchised restaurants that opened in 2009
and a full year of operations for the 46 franchised restaurants that opened in
2008. Same-store sales for franchised restaurants increased 3.4%.





Cost of
sales increased by $34.4 million, or 30.4%, to $147.7 million in 2009 from
$113.3 million in 2008 due primarily to more restaurants being operated in 2009.
Cost of sales as a percentage of restaurant sales increased to 30.2% in 2009
from 29.8% in 2008. The increase in cost of sales as a percentage of restaurant
sales was primarily due to the increase in chicken wing prices partially offset
by the leverage of food and alcohol costs as a result of menu price increases.
Chicken wing costs rose to $1.70 per pound in 2009 from $1.22 per pound in
2008.





Labor
expenses increased by $31.9 million, or 27.9%, to $146.6 million in 2009 from
$114.6 million in 2008 due primarily to more restaurants being operated in 2009.
Labor expenses as a percentage of restaurant sales decreased to 30.0% in 2009
compared to 30.2% in 2008. Labor costs in our restaurants were lower than prior
year due to restaurants having lower hourly labor costs which were partially
offset by higher medical costs.





Operating
expenses increased by $16.2 million, or 26.8%, to $76.4 million in 2009 from
$60.2 million in 2008 due primarily to more restaurants being operated in 2009.
Operating expenses as a percentage of restaurant sales decreased to 15.6% in
2009 from 15.9% in 2008. The decrease in operating expenses as a percentage of
restaurant sales was primarily due to lower natural gas and utility costs
partially offset by higher general liability insurance costs.





27


Occupancy
expenses increased by $7.2 million, or 28.6%, to $32.4 million in 2009 from
$25.2 million in 2008 due primarily to more restaurants being operated in 2009.
Occupancy expenses as a percentage of restaurant sales was flat at 6.6% for both
2009 and 2008.





Depreciation
and amortization increased by $9.0 million, or 38.0%, to $32.6 million in 2009
from $23.6 million in 2008. The increase was primarily due to the additional
depreciation on 36 new restaurants in 2009 and 40 new restaurants opened in 2008
and operated for a full year in 2009.





General
and administrative expenses increased by $9.3 million, or 23.0%, to $49.4
million in 2009 from $40.2 million in 2008. General and administrative expenses
as a percentage of total revenue decreased to 9.2% in 2009 from 9.5% in 2008.
Exclusive of stock-based compensation, our general and administrative expenses
decreased to 8.0% of total revenue in 2009 from 8.3% in 2008. This decrease was
primarily due better leverage of our wage-related expenses.





Preopening
costs decreased by $228,000, or 2.9%, to $7.7 million in 2009 from $7.9 million
in 2008. In 2009, we incurred costs of $7.4 million for 36 new company-owned
restaurants opened in 2009 and costs of $242,000 for restaurants opening in
2010. In 2008, we opened 31 new company-owned restaurants, incurred costs of
approximately $490,000 for restaurants opening in 2009, and incurred $197,000
related to the acquisition of the nine franchised restaurants located in Nevada.
Average preopening cost per restaurant in 2009 was $220,000. Preopening costs
for 2008 averaged $203,000 per restaurant, excluding the eight Don Pablo’s
conversions which averaged $316,000.





Loss on
asset disposals and impairment decreased by $155,000 to $1.9 million in 2009
from $2.1 million in 2008. The expense in 2009 represented the asset impairment
of one underperforming restaurant of $237,000, closure costs for one restaurant
of $31,000, and $1.6 million for the write-off of miscellaneous equipment. The
expense in 2008 represented the asset impairment of one relocated restaurant of
$395,000 and two underperforming restaurants of $154,000, the closure costs for
three relocated restaurants of $85,000, and $1.4 million for the write-off of
miscellaneous equipment.





Investment
income increased by $107,000 to $1.1 million in 2009 from $970,000 in 2008. The
majority of our investments were in short-term municipal securities. The
increase in investment income was primarily due to higher rates of return on our
investments related to our deferred compensation plan partially offset by lower
rates of return on our cash and marketable securities balances. Cash and
marketable securities balances at the end of the year were $53.2 million in 2009
compared to $44.5 million in 2008.





Provision
for income taxes increased $2.8 million to $14.8 million in 2009 from $11.9
million in 2008. The effective tax rate as a percentage of income before taxes
decreased to 32.5% in 2009 from 32.8% in 2008. The rate decrease was primarily
due to higher employee related federal tax credits offset partially by a
reduction in tax exempt interest income. For 2010, we believe our effective tax
rate will be between 32.5% and 33.5%.





Fiscal
Year 2008 Compared to Fiscal Year 2007





Restaurant
sales increased by $86.9 million, or 29.7%, to $379.7 million in 2008 from
$292.8 million in 2007. The increase in restaurant sales was due to a $70.6
million increase associated with the opening of 40 new company-owned restaurants
in 2008, which includes eight locations acquired from Avado Brands, Inc. and
nine restaurants acquired from our franchisee in Nevada, and the 34
company-owned restaurants opened before 2008 that did not meet the criteria for
same-store sales for all, or part, of the year. A 5.9% increase in same-store
sales accounted for $16.3 million of the increase in restaurant
sales.





Franchise
royalties and fees increased by $5.9 million, or 16.0%, to $42.7 million in 2008
from $36.8 million in 2007. The increase was due primarily to additional
royalties collected from the 46 new franchised restaurants that opened in 2008
and a full year of operations for the 46 franchised restaurants that opened in
2007. Same-store sales for franchised restaurants increased 2.8%.





Cost of
sales increased by $23.2 million, or 25.8%, to $113.3 million in 2008 from $90.1
million in 2007 due primarily to more restaurants being operated in 2008. Cost
of sales as a percentage of restaurant sales decreased to 29.8% in 2008 from
30.8% in 2007. The decrease in cost of sales as a percentage of restaurant sales
was primarily due to the leverage of food and alcohol costs as a result of menu
price increases and lower chicken wing prices. Chicken wing costs dropped to
$1.22 per pound in 2008 from $1.28 per pound in 2007. Also, boneless wings sales
increased in 2008 as a part of our menu mix, providing better margins and a
corresponding lower cost of sales percentage.





Labor
expenses increased by $26.8 million, or 30.6%, to $114.6 million in 2008 from
$87.8 million in 2007 due primarily to more restaurants being operated in 2008.
Labor expenses as a percentage of restaurant sales increased to 30.2% in 2008
compared to 30.0% in 2007. Labor costs in our restaurants were higher than prior
year due to restaurants having higher management salaries which were partially
offset by lower workers’ compensation costs.





28


Operating
expenses increased by $12.2 million, or 25.5%, to $60.2 million in 2008 from
$48.0 million in 2007 due primarily to more restaurants being operated in 2008.
Operating expenses as a percentage of restaurant sales decreased to 15.9% in
2008 from 16.4% in 2007. The decrease in operating expenses as a percentage of
restaurant sales was primarily due to lower repair and maintenance costs and
general liability insurance costs offset by higher natural gas hedging cost for
future months.





Occupancy
expenses increased by $5.2 million, or 25.9%, to $25.2 million in 2008 from
$20.0 million in 2007 due primarily to more restaurants being operated in 2008.
Occupancy expenses as a percentage of restaurant sales decreased to 6.6% in 2008
from 6.8% in 2007, primarily due to better leverage of rent expense with the
higher sales levels.





Depreciation
and amortization increased by $6.6 million, or 39.1%, to $23.6 million in 2008
from $17.0 million in 2007. The increase was primarily due to the additional
depreciation on 40 new restaurants in 2008 and 23 new restaurants opened in 2007
and operated for a full year in 2008. Accelerated depreciation related to three
restaurants which were relocated due to the Avado Brands, Inc. site acquisitions
also contributed to the increase.





General
and administrative expenses increased by $4.4 million, or 12.3%, to $40.2
million in 2008 from $35.7 million in 2007. General and administrative expenses
as a percentage of total revenue decreased to 9.5% in 2008 from 10.8 % in 2007.
Exclusive of stock-based compensation, our general and administrative expenses
decreased to 8.3% of total revenue in 2008 from 9.7% in 2007. This decrease was
primarily due to lower professional fees, conference costs, and better leverage
of our wage-related expenses.





Preopening
costs increased by $3.4 million, or 75.4%, to $7.9 million in 2008 from $4.5
million in 2007. In 2008, we opened 31 new company-owned restaurants, incurred
costs of approximately $490,000 for restaurants opening in 2009, and incurred
$197,000 related to the acquisition of the nine franchised restaurants located
in Nevada. In 2007, we opened 23 new company-owned restaurants and incurred cost
of approximately $47,000 for restaurants opening in 2008. Average preopening
cost per restaurant in 2008 was $203,000, excluding the eight Don Pablo’s
conversions which averaged $316,000. Preopening costs for 2007 averaged $195,000
per restaurant.





Loss on
asset disposals and impairment increased by $1.1 million to $2.1 million in 2008
from $987,000 in 2007. The expense in 2008 represented the asset impairment of
one relocated restaurant of $395,000 and two underperforming restaurants of
$154,000, the closure costs for three relocated restaurants of $85,000, and $1.4
million for the write-off of miscellaneous equipment. During 2007 we closed one
underperforming restaurant in North Carolina resulting in store closing costs
and a write-down of equipment costs for $183,000. The remaining 2007 expense was
for write-off of miscellaneous equipment.





Investment
income decreased by $1.9 million to $970,000 in 2008 from $2.9 million in 2007.
The majority of our investments were in short-term municipal securities. The
decrease in investment income was primarily due to lower rates of return on
investments and lower overall cash and marketable securities balances. Cash and
marketable securities balances at the end of the year were $44.5 million in 2008
compared to $68.0 million in 2007.





Provision
for income taxes increased $3.1 million to $11.9 million in 2008 from $8.9
million in 2007. The effective tax rate as a percentage of income before taxes
increased to 32.8% in 2008 from 31.1% in 2007. The rate increase was primarily
due to a reduction in tax exempt interest income.





Liquidity
and Capital Resources





Our
primary liquidity and capital requirements have been for new restaurant
construction, remodeling and maintaining our existing company-owned restaurants,
working capital, acquisitions, and other general business needs. We fund these
expenses, except for acquisitions, primarily with cash from operations.
Depending on the size of the transaction, acquisitions would generally be funded
from cash and marketable securities balances. The cash and marketable securities
balance at December 27, 2009 was $53.2 million. We invest our cash balances in
debt securities with the focus on protection of principal, adequate liquidity
and return on investment based on risk. As of December 27, 2009, nearly all
excess cash was invested in high quality municipal securities.





During
fiscal 2009, 2008, and 2007, net cash provided by operating activities was $79.3
million, $66.1 million, and $43.6 million, respectively. Net cash provided by
operating activities in 2009 consisted primarily of net earnings adjusted for
non-cash expenses and an increase in accrued expenses partially offset by an
increase in accounts receivable and trading securities. The increase in accrued
expenses was primarily due to increased payroll related costs including wages,
incentive compensation, and deferred compensation costs. The increase in
accounts receivable was primarily due to the timing of payments received related
to credit cards and royalties which was affected by the Christmas holiday. The
increase in trading securities was due to additional contributions to the
Management Deferred Compensation Plan.





29


Net cash
provided by operating activities in 2008 consisted primarily of net earnings
adjusted for non-cash expenses and an increase in accounts payable, and accrued
expenses, and a decrease in refundable income taxes. The increase in accounts
payable was primarily due to the larger number of restaurants in operation, the
amount of construction activity at the end of 2008, and the timing of payments.
The increase in accrued expenses was due primarily to higher utility accruals
and losses related to future natural gas contracts. The decrease in refundable
income taxes was due to the timing of tax payments.





Net cash
provided by operating activities in 2007 consisted primarily of net earnings
adjusted for non-cash expenses and an increase in accounts payable and accrued
expenses partially offset by an increase in accounts receivable, prepaid
expenses, and income tax receivables. The increase in accounts payable is
relative to the growth in the number of company-owned restaurants. The increase
in accrued expenses was due primarily to the growth in the number of
company-owned restaurants, and a higher gift card liability due to strong fourth
quarter gift card sales. The increase in accounts receivable was primarily due
to higher credit card receivables and landlord receivables for tenant
improvements. The increase in prepaid expense is primarily due to the timing of
payments related to our self insurance programs. The increase in income tax
receivables was due to the timing of payments.





Net cash
used in investing activities for 2009, 2008, and 2007, was $79.2 million, $60.1
million, and $54.7 million, respectively. Investing activities included
purchases of property and equipment related to the opening of new company-owned
restaurants and restaurants under construction in all periods. In 2009 we opened
36 new restaurants. In 2008 we purchased nine franchised locations in Nevada for
$23.1 million and opened 31 new restaurants. In 2007 we opened 23 new
restaurants. In 2010, we expect capital expenditures for approximately 42 new or
relocated company-owned restaurants to cost approximately $1.75 million per
location, and expenditures of approximately $20 million for the upgrades and
remodels of existing restaurants. In 2009, we purchased $57.0 million of
marketable securities and received proceeds of $51.6 million as investments in
marketable securities matured or were sold. In 2008, we purchased $116.3 million
of marketable securities and received proceeds of $146.6 million as investments
in marketable securities matured or were sold. In 2007, we purchased $158.2
million of marketable securities and received proceeds of $144.8 million as
investments in marketable securities matured.





Net cash
provided by financing activities for 2009, 2008, and 2007, was $1.1 million,
$853,000, and $873,000, respectively. Net cash provided by financing activities
for 2009 resulted primarily from the issuance of common stock for options
exercised and employee stock purchases of $1.2 million and excess tax benefits
for restricted stock unit issuances of $1.5 million partially offset by tax
payments for restricted stock units of $1.5 million. Net cash provided by
financing activities for 2008 resulted from the issuance of common stock for
options exercised and employee stock purchases of $1.2 million and excess tax
benefits for restricted stock unit issuances of $615,000 partially offset by tax
payments for restricted stock units of $989,000. Net cash provided by financing
activities for 2007 resulted primarily from the issuance of common stock for
options exercised and employee stock purchases of $1.4 million and excess tax
benefits for restricted stock unit issuances of $1.0 million partially offset by
tax payments for restricted stock units of $1.6 million. No additional funding
from the issuance of common stock (other than from the exercise of options and
employee stock purchases) is anticipated in 2010.





Our
liquidity is impacted by minimum cash payment commitments resulting from
operating lease obligations for our restaurants and our corporate offices. Lease
terms are generally 10 to 15 years with renewal options and generally require us
to pay a proportionate share of real estate taxes, insurance, common area
maintenance and other operating costs. Some restaurant leases provide for
contingent rental payments based on sales thresholds. We own the buildings in
which 31 of our restaurants operate and therefore have a very limited ability to
enter into sale-leaseback transactions as a potential source of
cash.





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





Payments
      Due By Period
              (in
      thousands)Total
            
            
            Less than
              one
      year
            
            
            1-3 years
            
            
            3-5 years
            
            
            After
      5
              yearsOperating
      lease obligations
            
            $
            240,869
            
            
            
            28,521
            
            
            
            53,734
            
            
            
            48,119
            
            
            
            110,495Commitments
      for restaurants under development
            
            
            34,477
            
            
            
            1,379
            
            
            
            5,073
            
            
            
            5,134
            
            
            
            22,891Total
            
            $
            275,346
            
            
            
            29,900
            
            
            
            58,807
            
            
            
            53,253
            
            
            
            133,386





30


We
believe the cash flows from our operating activities and our balance of cash and
marketable securities will be sufficient to fund our operations and building
commitments and meet our obligations in the foreseeable future. Our future cash
outflows related to income tax uncertainties amounts to $566,000. These amounts
are excluded from the contractual obligations table due to the high degree of
uncertainty regarding the timing of these liabilities.





