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Executives

Mary Twinem - EVP and CFO

Sally Smith - President and CEO

Analysts

Bryan Elliott - Raymond James

Paul Westra - Cowen & Company

Destin Tompkins - Morgan Keegan

David Tarantino - Robert W. Baird

Nicole Miller - Piper Jaffray

Brad Levington - KeyBanc Capital Markets

Will Hamilton - SMH Capital

Steve Anderson - MKM Partners

Conrad Lyon - Global Hunter Securities

Greg McKinley - Doherty Company

Buffalo Wild Wings, Inc. (BWLD) Q3 2008 Earnings Call October 27, 2008 5:00 PM ET

Operator

Ladies and gentleman, thank you for standing by and welcome to the Buffalo Wild Wings Incorporated third quarter 2008 Conference Call. During today's presentation all parties will be in a listen-only-mode. Following the presentation, the conference will be opened for questions. (Operator Instructions)

This conference is being recorded today, Monday, October 27, 2008. I would now like to turn the conference over to Ms. Mary Twinem, Executive Vice President and Chief Financial Officer. Please go ahead.

Mary Twinem

Good afternoon, and thank you for joining us as we review our third quarter 2008 results. I'm Mary Twinem, Chief Financial Officer and Executive Vice President of Buffalo Wild Wings. Joining me today is Sally Smith, our President and CEO. By now everyone should have access to our third quarter earnings release, which went out after the market closed today. If you have not received the release, it is available on the investor relations section of our website at buffalowildwings.com. A script of our prepared remarks will also be posted on our website after the call.

Before we get started, I want to remind you that during the course of today's call various remarks we make about future expectations, plans, and prospects for the company constitute forward-looking statements for purposes of the Safe Harbor provisions under the Private Securities Litigation Reform Act of 1995.

Actual results may vary materially from those contained in forward-looking statements based on a number of factors including without limitation, the number of locations opening during 2008 and beyond, the sales at these and our other company-owned and franchised locations, our ability to successfully operate a new market, the cost of commodities, the success of our marketing initiatives, our ability to control restaurant operating costs, and other factors disclosed from time-to-time in our filings with the U.S. Securities and Exchange Commission.

On today's call, Sally will provide an overview of the third quarter results for 2008. After that, I will provide further detail on our recent financial performance and comment on trends in the fourth quarter. Finally, Sally will share her thoughts about the rest of 2008, as well as the year ahead. We will then answer your questions.

So, with that, I'll turn it over to Sally.

Sally Smith

Good afternoon, everyone. Today we are pleased to release our quarterly earnings. Our results show the continued strength of our brand and operations, and our ability to achieve a compelling guest experience in our restaurants, as we expand the Buffalo Wild Wings brand across the United States. We are proud to report that during these challenging economic times, we continue to realize industry leading success. Our sales remained strong in the third quarter, with company-owned restaurants across same-store sales of 6.8% and franchised locations of 2.1%.

During the quarter, we opened 12 new company-owned restaurants, three of which were locations, and 12 new franchised restaurants, one of which was a relocation. And we finally completed the acquisition of our nine franchised restaurants in Las Vegas, on September 23rd.

We ended the quarter with 535 restaurants in 38 states, of which 187 were company-owned and 348 were franchised, a growth in units of more than 16% over last year. Our continued focus on driving sales, and our dedication to successfully opening new restaurants, is having a positive impact on total revenue, which in the third quarter increased by nearly 29%, to $106 million, fueled by strong same-store sales and increased sales volumes at new restaurants.

Our company-owned average weekly sales for the third quarter were up over 10% from prior-year, an increase of 330 basis points over the same-store sales increase, demonstrating the strength of our new unit openings. As we continue to implement our cost management programs at our company-owned restaurants, percentage improvements in our costs of sales, operating and occupancy expenses contributed to a 120 basis point improvement in restaurant-level performance over the prior years.

Likewise, we leveraged our general and administrative expenses by a 100 basis points over the last year, despite a $582,000 increase in stock-based compensation expense. We are also pleased to close in the acquisition of the nine Las Vegas restaurants. Our operations team is on the ground actively building sales for facility improvement, retraining service and hospitality and implementing targeted locals for marketing program.

Costs associated with transitioning the nine Las Vegas units to company-owned restaurants in September, along with opening 12 new locations and having an additional 12 units in construction at the end of the third quarter, are reflected in the increase of our preopening costs by $1.5 million in the third quarter.

The strategy of relocating three of our older units by converting Don Pablo's locations has been successful in increasing average weekly sales volume, but has also impacted our preopening costs. To maintain our commitment to the quality of our restaurant experience, we upgraded many company-owned locations with , and completed nine remodels in 2008.

These investments, along with asset write-downs connected with three relocations, account for most of the $624,000 increase in loss on asset disposals and impairment. When combined with our increased preopening costs, our earnings per diluted share for the quarter was $0.25, bringing the growth in net earnings year-to-date to 22%.

