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Buffalo Wild Wings, Inc. (NASDAQ:BWLD)

Q4 2008 Earnings Call Transcript

February 11, 2009 at 5:00 pm ET

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

Operator

Good day. Ladies and gentleman thank you for standing by. Welcome to the Buffalo Wild Wings fourth quarter 2008 financial results 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, Wednesday, February 11, 2009. I would now like to turn the conference over to Mary Twinem, Chief Financial Officer. Please go ahead.

Mary Twinem

Good afternoon and thank you for joining us as we review our fourth quarter 2008 results. I am Mary Twinem, Chief Financial Officer and Executive Vice President of Buffalo Wild Wings. Joining me today is Sally Smith, our President and Chief Executive Officer. By now everyone should have access to our fourth 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 2009 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, such as fresh chicken wings, the success of our marketing initiatives, our ability to control restaurant labor, and other restaurant operating costs, and other factors disclosed from time-to-time in our filings with the US Securities and Exchange Commission.

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

So, with that, I will turn it over to Sally.

Sally Smith

Good afternoon, everyone. First, let me say I am excited to be here today to share our strong fourth quarter and full year 2008 results. Our outstanding revenue growth is 32.6% for the fourth quarter, translated to net earnings growth of 28.7%. Our performance demonstrates the strength of the Buffalo Wild Wings brand and the high level of execution by our franchisees and team members throughout the organization. When we updated our annual performance target for 2008 in our October conference call to 15% unit growth, 25% revenue growth and 20% to 25% net earnings growth, we were confident in our ability to deliver on these metrics by remaining focused on our key strategic initiatives and executing on the tactics to achieve these goals.

We are very pleased to announce we exceeded our annual revenue growth goal achieving a 28% increase over the strong results of 2007. The key factor of this success is our ability to consistently provide our guests with great food and a fun experience that gives them a reason to come back to our restaurant again and again.

We asked our guests to rate how we were doing through online and 800 number call-in comments and we saw increases in our guest royalty scores in each quarter of 2008. We believe these scores are leading indicator of future performance. Our food taste and the promptness of food delivery and staff are also areas that our guests say we have improved upon throughout the year and they are telling us our restaurants have a better appearance and more inviting.

Our net earnings for the year are equally impressive. We achieved the high end of our goal for the tireless efforts of our team members to work more efficiently and effectively. Their efforts in addition to making long term investments like HDTV upgrades are the foundation that will keep us well positioned for the future. With our aggressive growth, we ended the year with 560 restaurants, a net increase of 67 units and our reach expanded to 38 cities. While we opened slightly fewer restaurants than planned it did not impact our ability to achieve our revenue and net earnings goals.

We continue to hone the already successful restaurant opening process we set in motion over the past few years. As a result, sales at our new and relocated restaurants contributed to an increase in average unit volume of 8.7% for our Company-owned and 3.2% for franchise locations for the year.

Our operations team remained committed to developing the bench strength of our general managers through a new selection process which we believe reduced turnover and growth sales throughout the year. We also saw positive results from the score card program we established that ranks each restaurant on key element of profitability. The use of the score card intend them with our focus on costs saving program, such as theoretical costing, waste management and labor scheduling but the year-over-year improvement in our Company-owned unit level performance throughout 2008.

Now, let us talk about our strong fourth quarter. We achieved significant increases in revenue filled by strong same store sales and the conversion of the Las Vegas units to Company-owned restaurant. These factors contributed to a 32.6% increase in total revenue for fourth quarter 2008 reaching $121.2 million, compared to $191.4 million a year ago. Our same store sales increased 4.5% at Company-owned restaurant and 2.5% at franchise restaurant.

Our net earnings for the fourth quarter of 2008 are equally impressive with an increase of 28.7% to $7.7 million driven by the operational improvements I mentioned earlier and translated the notably strong earnings per diluted share of $0.43 for the quarter. Our marketing and brand development efforts in the fourth quarter of 2008 positively impacted our results with the launch of a new product category flat bread, a favorable and shareable product that can be customized with our 14 signatures’ process. In addition of the alcohol free lemonade provided our guests with new and flavorful drink options and oversized and colorful new menu insert panel proved the successful strategy to showcase our products and build sales.

