10-K 1 bww_10k-123012.htm FORM 10-K bww_10k-123012.htm

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 1934 for the fiscal year ended December 30, 2012
or
 
¨      Transition Report Under Section 13 or 15(d) of the Securities Exchange Act of 1934 for 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 registered
Common 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  x    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   x    Accelerated Filer  ¨    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 $1.5 billion based on the closing sale price of the Company’s Common Stock as reported on the NASDAQ Stock Market on June 22, 2012.

The number of shares outstanding of the registrant’s common stock as of February 11, 2013: 18,635,931 shares.

DOCUMENTS INCORPORATED BY REFERENCE
Portions of the Proxy Statement for the 2013 Annual Meeting of Shareholders are incorporated by reference into Part III of this report.

 
 

 

PART I
 
Page
   
Item 1.
Business
3
Item 1A.
Risk Factors
10
Item 1B.
Unresolved Staff Comments
18
Item 2.
Properties
18
Item 3.
Legal Proceedings
19
Item 4.
Mining Safety Disclosures
19
   
PART II
 
Item 5.
Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities
20
Item 6.
Selected Financial Data
22
Item 7.
Management’s Discussion and Analysis of Financial Condition and Results of Operations
23
Item 7A.
Quantitative and Qualitative Disclosures About Market Risk
34
Item 8.
Consolidated Financial Statements and Supplementary Data
35
Item 9.
Changes in and Disagreements with Accountants on Accounting and Financial Disclosure
58
Item 9A.
Controls and Procedures
58
Item 9B.
Other Information
59
   
PART III
 
Item 10.
Directors, Executive Officers and Corporate Governance
61
Item 11.
Executive Compensation
61
Item 12.
Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters
61
Item 13.
Certain Relationships and Related Transactions, and Director Independence
61
Item 14.
Principal Accountant Fees and Services
61
   
PART IV
 
Item 15.
Exhibits and Financial Statement Schedules
62
   
Signatures
63
 
 
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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 from 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, craveable menu items including our Buffalo, New York-style chicken wings spun in any of our 16 signature sauces or 5 signature seasonings. 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 50 additional televisions, competing in Buzztime® Trivia or playing video games. The open layout of our restaurants offers dining and bar areas that provide distinct seating choices for sports fans and families. Our flexible restaurants allow 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 made-to-order menu items are enhanced by the bold flavor profile of our 16 signature sauces and 5 signature seasonings, ranging from Sweet BBQ to Blazin’®. Our restaurants offer 20 to 30 domestic and imported beers on tap, including craft brews, and a wide selection of bottled beers, wines, and liquor. Our award-winning food and memorable experience drive 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 advertising to support both our company-owned and franchised restaurants. We also prominently feature our trademark Buffalo insignias, yellow and black colors, 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 operating guidelines and 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 Canada and widely recognized as Buffalo Wild Wings.
 
Our Concept and Business Strategy
 
Our goal is to continue to grow and develop the Buffalo Wild Wings® concept as a leading nationally and internationally recognized restaurant chain. To do so, we plan to execute the following strategies:
 
 
·
Continue to strengthen the Buffalo Wild Wings® brand;
 
·
Deliver a unique guest experience;
 
·
Offer boldly-flavored menu items with broad appeal;
 
·
Create an inviting, neighborhood atmosphere;
 
·
Focus on operational excellence;
 
·
Open restaurants in new and existing domestic and international markets; and
 
·
Increase same-store sales, average unit volumes, and profitability.
 
 
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North American Growth Strategy
 
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 about 1,700 restaurants in North America. We have developed procedures for identifying new opportunities in both domestic and international markets, determining our expansion strategy in those markets and identifying sites for company-owned and franchised restaurants. Our current North American growth strategy is to continue to open both company-owned restaurants and franchised restaurants.
 
In most of our existing markets, we plan to continue to open new restaurants until a market is penetrated to a point that will enable us to gain marketing, operational, cost, and other efficiencies. We intend to enter new domestic and international 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.  We may grow our number of company-owned restaurants through the acquisition of franchised restaurants.
 
International Growth Strategy

We plan to embark upon our international growth, through development agreements with new and existing franchisees, and, potentially, through joint venture partnerships.  We have two signed franchise development agreements for restaurants in the Middle East and Puerto Rico. A typical international franchise development agreement provides for payment of development fees and franchise fees in addition to subsequent royalty fees based on the gross sales of each restaurant. We expect development agreements and joint ventures for international locations to remain limited to organizations having significant experience as restaurant operators and proven financial ability to support and develop multi-unit and multi-brand operations.
 
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 BBQ, Teriyaki, Mild, Parmesan Garlic, Medium, Honey BBQ, Spicy Garlic, Jammin’ Jalapeno, Asian Zing®, Caribbean Jerk, Thai Curry, Hot BBQ, Hot, Mango Habanero, Wild® and Blazin’® ; or signature seasonings: Buffalo, Desert Heat®, Chipotle BBQ, Lemon Pepper and Salt & Vinegar. Our chicken wings can be ordered in numbers ranging from six to 100 wings, with larger orders available for parties. Our sauces and seasonings complement and distinguish our wings and other menu offerings 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 Sharables, Wild Flatbreads™, specialty hamburgers and sandwiches, wraps, Buffalito® soft tacos, and salads. We also provide a 12 & Under Menu option for kids.
 
Our restaurants feature a full bar which offers an extensive selection of 20 to 30 domestic, imported, and craft 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 introduces 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, and many of the restaurants have patio seating.
 
We strategically place approximately 50 high-definition 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 14% of restaurant sales for company-owned restaurants in 2012. Many of our restaurants have separate parking spots for our take-out guests.
 
 
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Current Restaurant Locations
 
As of December 30, 2012, we owned or franchised 891 Buffalo Wild Wings restaurants in North America, of which 381 were company-owned and 510 were franchised. In 2013, we expect to open approximately 100 company-owned and franchised restaurants.
 
Our company-owned restaurants range in size from 3,900 to 9,700 square feet, with a typical size of approximately 5,700 square feet for restaurants that 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 $2.0 million, excluding preopening expenses of approximately $280,000. 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, market, or country. 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.
 
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 applicable 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 process 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. We employ an opportunistic approach to real estate by developing end caps, freestanding units, and conversions in both urban and suburban trade areas. Final approval by one or more members of our Real Estate Committee is required for each company-owned site.
 
Marketing and Advertising
 
Since 1982, Buffalo Wild Wings has created a unique brand experience with a loyal fan base, award-winning wings and sauces, a variety of beers and an exciting social atmosphere. This unique experience, centered around sports, sets us apart from our competition. Our marketing programs are designed to build awareness of our brand with sports fans, encouraging them to visit and ultimately develop a personal connection to Buffalo Wild Wings. These programs consistently drive trial, same-store sales and average check, and they support strong restaurant openings.
 
Marketing Campaigns. Each marketing campaign has a theme that reflects guest lifestyles and behaviors. These lifestyles and behaviors are the cornerstone for creating key brand touch-points within each campaign that include media, promotions, partnerships, and food and beverage experiences that will encourage social interactions and bring each theme to life. For example, we promoted Tablegating™ at Buffalo Wild Wings in 2012, which provided our guests with an opportunity to watch all the games and enjoy featured food and beverage items. In addition, our local restaurant marketing efforts are designed to enhance community connections. Examples of this are our Home Team Advantage and Eat Wings, Raise Funds programs that connect our restaurants to local sports teams and community groups.
 
Advertising. Our media strategy is to build continuity throughout the year while still supporting our peak periods. Our primary media vehicles include national television in relevant programming to drive awareness and consideration, national and local radio to drive consideration and trial and digital and search to drive all three. 
 
Franchise Involvement. System-wide campaigns and promotions are developed and implemented with input from the Buffalo Wild Wings Advertising Council. This volunteer board includes seven franchisees, elected 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 leadership team strives for operational excellence by recruiting, developing and supporting our highly qualified management teams and Team Members and implementing operational standards and best practices within our restaurants.
 