Recent
Accounting Pronouncements





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





Impact
of Inflation





In the
last three years we have not operated in a period of high general inflation;
however, the cost of commodities, labor and certain utilities have generally
increased or experienced price volatility. Our restaurant operations are subject
to federal and state minimum wage laws governing such matters as working
conditions, overtime and tip credits. Significant numbers of our food service
and preparation personnel are paid at rates related to the federal and/or state
minimum wage and, accordingly, increases in the minimum wage have increased our
labor costs in the last three years. In addition, costs associated with our
operating leases, such as taxes, maintenance, repairs and insurance, are often
subject to upward pressure. To the extent permitted by competition, we have
mitigated increased costs by increasing menu prices and may continue to do so if
deemed necessary in future years.





Quarterly
Results of Operations





The
following table sets forth, by quarter, the unaudited quarterly results of
operations for the two most recent years, as well as the same data expressed as
a percentage of our total revenue for the periods presented. Restaurant
operating costs are expressed as a percentage of restaurant sales. The
information for each quarter is unaudited and we have prepared it on the same
basis as the audited financial statements appearing elsewhere in this document.
In the opinion of management, all necessary adjustments, consisting only of
normal recurring adjustments, have been included to present fairly the unaudited
quarterly results. All amounts, except per share amounts, are expressed in
thousands.





Quarterly
and annual operating results may fluctuate significantly as a result of a
variety of factors, including increases or decreases in same-store sales,
changes in chicken wing prices, the timing and number of new restaurant openings
and their related expenses, asset impairment charges, store closing charges,
general economic conditions and seasonal fluctuations.





31


Results
of Quarterly Operations (unaudited)





Mar.
      30,
              2008
            
            
            Jun.
      29,
              2008
            
            
            Sep.
      28,
              2008
            
            
            Dec. 28,
              2008
            
            
            Mar.
      29,
              200
            
            
            Jun.
      28,
              2009
            
            
            Sep.
      27,
              200
            
            
            Dec. 27,
              2009Revenue:Restaurant
      sales
            
            $
            86,896
            
            
            
            87,462
            
            
            
            95,492
            
            
            
            109,836
            
            
            
            119,424
            
            
            
            117,763
            
            
            
            120,290
            
            
            
            131,225Franchise
      royalties and fees
            
            
            10,366
            
            
            
            10,406
            
            
            
            10,582
            
            
            
            11,377
            
            
            
            12,131
            
            
            
            11,859
            
            
            
            12,451
            
            
            
            13,781Total
      revenue
            
            
            97,262
            
            
            
            97,868
            
            
            
            106,074
            
            
            
            121,213
            
            
            
            131,555
            
            
            
            129,622
            
            
            
            132,741
            
            
            
            145,006Costs
      and expenses:Restaurant
      operating costs:Cost
      of sales
            
            
            26,415
            
            
            
            26,248
            
            
            
            28,422
            
            
            
            32,181
            
            
            
            36,208
            
            
            
            35,922
            
            
            
            35,809
            
            
            
            39,720Labor
            
            
            25,858
            
            
            
            27,020
            
            
            
            29,289
            
            
            
            32,442
            
            
            
            35,549
            
            
            
            36,056
            
            
            
            36,369
            
            
            
            38,581Operating
            
            
            13,275
            
            
            
            13,857
            
            
            
            15,675
            
            
            
            17,398
            
            
            
            17,987
            
            
            
            17,966
            
            
            
            19,416
            
            
            
            20,989Occupancy
            
            
            5,697
            
            
            
            5,902
            
            
            
            6,273
            
            
            
            7,285
            
            
            
            7,594
            
            
            
            7,924
            
            
            
            8,256
            
            
            
            8,588Depreciation
      and amortization
            
            
            5,239
            
            
            
            5,510
            
            
            
            5,971
            
            
            
            6,902
            
            
            
            7,495
            
            
            
            7,888
            
            
            
            8,267
            
            
            
            8,955General
      and administrative
            
            
            9,341
            
            
            
            9,047
            
            
            
            10,684
            
            
            
            11,079
            
            
            
            11,420
            
            
            
            11,773
            
            
            
            12,943
            
            
            
            13,268Preopening
            
            
            1,185
            
            
            
            1,758
            
            
            
            2,476
            
            
            
            2,511
            
            
            
            2,409
            
            
            
            1,673
            
            
            
            1,149
            
            
            
            2,471Loss
      on asset disposals and impairment
            
            
            753
            
            
            
            385
            
            
            
            930
            
            
            
            15
            
            
            
            175
            
            
            
            272
            
            
            
            842
            
            
            
            639Total
      costs and expenses
            
            
            87,763
            
            
            
            89,727
            
            
            
            99,720
            
            
            
            109,813
            
            
            
            118,837
            
            
            
            119,474
            
            
            
            123,051
            
            
            
            133,211Income
      from operations
            
            
            9,499
            
            
            
            8,141
            
            
            
            6,354
            
            
            
            11,400
            
            
            
            12,718
            
            
            
            10,148
            
            
            
            9,690
            
            
            
            11,795Investment
      income (loss)
            
            
            432
            
            
            
            400
            
            
            
            264
            
            
            
            (126
            )
            
            
            76
            
            
            
            413
            
            
            
            379
            
            
            
            209Earnings
      before income taxes
            
            
            9,931
            
            
            
            8,541
            
            
            
            6,618
            
            
            
            11,274
            
            
            
            12,794
            
            
            
            10,561
            
            
            
            10,069
            
            
            
            12,004Income
      tax expense
            
            
            3,406
            
            
            
            2,926
            
            
            
            2,050
            
            
            
            3,547
            
            
            
            4,308
            
            
            
            3,586
            
            
            
            3,197
            
            
            
            3,666Net
      earnings
            
            $
            6,525
            
            
            
            5,615
            
            
            
            4,568
            
            
            
            7,727
            
            
            
            8,486
            
            
            
            6,975
            
            
            
            6,872
            
            
            
            8,338Earnings
      per common share – basic
            
            $
            0.37
            
            
            
            0.32
            
            
            
            0.26
            
            
            
            0.43
            
            
            
            0.47
            
            
            
            0.39
            
            
            
            0.38
            
            
            
            0.46Earnings
      per common share – diluted
            
            $
            0.36
            
            
            
            0.31
            
            
            
            0.25
            
            
            
            0.43
            
            
            
            0.47
            
            
            
            0.39
            
            
            
            0.38
            
            
            
            0.46Weighted
      average shares outstanding – basic
            
            
            17,766
            
            
            
            17,810
            
            
            
            17,823
            
            
            
            17,854
            
            
            
            17,980
            
            
            
            17,999
            
            
            
            18,024
            
            
            
            18,038Weighted
      average shares outstanding – diluted
            
            
            17,877
            
            
            
            17,906
            
            
            
            17,920
            
            
            
            18,011
            
            
            
            18,041
            
            
            
            18,070
            
            
            
            18,098
            
            
            
            18,208





32


Results
of Quarterly Operations (unaudited)





Mar.
      30,
              2008
            
            
            Jun.
      29,
              2008
            
            
            Sep.
      28,
              2008
            
            
            Dec. 28,
              2008
            
            
            Mar.
      29,
              2009
            
            
            Jun.
      28,
              2009
            
            
            Sep.
      27,
              2009
            
            
            Dec. 27,
              2009Revenue:Restaurant
      sales
            
            
            89.3
            %
            
            
            89.4
            %
            
            
            90.0
            %
            
            
            90.6
            %
            
            
            90.8
            %
            
            
            90.9
            %
            
            
            90.6
            %
            
            
            90.5
            %Franchise
      royalties and fees
            
            
            10.7
            
            
            
            10.6
            
            
            
            10.0
            
            
            
            9.4
            
            
            
            9.2
            
            
            
            9.1
            
            
            
            9.4
            
            
            
            9.5Total
      revenue
            
            
            100.0
            
            
            
            100.0
            
            
            
            100.0
            
            
            
            100.0
            
            
            
            100.0
            
            
            
            100.0
            
            
            
            100.0
            
            
            
            100.0Costs
      and expenses:Restaurant
      operating costs:Cost
      of sales
            
            
            30.4
            
            
            
            30.0
            
            
            
            29.8
            
            
            
            29.3
            
            
            
            30.3
            
            
            
            30.5
            
            
            
            29.8
            
            
            
            30.3Labor
            
            
            29.8
            
            
            
            30.9
            
            
            
            30.7
            
            
            
            29.5
            
            
            
            29.8
            
            
            
            30.6
            
            
            
            30.2
            
            
            
            29.4Operating
            
            
            15.3
            
            
            
            15.8
            
            
            
            16.4
            
            
            
            15.8
            
            
            
            15.1
            
            
            
            15.3
            
            
            
            16.1
            
            
            
            16.0Occupancy
            
            
            6.6
            
            
            
            6.7
            
            
            
            6.6
            
            
            
            6.6
            
            
            
            6.4
            
            
            
            6.7
            
            
            
            6.9
            
            
            
            6.5Depreciation
      and amortization
            
            
            5.4
            
            
            
            5.6
            
            
            
            5.6
            
            
            
            5.7
            
            
            
            5.7
            
            
            
            6.1
            
            
            
            6.2
            
            
            
            6.2General
      and administrative
            
            
            9.6
            
            
            
            9.2
            
            
            
            10.1
            
            
            
            9.1
            
            
            
            8.7
            
            
            
            9.1
            
            
            
            9.8
            
            
            
            9.1Preopening
            
            
            1.2
            
            
            
            1.8
            
            
            
            2.3
            
            
            
            2.1
            
            
            
            1.8
            
            
            
            1.3
            
            
            
            0.9
            
            
            
            1.7Loss
      on asset disposals and impairment
            
            
            0.8
            
            
            
            0.4
            
            
            
            0.9
            
            
            
            0.0
            
            
            
            0.1
            
            
            
            0.2
            
            
            
            0.6
            
            
            
            0.4Total
      costs and expenses
            
            
            90.2
            
            
            
            91.7
            
            
            
            94.0
            
            
            
            90.6
            
            
            
            90.3
            
            
            
            92.2
            
            
            
            92.7
            
            
            
            91.9Income
      from operations
            
            
            9.8
            
            
            
            8.3
            
            
            
            6.0
            
            
            
            9.4
            
            
            
            9.7
            
            
            
            7.8
            
            
            
            7.3
            
            
            
            8.1Investment
      income (loss)
            
            
            0.4
            
            
            
            0.4
            
            
            
            0.2
            
            
            
            (0.1
            )
            
            
            0.1
            
            
            
            0.3
            
            
            
            0.3
            
            
            
            0.1Earnings
      before income taxes
            
            
            10.2
            
            
            
            8.7
            
            
            
            6.2
            
            
            
            9.3
            
            
            
            9.7
            
            
            
            8.1
            
            
            
            7.6
            
            
            
            8.3Income
      tax expense
            
            
            3.5
            
            
            
            3.0
            
            
            
            1.9
            
            
            
            2.9
            
            
            
            3.3
            
            
            
            2.8
            
            
            
            2.4
            
            
            
            2.5Net
      earnings
            
            
            6.7
            %
            
            
            5.7
            %
            
            
            4.3
            %
            
            
            6.4
            %
            
            
            6.5
            %
            
            
            5.4
            %
            
            
            5.2
            %
            
            
            5.8
            %




33


ITEM
7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK





We are
exposed to market risk related to our cash and cash equivalents and marketable
securities. We invest our excess cash in highly liquid short-term investments
with maturities of less than one year. These investments are not held for
trading or other speculative purposes. Changes in interest rates affect the
investment income we earn on our cash and cash equivalents and marketable
securities and, therefore, impact our cash flows and results of operations. We
also have trading securities, which are held to generate returns that seek to
offset changes in liabilities related to the equity market risk of our deferred
compensation arrangements.





Financial
Instruments





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





Inflation





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





Commodity
Price Risk





Many of
the food products purchased by us are affected by weather, production,
availability and other factors outside our control. We believe that almost all
of our food and supplies are available from several sources, which helps to
control food product risks. We negotiate directly with independent suppliers for
our supply of food and paper products. We use members of UniPro Food Services,
Inc., a national cooperative of independent food distributors, to distribute
these products from the suppliers to our restaurants. We have minimum purchase
requirements with some of our vendors, but the terms of the contracts and nature
of the products are such that our purchase requirements do not create a market
risk. The primary food product used by company-owned and franchised restaurants
is chicken wings. We work to counteract the effect of the volatility of chicken
wing prices, which can significantly change our cost of sales and cash flow,
with the introduction of new menu items, effective marketing promotions, focused
efforts on food costs and waste, and menu price increases. We also explore
purchasing strategies to reduce the severity of cost increases and fluctuations.
We currently purchase our chicken wings at market prices. If a satisfactory
long-term price agreement for chicken wings were to arise, we would consider
locking in prices to reduce our price volatility. Chicken wing prices in 2009
averaged 39.3% higher than 2008 as the average price per pound increased to
$1.70 in 2009 from $1.22 in 2008. If there is a significant rise in the price of
chicken wings, and we are unable to successfully adjust menu prices or menu mix
or otherwise make operational adjustments to account for the higher wing prices,
our operating results could be adversely affected. Chicken wings accounted for
approximately 25%, 21%, and 24% of our cost of sales in 2009, 2008, and 2007,
respectively, with an annual average price per pound of $1.70, $1.22, and $1.28,
respectively. A 10% increase in chicken wing costs during 2009, would have
increased restaurant cost of sales by approximately $3.8 million for fiscal
2009. Additional information related to chicken wing prices and our approaches
to managing the volatility thereof is included in Item 7 under “Results of
Operations.”





34


ITEM
8. CONSOLIDATED FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
 
 For
supplemental information regarding quarterly results of operations, refer to
Item 7, “Results of Quarterly Operations.”
 
 BUFFALO
WILD WINGS, INC.
 
 Index
to Consolidated Financial Statements
 
 Report
      of Independent Registered Public Accounting Firm
              36Consolidated
      Balance Sheets as of December 27, 2009 and December 28,
    2008
              37Consolidated
      Statements of Earnings for the Fiscal Years Ended December 27, 2009,
      December 28, 2008, and December 30, 2007
              38Consolidated
      Statements of Stockholders’ Equity for the Fiscal Years Ended December 27,
      2009, December 28, 2008, and December 30, 2007
              39Consolidated
      Statements of Cash Flows for the Fiscal Years Ended December 27, 2009,
      December 28, 2008, and December 30, 2007
              40Notes
      to Consolidated Financial Statements
              41
 
     35
 Report
of Independent Registered Public Accounting Firm
 
 The
      Board of Directors and Stockholders
 Buffalo
      Wild Wings, Inc.:
 
 We have
audited the accompanying consolidated balance sheets of Buffalo Wild Wings, Inc.
and subsidiaries (the “Company”) as of December 27, 2009 and December 28,
2008, and the related consolidated statements of earnings, stockholders’ equity,
and cash flows for each of the fiscal years in the three-year period ended
December 27, 2009. In connection with our audits of the consolidated
financial statements, we have also audited the accompanying financial statement
schedule for each of the fiscal years in the three-year period ended December
27, 2009. We also have audited Buffalo Wild Wings, Inc.’s internal control over
financial reporting as of December 27, 2009, based on criteria established
in Internal Control –
Integrated Framework issued by the Committee of Sponsoring Organizations
of the Treadway Commission (COSO). Buffalo Wild Wings, Inc.’s management is
responsible for these consolidated financial statements and financial statement
schedule, for maintaining effective internal control over financial reporting,
and for its assessment of the effectiveness of internal control over financial
reporting, included in the accompanying Management’s Report on Internal Control
over Financial Reporting. Our responsibility is to express an opinion on these
consolidated financial statements and financial statement schedule, and an
opinion on the Company’s internal control over financial reporting, based on our
audits.
 