In our second quarter conference call, we highlighted a number of operational initiatives that had been implemented in 2008, such as updated and web-based training programs, a performance score card for the field, and updated incentive plan. We believe the integration of these programs, along with the focused execution of our operations team and a great multi-layered marketing plan, have been instrumental and producing the year-over-year sales increases and unit level restaurant cash flow improvement.

As a result of these efforts, our guest satisfaction and loyalty scores are at an all time high, which we are confident contributed to such strong sales. Our third quarter marketing was anchored by our close connection with sports. We unveiled two new brand building TV commercials that highlight our brand experience for the first time during NFL games on CBS and FOX, and during college football and NASCAR on network TV.

In addition, we set our guest passion for football with our annual fantasy football draft party promotion, which we paired up with many great local promotions, including key sponsorships, and systems like sports trivia tournament. A redesigned menu was introduced in July, and included enticing menu additions that encouraged the shareable social experience in our restaurants. They include our Cheeseburger and Pulled Pork Slammers, two signature burgers, a new appetizer sampler, and tasty honey barbeque chicken salad.

We also introduced a new [rigatoni] homemade sauce, southwest chipotle, which is a fire roasted chili sauce. All of these factors along with the continued enthusiasm and dedication of our team, were critical to our success. Mary will now provide additional details on our third quarter performance, and then talk about trends and expectations for the fourth quarter.

Mary Twinem

Thank you, Sally. As Sally mentioned, total revenue in the third quarter increased 28.8% to $106.1 million, versus $82.4 million in the third quarter of 2007. Company-owned restaurant sales for the quarter increased to $95.5 million, a 30.3% increase over the prior year. Contributing to this increase was the same store sales increase of 6.8% for the quarter, trending over prior year comps of 8.3%. Menu price increases account for about 3.5% of this increase. We had 39 additional company-owned restaurants in operation by the end of the quarter versus the same period last year, and average weekly sales increased by 10.1% for the quarter, 330 basis points higher than our same store sales increase.

As our system continues to grow, our royalty and franchise fee revenue for the third quarter increased 16.5%, to $10.6 million versus $9.1million last year. Franchise restaurants exceed 2.1% same store sales for the quarter, accounting over 5.9% same store sales in the prior year. An additional 35 franchised units were in operation at the end of third quarter compared to 2007, reflecting the shift of the nine Las Vegas restaurants to the company-owned locations.

Franchise locations had a 2.2% increase in average weekly sales volume for the quarter. Now let's discuss our restaurant operating costs at company-owned locations. Cost of sales for the third quarter was 29.8%, 90 basis points lower than prior year, similar to last quarter cost decrease in some commodities was neutralized by increased menu pricing and a decrease in the cost of fresh chicken wings. Wings averaged to $1.17 per pound during the third quarter, $0.07 lower than last years average of $1.24. Our decision in March to float with the market has been successful.

Cost of labor for third quarter was 30.7% of restaurant sales, 50 basis points higher than third quarter last year. Hourly labor was slightly below last year's percentage, offset by higher management wages and unit level bonuses. Restaurant operating expenses were 16.4% of revenue in the third quarter, down 30 basis points from prior year, mainly the results of lower local store marketing costs, repair and maintenance expense, and liability insurance, offset by higher natural gas hedging costs for future months. Occupancy expense was 6.6% of restaurant sales for the third quarter, leveraging 30 basis points over 2007.

As we invested in maintaining and upgrading our guest experience with recent facility remodels and HDTV upgrades, depreciation has risen similar to what we have seen in prior quarters. This, combined with higher construction costs for new restaurant openings in 2007 and 2008, has resulted in a 40 basis points increase, and we would expect this trend to continue in the fourth quarter. Restaurant level cash flow, which was calculated before depreciation and pre-opening expenses was $15.8 million or 16.6% of restaurant sales versus $11.3 million, or 15.4%, in the third quarter last year, an impressive 120 basis points improvement.

General and administrative expenses of $10.7 million in the third quarter or 10. 1% of revenue compares to $9.1million last year or 11.1% of revenue. Third quarter results in 2008 included stock-based compensation expense of $1.3 million, versus $715,000 in the third quarter of 2007. Excluding stock-based compensation, G&A expenses for the current quarter totaled $9.4 million, or 8.9% of revenue, a 130 basis points decrease due to lower meeting benefits and travel expenses.

Preopening expenses for the quarter were $2.5 million versus 988,000 last year. We opened 12 new company-owned restaurants in the third quarter of 2008 including the three relocation’s compared to only three locations in 2007. We also incurred $516,000 of preopening expenses in the third quarter for locations that are expected to open in the fourth quarter of 2008, similar to the amount incurred in the third quarter last year for future openings.