 
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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 63 Regional Managers who oversee 3 to 8 restaurants each. As we expand geographically, we expect to add additional Regional Managers. Similarly, our franchised restaurants receive operational guidance from our 15 Franchise Consultants, who oversee 24 to 45 restaurants each. We have two Divisional Vice Presidents who have responsibility for all company-owned operations and nine Directors of Operations who provide leadership to the Regional Managers. We also have a Vice President of Franchising who has responsibility for all franchised restaurant operations and three Directors of Operations who provide leadership to the Franchise Consultants.
 
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.
 
Training. We provide thorough training for our management and hourly Team Members to prepare them for their role in delivering a positively engaging Buffalo Wild Wings experience for each and every guest.
 
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 and learn about key aspects of the business – from our culture to our core focus areas: Team, Guest, Quality Operations and Sales and Profits. This includes experience in both hourly and management functions.

After successful completion of the manager training program, the new managers work with their General Managers to build a tailored program to meet their training and development needs, specific to their assigned area of responsibility. A library of targeted modules covering both technical and managerial skills serves as the vehicle for this phase of learning. The program, which is progressive in nature, is also built around our core focus areas.  

Later in their careers, our General Managers and high-potential Assistant General Managers attend a management skills class where they take a deeper look into bringing all of the core elements for success together to create the ultimate experience for our guests.
 
Our hourly Team Members complete a comprehensive position certification process. Position certification requires 16 to 20 hours of hands-on training. Team members must also successfully pass position validations, which include menu certifications, responsible alcohol service training, and training in the safe handling of food.
 
Hourly Restaurant 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 for 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 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 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 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.
 
 
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Food Preparation, Quality Control and Purchasing
 
We strive to maintain high quality standards. Our systems are designed to protect our food supply, 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®, which was developed by the National Restaurant Association Educational Foundation.
 
We negotiate directly with independent suppliers for our supply of food and paper products. Domestically, we use UniPro Food Services, Inc. to distribute these products to our restaurants. We have signed a new distribution contract that covers food, paper, and non-food products and began transitioning locations to the new provider in December 2012 with full rollout expected to be completed by June 2013. 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.
 
T. Marzetti Company produces our signature sauces, and they maintain sufficient inventory levels to ensure consistent supply to our restaurants. We own the formulas for our sauces and seasonings, which prevents them 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. Current month chicken wing prices are determined based on the average of the previous months spot rates, but 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 $40,000.
 
Franchisees typically pay us a royalty fee of 5.0% of their restaurant sales. We also assess franchisees an advertising fee in the amount of 3.5% of their restaurant sales, of which 3.0% was contributed to our National Advertising Fund in 2012 and the remaining 0.5% was spent directly by the franchisee or through marketing co-ops in the applicable local market. Our current form of franchise agreement permits us to increase the royalty fee and to increase the required contribution to the Advertising Fund by 0.5% once every three years. The royalty fee and advertising fee are not expected to increase in 2013.
 
All of our franchise agreements require that each franchised restaurant operate 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 consistently 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 in person with our senior leaders and holds monthly conference calls. We also have other councils of franchisees whom we consult with periodically on specific matters.
 
 
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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 company-owned 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. This year we completed the rollout of a new point-of-sale and web-based back office system in all company-owned restaurants. We also upgraded our kitchen management system that provides automation and reporting of cook line performance, including speed-of-service and order accuracy.
 
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 guest experience. We believe that our attractive price-value relationship, the atmosphere of our restaurant, our sports viewing experience, our focus on our guest 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 national 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 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. In order to reduce this risk, restaurant employees are trained in standardized operating procedures designed to assure compliance with all applicable codes and regulations. As we expand into international markets we are taking on additional responsibilities under the Foreign Corrupt Practices Act and similar local regulations.  We have implemented policies, procedures and training to ensure compliance with these regulations.
 
We and our franchisees are also subject to laws governing our relationship with employees.  Our failure or the failure of our franchisees to comply with international, federal, state and local employment laws and regulations may subject us to losses and harm our brands.  The laws and regulations govern such matters as wage and hour requirements; workers’ compensation insurance; unemployment and other taxes; working and safety conditions, and citizenship and immigration status. Significant additional government-imposed regulations under the Fair Labor Standards Act and similar laws related to minimum wages, overtime, rest breaks, paid leaves of absence, mandated health benefits, may also impact the performance of company and franchised operations.  In addition, employee claims based on, among other things, discrimination, harassment, wrongful termination, wage and hour requirements and payments to employees who receive gratuities, may divert financial and management resources and adversely affect operations. The losses that may be incurred as a result of any violation of such governmental regulations by the company or our franchisees are difficult to quantify.
 
 
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We are also subject to licensing and regulation by state and local departments relating to the service of alcoholic beverages, health, sanitation, and fire and safety standards. Compliance with these laws and regulations may lead to increased costs and operational complexity and may increase our exposure to governmental investigations or litigation. 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;
 
 
·
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. 
 
Team Members
 
As of December 30, 2012, we employed approximately 25,500 Team Members. We have approximately 2,800 full-time and 22,300 part-time Team Members working in our company-owned restaurants and 400 Team Members based out of our home office or in field management positions. Our Team Members 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 Team Members to be good.
 
Executive Officers
 
The following sets forth certain information about our executive officers:
 
Sally J. Smith, 55, 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, 52, 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. She serves on the boards of the Minnesota Restaurant Association and Mendota Holdings, Inc.
 
Kathleen M. Benning, 50, has served as our Executive Vice President, Global Brand and Business Development since October 2011. She served as Executive Vice President, Global Marketing and Brand Development from January 2010 until October 2011. 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.
 
 
9

 
 
James M. Schmidt, 53, has served as our Chief Operating Officer since January 2011.  He served as our Executive Vice President since December 2006 and as General Counsel from April 2002 to January 2011. He served as either Vice President or Senior Vice President from April 2002 until December 2006. Mr. Schmidt also served as our Secretary from September 2002 until January 2011, and he served as a director on our Board from 1994 to September 2003. From 1997 to 2002, Mr. Schmidt was an attorney with the law firm of Robbins, Kelly, Patterson & Tucker.
 
Judith A. Shoulak, 53, has served as our Executive Vice President, North American Operations since October 2011. She served as Executive Vice President, Global Operations and Human Resources from January 2010 until October 2011, 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.

Lee R. Patterson, 39, has served as our Senior Vice President, Guest Experience and Innovation since October 2011. He served as Senior Vice President, Information Technology from January 2011 until October 2011 and as our Vice President, Information Technology from January 2008 until January 2011. Mr. Patterson was with Applebee’s International, Inc. from May 2003 to January 2008, serving most recently as Director of Restaurant Systems.

Andrew D. Block, 44, has served as our Senior Vice President, Talent Management since January 2012. He served as Vice President, Talent Management from April 2010 until January 2012. Mr. Block served as Director of Human Resources at C. H. Robinson Worldwide from December 2002 to April 2011. From March 1996 to December 2002 Mr. Block was with Wells Fargo Home Mortgage as Director of Human Resources. Earlier in his career Mr. Block worked in the Human Resources field for Ecolab and a subsidiary of Sony Corporation of America.

Emily C. Decker, 33, has served as our Vice President, General Counsel and Secretary since January 2011. She served as our Franchise Attorney from August 2007 until January 2011. From September 2004 to July 2007, Ms. Decker was an Associate at Briggs and Morgan, P.A., which provides legal services to us from time to time.

ITEM 1A. RISK FACTORS

This Form 10-K, including the discussions contained in Items 1 and 7, contains 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, restaurant openings and related expense, and cash requirements. Although we believe there is a reasonable basis for the forward-looking statements, our actual results could be materially different. While 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, and we do not undertake any obligation to update any forward-looking statement. We believe that all material risk factors have been discussed below.
 
Fluctuations in chicken wing prices could impact our operating income.
 
A 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. Current month chicken wing prices are determined based on the average of the previous months spot rates, but 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 2012 averaged 62.8% higher than 2011 as the average price per pound increased to $1.97 in 2012 from $1.21 in 2011. These prices were historically low in 2011 and historically high in 2012. 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 27%, 19%, and 24% of our cost of sales in 2012, 2011, and 2010, respectively, with an annual average price per pound of $1.97, $1.21, and $1.58, respectively. A 10% increase in the chicken wing costs for 2012 would have increased restaurant cost of sales by approximately $8.3 million. Additional information related to chicken wing prices is included in Item 7 under “Results of Operations.”
 