 We
conducted our audits in accordance with the standards of the Public Company
Accounting Oversight Board (United States). Those standards require that we plan
and perform the audits to obtain reasonable assurance about whether the
financial statements are free of material misstatement and whether effective
internal control over financial reporting was maintained in all material
respects. Our audits of the consolidated financial statements included
examining, on a test basis, evidence supporting the amounts and disclosures in
the financial statements, assessing the accounting principles used and
significant estimates made by management, and evaluating the overall financial
statement presentation. Our audit of internal control over financial reporting
included obtaining an understanding of internal control over financial
reporting, assessing the risk that a material weakness exists, and testing and
evaluating the design and operating effectiveness of internal control based on
the assessed risk. Our audits also included performing such other procedures as
we considered necessary in the circumstances. We believe that our audits provide
a reasonable basis for our opinions.
 
 A
company’s internal control over financial reporting is a process designed to
provide reasonable assurance regarding the reliability of financial reporting
and the preparation of financial statements for external purposes in accordance
with generally accepted accounting principles. A company’s internal control over
financial reporting includes those policies and procedures that (1) pertain
to the maintenance of records that, in reasonable detail, accurately and fairly
reflect the transactions and dispositions of the assets of the company;
(2) provide reasonable assurance that transactions are recorded as
necessary to permit preparation of financial statements in accordance with U.S.
generally accepted accounting principles, and that receipts and expenditures of
the company are being made only in accordance with authorizations of management
and directors of the company; and (3) provide reasonable assurance
regarding prevention or timely detection of unauthorized acquisition, use, or
disposition of the company’s assets that could have a material effect on the
financial statements.
 
 Because
of its inherent limitations, internal control over financial reporting may not
prevent or detect misstatements. Also, projections of any evaluation of
effectiveness to future periods are subject to the risk that controls may become
inadequate because of changes in conditions, or that the degree of compliance
with the policies or procedures may deteriorate.
 
 In our
opinion, the consolidated financial statements referred to above present fairly,
in all material respects, the financial position of Buffalo Wild Wings Inc. and
subsidiaries as of December 27, 2009 and December 28, 2008, and the results
of their operations and their cash flows for each of the fiscal years in the
three-year period ended December 27, 2009, in conformity with U.S.
generally accepted accounting principles. In our opinion, the accompanying
financial statement schedule, when considered in relation to the basic
consolidated financial statements taken as a whole, presents fairly, in all
material respects, the information set forth therein. Also in our opinion,
Buffalo Wild Wings, Inc. maintained, in all material respects, effective
internal control over financial reporting as of December 27, 2009, based on
criteria established in Internal Control – Integrated
Framework issued by the Committee of Sponsoring Organizations of the
Treadway Commission.
 
 
 
 /S/    KPMG
      LLP
 
  Minneapolis,
Minnesota
   36
 BUFFALO
WILD WINGS, INC. AND SUBSIDIARIES
 
 CONSOLIDATED
BALANCE SHEETS
 December
27, 2009 and December 28, 2008
 (Dollar
amounts in thousands)
 
 December 27,
                2009
              
              
              December 28,
                2008AssetsCurrent
      assets:Cash
      and cash equivalents
              
              $
              9,580
              
              
              
              8,347Marketable
      securities
              
              
              43,632
              
              
              
              36,157Accounts
      receivable – franchisees, net of allowance of $25
              
              
              2,118
              
              
              
              895Accounts
      receivable – other
              
              
              7,383
              
              
              
              5,759Inventory
              
              
              3,644
              
              
              
              3,104Prepaid
      expenses
              
              
              2,972
              
              
              
              3,294Refundable
      income taxes
              
              
              1,872
              
              
              
              1,611Deferred
      income taxes
              
              
              2,938
              
              
              
              1,731Restricted
      assets
              
              
              24,384
              
              
              
              7,670Total
      current assets
              
              
              98,523
              
              
              
              68,568Property
      and equipment, net
              
              
              189,639
              
              
              
              154,432Other
      assets
              
              
              9,665
              
              
              
              9,846Goodwill
              
              
              11,246
              
              
              
              10,972Total
      assets
              
              $
              309,073
              
              
              
              243,818Liabilities
      and Stockholders’ EquityCurrent
      liabilities:Unearned
      franchise fees
              
              $
              2,706
              
              
              
              2,514Accounts
      payable
              
              
              13,436
              
              
              
              16,691Accrued
      compensation and benefits
              
              
              19,554
              
              
              
              14,155Accrued
      expenses
              
              
              6,540
              
              
              
              7,116Current
      portion of deferred lease credits
              
              
              84
              
              
              
              56System-wide
      payables
              
              
              24,384
              
              
              
              7,670Total
      current liabilities
              
              
              66,704
              
              
              
              48,202Long-term
      liabilities:Other
      liabilities
              
              
              1,422
              
              
              
              1,270Deferred
      income taxes
              
              
              14,940
              
              
              
              8,916Deferred
      lease credits, net of current portion
              
              
              16,174
              
              
              
              13,837Total
      liabilities
              
              
              99,240
              
              
              
              72,225Commitments
      and contingencies (notes 6 and 16)Stockholders’
      equity:Undesignated
      stock, 1,000,000 shares authorized
              
              
              —
              
              
              
              —Common
      stock, no par value. Authorized 44,000,000 shares; issued and outstanding
      18,054,375 and 17,887,271, respectively
              
              
              93,887
              
              
              
              86,318Retained
      earnings
              
              
              115,946
              
              
              
              85,275Total
      stockholders’ equity
              
              
              209,833
              
              
              
              171,593Total
      liabilities and stockholders’ equity
              
              $
              309,073
              
              
              
              243,818
 
 See
accompanying notes to consolidated financial statements.
  37
 BUFFALO
WILD WINGS, INC. AND SUBSIDIARIES
 
 CONSOLIDATED
STATEMENTS OF EARNINGS
 Fiscal
years ended December 27, 2009, December 28, 2008, and December 30,
2007
 (Amounts
in thousands except per share data)
 
 Fiscal years
      endedDecember 27,
                2009
              
              
              December 28,
                2008
              
              
              December 30,
                2007Revenue:Restaurant
      sales
              
              $
              488,702
              
              
              
              379,686
              
              
              
              292,824Franchise
      royalties and fees
              
              
              50,222
              
              
              
              42,731
              
              
              
              36,828Total
      revenue
              
              
              538,924
              
              
              
              422,417
              
              
              
              329,652Costs
      and expenses:Restaurant
      operating costs:Cost
      of sales
              
              
              147,659
              
              
              
              113,266
              
              
              
              90,065Labor
              
              
              146,555
              
              
              
              114,609
              
              
              
              87,784Operating
              
              
              76,358
              
              
              
              60,205
              
              
              
              47,974Occupancy
              
              
              32,362
              
              
              
              25,157
              
              
              
              19,986Depreciation
      and amortization
              
              
              32,605
              
              
              
              23,622
              
              
              
              16,987General
      and administrative (1)
              
              
              49,404
              
              
              
              40,151
              
              
              
              35,740Preopening
              
              
              7,702
              
              
              
              7,930
              
              
              
              4,520Loss
      on asset disposals and impairment
              
              
              1,928
              
              
              
              2,083
              
              
              
              987Total
      costs and expenses
              
              
              494,573
              
              
              
              387,023
              
              
              
              304,043Income
      from operations
              
              
              44,351
              
              
              
              35,394
              
              
              
              25,609Investment
      income
              
              
              1,077
              
              
              
              970
              
              
              
              2,909Earnings
      before income taxes
              
              
              45,428
              
              
              
              36,364
              
              
              
              28,518Income
      tax expense
              
              
              14,757
              
              
              
              11,929
              
              
              
              8,864Net
      earnings
              
              $
              30,671
              
              
              
              24,435
              
              
              
              19,654Earnings
      per common share – basic
              
              $
              1.70
              
              
              
              1.37
              
              
              
              1.12Earnings
      per common share – diluted
              
              $
              1.69
              
              
              
              1.36
              
              
              
              1.10Weighted
      average shares outstanding – basic
              
              
              18,010
              
              
              
              17,813
              
              
              
              17,554Weighted
      average shares outstanding – diluted
              
              
              18,177
              
              
              
              17,995
              
              
              
              17,833
 
 (1)Includes stock-based compensation of $6,490, $4,900, and $3,755,
respectively
 
 
 See
accompanying notes to consolidated financial statements.
  38
 BUFFALO
WILD WINGS, INC. AND SUBSIDIARIES
 
 CONSOLIDATED
STATEMENTS OF STOCKHOLDERS’ EQUITY
 Fiscal
years ended December 27, 2009, December 28, 2008, and December 30,
2007
 (Dollar
amounts in thousands)
 
 Common
      Stock
              
              
              RetainedShares
              
              
              Amount
              
              
              Earnings
              
              
              TotalBalance
      at December 31, 2006
              
              
              17,268,016
              
              
              $
              75,030
              
              
              $
              41,186
              
              
              $
              116,216Net
      earnings
              
              
              —
              
              
              
              —
              
              
              
              19,654
              
              
              
              19,654Shares
      issued under employee stock purchase plan
              
              
              30,791
              
              
              
              685
              
              
              
              —
              
              
              
              685Shares
      issued from restricted stock units
              
              
              168,952
              
              
              
              —
              
              
              
              —
              
              
              
              —Units
      effectively repurchased for required employee withholding
      taxes
              
              
              (52,176
              )
              
              
              (413
              )
              
              
              —
              
              
              
              (413
              )Exercise
      of stock options
              
              
              241,437
              
              
              
              761
              
              
              
              —
              
              
              
              761Tax
      benefit from stock issued
              
              
              —
              
              
              
              1,007
              
              
              
              —
              
              
              
              1,007Stock-based
      compensation
              
              
              —
              
              
              
              3,755
              
              
              
              —
              
              
              
              3,755Balance
      at December 30, 2007
              
              
              17,657,020
              
              
              
              80,825
              
              
              
              60,840
              
              
              
              141,665Net
      earnings
              
              
              —
              
              
              
              —
              
              
              
              24,435
              
              
              
              24,435Shares
      issued under employee stock purchase plan
              
              
              43,948
              
              
              
              905
              
              
              
              —
              
              
              
              905Shares
      issued from restricted stock units
              
              
              153,891
              
              
              
              —
              
              
              
              —
              
              
              
              —Units
      effectively repurchased for required employee withholding
      taxes
              
              
              (45,320
              )
              
              
              (1,249
              )
              
              
              —
              
              
              
              (1,249
              )Exercise
      of stock options
              
              
              77,732
              
              
              
              322
              
              
              
              —
              
              
              
              322Tax
      benefit from stock issued
              
              
              —
              
              
              
              615
              
              
              
              —
              
              
              
              615Stock-based
      compensation
              
              
              —
              
              
              
              4,900
              
              
              
              —
              
              
              
              4,900Balance
      at December 28, 2008
              
              
              17,887,271
              
              
              
              86,318
              
              
              
              85,275
              
              
              
              171,593Net
      earnings
              
              
              —
              
              
              
              —
              
              
              
              30,671
              
              
              
              30,671Shares
      issued under employee stock purchase plan
              
              
              48,237
              
              
              
              1,096
              
              
              
              —
              
              
              
              1,096Shares
      issued from restricted stock units
              
              
              155,394
              
              
              
              —
              
              
              
              —
              
              
              
              —Units
      effectively repurchased for required employee withholding
      taxes
              
              
              (49,633
              )
              
              
              (1,553
              )
              
              
              —
              
              
              
              (1,553
              )Exercise
      of stock options
              
              
              13,106
              
              
              
              83
              
              
              
              —
              
              
              
              83Tax
      benefit from stock issued
              
              
              —
              
              
              
              1,453
              
              
              
              —
              
              
              
              1,453Stock-based
      compensation
              
              
              —
              
              
              
              6,490
              
              
              
              —
              
              
              
              6,490Balance
      at December 27, 2009
              
              
              18,054,375
              
              
              $
              93,887
              
              
              $
              115,946
              
              
              $
              209,833
  See
accompanying notes to consolidated financial statements.
  39
 BUFFALO
WILD WINGS, INC. AND SUBSIDIARIES
 
 CONSOLIDATED
STATEMENTS OF CASH FLOWS
 Fiscal
years ended December 27, 2009, December 28, 2008, and December 30,
2007
 (Dollar
amounts in thousands)
 
 Fiscal years
      endedDecember 27,
                2009
              
              
              December 28,
                2008
              
              
              December 30,
                2007Cash
      flows from operating activities:Net
      earnings
              
              $
              30,671
              
              
              
              24,435
              
              
              
              19,654Adjustments
      to reconcile net earnings to cash provided by operations:Depreciation
              
              
              31,993
              
              
              
              23,415
              
              
              
              16,987Amortization
              
              
              612
              
              
              
              207
              
              
              
              (54
              )Loss
      on asset disposals and impairment
              
              
              1,928
              
              
              
              2,083
              
              
              
              987Deferred
      lease credits
              
              
              2,181
              
              
              
              1,955
              
              
              
              2,374Deferred
      income taxes
              
              
              4,817
              
              
              
              6,322
              
              
              
              (894
              )Stock-based
      compensation
              
              
              6,490
              
              
              
              4,900
              
              
              
              3,755Excess
      tax benefit from stock issuance
              
              
              (1,453
              )
              
              
              (615
              )
              
              
              (1,007
              )Change
      in operating assets and liabilities, net of effect of
      acquisition:Trading
      securities
              
              
              (2,051
              )
              
              
              23
              
              
              
              (302
              )Accounts
      receivable
              
              
              (2,663
              )
              
              
              375
              
              
              
              (1,183
              )Inventory
              
              
              (540
              )
              
              
              (473
              )
              
              
              (595
              )Prepaid
      expenses
              
              
              322
              
              
              
              (152
              )
              
              
              (2,008
              )Other
      assets
              
              
              (490
              )
              
              
              (608
              )
              
              
              (600
              )Unearned
      franchise fees
              
              
              192
              
              
              
              198
              
              
              
              (31
              )Accounts
      payable
              
              
              1,150
              
              
              
              809
              
              
              
              3,683Income
      taxes
              
              
              1,192
              
              
              
              890
              
              
              
              (1,143
              )Accrued
      expenses
              
              
              4,935
              
              
              
              2,343
              
              
              
              3,956Net
      cash provided by operating activities
              
              
              79,286
              
              
              
              66,107
              
              
              
              43,579Cash
      flows from investing activities:Acquisition
      of property and equipment
              
              
              (73,748
              )
              
              
              (67,396
              )
              
              
              (41,359
              )Purchase
      of marketable securities
              
              
              (57,024
              )
              
              
              (116,259
              )
              
              
              (158,170
              )Proceeds
      of marketable securities
              
              
              51,600
              
              
              
              146,592
              
              
              
              144,842Acquisition
      of franchised restaurants
              
              
              —
              
              
              
              (23,071
              )
              
              
              —Net
      cash used in investing activities
              
              
              (79,172
              )
              
              
              (60,134
              )
              
              
              (54,687
              )Cash
      flows from financing activities:Issuance
      of common stock
              
              
              1,179
              
              
              
              1,227
              
              
              
              1,446Excess
      tax benefit from stock issuance
              
              
              1,453
              
              
              
              615
              
              
              
              1,007Tax
      payments for restricted stock
              
              
              (1,513
              )
              
              
              (989
              )
              
              
              (1,580
              )Net
      cash provided by financing activities
              
              
              1,119
              
              
              
              853
              
              
              
              873Net
      increase (decrease) in cash and cash equivalents
              
              
              1,233
              
              
              
              6,826
              
              
              
              (10,235
              )Cash
      and cash equivalents at beginning of year
              
              
              8,347
              
              
              
              1,521
              
              
              
              11,756Cash
      and cash equivalents at end of year
              
              $
              9,580
              
              
              
              8,347
              
              
              
              1,521
 
 See
accompanying notes to consolidated financial statements.
 40
 BUFFALO
WILD WINGS, INC. AND SUBSIDIARIES
 
 Notes
to Consolidated Financial Statements
 December
27, 2009 and December 28, 2008
 (Dollar
amounts in thousands, except per-share amounts)
 
 (1)
Nature of Business and Summary of Significant Accounting Policies
 
 (a)
Nature of Business
 
 References
in these financial statement footnotes to “company”, “we”, “us”, and “our” refer
to the business of Buffalo Wild Wings, Inc. and our subsidiaries. We were
organized for the purpose of operating Buffalo Wild Wings®
restaurants, as well as selling Buffalo Wild Wings restaurant franchises. In
exchange for the initial and continuing franchise fees received, we give
franchisees the right to use the name Buffalo Wild Wings. We operate as a single
segment for reporting purposes.
 