As we continue to invest in our long-term success, we realized the short-term impact with a loss of $930,000 on asset disposals and impairment, which was mainly related to the relocation of the three restaurants in the third quarter, along with facility remodels and HDTV upgrades that we completed prior to the start of football season to ensure a great viewing experience for our guests.

Interest income equaled $264,000 for the third quarter of 2008, compared with $768,000 in 2007, a reflection of the lower cash balance and a decline in the rate of return on investments. Our effective tax rate during the third quarter was 31% versus 33.2% in the prior year. Our estimated effective tax rate for the full year 2008 is now expected to be 33.5%.

In summary, third quarter net earnings increased 7.1% to $4.6 million, and earnings per diluted share increased 4.2% to $0.25 cents. From a balance sheet standpoint, as of September 28th, our cash and marketable securities balance was $45 million after the purchase of the nine Las Vegas restaurants, compared to $68 million at the end of 2007.

We ended the quarter with $232 million in total assets and $163 million in stockholders equity. Cash flow from operations was $48 million for the first nine months of the year and we also spent $48 million on capital expenditures, as well as $22.6 million for the Las Vegas acquisition. The Las Vegas purchase price included $350,000 of inventory and prepaid, $4.5 million of fixed assets, $7 million of reacquired franchise rights, which will be amortized over 14 years, and $10.6 million of goodwill.

We are debt free, and the strength of our balance sheet secures our confidence in our ability to sustain our growth plans, especially in these challenging economic times.

Now a few trends in details on the fourth quarter of 2008: we are please with our results year-to-date, and believe that fourth quarter will continue to build on this success. Our same-store sales to-date in the fourth quarter are about 3% for company-owned restaurants, which includes the Las Vegas markets, and about 2% for franchise locations.

The combined potential benefit in the fourth quarter for previous menu price increases is a little over 3.5% for company-owned restaurants, which includes the August increase in the promotional price of boneless wings on Thursday. Same-store sales and company-owned restaurants would have been about 1% higher, if the Las Vegas market were not included. We expect to open 10 to 12 company-owned restaurants and 18 to 20 franchise locations in the fourth quarter, three of which are relocation.

We expect our fourth quarter cost of sales percentage to show slight improvement over prior year. Year-over-year, we have seen slight increases in the cost of sauces shortening and further processed shipment has also been offset by a menu price increases and favorable pricing in the jumbo wing market. Our wing purchases remain based on market pricing, and the cost of wings for October and November will average about a $1.24 per pound, similar to the average in the prior year.

For the fourth quarter, our overall labor percentage will most likely be higher than last year, due to lower than normal workers compensation expense in 2007. We have been successful in leveraging our restaurant operating expenses in the first nine months of 2008, and we would expect the same in the fourth quarter. We anticipate that our G&A expenses in the fourth quarter, exclusive of stock-based compensation, will be approximately $9.5 million. Our estimate for stock-based compensation expense for the full year of 2008 is now $4.3 million.

Our efforts to open more company-owned units in the first half of 2009, along with a shift in strategy to increase the ratio of company-owned units, is expected to impact our fourth quarter preopening costs. Therefore, we estimate preopening costs in the fourth quarter to be about $2.5 million.

Throughout 2008, we have had great same store sales, improved restaurant level cash flows, and leveraging of general and administrative expenses. We have also invested time, energy, and dollars to remodel, relocate, and update our existing units, which we feel is critical to the long-term success of the Buffalo Wild Wings brand, which impacts our near term results.

The level of preopening cost and loss on asset disposals and impairment reflects this commitment. With the strong pipeline of company-owned units, and the investment in the associated preopening activities and our ongoing commitment to upgrading existing facilities, we expect that for the full year of 2008 we will achieve about 15% unit growth over 25% revenue growth, and 20% to 25% net earnings growth.

Please review the risk sections outlined in our SEC filings including our 10-Q for the third quarter, which will be filed in early November, as well as our Safe Harbor Statements for factors affecting our forward-looking statements.

And with that I'll turn it back to Sally.

Sally Smith

Thank you, Mary. Fourth quarter will continue to be fast paced. We expect to open at least 28 new company-owned and franchised locations in the fourth quarter, and our new restaurant opening teams are ready. We are confident that we can drive our average weekly sales steadily higher. Today we launched our new wild flatbreads across the Buffalo Wild Wing system. Flatbreads are new menu category for us, and we think they are the perfect hit with our brands. The honey barbecue, parmesan garlic, and Buffalo chicken flatbreads, all are featured one of our 14 signature sauces and are heaped with grilled chicken and mozzarella cheese.

In addition, our guests can create their own flatbread tops with their favorite signature sauce. We also have a new drink menu launching today with expanded margarita offerings. Our guest research tells us that just as our guests enjoys full array of beer choices, they also crave a variety of unique and flavorful margaritas.