 
10

 

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 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:

 
·
Negotiating acceptable lease or purchase terms for new restaurants;

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

 
·
Creating guest awareness of our restaurants in new markets;

 
·
Competition in new and existing markets;

 
·
Impact of inclement weather, natural disasters, and other calamities; and

 
·
General economic conditions.

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

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 location, 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 incur other expenses when we close, relocate, or remodel existing restaurants. These expenses are generally higher when we open restaurants in new markets, but the costs 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.
 
 
11

 
 
Our restaurants may not achieve market acceptance in the new domestic and international geographic regions we enter.
 
Our expansion plans depend on opening restaurants in new domestic and international 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 profitable levels, if at all.
 
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.
  
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 reporting failure or material weakness in internal control over financial reporting could cause a loss of investor confidence and decline in the market price of our stock.

Economic conditions 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.

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.

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

Goodwill represents the excess of cost over the fair value of identified net assets of business acquired. We review goodwill for impairment annually, or whenever circumstances change in a way which could indicate that impairment may have occurred. Goodwill is tested at the reporting unit level. We identify potential goodwill impairments by comparing the fair value of the reporting unit to its carrying amount, which includes goodwill and other intangible assets. The fair value of the reporting unit is calculated using a market approach. If the carrying amount of the reporting unit exceeds the fair value, this is an indication that impairment may exist. We calculate the amount of the impairment by comparing the fair value of the assets and liabilities to the fair value of the reporting unit. 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. 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 assets to 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.
 
 
12

 

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.

We are dependent on franchisees and their success.
 
Currently, approximately 57% of our restaurants are franchised. Franchising royalties and fees represented approximately 7.4%, 8.6%, and 9.5% of our revenues during fiscal 2012, 2011, and 2010, 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.
 
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 and quick service restaurants. 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 brand and our reputation for offering guests an unparalleled guest 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, or ambiance, or in any way believe 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.
 
 
13

 

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 sporting events viewed by our guests in our restaurants such as the NFL, MLB, NBA, NHL, and NCAA. Interruptions in the viewing of these professional and collegiate sporting league events due to strikes, lockouts, or labor disputes may impact our results. Additionally, our results are subject to fluctuations based on the dates of sporting events and their availability for viewing through broadcast, satellite and cable networks. Historically, sales in most of our restaurants have been higher during fall and winter months based on the relative popularity and extent of national, regional and local sporting and other events. Further, our quarterly operating results may fluctuate significantly because of other factors, including:
 
 
·
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;

 
·
Potential distraction or unusual expenses associated with our expansion into international markets;

 
·
Our ability to operate effectively in new markets domestically and internationally in which we or our franchisees have limited operating experience;

 
·
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 of inclement weather, natural disasters, and other calamities;

 
·
Fluctuations in interest rates;

 
·
The timing and amount of asset impairment loss and restaurant closing charges; and

 
·
Tax expenses and other non-operating costs.
 
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 and key executives to operate and manage our business.
 
Our success and the success of our individual restaurants and business depends on our ability to attract, motivate, develop and retain a sufficient number of qualified key executives and restaurant employees, including restaurant managers, and hourly Team Members. 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 any of our executive officers could jeopardize our ability to meet our financial targets.
 
 
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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 restaurants 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.

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 from traditional media or on-line social network postings may also result from actual or alleged incidents or events taking place in our restaurants.  Regardless of whether the allegations or complaints are valid, unfavorable publicity relating to a 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.

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. Further, growing movements to change laws relating to alcohol may result in a decline in alcohol consumption at our restaurants 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.

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, healthcare reform and the implementation of the Patient Protection and Affordable Care Act, unemployment tax rates, workers’ compensation rates, citizenship requirements, union membership, 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, changing regulations from the National Labor Relations Board 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.
 
 
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Changes in consumer preferences or discretionary consumer spending could harm our performance.
 
Our success depends, in part, upon the continued popularity of our Buffalo, New York-style chicken wings, our boneless wings, other food and beverage items, and appeal of sports bars and casual dining restaurants. We also depend on trends toward consumers eating away from home. Shifts in these consumer preferences could negatively affect our future profitability. Such shifts could be based on health concerns related to the cholesterol, carbohydrate, fat, calorie, or salt 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. In addition, we will be required to disclose calorie counts for all food items on our menus, due to federal regulations, and this may have an effect on consumers’ eating habits. Other federal regulations could follow this pattern. 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.
 
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 restaurants. 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.

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 or other restaurants. 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;

 
·
Problems maintaining key personnel;

 
·
Potential impairment of tangible and intangible assets and goodwill acquired in the acquisition;

 
·
Potential unknown liabilities;

 
·
Difficulties of integration; and

 
·
Disruption of our ongoing business, including 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.

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 same-store sales 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.
 
 
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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.

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. Also, 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, reduce efficiency in our operations, require significant investment to remediate the issue, or cause negative publicity that could damage our brand. 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 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 actively enforce and defend our marks and if violations are identified, 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.
 
 
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ITEM 1B. UNRESOLVED STAFF COMMENTS

Not applicable.
 
ITEM 2. PROPERTIES
 
We are headquartered in Minneapolis, Minnesota. Our home office has approximately 48,000 square feet of office space. We occupy this facility under a lease that terminates on November 30, 2020, with an option to renew for one five-year term. As of December 30, 2012, we owned and operated 381 restaurants. We either lease the land and building for our sites or utilize ground leases. 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 states and provinces in which Buffalo Wild Wings restaurants are located and the number of restaurants in each state or province as of December 30, 2012:
 
   
Number of Restaurants Open
 
   
Company-owned
   
Franchised
   
Total
 
United States:
                 
Alabama
    2       9       11  
Alaska
          1       1  
Arizona
    7       9       16  
Arkansas
          8       8  
California
    18       28       46  
Colorado
    19       2       21  
Connecticut
          9       9  
Delaware
          6       6  
Florida
    5       27       32  
Georgia
    13       1       14  
Hawaii
          1       1  
Idaho
          5       5  
Illinois
    18       43       61  
Indiana
    7       42       49  
Iowa
    14       1       15  
Kansas
    9             9  
Kentucky
    12       5       17  
Louisiana
          13       13  
Maine
          2       2  
Maryland
    2       12       14  
Massachusetts
          3       3  
Michigan
          47       47  
Minnesota
    23       5       28  
Mississippi
    2       8       10  
Missouri
    6       21       27  
Montana
          4       4  
Nebraska
    6       2       8  
Nevada
    9       1       10  
New Hampshire
          3       3  
New Jersey
    2       6       8  
New Mexico
          3       3  
New York
    10       12       22  
North Carolina
    17       5       22  
North Dakota
          5       5  
Ohio
    32       53       85  
Oklahoma
          14       14  
Oregon
          8       8  
Pennsylvania
    15       1       16  
South Carolina
    8       4       12  
South Dakota
          5       5  
Tennessee
    23             23  
Texas
    43       45       88  
Utah
    5             5  
Vermont
          1       1  
Virginia
    16       20       36  
Washington
    4       1       5  
West Virginia
          9       9  
Wisconsin
    26             26  
Wyoming
    1             1  
Canada:
                       
Alberta
    1             1  
Ontario
    6             6  
Total
    381       510       891  
 
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. MINING SAFETY DISCLOSURES
 
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 sale prices of our Common Stock.
 
   
2012
   
2011
 
   
High
   
Low
   
High
   
Low
 
First Quarter
  $ 91.44       62.19     $ 56.76       42.78  
Second Quarter
    94.81       75.96       63.52       53.75  
Third Quarter
    88.85       68.71       69.31       52.44  
Fourth Quarter
    89.90       69.72       68.24       56.30  
 
Holders
 
As of February 11, 2013, there were approximately 143 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 37,024 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 30, 2012 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 30, 2007, and in each of the foregoing indices on December 30, 2007 and assumes reinvestment of dividends.
 