 At
December 27, 2009, December 28, 2008, and December 30, 2007, we operated 232,
197, and 161 company-owned restaurants, respectively, and had 420, 363, and 332
franchised restaurants, respectively.
 
 (b)
Principles of Consolidation
 
 The
consolidated financial statements include the accounts of Buffalo Wild Wings,
Inc. and its wholly owned subsidiaries. All intercompany accounts and
transactions have been eliminated in consolidation.
 
 (c)
Accounting Estimates
 
 The
preparation of financial statements in conformity with U.S. generally accepted
accounting principles requires management to make estimates and assumptions that
affect the reported amounts of assets and liabilities and disclosure of
contingent assets and liabilities at the date of the financial statements and
the reported amounts of revenues and expenses during the reporting period.
Actual results could differ from those estimates.
 
 (d)
Fiscal Year
 
 We
utilize a 52- or 53-week accounting period that ends on the last Sunday in
December. The fiscal years ended December 27, 2009, December 28, 2008 and
December 30, 2007, comprised 52 weeks.
 
 (e)
Subsequent Events
 
 In
preparing the accompanying financial statements, we have evaluated subsequent
events through February 25, 2010, the issuance date of this Annual Report on
Form 10-K.  We have determined that no events or transactions have
occurred subsequent to December 27, 2009 which require recognition or disclosure
in the financial statements.
 
 (f)
Cash and Cash Equivalents
 
 Cash and
cash equivalents include highly liquid investments with original maturities of
three months or less.
 
 (g)
Marketable Securities
 
 Marketable
securities consist of available-for-sale securities and trading securities that
are carried at fair value and held-to-maturity securities that are stated at
amortized cost, which approximates market.
 
 Available-for-sale
securities are classified as current assets based upon our intent and ability to
use any and all of the securities as necessary to satisfy the operational
requirements of our business. Realized gains and losses from the sale of
available-for-sale securities were not material for fiscal 2009, 2008, and 2007.
Unrealized losses are charged against net earnings when a decline in fair value
is determined to be other than temporary. The available-for-sale investments
carry short-term repricing features which generally result in these investments
having a value at or near par value (cost).
 
 Trading
securities are stated at fair value, with gains or losses resulting from changes
in fair value recognized currently in earnings as investment income. We have
funded a deferred compensation plan using trading assets in a marketable equity
portfolio. This portfolio is held to generate returns that seek to offset
changes in liabilities related to the equity market risk of certain deferred
compensation arrangements. These deferred compensation liabilities were $3,487
and $1,505 as of December 27, 2009 and December 28, 2008, respectively, and are
included in accrued compensation and benefits in the accompanying consolidated
balance sheets.
  41
 BUFFALO
WILD WINGS, INC. AND SUBSIDIARIES
 
 Notes
to Consolidated Financial Statements
 December
27, 2009 and December 28, 2008
 (Dollar
amounts in thousands, except per-share amounts)
 
 (h)
Accounts Receivable
 
 Accounts
receivable – franchisees represents royalty receivables from our franchisees.
Accounts receivable – other consists primarily of contractually-determined
receivables for leasehold improvements, credit cards, vendor allowances, and purchased
interest on investments. Cash flows related to accounts receivable are
classified in net cash provided by operating activities in the Consolidated
Statements of Cash Flows.
  (i)
Inventories
 
 Inventories
are stated at the lower of cost or market. Cost is determined by the first-in,
first-out (FIFO) method. Cash flows related in inventory sales are classified in
net cash provided by operating activities in the Consolidated Statements of Cash
Flows.
 
 We
purchase products from a number of suppliers and believe there are alternative
suppliers. We have minimum purchase commitments from some of our vendors but the
terms of the contracts and nature of the products are such that purchase
requirements do not create a market risk. The primary food product used by
Company-owned and franchised restaurants is chicken wings. Chicken wings are
purchased by us at market prices. For fiscal 2009, 2008, and 2007, chicken wings
were 25%, 21%, and 24% of restaurant cost of sales, respectively.
 
 (j)
Property and Equipment
 
 Property
and equipment are recorded at cost. Leasehold improvements, which include the
cost of improvements funded by landlord incentives or allowances, are amortized
using the straight-line method over the lesser of the term of the lease, without
consideration of renewal options, or the estimated useful lives of the assets,
which typically range from five to ten years. Buildings are depreciated using
the straight-line method over the estimated useful life, which ranges from 10 to
20 years. Furniture and equipment are depreciated using the straight-line method
over the estimated useful lives of the assets, which range from two to eight
years. Maintenance and repairs are expensed as incurred. Upon retirement or
disposal of assets, the cost and accumulated depreciation are eliminated from
the respective accounts and the related gains or losses are credited or charged
to earnings.
 
 We review
property and equipment, along with other long-lived assets, quarterly to
determine if triggering events have occurred which would require a test to
determine if the carrying value of these assets may not be recoverable based on
estimated future undiscounted cash flows. Assets are reviewed at the lowest
level for which cash flows can be identified, which is the individual restaurant
level. In determining future cash flows, significant estimates are made by us
with respect to future operating results of each restaurant over its remaining
lease term. If such assets are considered impaired, the impairment to be
recognized is measured by the amount by which the carrying amount of the assets
exceeds the fair value of the assets. Fair value is generally determined by
estimated discounted future cash flows.
 
 (k)
Goodwill and Other Assets
 
 Goodwill
represents the excess of cost over the fair value of identified net assets of
businesses acquired. Goodwill and indefinite-life purchased liquor licenses are
subject to an annual impairment analysis. We identify potential impairments of
goodwill by comparing the carrying amount of a reporting unit, including
goodwill, with its fair value, estimated using both an income approach and a
market approach. For these purposes, a reporting unit is defined as a geographic
market.  If the fair value of the market exceeds the carrying amount,
the assets are not impaired. If the carrying amount exceeds the fair value, this
is an indication that impairment may exist. We calculate the amount of the
impairment by comparing the implied fair value of the assets and liabilities of
the reporting unit with the carrying amount. If the implied value of the asset
is less than the carrying amount, impairment is recognized for the difference.
All goodwill was considered recoverable as of December 27, 2009.
 
 Other
assets consist primarily of reacquired franchise rights and liquor licenses.
Reacquired franchise rights are amortized over the life of the related franchise
agreement. We evaluate reacquired franchise rights in conjunction with our
impairment evaluation of long-lived assets. Liquor licenses are either amortized
over their annual renewal period or, if purchased, are carried at the lower of
fair value or cost. We identify potential impairments for liquor licenses by
comparing the fair value with its carrying amount. If the fair value exceeds the
carrying amount, the liquor licenses are not impaired. If the carrying amount
exceeds the fair value, we calculate the possible impairment by comparing the
implied fair value of the liquor licenses with the carrying amount. If the
implied value of the asset is less than the carrying amount, a write-down is
recorded. The carrying amount of the liquor licenses not subject to amortization
as of December 27, 2009 and December 28, 2008 was $443 and $482, respectively,
and is included in other assets in the accompanying consolidated balance
sheets.
 
 42
 BUFFALO
WILD WINGS, INC. AND SUBSIDIARIES
 
 Notes
to Consolidated Financial Statements
 December
27, 2009 and December 28, 2008
 (Dollar
amounts in thousands, except per-share amounts)
  (l)
Fair Values of Financial Instruments
 
 Fair
value is the price that would be received to sell an asset or paid to transfer a
liability (an exit price) in the principal or most advantageous market for the
asset or liability in an orderly transaction between market participants at the
measurement date. We use a three-tier fair value hierarchy based upon observable
and non-observable inputs that prioritizes the information used to develop our
assumptions regarding fair value. Fair value measurements are separately
disclosed by level within the fair value hierarchy. We adopted the guidance for
fair value measurements, as it related to financial assets and liabilities on
December 31, 2007, the beginning of our 2008 fiscal year and for nonfinancial
assets and liabilities on December 29, 2008, the beginning of our 2009 fiscal
year. The adoption of this guidance had no impact on our consolidated financial
statements.
 
 We are
permitted by current accounting guidance to measure certain financial assets and
liabilities at fair value that are not currently required to be measured at fair
value (the “Fair Value Option”). Election of the Fair Value Option is made on an
instrument-by-instrument basis and is irrevocable. At the adoption date,
unrealized gains and losses on financial assets and liabilities for which the
Fair Value Option has been elected are reported as a cumulative adjustment to
beginning retained earnings. We have not elected the Fair Value Option as we had
no financial assets or liabilities that qualified for this treatment. In the
future, if we elect the Fair Value Option for certain financial assets and
liabilities, we would report unrealized gains and losses due to changes in their
fair value in net income at each subsequent reporting date.
 
 The
carrying value of cash and cash equivalents, accounts receivable, accounts
payable, and other current assets and liabilities approximate fair value because
of their short-term maturity.
 
 (m)
Asset Retirement Obligations
 
 An asset
retirement obligation associated with the retirement of a tangible long-lived
asset is recognized as a liability in the period incurred or when it becomes
determinable, with an associated increase in the carrying amount of the related
long-lived asset. We must recognize a liability for the fair value of a
conditional asset retirement obligation when incurred, if the liability’s fair
value can be reasonably estimated. Conditional asset retirement obligations are
legal obligations to perform asset retirement activities when the timing and/or
method of settlement are conditional on a future event or may not be within our
control. Asset retirement costs are depreciated over the useful life of the
related asset. As of December 27, 2009 and December 28, 2008, we had asset
retirement obligations of $259 and $211, respectively.
 
 (n)
Revenue Recognition
 
 Franchise
agreements have terms ranging from ten to twenty years. These agreements also
convey multiple extension terms of five or ten years, depending on contract
terms and certain conditions that must be met. We provide the use of the Buffalo
Wild Wings trademarks, system, training, preopening assistance, and restaurant
operating assistance in exchange for area development fees, franchise fees, and
royalties of 5% of a restaurant’s sales.
 
 Franchise
fee revenue from individual franchise sales is recognized upon the opening of
the franchised restaurant when all material obligations and initial services to
be provided by us have been performed. Area development fees are dependent upon
the number of restaurants in the territory, as are our obligations under the
area development agreement. Consequently, as obligations are met, area
development fees are recognized proportionally with expenses incurred with the
opening of each new restaurant and any royalty-free periods. Royalties are
accrued as earned and are calculated each period based on restaurant
sales.
 
 Sales
from Company-owned restaurant revenues are recognized as revenue at the point of
the delivery of meals and services. All sales taxes are presented on a net basis
and are excluded from revenue.
 
 43
 BUFFALO
WILD WINGS, INC. AND SUBSIDIARIES
 
 Notes
to Consolidated Financial Statements
 December
27, 2009 and December 28, 2008
 (Dollar
amounts in thousands, except per-share amounts)
 
 (o)
Franchise Operations
 
 We enter
into franchise agreements with unrelated third parties to build and operate
restaurants using the Buffalo Wild Wings brand within a defined geographical
area. We believe that franchising is an effective and efficient means to expand
the Buffalo Wild Wings brand. The franchisee is required to operate their
restaurants in compliance with their franchise agreement that includes adherence
to operating and quality control procedures established by us. We do not provide
loans, leases, or guarantees to the franchisee or the franchisee’s employees and
vendors. If a franchisee becomes financially distressed, we do not provide any
financial assistance. If financial distress leads to a franchisee’s
noncompliance with the franchise agreement and we elect to terminate the
franchise agreement, we have the right but not the obligation to acquire the
assets of the franchisee at fair value as determined by an independent
appraiser. We receive a 5% royalty of gross sales as defined in the franchise
agreement, and in 2009 allowances directly from the franchisees’ vendors were
approximately 0.4% of the franchisees’ gross sales. We have financial exposure
for the collection of the royalty payments. Franchisees generally remit royalty
payments weekly for the prior week’s sales, which substantially minimizes our
financial exposure. Historically, we have experienced insignificant write-offs
of franchisee royalties. Franchise and area development fees are paid upon the
signing of the related agreements.
 
 (p)
Advertising Costs
 
 Contributions
of franchise fees related to the national advertising fund constitute agency
transactions and are not recognized as revenues and expenses. Related
advertising obligations are accrued and the costs expensed at the same time the
related revenue is recognized. These advertising fees are recorded as a
liability against which specific costs are charged.
 
 Contributions
to the national advertising fund related to Company-owned restaurants are
expensed as contributed and local advertising costs for Company-owned
restaurants are expensed as incurred. These costs aggregated $17,758, $13,503,
and $10,548, in fiscal years 2009, 2008, and 2007, respectively.
 
 (q)
Preopening Costs
 
 Costs
associated with the opening of new Company-owned restaurants are expensed as
incurred.
 
 (r)
Payments Received from Vendors
 
 Vendor
allowances include allowances and other funds received from vendors. Certain of
these funds are determined based on various quantitative contract terms. We also
receive vendor allowances from certain manufacturers and distributors calculated
based upon purchases made by franchisees. Amounts that represent a reimbursement
of costs incurred, such as advertising, are recorded as a reduction of the
related expense. Amounts that represent a reduction of inventory purchase costs
are recorded as a reduction of inventoriable costs. We recorded an estimate of
earned vendor allowances that are calculated based upon monthly purchases. We
generally receive payment from vendors approximately 30 days from the end of a
month for that month’s purchases. During fiscal 2009, 2008, and 2007, vendor
allowances were recorded as a reduction in inventoriable costs, and cost of
sales was reduced by $5,985, $5,192, and $4,636, respectively.
 