We are also unveiling three new handcrafted alcohol-free drinks today: the wild, [huckleberries], and mango lemonade, which are an additional opportunity to build sales. Our fourth quarter media spend will increase by 16% over last year's levels as we continue to air during high profile sports programming on ABC, CBS, and FOX, and during late night programming. In addition, you'll see us on ESPN, and on the Big Ten Network as their exclusive halftime football show sponsor.

National and local radio spots will run throughout the quarter, and we will support local fall and winter sports teams, and continue our community involvement through the holiday season. Operationally, we are well positioned to perform in the fourth quarter and 2009. We have made a strong commitment of hiring and developing the very best management teams in our restaurants through a more in-depth selection process for our general managers and we have enhanced our shift leader program. The shift leader program provides our hourly Team Members a structured path to advance to entry level manager positions and to build their strength to support our unit growth.

As our performance reflects, we are focused on areas within our control to offset the impact of the economy and, of key importance is our continued focus on our guests and delivering the experience they want and need. Finally, our thoughts for 2009, we are confident in our ability to grow Buffalo Wild Wings in 2009 and beyond. We are also conservative, given the current economic environment.

In 2009, we are committed to our goal of 15% unit growth and our development pipelines are both company-owned and franchised restaurants is strong. Our enthusiasm for achieving our unit growth is only moderated by a current economy and the turmoil in the financial market and the impact on real estate development and availability of financing for developers and franchisees. We will continue to explore alternatives for new developments to fuel our company-owned unit growth such as this year's acquisition of the former Don Pablo sites.

At the beginning of 2008, 33% of the Buffalo Wild Wings system was company-owned. By year end that percentage will have moved to 35%. We expect this trend to continue with about 40% of the new unit growth in 2009 expected to beat company-owned restaurants. We are committed to driving revenue through strong same store sales and increasing our sales volumes of new restaurant. We are committed to growing the bottom line through improving our restaurant level performance and continuing leveraging of our general and administrative expenses.

Based on achieving our unit growth goal of 15% in 2009, we would expect revenue to grow by about 25% and net earnings can grow by 20% to 25%. We have targeted mid February for our 2008 year end conference call and hope that you will all join us for discussions of our fourth quarter results. In closing, 2008 will be remembered for many things. The mortgage crisis, a tumultuous financial market, a volatile stock market and a historic election year.

For Buffalo Wild Wings, 2008 will be remembered for our guests, who demonstrated their great resiliency despite the turbulent economy, and we are grateful for their loyalty and patronage. We are thankful for our team members and franchisees who work every day to deliver the Buffalo Wild Wings experience to our guests.

In 2009, we are dedicated to remain in the place our guests wants them to gather to escape, relax and enjoy the company of family and friends, and we'll have a cold beer and steaming hot wings waiting. This completes our prepared remarks. We will now open the call for questions.

Question-and-Answer Session

Operator

Thank you. We will now begin the question-and-answer session. (Operator instructions) Our first question comes from the line of Bryan Elliott with Raymond James. Please go ahead.

Bryan Elliott - Raymond James

Good afternoon. Just, I may have missed this Mary. But, when you were going through your Q4 outlook, did you talk about the impairments at all. I know we’re going to do three more relocation similar to this quarter, but are we pretty much through the upgrades of the TVs and the other activity that impacted the third quarter?

Mary Twinem

Yeah. Brian, I should clarify the three relocation’s that occur in the Q4 are franchise location, so there won't be any kind of an asset impairment booked on our books for that.

Bryan Elliott - Raymond James

Okay. So we are through the Don Pablo's conversions essentially?

Mary Twinem

Yeah. The relocation’s that we had, we still have two Don Pablo’s locations to open but they will be new facilities for us, not relocation.

Bryan Elliott - Raymond James

Okay, okay. So that number should normalize again, this was a one quarter kind of a blip?

Mary Twinem

Yeah. The two biggest things that we have had impacting on the third quarter and through a certain extend the second quarter had a little bit would be the bigger remodel jobs that we were doing that have all completed in the third quarter and then the three relocation’s that we had this quarter.

Bryan Elliott - Raymond James

Okay. And also to clarify the comp to-date, quarter to-date comps. Did I hear correctly you say that the Las Vegas transaction is impacting company comps by about a point?

Mary Twinem

Correct. Yes, through the month of October.

Bryan Elliott - Raymond James

Yeah. Alright. Thanks a lot.

Sally Smith

Welcome.

Operator

Thank you. Our next question comes from the line of Paul Westra with Cowen & Company. Please go ahead.

Paul Westra - Cowen & Company

Great. Good afternoon.

Mary Twinem

Hi, Paul.

Sally Smith

Hi, Paul.