   
12/30/07
   
12/28/08
   
12/27/09
   
12/26/10
   
12/25/11
   
12/30/12
 
                                     
Buffalo Wild Wings, Inc.
    100.00       106.83       185.48       194.34       294.90       310.89  
NASDAQ Composite
    100.00       59.03       82.25       97.32       98.63       110.78  
S&P 600 Restaurants
    100.00       66.19       90.28       122.57       122.25       146.60  

The preceding stock performance chart is furnished and not 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. 30,
2012
   
Dec. 25,
2011
   
Dec. 26,
2010
   
Dec. 27,
2009
   
Dec. 28,
2008
 
   
(in thousands, except share and per share data)
 
Consolidated Statements of Earnings Data:
                             
Revenue:
                             
Restaurant sales
  $ 963,963       717,395       555,184       488,702       379,686  
Franchise royalties and fees
    76,567       67,083       58,072       50,222       42,731  
Total revenue
    1,040,530       784,478       613,256       538,924       422,417  
Costs and expenses:
                                       
Restaurant operating costs:
                                       
Cost of sales
    303,653       203,291       160,877       147,659       113,266  
Labor
    289,167       215,649       167,193       146,555       114,609  
Operating
    141,417       109,654       88,694       76,358       60,205  
Occupancy
    54,147       44,005       36,501       32,362       25,157  
Depreciation and amortization
    67,462       49,913       39,205       32,605       23,622  
General and administrative
    84,149       72,689       53,996       49,404       40,151  
Preopening
    14,630       14,564       8,398       7,702       7,930  
Loss on asset disposals and store closures
    3,291       1,929       2,051       1,928       2,083  
Total costs and expenses
    957,916       711,694       556,915       494,573       387,023  
Income from operations
    82,614       72,784       56,341       44,351       35,394  
Investment income
    754       118       684       1,077       970  
Earnings before income taxes
    83,368       72,902       57,025       45,428       36,364  
Income tax expense
    26,093       22,476       18,625       14,757       11,929  
Net earnings
  $ 57,275       50,246       38,400       30,671       24,435  
Earnings per common share – basic
  $ 3.08       2.75       2.11       1.70       1.37  
Earnings per common share – diluted
    3.06       2.73       2.10       1.69       1.36  
Weighted average shares outstanding – basic
    18,582,000       18,337,000       18,175,000       18,010,000       17,813,000  
Weighted average shares outstanding – diluted
    18,705,000       18,483,000       18,270,000       18,177,000       17,995,000  
                                         
Consolidated Statements of Cash Flow Data:
                                       
Net cash provided by operating activities
  $ 145,188       148,260       89,699       79,286       66,107  
Net cash used in investing activities
    (142,753 )     (146,682 )     (85,226 )     (79,172 )     (60,134 )
Net cash (used in) provided by financing activities
    (1,588 )     3,690       1,265       1,119       853  
 
 
 
   
As Of  (1)
 
   
Dec. 30,
2012
   
Dec. 25,
2011
   
Dec. 26,
2010
   
Dec. 27,
2009
   
Dec. 28,
2008
 
   
(in thousands)
 
Consolidated Balance Sheets Data:
                             
Total current assets
  $ 125,536       139,245       134,204       98,523       68,568  
Total assets
    591,087       495,359       380,357       309,073       243,818  
Total current liabilities
    140,843       114,270       79,116       66,704       48,202  
Total liabilities
    207,715       177,373       123,536       99,240       72,225  
Retained earnings
    262,047       204,772       154,346       115,946       85,275  
Total stockholders’ equity
    383,372       317,986       256,821       209,833       171,593  

(1)
We utilize a 52- or 53-week accounting period that ends on the last Sunday in December. Each of the fiscal years in the four years ended December 25, 2011 were comprised of 52 weeks. The fiscal year ended December 30, 2012 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 2013, cash requirements, and our expected store openings and preopening costs. Such statements are forward-looking and speak only as of the date on which they are made. Actual results are subject to various risks and uncertainties including, but not limited to, 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 30, 2012, we owned and operated 381 company-owned and franchised an additional 510 Buffalo Wild Wings Grill & Bar® restaurants in North America. We believe that we will grow the Buffalo Wild Wings brand to about 1,700 locations in North America, continuing the strategy of developing both company-owned and franchised restaurants.
 
We believe we will open 60 company-owned and 45 franchised restaurants in 2013 and have set an annual net earnings growth goal of 25% based on a 52 week basis. Our growth and success depend on several factors and trends. First, 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 experience.
 
Our revenue is generated by:
 
 
Sales at our company-owned restaurants, which represented 93% of total revenue in 2012. Food and nonalcoholic beverages accounted for 78% of restaurant sales. The remaining 22% of restaurant sales was from alcoholic beverages. The menu items with the highest sales volumes are traditional and boneless wings at 20% and 19%, respectively, of total restaurant sales.
 
 
Royalties and franchise fees received from our franchisees.

A second factor is our success in developing restaurants in new markets. There are inherent risks in opening new restaurants, especially in new markets, including the lack of experience, logistical support, and brand awareness. These factors may result in lower than anticipated sales and cash flow for restaurants in new markets along with higher preopening costs. We believe our focus on our new restaurant opening procedures, along with our expanding North American presence, will help to mitigate the overall risk associated with opening restaurants in new markets.

Third, 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 27.2% to 32.0% of restaurant sales per quarter in 2012 and 2011, mostly due to the price and yield fluctuation in chicken wings. We work to counteract the volatility of chicken wing prices with the introduction of new menu items, 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 continue to explore purchasing strategies to lessen the severity of cost increases and fluctuations, and are reviewing menu additions and other strategies that may decrease the volatility of our cost of sales percentage and decrease the percentage that chicken wings represent in terms of total restaurant sales. Current month chicken wing prices are determined based on the average of the previous months spot rates. The market price for traditional wings reached its lowest price in several years during the second quarter of 2011. The market price trended substantially higher toward the end of 2012. The chart below illustrates the fluctuation in chicken wing prices from quarter to quarter in the last five years.

 
23

 
 
 
 
 
 
 
 
We generate cash from the operation of our company-owned restaurants and from franchise royalties and fees. We highlight the specific costs associated with the on-going operation of our company-owned restaurants in the consolidated statement of earnings under “Restaurant operating costs.” Nearly all of our depreciation expense relates to assets used by our company-owned restaurants and amortization of reacquired franchise rights. Preopening costs are those costs associated with opening new company-owned restaurants and will vary annually based on the number of new locations opening and under construction. Loss on asset disposals and store closures expense is related to company-owned restaurants and includes the costs associated with closures of locations and normal asset retirements. General and administrative expenses are related to home office and field support provided 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 four years ended December 25, 2011 were 52-week years. The fiscal year ended December 30, 2012 was a 53-week year.
 
Critical Accounting 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 all 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 intangibles, leasehold improvements, equipment and fixtures over the remaining life of the primary asset in the asset group, 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. No impairments were recognized in fiscal 2012, 2011 or 2010.
 
 
24

 
 
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 obligations 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 2012, 2011, and 2010, we recorded expenses of $413,000, $205,000, and $310,000, respectively, for restaurants that closed.
 
Goodwill

We review goodwill for impairment annually, or whenever circumstances change in a way which could indicate that impairment may have occurred. Goodwill is tested at the reporting unit level.

We identify potential goodwill impairments by comparing the fair value of the reporting unit to its carrying amount, which includes goodwill and other intangible assets. The fair value of the reporting unit is calculated using a market approach.

If the carrying amount of the reporting unit exceeds the fair value, this is an indication that impairment may exist. We calculate the amount of the impairment by comparing the fair value of the assets and liabilities to the fair value of the reporting unit. 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 30, 2012, our estimate of the fair value of our goodwill substantially exceeded the carrying value and therefore we concluded that our goodwill was not impaired. No goodwill impairment charges were recognized during 2012, 2011, or 2010.