In the fourth quarter we increased media presence during NFL TV broadcast on CBS and Fox, and Westwood One Sunday and Monday night came on radio. Sport programming on ABC and ESPN along with Late Night TV at network cable rounded out our national TV presence. Local TV and radio buys created an additional media layers supporting our marketing efforts. We also increased the impact of our television and radio commercials with unique in-program integration sponsorships which we believe helps capture the attention of audiences and increase interest in our brand. Additional marketing campaigns featured our ribs, our competitive holiday gift card offer and a reminder that takes out as a great option during the busy holidays.

Mary will now provide additional details on our fourth quarter performance and then talk about trends and expectations for the first quarter then I will return to share some of our plans for 2009.

Mary Twinem

Thank you. Beginning with the revenue, our fourth quarter result showed a continued strength of our brand and operation, with total revenue increasing 32.6% to a $121.2 million versus $91.4 million in the fourth quarter of 2007. Company-owned restaurant sales for the quarter increased to $209.8 million, a 35.7% increase over prior year. Contributing to this increase was the same store sales increase of 4.5% for the quarter, trending over prior year comps of 3.4%. Menu price increases at company-owned restaurant which includes both food and alcohol price adjustment approximated the same store sales increase. We had 36 additional company-owned restaurants in operation by the end of the quarter versus the same period last year, and average weekly sales increased by 8.3% for the quarter, 380 basis points higher than our same store sales increase. It was our 13th consecutive quarter with average weekly sales improvements out pacing our same store sales increases.

For 2008 our annual unit volume at company-owned location grows to $2.2 million, a 46% increase from our $1.5 million average when we became a public company five years ago. Our royalty and franchise fee revenues for the quarter also showed growth increasing 9% to $11.4 million versus $10.4 million last year. Franchise restaurants exceed 2.5% same store sales for the quarter, accounting over 2.3% in the prior year. An additional 31 franchise units were in operation at the end of fourth quarter compared to 2007. Franchise locations had a 2.4% increase in average weekly sales volumes for the quarter over the same period last year. For the year the unit volume at franchise restaurants averaged $2.5 million.

Moving to restaurant operating cost at company-owned location, our cost of sales for the fourth quarter was 29.3%, 150 basis points lower than prior year. The results of numerous factors including menu price increases, changes to our menu mix and refining our product preparation all of which helped us get an increase in the cost of fresh wings and cost creep in other commodities. Wings averaged to $1.27 per pound during the fourth quarter, $0.03 higher than last years average of a $1.24. However, they continue the decline as a percent of sales at 21% down from 23% in 2007. Boneless wings increased to 17% of sales from 14% in the prior year.

Cost of labor for fourth quarter was 29.5% of restaurant sales, 50 basis points higher than fourth quarter last year. Higher incentive pay at the restaurant level in 2008 and unusually low workers’ compensation expense in 2007 contributed to this increase. We continue to show year-over-year improvement in restaurant operating expenses which were 15.8% of revenue in the fourth quarter; this is down 90 basis points from the prior year, mainly the results of lower general liability insurance and leveraging across other operating expense line item. Occupancy expense was 6.6% of restaurant sales for the fourth quarter, up 10 basis points over 2007.

Depreciation for the fourth quarter was again higher than prior year by 50 basis points as has been the trend for the entire 2008 fiscal year. Higher construction cost in new restaurant openings in 2007 and 2008 and more aggressive remodel, relocation and audio visual upgrade programs have led to this year-over-year increase. In addition, the amortization of intangibles related to the acquisition of the Las Vegas franchise restaurant contributed almost 20 basis points to the year-over-year increase in the fourth quarter. Restaurant level cash flow which is calculated before depreciation and preopening expenses was $20.5 million or 18.7% of restaurant sales versus $13.8 million or 17% in the fourth quarter last year, an impressive 170 basis points improvement for the quarter.

General and administrative expenses of $11.1 million in the fourth quarter or 9.1% of revenue compares to $9.4million last year or 10.3% of revenue. Fourth quarter results in 2008 included stock-based compensation expense of $1.7 million, versus $700,000 in the fourth quarter of 2007. Excluding stock-based compensation, G&A expenses for the current quarter totaled $9.4 million, or 7.8% of revenue, this 180 basis points decrease is mainly due to the reduction in our vacation accrual, lower deferred compensation expense and lower departmental spending.

Preopening expenses for the quarter were $2.5 million versus $2.2 million last year. We opened 10 new company-owned restaurants in the fourth quarter of 2008, compared to 14 new locations in 2007. However, we also incurred nearly $500,000 of preopening expenses in the fourth quarter for locations that will open in 2009. While in the fourth quarter last year we only incurred $47,000 related to future openings.