 (s)
Restricted Assets and System-wide Payables
 
 We have a
system-wide marketing and advertising fund. Company-owned and franchised
restaurants are required to remit a designated portion of restaurant sales, to a
separate advertising fund that is used for marketing and advertising efforts
throughout the system. That amount was 3% of restaurant sales in all years
presented. Certain payments received from various vendors are deposited into the
National Advertising Fund. These funds are used for development and
implementation of system-wide initiatives and programs. As of December 27, 2009
and December 28, 2008, the national advertising fund liability was $16,084 and
$7,670, respectively. The current asset and current liability classification of
the national advertising fund as of December 28, 2008 has been corrected in the
consolidated balance sheet from its classification of long-term in the prior
year.
 
 We have a
system-wide gift card fund which consists of a cash balance, which is restricted
to funding of future gift card redemptions, and a corresponding liability for
those outstanding gift cards which we believe will be redeemed in the future. As
of December 27, 2009, the gift card liability was $8,300. This system-wide gift
card fund was established during 2009, therefore, the liability balance of
$2,259 as of December 28, 2008, which related only to Company-owned gift card
liabilities, was included in “accrued expenses” on our accompanying consolidated
balance sheet for that period.
  44
 BUFFALO
WILD WINGS, INC. AND SUBSIDIARIES
 
 Notes
to Consolidated Financial Statements
 December
27, 2009 and December 28, 2008
 (Dollar
amounts in thousands, except per-share amounts)
  We
account for the assets of these funds as “restricted assets” with an offsetting
“system-wide payables” on our accompanying consolidated balance
sheets.
 
 (t)
Earnings Per Common Share
 
 Basic
earnings per common share excludes dilution and is computed by dividing the net
earnings available to common stockholders by the weighted average number of
common shares outstanding during the period. Diluted earnings per common share
include dilutive common stock equivalents consisting of stock options determined
by the treasury stock method. Restricted stock units are contingently issuable
shares subject to vesting based on performance criteria. Vesting typically
occurs in the fourth quarter of the year when income targets have been met. Upon
vesting, the shares to be issued are included in the diluted earnings per share
calculation as of the beginning of the period in which the vesting conditions
are satisfied. Restricted stock units included in diluted earnings per share are
net of the required employee withholding taxes.
 
 (u)
Income Taxes
 
 Deferred
tax assets and liabilities are recognized for the future tax consequences
attributable to differences between the balance sheet carrying amounts of
existing assets and liabilities and their respective tax bases. Deferred tax
assets and liabilities are measured using enacted tax rates expected to apply to
taxable income in the years in which those temporary differences are expected to
be recovered or settled. A valuation allowance is recorded to reduce the
carrying amounts of deferred tax assets unless it is more likely than not that
such assets will be realized.
 
 (v)
Deferred Lease Credits
 
 Deferred
lease credits consist of reimbursement of costs of leasehold improvements from
our lessors. These reimbursements are amortized on a straight-line basis over
the term of the applicable lease, without consideration of renewal options. In
addition, this account includes adjustments to recognize rent expense on a
straight-line basis over the term of the lease commencing at the start of our
construction period for the restaurant, without consideration of renewal
options, unless renewals are reasonably assured because failure to renew would
result in an economic penalty.
 
 Leases
typically have an initial lease term of between 10 and 15 years and contain
renewal options under which we may extend the terms for periods of three to five
years. Certain leases contain rent escalation clauses that require higher rental
payments in later years. Leases may also contain rent holidays, or free rent
periods, during the lease term. Rent expense is recognized on a straight-line
basis over the initial lease term.
 
 (w)
Stock-Based Compensation
 
 We
maintain a stock equity incentive plan under which we may grant non-qualified
stock options, incentive stock options, and restricted stock units to employees,
non-employee directors and consultants. We also have an employee stock purchase
plan (“ESPP”).
 
 Stock-based
compensation expense is recognized in the consolidated financial statements for
granted, modified, or settled stock options and for expense related to the ESPP,
since the related purchase discounts exceeded the amount allowed for
non-compensatory treatment. Restricted stock units vesting upon the achievement
of certain performance targets are expensed based on the fair value on the date
of grant. All stock-based compensation is recognized as general and
administrative expense.
 
 Total
stock-based compensation expense recognized in the consolidated statement of
earnings for fiscal year 2009 was $6,490 before income taxes and consisted of
restricted stock, stock options, and employee stock purchase plan (ESPP) expense
of $5,769, $392 and $329, respectively. The related total tax benefit was $2,298
during 2009.
 
 45
 BUFFALO
WILD WINGS, INC. AND SUBSIDIARIES
 
 Notes
to Consolidated Financial Statements
 December
27, 2009 and December 28, 2008
 (Dollar
amounts in thousands, except per-share amounts)
 
 Total
stock-based compensation expense recognized in the consolidated statement of
earnings for fiscal year 2008 was $4,900 before income taxes and consisted of
restricted stock, stock options, and employee stock purchase plan (ESPP) expense
of $4,510, $138 and $252, respectively. The related total tax benefit was $1,817
during 2008.
 
 Total
stock-based compensation expense recognized in the consolidated statement of
earnings for fiscal year 2007 was $3,755 before income taxes and consisted of
restricted stock, stock options, and employee stock purchase plan (ESPP) expense
of $3,538, $37 and $180, respectively. The related total tax benefit was $2,291
during 2007.
 
 The fair
value of each option grant is estimated on the date of grant using the
Black-Scholes-Merton (“BSM”) option valuation model with the following
assumptions:
 
 Stock
      OptionsDecember 27,
                2009
              
              
              December 28,
                2008
              
              
              December 30,
                2007*Expected
      dividend yield
              
              
              0.0
              %
              
              
              0.0
              %
              
              
              N/AExpected
      stock price volatility
              
              
              59.2
              %
              
              
              45.6
              %
              
              
              N/ARisk-free
      interest rate
              
              
              2.0
              %
              
              
              2.8
              %
              
              
              N/AExpected
      life of options
              
              5
      years
              
              
              5
      years
              
              
              
              N/A
 
 Employee
      Stock Purchase PlanDecember 27,
                2009
              
              
              December 28,
                2008
              
              
              December 30,
                2007Expected
      dividend yield
              
              
              0.0
              %
              
              
              0.0
              %
              
              
              0.0
              %Expected
      stock price volatility
              
              
              52.7-59.1
              %
              
              
              46.7-55.7
              %
              
              
              41.4
      – 44.4
              %Risk-free
      interest rate
              
              
              0.2-0.3
              %
              
              
              0.8-1.9
              %
              
              
              3.6
      – 4.9
              %Expected
      life of options
              
              0.5
      years
              
              
              0.5
      years
              
              
              0.5
      years
 
  No stock
options were granted in 2007.
 The
expected term of the options represents the estimated period of time until
exercise and is based on historical experience of similar awards, giving
consideration to the contractual terms, vesting schedules and expectations of
future employee behavior. Expected stock price volatility is based on historical
volatility of our stock. The risk-free interest rate is based on the implied
yield available on U.S. Treasury zero-coupon issues with an equivalent remaining
term. We have not paid dividends in the past.
 
 (x)
New Accounting Pronouncements
 
 In
June 2009, the Financial Accounting Standards Board (FASB) issued SFAS No.
168, “The FASB Accounting Standards Codification and the Hierarchy of Generally
Accepted Accounting Principles.” SFAS No. 168 approved the FASB Accounting
Standards Codification (the Codification) as the single source of authoritative
nongovernmental GAAP. All existing accounting standard documents, such as FASB,
American Institute of Certified Public Accountants, Emerging Issues Task Force
and other related literature, excluding guidance from the Securities and
Exchange Commission, have been superseded by the Codification. All other
non-grandfathered, non-SEC accounting literature not included in the
Codification has become nonauthoritative. The Codification is effective for
interim or annual periods ending after September 15, 2009. There have been
no changes to the content of our financial statements or disclosures as a result
of implementing the Codification during the year ended December 27, 2009.
However, as a result of implementation of the Codification, previous references
to new accounting standards and literature are no longer applicable. In order to
ease the transition to the Codification, we are providing the Codification
cross-reference alongside the references to the standards issued and adopted
prior to the adoption of the Codification. All future references to
authoritative accounting literature in our consolidated financial statements
will be referenced in accordance with the Codification.
 
 46
 BUFFALO
WILD WINGS, INC. AND SUBSIDIARIES
 
 Notes
to Consolidated Financial Statements
 December
27, 2009 and December 28, 2008
 (Dollar
amounts in thousands, except per-share amounts)
 
 (2)
Fair Value Measurements
 
 On
December 29, 2008, we adopted new guidance for fair value measurements, related
to nonfinancial assets and liabilities. Our nonfinancial assets relate primarily
to long-lived assets and goodwill. We adopted the guidance for fair value
measurements related to financial assets and liabilities on December 31, 2007,
the beginning of fiscal 2008.
 
 The
guidance for fair value measurements establishes the authoritative definition of
fair value, sets out a framework for measuring fair value and outlines the
required disclosures regarding fair value measurements. Fair value is the price
that would be received to sell an asset or paid to transfer a liability (an exit
price) in the principal or most advantageous market for the asset or liability
in an orderly transaction between market participants at the measurement date.
We use a three-tier fair value hierarchy based upon observable and
non-observable inputs as follows:
 
 •
              Level 1 – Observable inputs such
      as quoted prices in active
markets;
 •
              Level 2 – Inputs, other than the
      quoted prices in active markets, that are observable either directly or
      indirectly; and
 •
              Level
      3 – Unobservable inputs in which there is little or no market data, which
      require the reporting entity to develop its own
    assumptions.
 
 The
following table summarizes the financial instruments measured at fair value in
our consolidated balance sheet as of December 27, 2009:
 
 Fair
      Value MeasurementsLevel
      1
              
              
              Level
      2
              
              
              Level
      3
              
              TotalAssetsMarketable securities
      (1)
              
              $
              3,618
              
              
              
              24,307
              
              
              
              —
              
              27,925Derivatives
              
              
              —
              
              
              
              11
              
              
              
              —
              
              11
 
 (1)
              We
      classified a portion of our marketable securities as available-for-sale
      and trading securities which were reported at fair market value, using the
      “market approach” valuation technique. The “market approach” valuation
      method used prices and other relevant information observable in market
      transactions involving identical or comparable assets. Our trading
      securities are valued using the Level 1 approach. Our available-for-sale
      marketable securities are valued using the Level 2
    approach.
    Assets
and liabilities that are measured at fair value on a recurring
basis
  At
December 27, 2009, we did not have any significant nonfinancial assets or
liabilities that required a fair-value measurement on a recurring basis.
  Assets
and liabilities that are measured at fair value on a non-recurring
basis
  The test
for goodwill impairment is performed at least annually. Fair value is determined
using a combination of income-based and market-based approaches utilizing widely
accepted valuation techniques.  Under the
income approach, we use the discounted cash flow method to derive fair value by
calculating the present value of estimated after-tax cash flows. Our market
approach is based on analysis of comparable company market multiples. The
inputs, and values derived under both methods, are categorized as Level
3.
  47
 BUFFALO
WILD WINGS, INC. AND SUBSIDIARIES
 
 Notes
to Consolidated Financial Statements
 December
27, 2009 and December 28, 2008
 (Dollar
amounts in thousands, except per-share amounts)
 
 We
generally estimate long-lived asset fair values, including property, plant and
equipment and leasehold improvements, using the income approach. The inputs used
to determine fair value relate primarily to future assumptions regarding
restaurant sales and profitability. These inputs are categorized as Level 3
inputs. The inputs used represent management’s assumptions about what
information market participants would use in pricing the assets and are based
upon the best information available at the balance sheet date.
  The
following table presents the asset impairment charges we recorded during 2009
and the remaining net carrying value of those impaired long-lived assets as of
December 27, 2009:
  Fair
      Value Measured
                and
      Recorded At
                Reporting
      Date UsingNet
      Carrying
                Value
      as of
                December
      27, 2009
              
              Level
      1
              
              Level
      2
              
              Level
      3
              
              2009
      Impairment
                ChargesLong-lived
      assets
              
              $
              296
              
              $
              —
              
              $
              —
              
              $
              296
              
              $
              (296
              )
  Financial
Assets and Liabilities not Measured at Fair Value
  Certain
of our financial assets and liabilities are recorded at their carrying amounts
which approximate fair value, based on their short-term nature or variable
interest rate. These financial assets and liabilities include cash and cash
equivalents, accounts receivable, and accounts payable.
  (3)
Marketable Securities
 
 Marketable
securities were comprised as follows:
 
 December 27,
                2009
              
              
              December 28,
                2008Held-to-maturityMunicipal
      securities
              
              $
              15,707
              
              
              
              17,254Available-for-saleMunicipal
      securities
              
              
              24,307
              
              
              
              17,336TradingMutual
      funds
              
              
              3,618
              
              
              
              1,567Total
              
              $
              43,632
              
              
              
              36,157
 
 Purchases
of available for-sale securities totaled $36,084 and sales totaled $29,113 in
2009. Purchases of held-to-maturity securities totaled $20,940 and proceeds from
maturities totaled $22,487 in 2009. All held-to-maturity debt securities mature
within one year and had an aggregate fair value of $15,712 at December 27,
2009.
 
 Purchases
of available for-sale securities totaled $91,044 and sales totaled $113,684 in
2008. Purchases of held-to-maturity securities totaled $25,215 and proceeds from
maturities totaled $32,908 in 2008. All held-to-maturity debt securities mature
within one year and had an aggregate fair value of $17,278 at December 28,
2008.
 
 Purchases
of available for-sale securities totaled $132,346 and sales totaled $109,181 in
2007. Purchases of held-to-maturity securities totaled $25,824 and proceeds from
maturities totaled $35,661 in 2007. All held-to-maturity debt securities mature
within one year and had an aggregate fair value of $23,753 at December 30,
2007.
 
 48
 BUFFALO
WILD WINGS, INC. AND SUBSIDIARIES
 
 Notes
to Consolidated Financial Statements
 December
27, 2009 and December 28, 2008
 (Dollar
amounts in thousands, except per-share amounts)
 
 Trading
securities represent investments held for future needs of a non-qualified
deferred compensation plan.
 
 The fair
value of available-for-sale investments in debt securities by contractual
maturities at December 27, 2009, was as follows:
 
 Maturity
      date
              
              Fair Value1-5
      years
              
              $
              2,5505-10
      years
              
              
              1,039After
      10 years
              
              
              20,718Total
              
              $
              24,307
 
 (4)
Property and Equipment
 
 Property
and equipment consisted of the following:
 
 December 27,
                2009
              
              
              December 28,
                2008Construction
      in process
              
              $
              6,443
              
              
              
              10,703Buildings
              
              
              18,338
              
              
              
              6,639Furniture,
      fixtures, and equipment
              
              
              121,166
              
              
              
              95,460Leasehold
      improvements
              
              
              152,108
              
              
              
              122,796298,055
              
              
              
              235,598Less
      accumulated depreciation
              
              
              (108,416
              )
              
              
              (81,166
              )$
              189,639
              
              
              
              154,432
 
 (5)
Goodwill and Other Intangible Assets
 
 Goodwill
is summarized below:
 
 December 27,
                2009
              
              
              December 28,
                2008Beginning
      of year
              
              $
              10,972
              
              
              
              369Goodwill
      acquired
              
              
              —
              
              
              
              10,603Adjustments
              
              
              274
              
              
              
              —End
      of year
              
              $
              11,246
              
              
              
              10,972
 
 Goodwill
acquired during 2008 related to the acquisition of our nine franchised
restaurants in Nevada. Goodwill is not subject to amortization but is fully
deductible for tax purposes.
 