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 2012, 2011, and 2010, vendor allowances were recorded as a reduction in inventoriable costs, and cost of sales was reduced by $8.7 million, $7.0 million, and $6.4 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.
 
 
25

 
 
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.

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 2012, 2011and 2010 are subject to three-year cliff vesting and a cumulative three-year earnings target. The number of units that vest is based on performance against the target. Stock-based compensation is recognized for the expected number of shares vesting at the end of the three-year period and is expensed over that period. For 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 2012, 2011, and 2010, 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 Ended
 
   
Dec. 30,
2012
   
Dec. 25,
2011
   
Dec. 26,
2010
 
Revenue:
                 
Restaurant sales
    92.6 %     91.4 %     90.5 %
Franchise royalties and fees
    7.4       8.6       9.5  
Total revenue
    100.0       100.0       100.0  
Costs and expenses:
                       
Restaurant operating costs:
                       
Cost of sales
    31.5       28.3       29.0  
Labor
    30.0       30.1       30.1  
Operating
    14.7       15.3       16.0  
Occupancy
    5.6       6.1       6.6  
Depreciation and amortization
    6.5       6.4       6.4  
General and administrative
    8.1       9.3       8.8  
Preopening
    1.4       1.9       1.4  
Loss on asset disposals and store closures
    0.3       0.2       0.3  
Total costs and expenses
    92.1       90.7       90.8  
Income from operations
    7.9       9.3       9.2  
Investment income
    0.1             0.1  
Earnings before income taxes
    8.0       9.3       9.3  
Income tax expense
    2.5       2.9       3.0  
Net earnings
    5.5 %     6.4 %     6.3 %
 
 
26

 
 
The number of company-owned and franchised restaurants open are as follows:
 
   
As of
 
   
Dec. 30,
2012
   
Dec. 25,
2011
   
Dec. 26,
2010
 
Company-owned restaurants
    381       319       259  
Franchised restaurants
    510       498       473  
  
The restaurant sales for company-owned and franchised restaurants are as follows (amounts in thousands):
 
   
Fiscal Years Ended
 
   
Dec. 30,
2012
   
Dec. 25,
2011
   
Dec. 26,
2010
 
Company-owned restaurant sales
  $ 963,963       717,395       555,184  
Franchised restaurant sales
    1,510,020       1,326,213       1,147,848  
 
Increases in comparable same-store sales are as follows (based on restaurants operating at least fifteen months):
 
   
Fiscal Years Ended
 
   
Dec. 30,
2012
   
Dec. 25,
2011
   
Dec. 26,
2010
 
Company-owned same-store sales
    6.6 %     6.1 %     0.6 %
Franchised same-store sales
    6.5       3.6       (0.2 )
 
The annual average prices paid per pound for chicken wings for company-owned restaurants are as follows:
 
   
Fiscal Years Ended
 
   
Dec. 30,
2012
   
Dec. 25,
2011
   
Dec. 26,
2010
 
Average price per pound
  $ 1.97       1.21       1.58  
 
Fiscal Year 2012 Compared to Fiscal Year 2011
 
Restaurant sales increased by $246.6 million, or 34.4%, to $964.0 million in 2012 from $717.4 million in 2011. The increase in restaurant sales was due to a $182.7 million increase associated with 69 company-owned restaurants that opened or were acquired in 2012 and the company-owned restaurants that opened or were acquired before 2012 that did not meet the criteria for same-store sales for all, or part, of the year. The 53rd week of 2012 contributed an additional $22.3 million. A same-store sales increase of 6.6% accounted for $41.6 million of the increase in restaurant sales.
 
Franchise royalties and fees increased by $9.5 million, or 14.1%, to $76.6 million in 2012 from $67.1 million in 2011. The increase was primarily due to royalties related to additional sales at 12 more franchised restaurants in operation at the end of the period compared to prior year, and an increase in same-store sales for franchised restaurants of 6.5% in 2012. In the 53rd week of fiscal 2012, we recognized $1.5 million in franchise royalties and fees.
 
Cost of sales increased by $100.4 million, or 49.4%, to $303.7 million in 2012 from $203.3 million in 2011 due primarily to more restaurants being operated in 2012. Cost of sales as a percentage of restaurant sales increased to 31.5% in 2012 from 28.3% in 2011. Cost of sales as a percentage of restaurant sales increased primarily due to higher chicken wing prices and a lower wing-per-pound yield. In 2012, chicken wings averaged $1.97 per pound which was a 62.8% increase compared to 2011.
 
Labor expenses increased by $73.5 million, or 34.1%, to $289.2 million in 2012 from $215.6 million in 2011 due primarily to more restaurants being operated in 2012. Labor expenses as a percentage of restaurant sales decreased slightly to 30.0% in 2012 compared to 30.1% in 2011. The decrease in labor expenses as a percentage of restaurant sales is primarily due to lower management costs and payroll related taxes partially offset by higher hourly labor costs and health insurance costs.
 
Operating expenses increased by $31.8 million, or 29.0%, to $141.4 million in 2012 from $109.7 million in 2011 due primarily to more restaurants being operated in 2012. Operating expenses as a percentage of restaurant sales decreased to 14.7% in 2012 from 15.3% in 2011. The decrease in operating expenses as a percentage of restaurant sales was primarily due to lower utility costs and credit card fees.

Occupancy expenses increased by $10.1 million, or 23.0%, to $54.1 million in 2012 from $44.0 million in 2011 due primarily to more restaurants being operated in 2012. Occupancy expenses as a percentage of restaurant sales decreased to 5.6% in 2012 from 6.1% in 2011 due primarily to leveraging rent costs with higher sales and a shift toward more company-owned buildings.
 
 
27

 
 
Depreciation and amortization increased by $17.5 million, or 35.2%, to $67.5 million in 2012 from $49.9 million in 2011. The increase was primarily due to the additional depreciation related to the 62 additional company-owned restaurants compared to 2011 and incremental amortization related to the acquisition of franchised restaurants.
 
General and administrative expenses increased by $11.5 million, or 15.8%, to $84.1 million in 2012 from $72.7 million in 2011 primarily due to additional headcount partially offset by lower stock-based compensation expense. General and administrative expenses as a percentage of total revenue decreased to 8.1% in 2012 from 9.3% in 2011. Exclusive of stock-based compensation, our general and administrative expenses decreased to 7.3% of total revenue in 2012 from 7.8% in 2011. This decrease was primarily due to the leveraging of salaried costs due to higher sales volumes and lower cash incentive expense.
 
Preopening costs increased by $66,000 to $14.6 million in 2012 from $14.6 million in 2011. In 2012, we incurred costs of $13.4 million for 51 new company-owned restaurants and costs of $1.2 million for restaurants that will open in 2013. In 2011, we incurred costs of $13.4 million for 50 new company-owned restaurants and costs of $1.1 million for restaurants that opened in 2012. Average preopening cost per restaurant in 2012 and 2011 was $281,000 and $275,000, respectively.
 
Loss on asset disposals and store closures increased by $1.4 million to $3.3 million in 2012 from $1.9 million in 2011. The expense in 2012 represented the closures costs for seven closed or relocated restaurants of $413,000, the write-off of equipment related to the rollout of new point-of-sale and back-office systems of $1.3 million, and the write-off of miscellaneous equipment and disposals due to remodels. The expense in 2011 represented the closures costs for eight closed or relocated restaurants of $205,000, and the write-off of miscellaneous equipment and disposals due to remodels.
 
Investment income increased by $636,000 to $754,000 in 2012 from $118,000 in 2011. Our investments were in short-term municipal securities and our deferred compensation investments were primarily in mutual funds. The increase in investment income was due to gains on investments held for our deferred compensation plan. Cash and marketable securities balances at the end of the year were $30.9 million in 2012 compared to $60.5 million in 2011.
 
Provision for income taxes increased $3.6 million to $26.1 million in 2012 from $22.5 million in 2011. The effective tax rate as a percentage of income before taxes increased to 31.3% in 2012 from 30.8% in 2011. The rate increase was primarily due to lower employment-related Federal tax credits. We estimate our effective tax rate in 2013 will be about 31.0% before we record an estimated $1.0 million tax reduction for the savings anticipated on our 2012 tax return related to the favorable impact of the American Taxpayer Relief Tax Act of 2012.
 