Investment income showed a loss of $126,000 for the fourth quarter of 2008, compared to income of $686,000 of 2007. The loss includes the interest income on our excess cash of $306,000 and an investment loss of $433,000 for funds that are set aside for future payouts under our deferred compensation program. These funds have been invested to reflect the participant shows an investment style and typically the net investment income or loss on these funds is not significant, but as we all know the results in the stock market were not typical in the fourth quarter. This also contributed to the lower deferred compensation expense that I referenced in the earlier discussion of G&A expenses.

Our effective tax rate during the fourth quarter was 31.5% versus 25% in the prior year. Our effective tax rate for the full year 2008 calculates the 32.8% compared to 2007 rate of 31.1%. Estimating the 2009 tax rate is difficult as tax laws likely to change at federal and state level. If there were no significant changes to tax laws we would expect our 2009 tax rate to be in the range of 33% to 34%.

In summary, fourth quarter net earnings increased 28.7% to $7.7 million, and earnings per diluted share increased 26.5% to $0.43. For the full year we grew our full year earnings per diluted share by nearly 24% to $1.36, a great 2008. From a balance sheet standpoint at the end of the year, cash and marketable securities totaled $44.5 million, compared to $68 million at the end of 2007.

We ended the year with $244 million in total assets and $172 million in stockholders equity. Cash flow from operations was $66.1 million for the year and we spent $67.4 million on capital expenditures, as well as $23.1 million for the Las Vegas acquisition. We remained debt free and are confident in our ability to fund our growth in 2009 and beyond.

Now a few trends and details on the first quarter of 2009, 2009 is off to a great start. To date in the first quarter our same store sales have increased about 8% for company-owned restaurants which include the Las Vegas market and about 7% for franchise location. A combined potential benefit from food and alcohol menu price increases which includes a small increase taking affect in next week’s menu rollout is about 4% for company-owned restaurant. Our first quarter sales could also see a benefit due to the timing of Easter. Last year, Easter fell on the first Sunday of the NCAA tournament. This year, Easter is in April after the College Basketball tournament has ended.

We have opened two company-owned and five franchise restaurants since the beginning of the year and we expect to open an additional six to eight company-owned restaurants and five to seven franchise locations before the end of March. In thinking about our cost of sales percentage for the quarter, year-over-year the wings market is up, which has been somewhat offset by lower year-over-year contract prices for cheese, oil and sauces.

Our wing purchases remain based on market pricing and the cost of wings for January and February will average about $1.55 per pound which compares to last year’s average of $1.33 for the quarter. We believe that with the menu price increased to 4% continued focus on our theoretical food cost initiative of portion and waste control along with wings continuing to decline as a percent of overall sales. Our first quarter cost of sales percentage will only be slightly higher than last year.

For the first quarter, we are optimistic that our overall cost of labor percentage will be down slightly to last year as we continue these improvements in hourly labor through ongoing refinements and better adherence to our labor scheduling system. In addition, we believe the continued rollout of our ship leader program and other tactics to lower management labor will help us leverage this line.

Restaurant operating expenses maybe difficult to leverage in the first quarter over prior year as last year’s expenses had about 40 basis points of favorable improvement such as lower general liability insurance that may not be repeatable. We anticipate that our G&A expenses in the first quarter exclusive of stock based compensation will be approximately $10 million. As the stock based compensation of 2009 equity brands are expected to be finalized in March and we currently estimate a full year 2009 expense to be approximately $5 million. With a total of 8 to 10 company-owned locations opening in the first quarter and additional sites under construction, we estimate preopening cost for the quarter to be about $2 million.

We are reiterating our annual target for 2009 of 15% unit growth, 25% revenue growth and 20% to 25% net earnings growth. Although, there are risks and uncertainties that are inherent to our current economy, our franchisees, home office and team members are united in our enthusiasm and optimism for 2009.

Pleased review the risk sections outlined in our SEC filings included in our 10-K for 2008 which will be filed in the coming weeks, as well as the Safe Harbor statement for factors affecting our forward-looking statements. And with that, I will turn it back to Sally.