Paul Westra - Cowen & Company

I was wondering if you can help us with the stock compensation for the third quarter seemed surprisingly a little bit high. I know you gave us some full year and third quarter to-date was that higher than you expect anticipated heading in?

Mary Twinem

It was. You know, we had given different expectation in our second quarter conference call. But our new restricted stock programs for the grants that happened at the beginning of 2008, and that having a higher portion of the three-year investing expense in the first year. Our third quarter expense brings its current trends by year end then as relates to that grant, we would have expensed about 50% of what the ultimate three-year investing is estimated to be. On the flip side, it does have less expense on a go forward basis as it relates to that grant.

Paul Westra - Cowen & Company

I have a follow-up on your labor line. Your labor line obviously had a stellar comp performance that I’ve seen in the third quarter, especially in light of the environment, but you are unable to leverage the labor line. I know you mentioned the hourly labor rate was down. Can you talk to us little bit about, the management side that saw 50 basis points of deleverage?

Mary Twinem

On the hourly labor piece, actually as a percent of revenue we did see leveraging on that. Where we've lost it a little bit, was in the higher management wages. A piece of that is related to the training and the carpet time that we have for managers, for the greater amount of openings that are happening in the third and the fourth quarter. It's really one of the reasons why we are looking at that shift leader program, because we think that utilizing the shift leader can help us leverage a little bit on that management wage line.

Paul Westra - Cowen & Company

As far as a comparison year-over-year, I know you had leveraged flat-to-down in the first half of the year, yet this quarter we saw, deleveraging. I know you had the Vegas, I assume a training costs in there, but can you talk a little bit more detail is there something significant on a go forward basis, on the labor line that we should be concerned about?

Mary Twinem

In the future, labor and leveraging in 2009, I think we have the ability to continue to see some leveraging in the hourly labor piece like we saw this time. I think on the management labor piece the shift leader program will help us get year-over-year leveraging in that piece as well

Paul Westra - Cowen & Company

Okay. And then lastly, your 2009 outlook, obviously things are changing by the minute, if not by the hour, and day, and month but you listed your outlook on the earnings side, I guess generally assume you are looking for, as far as I know the Vegas piece will add today to these calculations. But I assume, are you looking for slightly positive comps in that outlook and sounds like you are looking for generally flattish margins as well.

Mary Twinem

Right. Well let's talk a bit about the revenue expectation for 2009. We think it could be about a 25% increase. We would base that on the number of units that we have opened this year that will have a full year of operation for next year with the purchase of the nine Las Vegas restaurants, and then the waiting of our new developments in 2009 that we expected to be about 40% company-owned, so we believe we can achieve about a 25% increase in our revenue with pretty modest same store sales increases year-over-year.

Paul Westra - Cowen & Company

Okay. And I guess lastly, pricing as you look out to '09 is about the same rate, you are running about 3.5 did you say?

Mary Twinem

We are currently running about 3.5 that would carry through until the middle of February when that fall off and then we have a new menu rolling again in February and we have not yet decided what we'll take as it relates to menu price increases.

Paul Westra - Cowen & Company

Okay, great. Thank you.

Operator

Thank you. Our next question comes from the line of Destin Tompkins with Morgan Keegan. Please go ahead.

Destin Tompkins - Morgan Keegan

Thank you. My question is on the guidance for 2008, s you opened up the low end a little bit from what you had said previously. Can you go through what's changed or what is the preopening, is it the loss on impairment or the loss on disposals or was it the stock comp? What made you open up the low end of that earnings guidance for this year?

Mary Twinem

Well, we are currently running at 22% for the first nine months. As you look forward to the fourth quarter, it's really the extent of the preopening costs that are coming into our financials overall this year. It's a combination of the number of new store openings that we've had. Our expectation that we're going to have 10 to 12 in the fourth quarter and then we have, we believe, about another 14 that are going to enter constructions by the end of the year that would be on 2009 openings.

I think that as well as our updated stock comp number of $4.3 million versus what we had as guidance before the biggest drivers were put in the range of 20% to 25%.

Destin Tompkins - Morgan Keegan

Okay. And on that development, the 40% company-owned next year, is that going to be more weighted towards the first half of the year or is there any change in the timing? And then also, does the percentage of development, does that speak to any issues that the franchisees may have and holding up their side of the 15% unit growth?

Mary Twinem

No, I would say, it's actually more of a reflection of the pipeline that we have of company-owned deals. In process now you know based on 10 to 12 company stores opening before the end of the year and then the 18 to 20 franchise locations, we’re going to end the year somewhere around 563 to 565 locations, 15% unit growth on that would be about 85 new locations. And based on our pipeline of deals on the company site, we think about 35 of those are going to be company stores.

Destin Tompkins - Morgan Keegan

Okay. And then the timing, are they expected to be any different than what they have been running?