We estimate the 53rd week in fiscal 2012 contributed approximately $0.19 of earnings per diluted share.

Fiscal Year 2011 Compared to Fiscal Year 2010
 
Restaurant sales increased by $162.2 million, or 29.2%, to $717.4 million in 2011 from $555.2 million in 2010. The increase in restaurant sales was due to a $131.2 million increase associated with 50 new company-owned restaurants that opened in 2011, 18 franchised locations that were acquired in 2011 and 84 company-owned restaurants opened before 2011 that did not meet the criteria for same-store sales for all or part of the year, and $31.1 million related to a 6.1% increase in same-store sales.
 
Franchise royalties and fees increased by $9.0 million, or 15.5%, to $67.1 million in 2011 from $58.1 million in 2010. The increase was due primarily to additional royalties collected from the 53 new franchised restaurants that opened in 2011 and a full year of operations for the 60 franchised restaurants that opened in 2010. Same-store sales for franchised restaurants increased 3.6% in 2011.
 
Cost of sales increased by $42.4 million, or 26.4%, to $203.3 million in 2011 from $160.9 million in 2010 due primarily to more restaurants being operated in 2011. Cost of sales as a percentage of restaurant sales decreased to 28.3% in 2011 from 29.0% in 2010, primarily due to lower chicken wing prices partially offset by a sales mix shift to appetizers. In 2011, the cost of chicken wings averaged $1.21 per pound which was a 23.4% decrease compared to 2010.
 
Labor expenses increased by $48.5 million, or 29.0%, to $215.6 million in 2011 from $167.2 million in 2010 due primarily to more restaurants being operated in 2011. Labor expenses as a percentage of restaurant sales remained steady at 30.1% in 2011 and 2010. Cost of labor as a percentage of restaurant sales was primarily affected by higher hourly labor costs partially offset by lower management labor costs.
 
Operating expenses increased by $21.0 million, or 23.6%, to $109.7 million in 2011 from $88.7 million in 2010 due primarily to more restaurants being operated in 2011. Operating expenses as a percentage of restaurant sales decreased to 15.3% in 2011 from 16.0% in 2010. The decrease in operating expenses as a percentage of restaurant sales was primarily due to lower utility and insurance costs.
 
 
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Occupancy expenses increased by $7.5 million, or 20.6%, to $44.0 million in 2011 from $36.5 million in 2010 due primarily to more restaurants being operated in 2011. Occupancy expenses as a percentage of restaurant sales decreased to 6.1% in 2011 from 6.6% in 2010 due primarily to leveraging rent costs with higher sales and a shift toward more company-owned buildings.
 
Depreciation and amortization increased by $10.7 million, or 27.3%, to $49.9 million in 2011 from $39.2 million in 2010. The increase was primarily due to the additional depreciation on 50 new restaurants that opened in 2011, 18 franchised locations that were acquired in 2011, and 35 new restaurants opened in 2010 and operated for a full year in 2011. Depreciation and amortization expense as a percentage of total revenue remained steady at 6.4% in 2011 and 2010 due primarily to leveraging costs with higher sales offset by higher depreciation on company-owned buildings and amortization related to reacquired franchise rights.
 
General and administrative expenses increased by $18.7 million, or 34.6%, to $72.7 million in 2011 from $54.0 million in 2010. General and administrative expenses as a percentage of total revenue increased to 9.3% in 2011 from 8.8% in 2010. Exclusive of stock-based compensation, our general and administrative expenses increased to 7.8% of total revenue in 2011 from 7.5% in 2010. This increase was primarily due to higher cash incentive expense.
 
Preopening costs increased by $6.2 million, or 73.4%, to $14.6 million in 2011 from $8.4 million in 2010. In 2011, we incurred costs of $13.4 million for 50 new company-owned restaurants and costs of $1.1 million for restaurants that  opened in 2012. In 2010, we incurred costs of $8.0 million for 35 new company-owned restaurants and costs of $390,000 for restaurants that opened in 2011. Average preopening cost per restaurant in 2011 and 2010 was $275,000 and $235,000, respectively. The higher per restaurant costs in 2011 were due to additional costs for expansion into new markets.
 
Loss on asset disposals and store closures decreased by $122,000 to $1.9 million in 2011 from $2.1 million in 2010. The expense in 2011 represented the closures costs for eight closed or relocated restaurants of $205,000, and the write-off of miscellaneous equipment and disposals due to remodels. The expense in 2010 represented the closure costs for eight closed or relocated restaurants of $310,000, and the write-off of miscellaneous equipment and disposals due to remodels.
 
Investment income decreased by $566,000 to $118,000 in 2011 from $684,000 in 2010. The majority of our investments were in short-term municipal securities. The decrease in investment income was due to a loss on investments held for a deferred compensation plan and lower rates of return on investments. Cash and marketable securities balances at the end of the year were $60.5 million in 2011 compared to $72.1 million in 2010.
 
Provision for income taxes increased $3.9 million to $22.5 million in 2011 from $18.6 million in 2010. The effective tax rate as a percentage of income before taxes decreased to 30.8% in 2011 from 32.7% in 2010. The rate decrease was primarily due to higher employment-related Federal tax credits.
 
Liquidity and Capital Resources
 
Our primary liquidity and capital requirements have been for constructing, remodeling and maintaining our new and existing company-owned restaurants; working capital; acquisitions; and other general business needs. We fund these expenses, except for acquisitions and emerging brands, primarily with cash from operations. Depending on the size of the transaction, acquisitions or investments in emerging brands would generally be funded from cash and marketable securities balances or using our line of credit. The cash and marketable securities balance at December 30, 2012 was $30.9 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 30, 2012, nearly all excess cash was invested in high quality municipal securities and mutual funds.

During fiscal 2012, 2011, and 2010, net cash provided by operating activities was $145.2 million, $148.3 million, and $89.7 million, respectively. Net cash provided by operating activities in 2012 consisted primarily of net earnings adjusted for non-cash expenses and an increase in accrued expenses and decrease in refundable income taxes partially offset by an increase in accounts receivable. The increase in accrued expenses was primarily due to the timing of our bi-weekly payroll.  The decrease in refundable income taxes was due to the timing of payments.  The increase in accounts receivable was primarily due to an increase in credit card receivable due to the timing of the holidays near our fiscal year ends.
 
Net cash provided by operating activities in 2011 consisted primarily of net earnings adjusted for non-cash expenses and an increase in accounts payable and accrued expenses. The increase in accounts payable was primarily due to an increase in the number of restaurants and the timing of payments. The increase in accrued expenses was due to higher payroll-related costs including incentive compensation and wages.
 
 
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Net cash provided by operating activities in 2010 consisted primarily of net earnings adjusted for non-cash expenses and an increase in accounts payable partially offset by an increase in refundable income taxes and trading securities. The increase in accounts payable was primarily due to an increase in the number of restaurants and the timing of payments. The increase in refundable income taxes was due to benefits received from tax laws changed in late 2010. The increase in trading securities was due to additional contributions to and investment returns on our deferred compensation plan.

Net cash used in investing activities for 2012, 2011, and 2010, was $142.8 million, $146.7 million, and $85.2 million, respectively. Investing activities included acquisitions of property and equipment related to the additional company-owned restaurants and restaurants under construction in all periods. In 2012, 2011, and 2010, we opened or purchased 69, 68, and 35 restaurants, respectively.  In 2013, we expect capital expenditures of approximately $128.2 million for the cost of 60 new or relocated company-owned restaurants, $8.4 million for technology improvements on our restaurant and corporate systems, and $22.3 million for capital expenditures at existing restaurants. In 2012, we purchased $132.1 million of marketable securities and received proceeds of $163.5 million as investments in marketable securities matured or were sold. In 2011, we purchased $97.1 million of marketable securities and received proceeds of $114.3 million as marketable securities matured or were sold. In 2010, we purchased $99.2 million of marketable securities and received proceeds of $87.3 million as investments in marketable securities matured or were sold.
 