 Reacquired
franchise rights were acquired during 2008 in connection with the acquisition of
nine franchised restaurants in Nevada and are included in other assets in the
accompanying consolidated balance sheets. Reacquired franchise rights consisted
of the following:
 
 December 27,
                2009
              
              
              December 28,
                2008Reacquired
      franchise rights
              
              $
              7,040
              
              
              
              7,040Accumulated
      amortization
              
              
              (819
              )
              
              
              (207
              )$
              6,221
              
              
              
              6,833
  49
 BUFFALO
WILD WINGS, INC. AND SUBSIDIARIES
 
 Notes
to Consolidated Financial Statements
 December
27, 2009 and December 28, 2008
 (Dollar
amounts in thousands, except per-share amounts)
 
 Amortization
expense related to reacquired franchise rights for 2009 and 2008 was $612 and
$207, respectively. The weighted average amortization period is 18 years.
Estimated future amortization expense as of December 27, 2009 is as
follows:
 
 Fiscal
      year ending:2010
              
              $
              6142011
              
              
              6052012
              
              
              5792013
              
              
              5352014
              
              
              491Thereafter
              
              
              3,397Total
      future amortization expense
              
              $
              6,221
 
 (6)
Lease Commitments
 
 We lease
all of our restaurants and corporate offices under operating leases that have
various expiration dates. In addition to base rents, leases typically require us
to pay our share of maintenance and real estate taxes and certain leases include
provisions for contingent rentals based upon sales.
 
 Future
minimum rental payments due under noncancelable operating leases for existing
restaurants and commitments for restaurants under development as of December 27,
2009 were as follows:
 
 Operating
                leases
              
              
              Restaurants
                under
                developmentFiscal
      year ending:2010
              
              $
              28,521
              
              
              
              1,3792011
              
              
              27,409
              
              
              
              2,5292012
              
              
              26,325
              
              
              
              2,5442013
              
              
              24,715
              
              
              
              2,5552014
              
              
              23,404
              
              
              
              2,579Thereafter
              
              
              110,495
              
              
              
              22,891Total
      future minimum lease payments
              
              $
              240,869
              
              
              
              34,477
 
 In 2009,
2008, and 2007, we rented office space under operating leases which, in addition
to the minimum lease payments, require payment of a proportionate share of the
real estate taxes and building operating expenses. We also rent restaurant space
under operating leases, some of which, in addition to the minimum lease payments
and proportionate share of real estate and operating expenses, require payment
of percentage rents based upon sales levels. Rent expense, excluding our
proportionate share of real estate taxes and building operating expenses, was as
follows:
 
 Fiscal Years
      EndedDecember 27,
                2009
              
              
              December 28,
                2008
              
              
              December 30,
                2007Minimum
      rents
              
              $
              27,042
              
              
              
              21,714
              
              
              
              16,729Percentage
      rents
              
              
              361
              
              
              
              308
              
              
              
              250Total
              
              $
              27,403
              
              
              
              22,022
              
              
              
              16,979Equipment
      and auto leases
              
              $
              495
              
              
              
              356
              
              
              
              359
 
 50
 BUFFALO
WILD WINGS, INC. AND SUBSIDIARIES
 
 Notes
to Consolidated Financial Statements
 December
27, 2009 and December 28, 2008
 (Dollar
amounts in thousands, except per-share amounts)
 
 (7)
Derivative Instruments
 
 We use
commodities derivatives to manage our exposure to commodity price fluctuations.
We enter into options and future contracts to reduce our risk of natural gas
price fluctuations. These derivatives do not qualify for hedge accounting and
changes in fair value are included in current net income. These changes are
classified as a component of restaurant operating expenses. All changes in the
fair value of these contracts are recorded in earnings in the period in which
they occur. Net losses of $383 and $592 were recognized in fiscal 2009 and 2008,
respectively. The fair value of our derivative instruments as of December 27,
2009 and December 28, 2008 was $11 and $461, respectively, and is a liability in
accrued expenses in the accompanying consolidated balance sheets. As of December
27, 2009, the maximum length of time over which we are hedging our exposure to
the variability in future cash flows related to the purchase of natural gas is
three months. As of December 27, 2009 and December 28, 2008 we were party to
natural gas swap contracts with notional values of $525 and $5,797,
respectively.
 
 (8)
Income Taxes
 
 We file a
consolidated return in the United States Federal jurisdiction and in many state
jurisdictions. The Internal Revenue Service completed their examination of our
2005 U.S. Federal Income Tax Return in 2008. No proposed changes were made. With
few exceptions, we are no longer subject to state income tax examinations for
years before 2005. We do not anticipate that total unrecognized tax benefits
will significantly change due to the settlement of audits and the expiration of
statutes of limitations prior to December 26, 2010. The provision for income
taxes consisted of the following:
 
 Fiscal Years
      EndedDecember 27,
                2009
              
              
              December 28,
                2008
              
              
              December 30,
                2007Current:Federal
              
              $
              7,917
              
              
              
              4,082
              
              
              
              8,320State
              
              
              2,023
              
              
              
              1,525
              
              
              
              1,438Deferred:Federal
              
              
              4,824
              
              
              
              6,125
              
              
              
              (869
              )State
              
              
              (7
              )
              
              
              197
              
              
              
              (25
              )Total
      income tax expense
              
              $
              14,757
              
              
              
              11,929
              
              
              
              8,864
 
 A
reconciliation of the expected federal income taxes (benefits) at the statutory
rate of 35% to the actual provision for income taxes is as follows:
 
 Fiscal Years
      EndedDecember 27,
                2009
              
              
              December 28,
                2008
              
              
              December 30,
                2007Expected
      federal income tax expense
              
              $
              15,883
              
              
              
              12,728
              
              
              
              9,981State
      income tax expense, net of federal effect
              
              
              1,310
              
              
              
              1,119
              
              
              
              919Nondeductible
      expenses
              
              
              69
              
              
              
              116
              
              
              
              144Tax
      exempt income
              
              
              (85
              )
              
              
              (430
              )
              
              
              (824
              )General
      business credits
              
              
              (2,713
              )
              
              
              (1,752
              )
              
              
              (1,121
              )Other,
      net
              
              
              293
              
              
              
              148
              
              
              
              (235
              )Total
      income tax expense
              
              $
              14,757
              
              
              
              11,929
              
              
              
              8,864
 
 51
 BUFFALO
WILD WINGS, INC. AND SUBSIDIARIES
 
 Notes
to Consolidated Financial Statements
 December
27, 2009 and December 28, 2008
 (Dollar
amounts in thousands, except per-share amounts)
 
 Deferred
tax assets and liabilities are classified as current and noncurrent on the basis
of the classification of the related asset or liability for financial reporting.
Deferred income taxes are provided for temporary differences between the basis
of assets and liabilities for financial reporting purposes and income tax
purposes. A valuation allowance is established when it is more likely than not
that some portion of deferred tax assets will not be realized.  Since
we believe sufficient future taxable income will be generated to utilize the
benefits of the deferred tax assets, a valuation allowance has not been
recognized. Temporary differences comprising the net deferred tax assets and
liabilities on the accompanying consolidated balance sheets are as
follows:
 
 Fiscal Years
      EndedDecember 27,
                2009
              
              
              December 28,
                2008Deferred
      tax assets:Unearned
      franchise fees
              
              $
              1,028
              
              
              
              974Accrued
      vacation
              
              
              372
              
              
              
              314Accrued
      compensation
              
              
              1,509
              
              
              
              715Deferred
      lease credits
              
              
              1,992
              
              
              
              1,716Restricted
      stock units
              
              
              1,362
              
              
              
              404Other
              
              
              839
              
              
              
              609$
              7,102
              
              
              
              4,732Deferred
      tax liability:Depreciation
              
              $
              18,736
              
              
              
              11,780Goodwill
              
              
              368
              
              
              
              137Total
              
              $
              19,104
              
              
              
              11,917
 
 A
reconciliation of the beginning and ending amount of unrecognized tax benefits
is as follows:
 
 Balance
      at December 28, 2008
              
              $
              442Additions
      based on tax positions related to the current year
              
              
              170Reductions
      for tax positions of prior years
              
              
              (46
              )Balance
      at December 27, 2009
              
              $
              566
 
 We
recognize accrued interest and penalties related to unrecognized tax benefits in
income tax expense. During 2009, 2008, and 2007, interest and penalties of $24,
$26, and ($53), respectively, were included in income tax expense. As of
December 27, 2009, and December 28, 2008, interest and penalties related to
unrecognized tax benefits totaled $89, and $114, respectively. Included in the
balance at December 27, 2009, and December 28, 2008, are unrecognized tax
benefits of $368, and $287, respectively, which if recognized, would affect the
annual effective tax rate. The difference between these amounts and the amount
reflected in the reconciliation above relates to the deferred U.S. federal
income tax benefit on unrecognized tax benefits related to U.S. state income
taxes.
  52
 BUFFALO
WILD WINGS, INC. AND SUBSIDIARIES
 
 Notes
to Consolidated Financial Statements
 December
27, 2009 and December 28, 2008
 (Dollar
amounts in thousands, except per-share amounts)
 
 (9)
Stockholders’ Equity
 
 (a)
Stock Options
 
 We have
3.9 million shares of common stock reserved for issuance under the Equity
Incentive Plan (the Plan) for employees, officers, and directors. The option
price for shares issued under this plan is to be not less than the fair market
value on the date of grant with respect to incentive and nonqualified stock
options. Incentive stock options become exercisable in four equal installments
from the date of the grant and have a contractual life of seven to ten years.
Nonqualified stock options issued pursuant to the Plan have varying vesting
periods from immediately to four years and have a contractual life of seven to
ten years. 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. In
2008, our shareholders approved amendments to the Plan which extended the Plan
to 2018. Option activity is summarized for the year ended December 27, 2009 as
follows:
 
 Number
                of
      shares
              
              
              Weighted
                average
                exercise price
              
              
              Average
                remaining
                contractual
                life
      (years)
              
              
              Aggregate
                Intrinsic
      ValueOutstanding,
      December 28, 2008
              
              
              146,548
              
              
              $
              13.71
              
              
              
              4.5
              
              
              $
              1,627Granted
              
              
              56,302
              
              
              
              30.90Exercised
              
              
              (13,106
              )
              
              
              6.33Cancelled
              
              
              (10,610
              )
              
              
              24.74Outstanding,
      December 27, 2009
              
              
              179,134
              
              
              $
              19.00
              
              
              
              4.3
              
              
              $
              4,285Exercisable,
      December 27, 2009
              
              
              115,986
              
              
              
              13.81
              
              
              
              3.5
              
              
              
              3,377
 
 The
aggregate intrinsic value in the table above is before applicable income taxes,
based on our closing stock price of $42.92 as of the last business day of the
year ended December 27, 2009, which would have been received by the optionees
had all options been exercised on that date. As of December 27, 2009, total
unrecognized stock-based compensation expense related to nonvested stock options
was approximately $814, which is expected to be recognized over a weighted
average period of approximately 2.7 years. During 2009, 2008, and 2007, the
total intrinsic value of stock options exercised was $450, $1,567, and $5,978,
respectively. During 2009, 2008, and 2007, the total fair value of options
vested was $369, $33, and $201, respectively. During 2009 and 2008, the weighted
average grant date fair value of options granted was $15.96 and $10.77,
respectively. No options were granted during 2007.
 
 The
following table summarizes our stock options outstanding at December 27,
2009:
 
 Options
      outstanding
              
              
              Options
      exercisableRange
              
              
              Shares
              
              
              Average
                remaining
                contractual
                life
      (years)
              
              
              Weighted
                average
                exercise
                price
              
              
              Shares
              
              
              Weighted
                average
                exercise
                price$
              1.95
      – 5.63
              
              
              
              45,472
              
              
              
              1.8
              
              
              $
              4.46
              
              
              
              45,472
              
              
              $
              4.466.38
      – 17.41
              
              
              
              29,450
              
              
              
              3.6
              
              
              
              9.92
              
              
              
              29,450
              
              
              
              9.9224.96
              
              
              
              52,447
              
              
              
              5.0
              
              
              
              24.96
              
              
              
              27,378
              
              
              
              24.9630.87
      – 31.00
              
              
              
              51,765
              
              
              
              6.0
              
              
              
              30.90
              
              
              
              13,686
              
              
              
              30.90179,134
              
              
              
              
              
              
              
              
              
              
              
              115,986
 
 The Plan
has 829,614 shares available for grant as of December 27, 2009.
  53
 BUFFALO
WILD WINGS, INC. AND SUBSIDIARIES
 
 Notes
to Consolidated Financial Statements
 December
27, 2009 and December 28, 2008
 (Dollar
amounts in thousands, except per-share amounts)
 (b)
Restricted Stock Units
 
 We have a
stock performance plan, under which restricted stock units are granted annually
at the discretion of the Board of Directors. For restricted stock units granted
prior to 2008, units vest annually if performance targets are achieved. The
performance targets for these restricted stock units are annual income targets
set by our Board of Directors at the beginning of the year. We record
compensation expense for these restricted stock units if vesting is probable,
based on the achievement of the performance targets. These restricted stock
units may vest one-third annually over a ten-year period as determined by
meeting performance targets. However, the second one-third of the restricted
stock units is not subject to vesting until the first one-third has vested and
the final one-third is not subject to vesting until the first two-thirds of the
award have vested.
 
 In 2008,
we granted restricted stock units subject to cumulative one-year, two-year, and
three-year net earnings targets. The number of units that vest each year is
based on performance against those cumulative targets. These restricted stock
units are subject to forfeiture if they have not vested at the end of the
three-year period. Stock-based compensation is recognized for the expected
number of units vesting at the end of each annual period. Restricted stock units
expected to vest at the end of the first year are fully expensed in the first
year. Restricted stock units expected to vest at the end of the second year are
expensed during the first and second years. Restricted stock units expected to
vest at the end of the third year are expensed over all three
years.
 
 In 2009,
we granted restricted stock units subject to three-year cliff vesting and a
cumulative three-year earnings target. The number of units which vest at the end
of the three-year period is based on performance against the target. These
restricted stock units are subject to forfeiture if they have not vested at the
end of the three-year period. Stock-based compensation is recognized for the
expected number of units vesting at the end of the period and is expensed over
the three-year period.
 