Sally Smith

Thank you, Mary. We are well underway to what we believe will be an exciting and successful 2009. Our teams are solidly aligned to achieve our goal. Our commitment and focus is clear as we drive forward our strategic initiatives in all areas of our business. Our growth and ability to create a great guests experience rewarded us with our biggest college ball season and NFL playoffs and Super Bowl Sunday in our history, as the evidenced by our same store sales trend to date in the first quarter of 8% at company-owned restaurant and 7% at franchise locations.

Our first quarter marketing and media plans are firmly in place. We are bringing back our successful bracket challenge promotion for our guests and team members and we are launching a new TV spot that highlights the experiences in our restaurant during basketball mania. The commercial will run nationally in ESPN and CBS throughout each week of the College Basketball tournament and up to the final match up and championship game doubling our broadcast presence from 2008.

In addition, our first quarter media plans include national cable, Fox Sports network regional and local TV, cable and radio. Our restaurant team members are well prepared, energized and ready to wow the guests. Our culinary development strategies are moving forward for the year and we are launching a new menu later this month. The menu insert panel will highlight three new products, twisted chicken, pepperoni kickers and barbeque nacho. All three are items that we believe enhance our food experience and will build sales. In testing, our guests particularly enjoyed the twisted chicken, which are twisted strips of breaded chicken in our great for dipping in our signature sauces.

As we look back at 2008, our performance demonstrates the strength of this brand and our ability to provide our guests an experience that keeps them coming back for more. We believe our dedication to our long term strategy and our commitment to stay the course will continue to serve as well. We are financially strong with $44 million in cash and are debt free. We expect that our ability to fund our Company growth will allow us to take advantage of development opportunities that are likely to arise.

Our franchisees and team members at every level of the organization are proud to be part of this successful brand. Our operation team continues to drive to deliver the best guests experience possible with updated and more engaging manager, our team member and menu training program. We are utilizing our vendor partnerships to develop unique promotion that engage and reward our guests and our team members. These efforts along with an ongoing commitment would dedicate 3% of our system wide sales through a national advance and 0.5% of sales to local marketing program should drive same store sales and average unit volume.

We realized these are challenging economic times. Changes in consumer spending and preference, changes in commodity prices and tightening of credit market are just a few and many variables that are present in our business. This and the past success of remaining focused on our guests, adhering to our cost savings program and striving to streamline and build efficiencies into our processes, we believe we can manage through this economy. We believe that our 2009 goals are achievable. Our brand offers a unique and appealing experience that is more than just going out to eat. Buffalo Wild Wings is a haven where people go to relax and connect with friends and family and we are thankful that in this economy they are choosing Buffalo Wild Wings as the place they want to be for hot wings and a cold beer.

In closing, a sincere thank you to our franchisees, team members and vendor partners for their contribution to another great year and for their ongoing dedication to our future success. We look forward to sharing our first quarter results with you in April. Thank you for your time and we will now open the call for questions. Operator?

Question-and-Answer Session

Operator

We will now begin the question-and-answer session. (Operators Instruction) Your first question comes from the line of Robert Weiler - Piper Jaffray.

Rober Weiler - Piper Jaffray

Just a couple of questions for you. First of all, openings and closings on the franchise side, you guys disclosed that?

Sally Smith

We gave the net openings in the fourth quarter and that was… The openings on franchise in the fourth quarter would have been just like 15.

Rober Weiler - Piper Jaffray

Fifteen okay. But you do not give openings or closings?

Sally Smith

I do not know if we had any closings in the fourth quarter. None come to mind, and we can check that. If we had any throughout the year I think maybe one or two relocations or renewals throughout the year but I do not think any in the fourth quarter.

Rober Weiler - Piper Jaffray

Okay, great. And then the next question, I think I missed the CapEx for 2008 was $66 million, is that right?

Mary Twinem

Correct.

Rober Weiler - Piper Jaffray

And then expectations for that in the FY09 can you give us any color? Should we be expecting similar for FY09 and FY10?

Mary Twinem

For 2009, we have expected about $75 million in CapEx. That would be opening 35 new company stores, so if you had 35 new company stores at $1.5 million a piece. In addition to that we would expect about 15 remodels and they would cost about $500, 000 a piece and then we have additional AV upgrade that we planned to do that would be about $4.5 million and then other special project CapEx kind of stuff that would total up to $10 million.

Rober Weiler - Piper Jaffray

Perfect and then one more, I believe you said for the first quarter 2009 on the development that there are five company-owned but then 68 additional but then I think later on you circled back and said 8 to 10 full company-owned for the quarter?