Net cash provided by (used in) financing activities for 2012, 2011, and 2010, was ($1.6 million), $3.7 million, and $1.3 million, respectively. Net cash used in financing activities for 2012 resulted primarily from tax payments for restricted stock units of $8.5 million partially offset by the issuance of common stock for options exercised and employee stock purchases of $2.8 million and excess tax benefits from stock issuances of $4.2 million. Net cash provided by financing activities for 2011 resulted primarily from the issuance of common stock for options exercised and employee stock purchases of $1.7 million and excess tax benefits for stock issuance of $4.5 million partially offset by tax payments for restricted stock units issuances of $2.5 million. Net cash provided by financing activities for 2010 resulted primarily from the issuance of common stock for options exercised and employee stock purchases of $1.4 million and excess tax benefits from stock issuances of $1.5 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 2013.
 
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 89 of our restaurants operate and therefore have the 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 30, 2012:
 
         
Payments Due By Period
(in thousands)
 
   
Total
   
Less than
one year
   
1-3 years
   
3-5 years
   
After 5
years
 
Operating lease obligations
  $ 462,562       49,725       96,081       87,436       229,320  
Commitments for restaurants under development
    75,349       3,067       11,345       11,406       49,531  
Total
  $ 537,911       52,792       107,426       98,842       278,851  
 
 
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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. In February 2013, to allow us to remain nimble for future investment in franchised acquisitions and emerging brands as we build the foundation for continued growth, we entered into a three-year $100 million unsecured revolving credit facility.  There is a commitment fee on the average unused portion of the facility at a rate per annum equal to 0.15%, if our consolidated total leverage ratio is less than or equal to 0.50, or 0.20% if our consolidated total leverage ratio is greater than or equal to 0.51. Our future cash outflows related to income tax uncertainties amount to $782,000 as of December 30, 2012. 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 July 2012, the Financial Accounting Standards Board (FASB) issued Accounting Standards Update (ASU) 2012-02 “Intangibles – Goodwill and Other (Topic 350): Testing Indefinite-Lived Assets for Impairment.”  ASU 2012-02 gives companies the option to perform a qualitative assessment before calculating the fair value of the indefinite-lived intangible asset. Under the guidance in ASU 2012-02, if this option is selected, a company is not required to calculate the fair value of the indefinite-lived intangible unless the entity determines it is more likely than not that its fair value is less than its carrying amount. The provisions of ASU 2012-02 are effective for annual and interim impairment tests performed for fiscal years beginning after September 15, 2012, but early adoption is permitted. We have elected not to early adopt the provisions of ASU 2012-02 and do not expect ASU 2012-02 to materially impact our consolidated financial statements.
 
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 commodity prices, the timing and number of new restaurant openings and related preopening expenses, asset impairment charges, store closing charges, general economic conditions, stock-based compensation, and seasonal fluctuations. As a result, our results of operations are not necessarily indicative of the results that may be achieved for any future period.
 
 
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Results of Quarterly Operations (unaudited) (amounts in thousands except per share data)
 
   
Mar. 27,
2011
   
Jun. 26,
2011
   
Sep. 25,
2011
   
Dec. 25,
2011
   
Mar. 25,
2012
   
Jun. 24,
2012
   
Sep. 23,
2012
   
Dec. 30,
2012
 
Revenue:
                                               
Restaurant sales
    165,527       167,896       181,036       202,936       232,316       220,550       228,418       282,679  
Franchise royalties and fees
    16,623       16,205       16,727       17,528       18,806       18,173       18,441       21,147  
Total revenue
    182,150       184,101       197,763       220,464       251,122       238,723       246,859       303,826  
Costs and expenses:
                                                               
Restaurant operating costs:
                                                               
Cost of sales
    46,264       45,735       51,655       59,637       72,151       69,799       71,263       90,440  
Labor
    48,878       51,309       54,783       60,679       68,268       66,638       68,804       85,457  
Operating
    24,549       25,048       28,537       31,520       32,797       32,349       34,626       41,645  
Occupancy
    10,227       10,659       11,195       11,924       12,800       13,091       13,458       14,798  
Depreciation and amortization
    11,022       11,931       12,748       14,212       15,531       16,090       16,818       19,023  
General and administrative
    16,292       18,766       18,336       19,295       19,424       20,976       21,813       21,936  
Preopening
    2,387       4,116       3,864       4,197       2,591       1,536       4,535       5,968  
Loss on asset disposals and store closures
    411       492       612       414       737       597       788       1,169  
Total costs and expenses
    160,030       168,056       181,730       201,878       224,299       221,076       232,105       280,436  
Income from operations
    22,120       16,045       16,033       18,586       26,823       17,647       14,754       23,390  
Investment income (loss)
    356       (152 )     (374 )     288       410       (115 )     418       41  
Earnings before income taxes
    22,476       15,893       15,659       18,874       27,233       17,532       15,172       23,431  
Income tax expense
    7,615       5,220       4,393       5,248       8,988       5,870       4,464       6,771  
Net earnings
    14,861       10,673       11,266       13,626       18,245       11,662       10,708       16,660  
                                                                 
Earnings per common share – basic
    0.81       0.58       0.61       0.74       0.98       0.63       0.58       0.90  
Earnings per common share – diluted
    0.81       0.58       0.61       0.73       0.98       0.62       0.57       0.89  
Weighted average shares outstanding – basic
    18,306       18,330       18,352       18,361       18,555       18,575       18,589       18,608  
Weighted average shares outstanding – diluted
    18,375       18,401       18,520       18,633       18,638       18,660       18,723       18,789  
 
 
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Results of Quarterly Operations (unaudited)
 
   
Mar. 27,
2011
   
Jun. 26,
2011
   
Sep. 25,
2011
   
Dec. 25,
2011
   
Mar. 25,
2012
   
Jun. 24,
2012
   
Sep. 23,
2012
   
Dec. 30,
2012
 
Revenue:
                                               
Restaurant sales
    90.9 %     91.2 %     91.5 %     92.0 %     92.5 %     92.4 %     92.5 %     93.0 %
Franchise royalties and fees
    9.1       8.8       8.5       8.0       7.5       7.6       7.5       7.0  
Total revenue
    100.0       100.0       100.0       100.0       100.0       100.0       100.0       100.0  
Costs and expenses:
                                                               
Restaurant operating costs:
                                                               
Cost of sales
    27.9       27.2       28.5       29.4       31.1       31.6       31.2       32.0  
Labor
    29.5       30.6       30.3       29.9       29.4       30.2       30.1       30.2  
Operating
    14.8       14.9       15.8       15.5       14.1       14.7       15.2       14.7  
Occupancy
    6.2       6.3       6.2       5.9       5.5       5.9       5.9       5.2  
Depreciation and amortization
    6.1       6.5       6.4       6.4       6.2       6.7       6.8       6.3  
General and administrative
    8.9       10.2       9.3       8.8       7.7       8.8       8.8       7.2  
Preopening
    1.3       2.2       2.0       1.9       1.0       0.6       1.8       2.0  
Loss on asset disposals and store closures
    0.2       0.3       0.3       0.2       0.3       0.3       0.3       0.4  
Total costs and expenses
    87.9       91.3       91.9       91.6       89.3       92.6       94.0       92.3  
Income from operations
    12.1       8.7       8.1       8.4       10.7       7.4       6.0       7.7  
Investment income (loss)
    0.2       (0.1 )     (0.2 )     0.1       0.2       0.0       0.2       0.0  
Earnings before income taxes
    12.3       8.6       7.9       8.6       10.8       7.3       6.1       7.7  
Income tax expense
    4.2       2.8       2.2       2.4       3.6       2.5       1.8       2.2  
Net earnings
    8.2 %     5.8 %     5.7 %     6.2 %     7.3 %     4.9 %     4.3 %     5.5 %
 
 
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ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
 
We are exposed to international 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. We invest with a strategy focused on principal preservation. 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 in any country that we operate in 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 and supply risks. We negotiate directly with independent suppliers for our supply of food and other products. Domestically, 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 signed a new distribution contract that covers food, paper, and non-food products and began transitioning locations to the new provider in December 2012 with full rollout expected to be completed by June 2013. 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. Current month chicken wing prices are determined based on the average of the previous months spot rates. Chicken wings accounted for approximately 27%, 19%, and 24% of our cost of sales in 2012, 2011, and 2010, respectively, with an annual average price per pound of $1.97, $1.21, and $1.58, respectively. A 10% increase in traditional chicken wing costs during 2012, would have increased restaurant cost of sales by approximately $8.3 million for fiscal 2012. Additional information related to chicken wing prices and our approaches to managing the volatility thereof is included in Item 7 under “Results of Operations.”
 