 For each
grant, restricted stock units meeting the performance criteria will vest as of
the end of our fiscal year. The distribution of vested restricted stock units as
common stock typically occurs in March of the following year. The common stock
is issued to participants net of the number of shares needed for the required
minimum employee withholding taxes. We issue new shares of common stock upon the
disbursement of restricted stock units. Restricted stock units are contingently
issuable shares, and the activity for fiscal 2009 is as follows:
 
 Number
                of
      shares
              
              
              Weighted
                average
                grant
      date
                fair
      valueOutstanding,
      December 28, 2008
              
              
              284,845
              
              
              $
              20.19Granted
              
              
              341,802
              
              
              
              33.13Vested
              
              
              (137,454
              )
              
              
              23.41Cancelled
              
              
              (38,324
              )
              
              
              27.11Outstanding,
      December 27, 2009
              
              
              450,869
              
              
              $
              28.43
 
 As of
December 27, 2009, the stock-based compensation expense related to nonvested
awards not yet recognized was $7,097, which is expected to be recognized over a
weighted average period of 1.4 years. During fiscal years 2009 and 2008, the
total grant date fair value of shares vested was $3,218 and $3,439,
respectively. The weighted average grant date fair value of restricted stock
units granted during 2008 was $20.42. During 2009, we recognized $5,769 of
stock-based expense related to restricted stock units.
 
 54
 BUFFALO
WILD WINGS, INC. AND SUBSIDIARIES
 
 Notes
to Consolidated Financial Statements
 December
27, 2009 and December 28, 2008
 (Dollar
amounts in thousands, except per-share amounts)
 
 (c)
Employee Stock Purchase Plan
 
 We have
reserved 600,000 shares of common stock for issuance under the Employee Stock
Purchase Plan (“ESPP”). The ESPP is available to substantially all employees
subject to employment eligibility requirements. Participants may purchase our
common stock at 85% of the beginning or ending closing price, whichever is
lower, for each six-month period ending in May and November. During 2009, 2008,
and 2007, we issued 48,237, 43,948, and 30,791 shares, respectively, of common
stock and have 340,838 shares available for future issuance under the
ESPP.
 
 (10)
Earnings Per Common Share
 
 The
following is a reconciliation of basic and fully diluted earnings per common
share for fiscal 2009, 2008, and 2007:
 
 Fiscal
      year ended December 27, 2009Earnings
                (numerator)
              
              
              Shares
                (denominator)
              
              
              Per-share
                amountNet
      earnings
              
              $
              30,671Earnings
      per common share
              
              
              30,671
              
              
              
              18,010,430
              
              
              $
              1.70Effect
      of dilutive securities – stock options
              
              
              —
              
              
              
              78,383Effect
      of dilutive securities – restricted stock units
              
              
              —
              
              
              
              87,881Earnings
      per common share – assuming dilution
              
              $
              30,671
              
              
              
              18,176,694
              
              
              $
              1.69
 
 Fiscal
      year ended December 28, 2008Earnings
                (numerator)
              
              
              Shares
                (denominator)
              
              
              Per-share
                amountNet
      earnings
              
              $
              24,435Earnings
      per common share
              
              
              24,435
              
              
              
              17,813,200
              
              
              $
              1.37Effect
      of dilutive securities – stock options
              
              
              —
              
              
              
              95,351Effect
      of dilutive securities – restricted stock units
              
              
              —
              
              
              
              86,975Earnings
      per common share – assuming dilution
              
              $
              24,435
              
              
              
              17,995,526
              
              
              $
              1.36
 
 Fiscal
      year ended December 30, 2007Earnings
                (numerator)
              
              
              Shares
                (denominator)
              
              
              Per-share
                amountNet
      earnings
              
              $
              19,654Earnings
      per common share
              
              
              19,654
              
              
              
              17,553,998
              
              
              $
              1.12Effect
      of dilutive securities – stock options
              
              
              —
              
              
              
              189,238Effect
      of dilutive securities – restricted stock units
              
              
              —
              
              
              
              89,587Earnings
      per common share – assuming dilution
              
              $
              19,654
              
              
              
              17,832,825
              
              
              $
              1.10
 
 The
following is a summary of those securities outstanding at the end of the
respective periods, which have been excluded from the fully diluted calculations
because the effect on net earnings per common share would have been
anti-dilutive or were performance-granted shares for which the performance
criteria had not yet been met:
 
 December 27,
                2009
              
              
              December 28,
                2008
              
              
              December 30,
                2007Stock
      options
              
              
              45,958
              
              
              
              50,614
              
              
              
              —Restricted
      stock units
              
              
              450,869
              
              
              
              284,845
              
              
              
              140,692
 
 55
 BUFFALO
WILD WINGS, INC. AND SUBSIDIARIES
 
 Notes
to Consolidated Financial Statements
 December
27, 2009 and December 28, 2008
 (Dollar
amounts in thousands, except per-share amounts)
 
 
 (11)
Supplemental Disclosures of Cash Flow Information
 
 Fiscal Years
      EndedDecember 27,
                2009
              
              
              December 28,
                2008
              
              
              December 30,
                2007Cash
      paid during the period for:Income
      taxes
              
              $
              8,899
              
              
              
              4,681
              
              
              
              10,783Noncash
      financing and investing transactions:Property
      and equipment not yet paid for
              
              
              (4,405
              )
              
              
              5,190
              
              
              
              1,135Tax
      withholding for restricted stock units
              
              
              1,400
              
              
              
              1,360
              
              
              
              1,100Goodwill
      adjustment
              
              
              274
              
              
              
              —
              
              
              
              —
 
 (12)
Loss on Asset Disposals and Impairment
 
 In 2009,
2008, and 2007, we closed restaurants. As a result, a charge was taken for
remaining lease obligations, broker fees, and utilities. These charges were
recognized as a part of the loss on asset disposals and impairment and were
based on remaining lease obligations.
 
 The
rollforward of the store closing reserve for the years ended December 27, 2009,
December 28, 2008, and December 30, 2007, is as follows:
 
 As
      of
                December 28,
                2008
              
              
              2009
                expense
              
              
              Costs
                incurred
              
              
              As
      of
                December 27,
                2009Remaining
      lease obligation and utilities
              
              $
              —
              
              
              $
              31
              
              
              $
              (31
              )
              
              $
              —$
              —
              
              
              $
              31
              
              
              $
              (31
              )
              
              $
              —
 
 As
      of
                December 30,
                2007
              
              
              2008
                expense
              
              
              Costs
                incurred
              
              
              As
      of
                December 28,
                2008Remaining
      lease obligation and utilities
              
              $
              —
              
              
              $
              85
              
              
              $
              (85
              )
              
              $
              —$
              —
              
              
              $
              85
              
              
              $
              (85
              )
              
              $
              —
 
 As
      of
                December 31,
                2006
              
              
              2007
                expense
              
              
              Costs
                incurred
              
              
              As
      of
                December 30,
                2007Remaining
      lease obligation and utilities
              
              $
              54
              
              
              $
              85
              
              
              $
              (139
              )
              
              $
              —$
              54
              
              
              $
              85
              
              
              $
              (139
              )
              
              $
              —
 
 During
2009, we recorded an impairment charge for the assets of one underperforming
restaurant. An impairment charge of $237 was recorded to the extent that the
carrying amount of the assets was not considered recoverable based on estimated
discounted future cash flows and the underlying fair value of the assets. We
also recorded an impairment charge of $59 related to liquor licenses to the
extent that the carrying amount of the licenses was higher that the fair value
as determined using market quotes.
 
 During
2008, we recorded an impairment charge for the assets of two underperforming
restaurants. An impairment charge of $154 was recorded to the extent that the
carrying amount of the assets was not considered recoverable based on estimated
discounted future cash flows and the underlying fair value of the assets. We
also recorded an impairment charge of $395 for the assets of one restaurant
being relocated. No impairment charges were incurred during 2007.
  56
 BUFFALO
WILD WINGS, INC. AND SUBSIDIARIES
 
 Notes
to Consolidated Financial Statements
 December
27, 2009 and December 28, 2008
 (Dollar
amounts in thousands, except per-share amounts)
 
 A summary
of the loss on asset disposals and impairment charges recognized by us is as
follows:
 
 Fiscal Years
      EndedDecember 27,
                2009
              
              
              December 28,
                2008
              
              
              December 30,
                2007Store
      closing charges
              
              $
              31
              
              
              
              85
              
              
              
              85Long-lived
      asset impairment
              
              
              296
              
              
              
              549
              
              
              
              —Other
      asset write-offs
              
              
              1,601
              
              
              
              1,449
              
              
              
              902$
              1,928
              
              
              
              2,083
              
              
              
              987
 
 (13)
Defined Contribution Plans
 
 We have a
defined contribution 401(k) plan whereby eligible employees may contribute
pretax wages in accordance with the provisions of the plan. We match 100% of the
first 3% and 50% of the next 2% of contributions made by eligible employees.
Matching contributions of approximately $819, $702, and $840 were made by us
during fiscal 2009, 2008, and 2007, respectively.
 
 Under our
Management Deferred Compensation Plan, our executive officers and certain other
individuals are entitled to receive an amount equal to a percentage of their
base salary ranging from 5% to 12.5% which is credited on a monthly basis to
their deferred compensation account. Cash contributions of $359, $335, and $261
were made by us during 2009, 2008, and 2007, respectively. Such amounts are
subject to certain vesting provisions, depending on length of employment and
circumstances of employment termination. In addition, individuals may elect to
defer a portion or all of their cash compensation.
 
 (14)
Related Party Transactions
 
 It is our
policy that all related party transactions must be disclosed and approved by the
disinterested directors, and the terms and considerations for such related party
transactions are compared and evaluated to terms available or the amounts that
would have to be paid or received, as applicable, in arms-length transactions
with independent third-parties.
 
 A member
of our board of directors, Warren Mack, is an officer at our primary law
firm.
 
 (15) Designation of Shares and Stock
Split
 
 On May
15, 2008, the Board of Directors authorized an increase to 45,000,000 authorized
shares which consists of 44,000,000 shares of Common Stock and 1,000,000 shares
of Undesignated Stock.
 
 On June
15, 2007, we effected a two-for-one stock split of our common stock for holders
of record on June 1, 2007.
 All
applicable share and per-share data in the accompanying consolidated financial
statements and related disclosures have been retroactively adjusted to give
effect to this stock split.
 
 On May
17, 2007, the Board of Directors authorized 4,600,000 shares of the 5,600,000
undesignated shares be designated as additional common stock.
 
 (16)
Contingencies
 
 We are
involved in various legal matters arising in the ordinary course of business. In
the opinion of management, the ultimate disposition of these matters will not
have a material adverse effect on our consolidated financial position, results
of operations, or cash flows.
 
 57
 BUFFALO
WILD WINGS, INC. AND SUBSIDIARIES
 
 Notes
to Consolidated Financial Statements
 December
27, 2009 and December 28, 2008
 (Dollar
amounts in thousands, except per-share amounts)
 
 
 (17) Acquisition
of Franchised Restaurants in Nevada
 
 On
September 23, 2008, we acquired the assets of nine Buffalo Wild Wings franchised
restaurants located in Las Vegas, Nevada. The total purchase price of $23,071,
which includes direct acquisition costs of $426, was paid in cash and was funded
by cash and the sale of marketable securities. The acquisition was accounted for
as a business combination. The assets acquired were recorded based on their fair
values at the time of the acquisition as detailed below:
 
 Inventory,
      prepaids, and other assets
              
              $
              458Equipment,
      leasehold improvements, and a building
              
              
              4,221Deferred
      lease credits
              
              
              475Reacquired
      franchise rights
              
              
              7,040Goodwill
              
              
              10,877$
              23,071
 
 The
excess of the purchase price over the aggregate fair value of assets acquired
was allocated to goodwill. The results of operations of these locations are
included in our consolidated statement of earnings as of the date of
acquisition.
 
 (18) Acquisition
of Don Pablo’s Locations
 
 During
February 2008, we acquired certain leases and assets of eight Don Pablo’s
locations from Avado Brands, Inc. for approximately $1,200, which was paid in
cash. Due to this acquisition, we recorded an impairment charge for the assets
of one restaurant being relocated. The impairment charge of $395 was recorded in
the first quarter of 2008 to the extent that the carrying amount was not
considered recoverable based on estimated future discounted cash flows. Three
restaurants were relocated due to this acquisition, resulting in a charge of $85
for remaining lease obligations and utilities.
 
 58
  ITEM
9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL
DISCLOSURE
 
 Not
applicable.
 
 ITEM
9A. CONTROLS AND PROCEDURES
 
 Evaluation
of Disclosure Controls and Procedures
 
 We have
established and maintain disclosure controls and procedures that are designed to
ensure that material information relating to us and our subsidiaries required to
be disclosed by us in the reports that we file or submit under the Securities
Exchange Act of 1934 is recorded, processed, summarized, and reported within the
time periods specified in the SEC’s rules and forms, and that such information
is accumulated and communicated to our management, including our chief executive
officer and chief financial officer, as appropriate to allow timely decisions
regarding required disclosure. In designing and evaluating the disclosure
controls and procedures, management recognized that any controls and procedures,
no matter how well designed and operated, can only provide reasonable assurance
of achieving the desired control objectives, and in reaching a reasonable level
of assurance, management necessarily was required to apply its judgment in
evaluating the cost-benefit relationship of possible controls and
procedures.
 
 We
carried out an evaluation, under the supervision and with the participation of
our management, including our chief executive officer and chief financial
officer, of the effectiveness of the design and operation of our disclosure
controls and procedures as of the end of the period covered by this report.
Based on that evaluation, the chief executive officer and chief financial
officer concluded that our disclosure controls and procedures were effective as
of the date of such evaluation to provide reasonable assurance that information
required to be disclosed by the Company in the reports that it files or submits
under the Exchange Act is recorded, processed, summarized and reported within
the time periods specified by the Securities and Exchange Commission’s rules and
forms.
 
 Management’s
Report on Internal Control over Financial Reporting
 
 Our
management is responsible for establishing and maintaining adequate internal
control over financial reporting. Internal control over financial reporting is a
process designed by, or under the supervision of, our chief executive and chief
financial officers and effected by our board of directors, management and other
personnel to provide reasonable assurance regarding the reliability of financial
reporting and the preparation of financial statements for external purposes in
accordance with U.S. generally accepted accounting principles and includes those
policies and procedures that:
 
 •
              pertain
      to the maintenance of records that in reasonable detail accurately and
      fairly reflect the transactions and dispositions of our
      assets;
 
 •
              provide
      reasonable assurance that transactions are recorded as necessary to permit
      preparation of financial statements in accordance with generally accepted
      accounting principles, and that our receipts and expenditures are being
      made only in accordance with the authorizations of our management and
      directors; and
 
 •
              provide
      reasonable assurance regarding prevention or timely detection of
      unauthorized acquisition, use or disposition of our assets that could have
      a material effect on our financial
statements.
 
 Because
of inherent limitations, internal control over financial reporting may not
prevent or detect misstatements. Projections of any evaluation of effectiveness
to future periods are subject to the risks that controls may become inadequate
because of changes in conditions, or that the degree of compliance with policies
or procedures may deteriorate. However, these inherent limitations are known
features of the financial reporting process. It is possible to design into the
process safeguards to reduce, thought not eliminate, the risk that misstatements
are not prevented or detected on a timely basis. Management is responsible for
establishing and maintaining adequate internal control over financial reporting
for the company.
 