Mary Twinem

I think a little bit based on us leaving, we’re going to have 14 in construction by the end of the year, we are going to have a fair amount of openings that happened late February, March and April, this year. So I think you are going to see us have a fair amount of openings that kind of hit that middle portion of '09.

Destin Tompkins - Morgan Keegan

Okay. And then, I think you mentioned a couple of times that your guidance for 2009, you feel like it’s conservative at this point. Does that imply that unit growth could impact the even greater than the typical 15%?.

Sally Smith

This is Sally. I think that where that 15% reflects both the company and the franchise pipeline. We mentioned that there is uncertainty of real estate development with developers throughout the country. Our pipeline on the company site was very strong as is our franchisees. But they have commented that they have seen perhaps a slowing in some of their financing. And so we really try to take that into consideration in targeting a 15% unit growth and 85 new units is pretty healthy growth.

Destin Tompkins - Morgan Keegan

Yes, it is. Thank you very much.

Operator

Thank you. Our next question comes from the line of David Tarantino with Robert W. Baird. Please go ahead.

David Tarantino - Robert W. Baird

Hi. Good afternoon. The question, Mary, on the G&A expenses, which were up about a $1 million dollars sequentially, if you exclude the stock compensation increase, just wondering what drove that sequential increase?

Mary Twinem

You are talking about in comparison to Q3 of '07?

David Tarantino - Robert W. Baird

No from Q2 to Q3, it looked like you had a pretty sharp increase in dollars and I was just wondering what types of investments you are making on the G&A side?

Mary Twinem

When you are looking at that, are you including the stock compensation expense in that?

David Tarantino - Robert W. Baird

Correct.

Mary Twinem

I mean that would be really one of the biggest component pieces on for the quarter would be the stock comp piece.

David Tarantino - Robert W. Baird

Right. I guess it increased a little more than the stock comp or at least by a $1 million more than the stock comp figure that you quoted. So, I was wondering what else is going on in the G&A line that might have caused it to go a lot higher in Q3 relative to Q2.

Mary Twinem

You know I'm not coming up with anything off the, top of my head David, so I will think on that. But otherwise I think sequentially the amount that we were spending outside this stock comp was…

Sally Smith

As I look, typically our second quarter, our third quarter sales are typically higher, but nothing comes to mind from a G&A standpoint of third quarter versus second quarter.

David Tarantino - Robert W. Baird

Okay. I can follow-up offline. And then, the next question related to the franchise development for '09. What degree of confidence do you have right now that the franchises can get to that sort of 50 unit mark next year, given all the financing issues?

Sally Smith

We’ve tried to take that into consideration as we looked at our numbers for 2009. We actually have more contracts or more deals under contracts that are contractually supposed to be open in 2009. So we discounted that back into our numbers, taking into consideration you know that they may run into some financing issues. They are not seeing the terms that they like. I think, they’re taking a little bit longer. That's why given the strength of our balance sheets we can ramp up company stores still achieve the 15%. But in giving you that number of 50, we have taken any difficulty they might have into consideration.

Mary Twinem

David, this is Mary, I'll go back to the question you had on G&A. The second quarter G&A amount had benefited from lower convention and conference expenses, and still from our run-rate standpoint the base G&A was more like an $8.6 million or $8.7 million number. Then we were sequentially up from that in the third quarter.

David Tarantino - Robert W. Baird

Okay. Thank you very much.

Operator

Thank you. Our next question comes from the line of Nicole Miller with Piper Jaffray. Please go ahead.

Nicole Miller - Piper Jaffray

Good afternoon. Mary just a couple of things I missed, it went kind of quickly, is the openings for the fourth quarter 10 to 12 company net and 18 to 20 franchise net?

Sally Smith

I think that for the fourth quarter we expected, what 12 new openings? 10 to 12 company stores that is net and then the 18 to 20 franchise and you would have to subtract three so it would be a net 15 to 18.

Nicole Miller - Piper Jaffray

Okay. Thank you. And the G&A, the $9.5 million does that include or exclude stock comp expense?

Sally Smith

That excludes.

Nicole Miller - Piper Jaffray

Which, can you give me that number then to add in? I'm sorry.

Sally Smith

The overall full year stock based compensation would be $4.3 million.

Nicole Miller - Piper Jaffray

Do you have what that is for the fourth quarter?

Sally Smith

I have quarter to, we’re running what $3.7million?

Nicole Miller - Piper Jaffray

Okay.

Sally Smith

$3.2million as of the end of the third quarter or so.

Nicole Miller - Piper Jaffray

Got you. The CapEx buckets for '08. What is the total amount and how does it split between new development, maintenance, and reloads?

Sally Smith

I don't have the breakdown for the 2008 spending. We have about $48 million that we spent and then we’ll have the $23 million on top of that for the Las Vegas piece split between new and maintenance, I don't have on the top of my head though. A new store typically costs us around $1.5 million.