Mary Twinem

We have opened up the two companies so far and we expect another 6 to 8 for a total of about the 8 to 10 in the quarter and then on a franchise side they have opened five already and then there is five to seven more to open. So there will be 10 to 12.

Operator

Your next question comes from the line of Paul Westra of Cowen & Company.

Paul Westra - Cowen & Company

Any comp trends, you said that Super Bowl and the ball games for last year-over-year was there any sort of variability in January or pretty strong trends or updates?

Mary Twinem

Months started out nearly well. I think the way that the whole games matched up in the first two weeks of January. We had very strong results and then obviously we have given the results to the Super Bowl so the company stores to be turning in an 8% and our franchisees with 7% we think it is outstanding.

Paul Westra - Cowen & Company

Then last, you know we have just seen a lot of wing price inflation in the last week, what kind of outlook would you need to still have to 20% to 25% EPS growth? Is it more based on the $1.55 that you paid average quarter to date or how should we think about wing price?

Mary Twinem

At the current prices I think we are confident in our ability to meet our goals for 2009. We do not really have an outlook for the full year .It is really to what the wing market will do but I would say historically, we have done a really nice job of managing our other lines of our P&L in order to still achieve our goals for the year no matter what wing prices we are doing.

Paul Westra - Cowen & Company

And then just lastly on the theoretical food cost program, I know we have been talking about that for a few years, can you just give us some progress update and where you are compared to internal development?

Mary Twinem

We have got it fully implement in the field. We still had some additional training items that we want to do. I think it is very much embraced by our entire group of company-owned stores. We think that in the fourth quarter, we had about 20 basis points improvement in our ways so we think there is some additional improvements to be had in 2009.

Paul Westra - Cowen & Company

And then just lastly on the items affecting the interest expense line it sounds like it should normalize going forward or should there be another type of charge against it?

Mary Twinem

Well you never know, you know that and just to make sure everybody understands, it gets reflected in two months in our P&L. It is shown both on our G&A line as well as on the investment loss line and they offset each other. So the bottom line impact is zero but it does get placed on two different lines on our P&L.

Operator

Your next question comes from the line with Jeffrey Farmer of Jefferies & Co.

Jeffrey Farmer of Jefferies & Co.

Just coming back to the wing question for a second so you did give us a $1.55 to end the average to January and February and if we are to look at the spot price today and correct me if am wrong I think you guys will be probably paying close to a $1.80 or so is that about right?

Mary Twinem

Yes I think we will be in the $1.75 to $1.80 range for the month of March if the market does not fall.

Jeffrey Farmer of Jefferies & Co.

I know you guys are not in the business of predicting where wing prices are going but can you at least validate for us that wings are acting unusually in the sense that they actually ticked up pretty meaningfully in the week after the Super Bowl is that historically unusual for that to happen?

Mary Twinem

I do not know I mean we would expect them to be high in the Super Bowl range and then even a few marks madness sometimes they can stay high and then as they come out of the peak season we would think in April, May, June you would see it come down but we would sure like to see a couple of cents come off.

Jeffrey Farmer of Jefferies & Co.

In terms of what your supplier outlook is, it sounds like that is potentially where they are pointing to that maybe in the end of spring that this could recede a little bit?

Mary Twinem

Yes I cannot say that that would be my opinion and that our supplier’s opinion I can say that we are confident we will have supply. We really can not make any comment on what prices in the future will be.

Jeffrey Farmer of Jefferies & Co.

And then just at relates to your ability to… because you used to give this guidance and I think the numbers moved around a bit but I think for every penny price change in the per pound price of wings it was I think $0.01 of EPS I think it is probably closer to $0.08 to $0.01 now so that was what some of the concern if you were to see $0.30 of year-over-year EPS pressure that could be a meaningful EPS headwind but listening to you already it sounds like between pricing and some other initiatives you think that you can probably control that pretty well?

Mary Twinem

Well, the task, if you look at our historical result, as wings prices fluctuated we have been able to deliver on the bottom line and that certainly will be our goal for the first quarter and for all of 2009. Our dependent on fresh around wing, the bone and wing it certainly fallen as the popularity performance was taking off and we continue to roll out new menu item. Hopefully those will attract some people also. Bone and Wing but again we watch every line and certainly in times that high wing prices will be much even better.