 Management
assessed the effectiveness of our internal control over financial reporting as
of December 27, 2009. In making this assessment, management used the criteria
set forth by the Committee of Sponsoring Organizations of the Treadway
Commission in Internal
Control-Integrated Framework. Based on this assessment, our management
concluded that, as of December 27, 2009, our internal control over financial
reporting was effective to provide reasonable assurance regarding the
reliability of financial reporting and the preparation and presentation of
financial statements for external purposes in accordance with generally accepted
accounting principles. Our independent registered public accounting firm, KPMG
LLP, has issued an audit report on the effectiveness of our internal control
over financial reporting.
  59
 Change
in Internal Control Over Financial Reporting
 
 There
were no changes in the our internal control over financial reporting that
occurred during our last fiscal quarter that have materially affected, or are
reasonably likely to materially affect, our internal control over financial
reporting.
 
 ITEM
9B. OTHER INFORMATION
 
 Not
applicable.
  60
 PART
III
 
 ITEM
10. DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE
 
 Information
required by this item is contained in Part I of this document under the heading
“Executive Officers,” and the sections entitled “Election of Directors,”
“Compliance with Section 16(a) of the Exchange Act,” and “Corporate Governance”
appearing in our Proxy Statement to be delivered to shareholders in connection
with the 2009 Annual Meeting of Shareholders. Such information is incorporated
herein by reference.
 
 Our Board
of Directors has adopted a Code of Ethics & Business Conduct for all
employees and directors. A copy of this document is available on our website at
www.buffalowildwings.com,
free of charge, under the Corporate Governance Investors section. We will
satisfy any disclosure requirements under Item 10 or Form 8-K regarding an
amendment to, or waiver from, any provision of the Code with respect to our
principal executive officer, principal financial officer, principal accounting
officer and persons performing similar functions by disclosing the nature of
such amendment or waiver on our website or in a report on Form 8-K.
 
 Our Board
of Directors has determined that Mr. J. Oliver Maggard, a member of the Audit
Committee and an independent director, is an audit committee financial expert,
as defined under 407(d) (5) of Regulation S-K. Mr. Maggard is an “independent
director” as that term is defined in Nasdaq Rule 4200(a)(15). The designation of
Mr. Maggard as the audit committee financial expert does not impose on Mr.
Maggard any duties, obligations or liability that are greater than the duties,
obligations and liability imposed on Mr. Maggard as a member of the Audit
Committee and the Board of Directors in the absence of such designation or
identification.
 
 ITEM
11. EXECUTIVE COMPENSATION
 
 The
information required by this item is contained in the sections entitled
“Executive Compensation” and “Compensation Discussion and Analysis” appearing in
our Proxy Statement to be delivered to shareholders in connection with the 2010
Annual Meeting of Shareholders. Such information is incorporated herein by
reference.
 
  ITEM
12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED
STOCKHOLDER MATTERS
 The
information required by this item relating to the security ownership of certain
holders is contained in the sections entitled “Security Ownership of Officers
and Directors,” “Security Ownership of Certain Beneficial Holders,” and “Equity
Compensation Plan Information” appearing in our Proxy Statement to be delivered
to shareholders in connection with the 2010 Annual Meeting of Shareholders. Such
information is incorporated herein by reference.
 
 ITEM
13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR
INDEPENDENCE
 
 The
information required by this item is contained in the sections entitled
“Corporate Governance” and “Certain Relationships and Related Transactions”
appearing in our Proxy Statement to be delivered to shareholders in connection
with the 2010 Annual Meeting of Shareholders. Such information is incorporated
herein by reference.
 
 ITEM
14. PRINCIPAL ACCOUNTANT FEES AND SERVICES
 
 The
information required by this item is contained in the section entitled
“Independent Registered Public Accounting Firm” appearing in our Proxy Statement
to be delivered to shareholders in connection with the 2010 Annual Meeting of
Shareholders. Such information is incorporated herein by reference.
 
 61
 PART
IV
 
 ITEM
15. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES
 
 (a)  Financial Statements. The
following consolidated financial statements of ours are filed with this report
and can be found at Item 8 of this Form 10-K.
 
 Report of
Independent Registered Public Accounting Firm dated February 26,
2010
 
 Consolidated
Balance Sheets as of December 27, 2009 and December 28, 2008
 
 Consolidated
Statements of Earnings for the Fiscal Years Ended December 27, 2009, December
28, 2008, and December 30, 2007
 
 Consolidated
Statements of Stockholders’ Equity for the Fiscal Years Ended December 27, 2009,
December 28, 2008, and December 30, 2007
 
 Consolidated
Statements of Cash Flows for the Fiscal Years Ended December 27, 2009, December
28, 2008, and December 30, 2007
 
 Notes to
Consolidated Financial Statements
 
 (b)Financial Statement
Schedules. The following schedule is included following the exhibits to
this Form 10-K.
 
 Schedule
II – Valuation and Qualifying Accounts
 
 All other
schedules for which provision is made in the applicable accounting regulations
of the SEC have been omitted as not required or not applicable, or the
information required has been included elsewhere by reference in the financial
statements and related notes.
 
 (c)  Exhibits. See “Exhibit Index”
following the signature page of this Form 10-K for a description of the
documents that are filed as Exhibits to this report on Form 10-K or incorporated
by reference herein.
 
 62
 SIGNATURES
 
 In
accordance with Section 13 or 15(d) of the Exchange Act, the registrant caused
this report to be signed on its behalf by the undersigned, thereunto duly
authorized.
 
 Date:
      February 26, 2010
              BUFFALO
      WILD WINGS, INC.By
              /s/    SALLY J. SMITHSally
      J. Smith
                Chief
      Executive Officer and President
 
 In
accordance with the Exchange Act, this report has been signed below by the
following persons on behalf of the registrant and in the capacities and on the
dates indicated below.
 
 Each
person whose signature appears below constitutes and appoints Sally J. Smith and
Mary J. Twinem as the undersigned’s true and lawful attorneys-in fact and
agents, each acting alone, with full power of substitution and resubstitution,
for the undersigned and in the undersigned’s name, place and stead, in any and
all amendments to this Annual Report on Form 10-K and to file the same, with all
exhibits thereto, and other documents in connection therewith, with the
Securities and Exchange Commission, granted unto said attorneys-in-fact and
agents, each acting alone, full power and authority to do and perform each and
every act and thing requisite and necessary to be done in and about the
premises, as fully to all intents and purposes as the undersigned might or could
do in person, hereby ratifying and confirming all said attorneys-in-fact and
agents, each acting alone, or his substitute or substitutes, may lawfully do or
cause to be done by virtue thereof.
 
 Name
              
              Title
              
              Date/s/    SALLY
      J. SMITH
              
              Chief
      Executive Officer, President and Director (principal executive
      officer)
              
              2/26/10Sally
      J. Smith/s/    MARY
      J. TWINEM
              
              Executive
      Vice President, Chief Financial Officer and Treasurer (principal financial
      and accounting officer)
              
              2/26/10Mary
      J. Twinem/s/    DALE
      M. APPLEQUIST
              
              Director
              
              2/26/10Dale
      M. Applequist/s/    JAMES
      M. DAMIAN
              
              Director,
      Chairman of the Board
              
              2/26/10James
      M. Damian/s/    MICHAEL
      P.JOHNSON
              
              Director
              
              2/26/10Michael
      P. Johnson/s/    ROBERT
      W. MACDONALD
              
              Director
              
              2/26/10Robert
      W. MacDonald/s/    WARREN
      E. MACK
              
              Director
              
              2/26/10Warren
      E. Mack/s/    J.
      OLIVER
      MAGGARD
              
              Director
              
              2/26/10J.
      Oliver Maggard
 
 63
 Buffalo
Wild Wings, Inc.
 
 SCHEDULE
II – VALUATION AND QUALIFYING ACCOUNTS
 
 Description
              
              
              Balance
                at
                Beginning
                of
      Period
              
              
              Additions
                Charged
                to
      Costs
                and
                Expenses
              
              
              Deductions
                From
                Reserves
              
              
              Balance
                at End of
                PeriodAllowance
      for doubtful accounts
              2009
              
              $
              25
              
              
              
              —
              
              
              
              —
              
              
              
              252008
              
              
              25
              
              
              
              544
              
              
              
              544
              
              
              
              252007
              
              
              47
              
              
              
              —
              
              
              
              22
              
              
              
              25Store
      closing reserves
              2009
              
              
              —
              
              
              
              31
              
              
              
              31
              
              
              
              —2008
              
              
              —
              
              
              
              85
              
              
              
              85
              
              
              
              —2007
              
              
              54
              
              
              
              85
              
              
              
              139
              
              
              
              —
 
   64
 BUFFALO WILD WINGS,
INC.
 EXHIBIT
INDEX TO FORM 10-K
 
 For
      the Fiscal Year Ended:
              
              Commission
      File
      No.December
      27, 2009
              
              000-24743
 
 Exhibit
                Number
              
              Description3.1
              
              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)4.1
              
              Form
      of specimen certificate representing Buffalo Wild Wings, Inc.’s common
      stock (incorporated by reference to Exhibit 4.1 to Amendment No. 2 to our
      Registration Statement on Form S-1, Reg. No. 333-108695 filed November 5,
      2003)10.1
              
              Forms
      of stock option agreements under 2003 Equity Incentive Plan (incorporated
      by reference to Exhibit 10.1 to Amendment No. 2 to our Registration
      Statement on Form S-1, Reg. No. 333-108695 filed November 5,
      2003)(1)10.2
              
              Employee
      Stock Purchase Plan and Amendment No. 1 (incorporated by reference to
      Exhibit 10.19 to Amendment No. 2 to our Registration Statement on Form
      S-1, Reg. No. 333-108695 filed November 5, 2003) (1)10.3
              
              Form
      of 2005 Restricted Stock Unit Award Notice to Directors used under the
      2003 Equity Incentive Plan (incorporated by reference to Exhibit 10.16 to
      our Form 10-K for the fiscal year ended December 25, 2005)
    (1)10.4
              
              The
      Executive Nonqualified Excess Plan (incorporated by reference to Exhibit
      10.1 to our Form 10-Q for the fiscal quarter ended September 24, 2006)
      (1) 10.5
              
              The
      Executive Nonqualified Excess Plan Adoption Agreement (incorporated by
      reference to Exhibit 10.2 to our Form 10-Q for the fiscal quarter ended
      September 24, 2006) (1) 10.6
              
              2003
      Equity Incentive Plan, as Amended Through March 17, 2007 (incorporated by
      reference to Appendix A to our Proxy Statement filed on April 20, 2007)
      (1)10.7
              
              Cash
      Incentive Plan (incorporated by reference to Appendix B to our Proxy
      Statement filed on April 20, 2007) (1) 10.8
              
              Form
      of Notice of Performance-Based Restricted Stock Unit Award (Officer Level)
      as of March 1, 2009 (incorporated by reference to Exhibit 10.2 to our Form
      10-Q for the fiscal quarter ended March 29, 2009) (1)10.9
              
              Form
      of Notice of Performance-Based Restricted Stock Unit Award under the 2003
      Equity Incentive Plan (incorporated by reference to Exhibit 10.1 to our
      Form 8-K filed on February 22, 2008) (1)10.10
              
              Form
      of Notice of Incentive Stock Option Award under the 2003 Equity Incentive
      Plan (incorporated by reference to Exhibit 10.2 to our Form 8-K filed on
      February 22, 2008) (1)10.11
              
              2003
      Equity Incentive Plan, as Amended and Restated on May 15, 2008
      (incorporated by reference to Exhibit 10.1 to our Form 8-K filed May 21,
      2008)(1)10.12
              
              The
      Executive Nonqualified Excess Plan as of May 15, 2008 (incorporated by
      reference to Exhibit 10.2 to our Form 8-K filed May 21,
      2008)(1)10.13
              
              The
      Executive Nonqualified Excess Plan Adoption Agreement as of May 15, 2008
      (incorporated by reference to Exhibit 10.3 to our Form 8-K filed May 21,
      2008)(1)10.14
              
              Employment
      Agreement dated September 16, 2008 with Sally J. Smith (incorporated by
      reference to Exhibit 10.1 to our Form 8-K filed September 22,
      2008)(1)10.15
              
              Employment
      Agreement dated September 16, 2008 with Mary J. Twinem (incorporated by
      reference to Exhibit 10.2 to our Form 8-K filed September 22,
      2008)(1)  65
 10.16
              
              Employment
      Agreement dated September 16, 2008 with James M. Schmidt (incorporated by
      reference to Exhibit 10.3 to our Form 8-K filed September 22,
      2008)(1)10.17
              
              Employment
      Agreement dated September 16, 2008 with Judith A. Shoulak (incorporated by
      reference to Exhibit 10.4 to our Form 8-K filed September 22,
      2008)(1)10.18
              
              Employment
      Agreement dated September 16, 2008 with Kathleen M. Benning (incorporated
      by reference to Exhibit 10.5 to our Form 8-K filed September 22,
      2008)(1)10.19
              
              Employment
      Agreement dated September 16, 2008 with Linda G. Traylor (incorporated by
      reference to Exhibit 10.7 to our Form 10-Q for the fiscal quarter ended
      September 28, 2008)(1)10.20
              
              Employment
      Agreement dated September 16, 2008 with Mounir N. Sawda (incorporated by
      reference to Exhibit 10.8 to our Form 10-Q for the fiscal quarter ended
      September 28, 2008)(1)10.21
              
              Form
      of Amendment to Notice of Restricted Stock Unit Award Relating to Awards
      in Fiscal Years 2006 and 2007 to Executive Officers (incorporated by
      reference to Exhibit 10.6 to our Form 8-K filed September 22,
      2008)(1)10.22
              
              Amendment
      No. 1 to 2003 Equity Incentive Plan (incorporated by reference to Exhibit
      10.1 to our Form 8-K filed on December 10, 2008)(1)10.23
              
              Director
      Compensation Arrangements for Fiscal Year 2009 (incorporated by reference
      to Exhibit 10.28 to our Form 10-K for the fiscal year ended December 28,
      2008) (1)10.24
              
              Executive
      Officer Compensation Arrangements for Fiscal Year 2009 (incorporated by
      reference to Exhibit 10.29 to our Form 10-K for the fiscal year ended
      December 28, 2008) (1)10.25
              
              2009
      Executive Cash Incentive Program (incorporated by reference to Exhibit
      10.30 to our Form 10-K for the fiscal year ended December 28, 2008)
      (1)10.26
              
              2009
      Executive Cash Incentive Program for Chief Executive Officer (incorporated
      by reference to Exhibit 10.1 to our Form 10-Q for the fiscal quarter ended
      March 29, 2009) (1)21.1
              
              List
      of Subsidiaries (incorporated by reference to Exhibit 21.1 to our Form
      10-K for the fiscal year ended December 26, 2004) 23.1*
              
              Consent
      of KPMG LLP, Independent Registered Public Accounting
  Firm24.1*
              
              Power
      of Attorney (included on the signature page)31.1*
              
              Certification
      of Chief Executive Officer Pursuant to Section 302 of the Sarbanes-Oxley
      Act of 200231.2*
              
              Certification
      of Chief Financial Officer Pursuant to Section 302 of the Sarbanes-Oxley
      Act of 200232.1*
              
              Certification
      of Chief Executive Officer Pursuant to Section 906 of the Sarbanes-Oxley
      Act of 200232.2*
              
              Certification
      of Chief Financial Officer Pursuant to Section 906 of the Sarbanes-Oxley
      Act of 200299.1*
              
              Nevada
      Gaming Regulation
 
 *
              Filed
      herewith.
 (1)
              Management
      agreement or compensatory plan or
arrangement.