Nicole Miller - Piper Jaffray

$1.5. Okay, and then finally what is the commodity kind of projections implied in '09, bottom-line guidance wings up or down? How do you see that playing out?

Sally Smith

We don't separate out our the leveraging points line-by-line for 2009. From a positive note in the current economy, we have seen some softening on the commodity prices in the recent weeks. So a couple of the contracts that we had that will be coming up in the first half of 2009 like frying oil and sauces, and then with our cheese as well, we believe we have either contracted or expect to contract at costs that are equal or slightly below what our 2008 prices were.

So we think that we're going to see a fair amount of restaurant that will have no increase year-over-year. The pieces that are still unknown is the cost of our burgers, our potatoes and our further processed chicken and that we really won't know until close to the year end when we come up to the renewal dates on that and then wings, you know, no real outlook on that. Typically pretty hard to track.

Nicole Miller - Piper Jaffray

Thank you.

Operator

Thank you. Our next question comes from the line of Brad Levington with KeyBanc Capital Markets. Please go ahead.

Brad Levington - KeyBanc Capital Markets

Thank you. Good afternoon.

Mary Twinem

Hi, Brad.

Brad Levington - KeyBanc Capital Markets

Hey. I wanted to ask you, I am sorry, I think Nicole, I got distracted during that. I think she asked something about what '08 CapEx would be and I didn't catch that. Did you give up related guidance on that since there are more store openings?

Mary Twinem

No, we didn't give a total number for 2008. But as it relates to that 10 to 12 company stores left to open in the fourth quarter, they would cost about $1.5 million a piece.

Brad Levington - KeyBanc Capital Markets

Okay. And then looking out into your 2009 store opening guidance, should we expect any certain level of closures for relocation’s in either company or franchise openings?

Sally Smith

The numbers that we gave you would probably be net of those numbers anyway. We typically have maybe a couple of franchise either closings or relocation’s and as I'm looking at renewals, or as I am speaking about renewals for 2009 on some of our older locations, there might be one or two, but nothing that jumps out.

Brad Levington - KeyBanc Capital Markets

Okay. And then, last thing, touching back on the G&A, excluding the stock-based compensation in the third quarter, would there be any charges that were related to the acquisition that fell in there as well?

Sally Smith

No. There would be some expenses as relates to travel, for some people. Otherwise, in our preopening line, we had about 77,000 of travel and training related expenses and then we would have had some additional overhead style stuff in the general administrative line, but no one-time write off of acquisition charges, or anything like that.

Brad Levington - KeyBanc Capital Markets

Okay. Thank you very much.

Operator

Thank you. (Operator Instructions). Our next question is a follow-up question from the line of Bryan Elliott with Raymond James. Please go ahead.

Bryan Elliott - Raymond James

Mary, I just wanted to circle back to the CapEx questioning here. You said 10 stores, fourth quarter, about $1.5 million a piece. That would imply $65 million kind of full year and that seems high. Obviously we've probably invested some of that year-to-date in the Q3 numbers we got in the cash flow statement today, right?

Mary Twinem

Correct. Yes. We would have because there is fair amount of those who are already in construction.

Bryan Elliott - Raymond James

Right. So I think your prior guidance was for something in the high 50s. Is that still a good number for this year?

Mary Twinem

That would hold.

Bryan Elliott - Raymond James

Thanks.

Operator

Thank you. Our next question comes from the line of Will Hamilton with SMH Capital. Please go ahead.

Will Hamilton - SMH Capital

Hi, good afternoon. Mary, I was wondering if you could breakdown the preopening the $2.5 million for the fourth quarter between fourth quarter openings and what you expect to spend on first quarter? As you report first quarter, sorry.

Mary Twinem

As it relates to the fourth quarter guidance?

Will Hamilton - SMH Capital

Yes, the $2.5 million. How’s that breakdown between fourth quarter openings and first quarter openings of '09.

Mary Twinem

It would be…

Sally Smith

I think it’s about $516,000 in the up stores that are in process for the first quarter.

Mary Twinem

That would be in the third quarter number.

Sally Smith

In the third quarter, yes.

Mary Twinem

In the fourth quarter number there is about $200,000 that would be for the 2009 opening and the rest would be what we would expect for the 10 to 12 that would be opening in the fourth quarter, which includes Don Pablo's locations that are still out there.

Will Hamilton - SMH Capital

Okay. And then, I was wondering if you could provide an update as to how the night hunger menu performed in the quarter since this is the first full quarter of that and this being a busier time of your year?

Sally Smith

That campaign, we think helped increase our, day park by about 6% over the prior-year. So remember that would be 6% of that day park number, which is what about 19 or 20% of overall food sales.

Will Hamilton - SMH Capital

So right now, the late night is how much of your sales?

Sally Smith

Late night, I think is about what 20% of total sales?