 
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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
      36
Consolidated Balance Sheets as of December 30, 2012 and December 25, 2011
      37
Consolidated Statements of Earnings for the Fiscal Years Ended December 30, 2012, December 25, 2011, and December 26, 2010
      38
Consolidated Statements of Comprehensive Income for the Fiscal Years Ended December 30, 2012, December 25, 2011, and December 26, 2010
      38
Consolidated Statements of Stockholders’ Equity for the Fiscal Years Ended December 30, 2012, December 25, 2011, and December 26, 2010
      39
Consolidated Statements of Cash Flows for the Fiscal Years Ended December 30, 2012, December 25, 2011, and December 26, 2010
      40
Notes 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 as of December 30, 2012 and December 25, 2011, and the related consolidated statements of earnings, comprehensive income, stockholders’ equity, and cash flows for each of the fiscal years in the three-year period ended December 30, 2012. In connection with our audits of the consolidated financial statements, we have also audited the accompanying financial statement schedule. These consolidated financial statements and the financial statement schedule are the responsibility of the Company’s management. Our responsibility is to express an opinion on these consolidated financial statements and the financial statement schedule 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 audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.
 
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 30, 2012 and December 25, 2011, and the results of their operations and their cash flows for each of the fiscal years in the three-year period ended December 30, 2012, in conformity with U.S. generally accepted accounting principles. Also 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.
 
We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), Buffalo Wild Wings, Inc.’s internal control over financial reporting as of December 30, 2012, based on criteria established in Internal Control – Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO), and our report dated February 28, 2013 expressed an unqualified opinion on the effectiveness of the Company’s internal control over financial reporting.
 
 
   
/S/    KPMG LLP
 
 
 
Minneapolis, Minnesota
February 28, 2013
 
 
36

 
 
BUFFALO WILD WINGS, INC. AND SUBSIDIARIES
 
CONSOLIDATED BALANCE SHEETS
December 30, 2012 and December 25, 2011
(Dollar amounts in thousands)
 
   
December 30,
2012
   
December 25,
2011
 
Assets
           
Current assets:
           
Cash and cash equivalents
  $ 21,340     $ 20,530  
Marketable securities
    9,579       39,956  
Accounts receivable, net of allowance of $25
    20,203       12,165  
Inventory
    7,820       6,311  
Prepaid expenses
    3,869       3,707  
Refundable income taxes
    4,122       7,561  
Deferred income taxes
    5,774       6,323  
Restricted assets
    52,829       42,692  
Total current assets
    125,536       139,245  
Property and equipment, net
    386,570       310,170  
Reacquired franchise rights, net
    37,370       21,028  
Goodwill
    32,365       17,770  
Other assets
    9,246       7,146  
Total assets
  $ 591,087     $ 495,359  
Liabilities and Stockholders’ Equity
               
Current liabilities:
               
Unearned franchise fees
  $ 1,763     $ 1,852  
Accounts payable
    36,418       30,089  
Accrued compensation and benefits
    39,637       30,499  
Accrued expenses
    11,461       7,580  
System-wide payables
    51,564       44,250  
Total current liabilities
    140,843       114,270  
Long-term liabilities:
               
Other liabilities
    1,752       1,544  
Deferred income taxes
    37,128       38,512  
Deferred lease credits
    27,992       23,047  
Total liabilities
    207,715       177,373  
Commitments and contingencies (notes 6 and 15)
               
Stockholders’ equity:
               
Undesignated stock, 1,000,000 shares authorized, none issued
           
Common stock, no par value. Authorized 44,000,000 shares; issued and outstanding 18,623,370 and 18,377,920, respectively
    121,450       113,509  
Retained earnings
    262,047       204,772  
Accumulated other comprehensive loss
    (125 )     (295 )
Total stockholders’ equity
    383,372       317,986  
Total liabilities and stockholders’ equity
  $ 591,087     $ 495,359  
 
See accompanying notes to consolidated financial statements.
 
 
37

 
 
BUFFALO WILD WINGS, INC. AND SUBSIDIARIES
 
CONSOLIDATED STATEMENTS OF EARNINGS
Fiscal years ended December 30, 2012, December 25, 2011, and December 26, 2010
(Amounts in thousands except per share data)
 
   
Fiscal years ended
 
   
December 30,
2012
   
December 25,
2011
   
December 26,
2010
 
Revenue:
                 
Restaurant sales
  $ 963,963       717,395       555,184  
Franchise royalties and fees
    76,567       67,083       58,072  
Total revenue
    1,040,530       784,478       613,256  
Costs and expenses:
                       
Restaurant operating costs:
                       
Cost of sales
    303,653       203,291       160,877  
Labor
    289,167       215,649       167,193  
Operating
    141,417       109,654       88,694  
Occupancy
    54,147       44,005       36,501  
Depreciation and amortization
    67,462       49,913       39,205  
General and administrative
    84,149       72,689       53,996  
Preopening
    14,630       14,564       8,398  
Loss on asset disposals and store closures
    3,291       1,929       2,051  
Total costs and expenses
    957,916       711,694       556,915  
Income from operations
    82,614       72,784       56,341  
Investment income
    754       118       684  
Earnings before income taxes
    83,368       72,902       57,025  
Income tax expense
    26,093       22,476       18,625  
Net earnings
  $ 57,275       50,426       38,400  
                         
Earnings per common share – basic
  $ 3.08       2.75       2.11  
Earnings per common share – diluted
  $ 3.06       2.73       2.10  
Weighted average shares outstanding – basic
    18,582       18,337       18,175  
Weighted average shares outstanding – diluted
    18,705       18,483       18,270  
 

CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
 
 
Net earnings
  $ 57,275       50,426       38,400  
Other comprehensive income (loss):
                       
Foreign currency translation adjustments, net of tax
    170       (286 )     (9 )
Other comprehensive income (loss), net of tax
    170       (286 )     (9 )
Comprehensive income
    57,445       50,140       38,391  

See accompanying notes to consolidated financial statements.
 
 
38

 
 
BUFFALO WILD WINGS, INC. AND SUBSIDIARIES
 
CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY
Fiscal years ended December 30, 2012, December 25, 2011, and December 26, 2010
(Dollar amounts in thousands)
 
   
Common Stock
    Retained    
Accumulated
Other
Comprehensive
       
   
Shares
   
Amount
    Earnings    
(Loss) Income
   
Total
 
Balance at December 27, 2009
    18,054,375     $ 93,887       115,946           $ 209,833  
Net earnings
                38,400             38,400  
Other comprehensive loss
                      (9 )     (9 )
Shares issued under employee stock purchase plan
    36,049       1,186                   1,186  
Shares issued from restricted stock units
    134,819                          
Units effectively repurchased for required employee withholding taxes
    (37,038 )     (2,005 )                 (2,005 )
Exercise of stock options
    25,860       229                   229  
Excess tax benefit from stock issued
          1,475                   1,475  
Stock-based compensation
          7,712                   7,712  
Balance at December 26, 2010
    18,214,065       102,484       154,346       (9 )     256,821  
Net earnings
                50,426             50,426  
Other comprehensive loss
                      (286 )     (286 )
Shares issued under employee stock purchase plan
    30,127       1,373                   1,373  
Shares issued from restricted stock units
    142,797                          
Units effectively repurchased for required employee withholding taxes
    (45,539 )     (6,530 )                 (6,530 )
Exercise of stock options
    36,470       337                   337  
Excess tax benefit from stock issued
          4,462                   4,462  
Stock-based compensation
          11,383                   11,383