Paul Westra - Cowen & Company

And then just final question on that as it relates to Tuesdays and Thursdays do you still have, do you think in your mind ability to take another nickel pricing on those Wings Special Nights if you needed to or things short of stay at this level?

Mary Twinem

I think Bonus Thursdays we moved that on our companies stores from $0.50 to $0.60 last year. We have not given any thoughts to moving that again. Tuesdays side, our companies stores majority are still at the $0.40.We have discussions about moving the stores up there right now. We are just going to let it sit where it is and we will make a decision later in the year.

Operator

Your next question comes from the line of Bryan Elliott with Raymond James.

Analyst for Bryan Elliott - Raymond James

I was going to see if you might give us an update on your commodity contracts and if those contracts have been extended later in 2009?

Mary Twinem

Most of our contracts for 2009 are done. We talked in the conference call that wings are still at market pricing and we do not see a change in the near future on that. As it relates to the rest of our market basket of commodities we feel that our prices are really going to be neutral for 2009 to 2008 that we have enough things that moved up a little and we have enough things that have moved down to offset each other. So other than wing we think our commodity costs are neutral.

Analyst for Bryan Elliott - Raymond James

Quickly moving on over to your menu pricing, it looks like you are going to run and I think you said 4% in Q1, is that what you are expecting between on the food side and the alcohol side?

Mary Twinem

Correct.

Analyst for Bryan Elliott - Raymond James

Do you expect to maintain that pricing throughout the year?

Mary Twinem

Well if we did not do anything as it relates to future menu prices that 4% would lower down the 3% in the second quarter and then down to 2%% in the third quarter and then 1% for the last quarter. As it relates to one, we can not take menu pricing; it is easy for us to do it in the third quarter when we roll out another menu. We could take it at a different time that we felt like we needed to and then if we were to move the Wing Tuesdays pricing that requires us about a three week planning period.

Analyst for Bryan Elliott - Raymond James

Okay and has been a particular focus for those menu price increases or I think you alluded to earlier couple of weeks I guess you took some on menu pricing. Is it more on the alcohol side or the food side or just on all broad based increase?

Mary Twinem

We did take a small price increase in alcohol in the fourth quarter as we saw our cost moving up than we expect. There will be more increases coming on that in the first quarter. As it relates to the menu that we just rolled out, or we are rolling out next week on the food side there is only about a 0.8% menu price increase included in that.

Operator

Your next question comes from the line of Destin Tompkins with Morgan, Keegan & Company, Inc.

Destin Tompkins - Morgan, Keegan & Company, Inc.

Looking at the sales trends both in Q4 and in the quarter to date, are you seeing a special strength around sporting events? Can you talk about where you are seeing the greatest sales?

Sally Smith

You know sporting events always help. They help us, they help our sales. I do not think we can point to anything in particular. We have just in strength across the board all day part and really all days of the week because typically you have a sporting event. You are going up against sporting event from the prior year. It may not be on the exact same day but it is certainly and usually within the same week or two and so I think we are pretty neutral number of events year-over-year.

Destin Tompkins - Morgan, Keegan & Company, Inc.

So there is no unusual timing or anything else that might be affecting the early strength in sales. I guess it is just trying to see if you think there is just increasing popularity around sporting events currently that, that maybe aiding your trends year-over-year? Do you have anything unusual as far as timing goes that might be affecting the trends?

Sally Smith

Not in the quarter to date, weakness, well and I can’t point to anything and certainly we continue to be popular.

Mary Twinem

Yes, the ball game weeks were really strong in the beginning in January. We are hopeful that the college basketball tournament weeks coming up in March will be equally as strong.

Destin Tompkins - Morgan, Keegan & Company, Inc.

You guys rolled out your flat bread product in the fourth quarter I believed. Are you seeing a benefit from rolling out some new products? Can you speak to the success of some of those new products?

Sally Smith

I think it is always important to keep your menu fresh and that is our great product. They are relatively new and some of our percent of sales endpoint and it was probably about 1% of our total menu. I think again it gives people opportunity to try our sauces. Maybe they do not want to have wings but they come in for the flat bread so I think that is important. We are excited about the new menus that we are rolling with a couple of unique products on that. Certainly the alcohol free lemonade has been very successful for us and it is always a great product. I think you have to keep your menu fresh.

Destin Tompkins - Morgan, Keegan & Company, Inc.

Is alcohol as a percent of sales fluctuating at all?