Will Hamilton - SMH Capital Okay.

Sally Smith

I'm trying to think. The dinner hour is about, it is how much?

Mary Twinem

14

Sally Smith

14, sorry.

Will Hamilton - SMH Capital

Okay. And then, how did alcohol sales and chicken wing sales fare just this quarter?

Mary Twinem

Year-over-year, really no change.

Will Hamilton - SMH Capital

No change? Okay. Thank you.

Operator

Thank you. Our next question comes from the line of Steve Anderson with MKM Partners. Please go ahead.

Steve Anderson - MKM Partners

Yes, good evening. I just wanted to ask a quick question, again on the labor side. Can you give any numbers as far as turn over both on the management side and on the restaurant level labor side?

Mary Twinem

On the hourly turn over side we’re….

Steve Anderson - MKM Partners

Yeah.

Mary Twinem

A little over a 100%, or about a, between 105% and 110% for the rolling 12 months. And on the management side, we are a little under 30%.

Steve Anderson - MKM Partners

Okay. And how is it compared with the year ago period?

Mary Twinem

They are both improved year-over-year.

Steve Anderson - MKM Partners

Okay. Thank you.

Operator

Thank you. Our next question comes from the line of Conrad Lyon with Global Hunter Securities. Please go ahead.

Conrad Lyon - Global Hunter Securities

Hi. Got a question about the franchise contribution to net income or EBIT, however you may look at it. Mary maybe you can just help me out this. Do you tracked out franchise like as a percent of the total profit, what comes from the franchise fees?

Sally Smith

This is Sally. No, we don't. You certainly need some very arbitrary allocations of your general and administrative expenses. We have franchise consultants that I mean we can certainly track some of our franchise expenses that could be attributed, we have franchise consultants. But in terms of our marketing, our accounting, human resources, things like that, they reflect the system as a whole.

Conrad Lyon - Global Hunter Securities

And part of my question stems from, with the Vegas stores, do you see that falling off quite a bit? Or was the, did the Vegas stores have quite a bit of impact on contributing to your net income?

Sally Smith

I think from a modeling standpoint, you would remove the royalty that we would have had from those nine stores and then you’re going to replace it with the revenue and restaurant cash flows that they provide us now.

Conrad Lyon - Global Hunter Securities

I'm assuming before you gave some indication of this absolutely that sales come often in those stores, should we temper that down a little bit or any idea what we should use going forward?

Sally Smith

What we did give you in our press release in September when we had purchased the locations, we gave you what their current average weekly sales volumes were at that point.

Conrad Lyon - Global Hunter Securities

Okay. Fair enough.

Operator

Thank you. Our next question comes from the line of Greg McKinley with Doherty Company. Please go ahead.

Greg McKinley - Doherty Company

Yeah. Thank you. Could you just talk a little bit about the level of preopening expense per location with the relocation’s occurring in the franchise acquisition occurring and now we are talking about spending for a fair amount of openings in Q1'09 that’s occurring here in the fourth quarter, can you give us a little sense for what the per unit preopening expense trend is please?

Mary Twinem

You bet. For the non Don Pablo’s locations, they have run us about $200,000 per location for an opening and that would be a standard opening. As it relates to the eight Don Pablo’s conversion sites, they have run an average of 275,000 a piece, which is attributable to the additional rent and carrying costs that we have for those, plus the delay that we’ve had in the two units that are still to open in the fourth quarter.

And then for the effect overall is about a $600,000 year-over-year increase, due to the higher preopening on the Don Pablo’s locations. And then the preopening line also had 77,000 related to the Las Vegas acquisition.

Greg McKinley - Doherty Company

Okay. And as a reminder for the fourth quarter, you’re going to be opening 10 to 12 company-owned units and 15 to 18 franchise units, did I hear that correctly?

Mary Twinem

Great. On a net basis, yes.

Greg McKinley - Doherty Company

Okay. And when you say net, that's net of?

Mary Twinem

Closing.

Greg McKinley - Doherty Company

Net of what? I'm sorry?

Mary Twinem

Net of any closings we would have.

Greg McKinley - Doherty Company

Okay. Thank you.

Operator

Thank you. Ladies and gentlemen that does conclude our question-and-answer session. I would like to turn the call back over to management for any closing remarks.

Mary Twinem

Okay. We want to thank everyone for taking the time to listen to our third quarter earnings call. We look forward to speaking with you and sharing our results for the full year in mid February, 2009. Thank you.

Operator

Thank you ladies and gentlemen that does conclude the Buffalo Wild Wings Incorporated third quarter 2008 conference call. This conference is available for replay and if you would like to listen to replay of this conference, please dial 303-590-3030 and enter in the pass code of 3930835. Again that telephone number is 303-590-3030 and the pass code number is 3930835. Ladies and gentlemen, thank you for your participation. You may now disconnect.

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