Sally Smith

It stayed. I think it stayed pretty flat.

Mary Twinem

Yes it just changed our 1% fourth quarter over fourth quarter and we were 72%, food this fourth quarter we were 73% food last year.

Destin Tompkins - Morgan, Keegan & Company, Inc.

Okay and then a quarter ago we were talking about franchisees access to capital and their ability to finance development. Any update there?

Sally Smith

I think that our franchisees certainly our experience is the same thing with the rest of market. Tighter term or perhaps personal guarantees, maybe at some rate with their kind of back to where we used to be but they are able to get credit.

Destin Tompkins - Morgan, Keegan & Company, Inc.

And then lastly can you just clarify on the menu pricing? I think you said you are running 4% currently and then there is an additional increase coming from small alcohol increased that you are getting ready to roll out and then I think with the new menu there would be 0.8% so where would that put us once all of that is in place?

Mary Twinem

Yes. Your details are not exactly right but when we gave the 4% that would be the average for the whole first quarter taking in effect anything that happened in 2008 that is going forward as well as some menu that were rolling out next week which would be the approved price increase.

Operator

Your next question comes from the line of David Tarantino with Robert W. Baird & Co., Inc.

Analyst for David Tarantino - Robert W. Baird & Co., Inc.

I am just wondering when you are looking to 2009 if you could comment on what type of comps assumption you would need in order to hold the restaurant level margin flat compared to 2008?

Sally Smith

Well, I am not sure I can give you some specific but if you look at the fourth quarter we had 4.5 % of sales and we had a 170 days for improvement on our restaurant level cash flow. So that is pretty good. It flows to around single digit in terms of sales.

Analyst for David Tarantino - Robert W. Baird & Co., Inc.

And then looking at the G&A line can you talk about what type of leverage you may be expecting in 2009?

Mary Twinem

When we talk about our revenue growth and the net income or the unit growth of 15% and then having that earnings grow to 20% to 25% that does not file leverage in the G&A expenses. We do not give specific guidance on what kind of basic points we think we can get there. We had a great leverage in 2008 over 2007. When you look at the run rate that we have in the first quarter at about $10 million, I mean you would not expect us to go underneath CapEx that would be ongoing. We will have a little bit increase on a quarter-to-quarter basis from a dollar standpoint above that.

Analyst for David Tarantino - Robert W. Baird & Co., Inc.

And then just a question, I think in the last quarter you said the Las Vegas units that you acquired had an effect on the comps. I think it was about a 100 basis points? Are you still seeing that type of impact?

Sally Smith

Yes in fourth quarter they did pull down our company-owned same store sales a little bit. We are really happy with the trends that we see in Las Vegas in the first quarter and we did not pull out numbers specifically but with 8% comps that our company-owned stores and that included our Las Vegas market, we are very pleased in the first quarter.

Operator

(Operator instruction)

You have a follow-up question from the line of Paul Westra with Cowen and Company.

Paul Westra - Cowen and Company

Just one last general question, given that your Company that is out there growing while others are not that impressive with still low level returns. What is the environment out there like? What kind of change that you seen in rents or real state opportunities or franchisees looking at even conversions of closing stores? Just any kind of feedbacks out there with what is going on and I think that would be helpful?

Sally Smith

We talked about our franchise same store sales in the first quarter of 7% year to date. For the fourth quarter it is 2.5% so our franchise system is very strong. That guide existing franchisees adding very, very nice on my radar screen I do not expect it closing. From our rents and real state standpoint I think that you are not seeing a lot of deals from the rent side. There are deals in some existing real state but again on existing where we can. We would certainly love to grow in some areas that we will use the same discipline or take our existing sites that we do for new state, making sure that we review the site as an A trade location that the rents make sense.

You get in some TI money offers, things like that but not a big drop in real state or rents in new developments.

Operator

(Operator instruction)

Sally Smith

I would like to thank everybody for calling in today it was great to share our results with you and we look forward to another Conference Call in April for our first quarter result. Thank you.

Operator

(Operator instruction)

Thank you ladies and gentlemen these conclude the Buffalo Wild Wings Fourth Quarter 2008 Financial Results Conference Call. This conference will be available for replay. You may access the replay system at any time by dialing 303 590 3030 and entering the access code of 3967792. Thank you for your participation. You may now disconnect.

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Source: Buffalo Wild Wings, Inc. Q4 2008 Earnings Call Transcript
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