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Executives

Mary Twinem - Chief Financial Officer

Sally Smith - President and Chief Executive Officer

Analysts

Jeff Farmer – Jefferies & Company

Bryan Elliott - Raymond James

Destin Tompkins - Morgan Keegan

David Tarantino - Robert W. Baird

Paul Westra - Cowen & Company

Larry Miller – RBC Capital Markets

Nicole Miller - Piper Jaffray

Brad Levington - KeyBanc Capital Markets

Matt DiFrisco – Oppenheimer & Co.

Will Hamilton - SMH Capital

Greg McKinley - Doherty Company

Buffalo Wild Wings, Inc. (BWLD) Q1 2009 Earnings Call Transcript April 28, 2009 5:00 PM ET

Operator

Good day. Ladies and gentleman thank you for standing by. Welcome to the Buffalo Wild Wings first quarter 2009 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, Tuesday, April 28, 2009. I would now like to turn the conference over to Mary Twinem, Chief Financial Officer and Executive Vice President.

Mary Twinem

Good afternoon and thank you for joining us as we review our first quarter 2009 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 first 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 U.S. Securities and Exchange Commission.

On today's call, Sally will provide an overview of the first quarter. After that, I will provide further detail on our recent financial performance and comment on trends in the second quarter. Finally, Sally will share some thoughts about the second quarter and the remainder of 2009. We will then answer questions.

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

Sally Smith

Good afternoon, everyone. I’m excited to be here today to share the continued strength and momentum of our results. Our outstanding first quarter revenue growth of 35.3% translated to net earnings growth of 30.1% and earnings per diluted share of $0.47, an impressive 30.6% increase.

Our performance demonstrates the stability and strength of the Buffalo Wild Wings brand and the ongoing commitment to exceptional execution by our Franchisees and Team Members. I applaud the entire Buffalo Wild Wings Team. They are thrilled to be part of a winning team and it shows in our results.

The first quarter significantly outpaced our 25% annual revenue goal. And that was over strong revenue growth of first quarter 2008. We have an intense focus on providing our guests with a compelling experience, and our Guest Experience Management program indicates that our guests are rating their experience higher than in prior periods. Loyalty scores increased in the first quarter 2009 over 2008 and we believe this is a leading indicator of future sales performance. A significant factor in our revenue growth is our continued ability to sustain our growth rate moving forward.

Our New Restaurant Opening Team, along with our Development Team, continues to streamline and improve our processes to ensure we’re opening strong and on time. We’ve opened more restaurants earlier in the year, and see ongoing sales growth in our new units as shown in the increase in our average weekly volumes at company-owned and franchised locations.

Our ability to provide a great guest experience is also evident in our first quarter same store sales, which increased 6.4% at company-owned locations and 6.0% at franchised locations compared to last year.

The combination of focusing on key execution fundamentals like hot wings hot and cold beer cold, along with an increased media presence and the launch of our new basketball TV spot that you couldn’t miss during the tournaments, provided a powerful foundation.

And, we added a high-profile sponsorship layer on ESPN TV, Top 30 Basketball Plays of the Past 30 Years that captured the attention of viewers across the country during the college basketball tournaments.

We also continued to build upon the success of key sales opportunities like take out and our signature Boneless Thursday promotion. Buffalo Wild Wings is the perfect place to start the weekend and we reminded our guests of that with our Weekends Start on Thursday promotion.

We’re keeping the experience in our restaurants fresh and new. Our flatbreads, which became part of our core menu in February, along with our signature alcohol-free lemonades, had very strong sales. We also launched three exciting new menu items in the first quarter: Twisted Chicken, Pepperoni Kickers and BBQ Nachos. All three are flavorful, shareable ways to start a meal, and are boosting sales in our appetizer category.

Along with driving sales, we remained focused on continually striving to improve cost controls in key areas, which is evident in the net earnings for the first quarter. Here, again, we outpaced our 20% to 25% annual net earnings goal through our efforts to manage costs. Although fresh wing prices were higher than prior year, we were able to bring down our cost of sales percentage. We showed overall improvement in restaurant-level cash flow at company-owned locations and we leveraged G & A.

All of these factors, combined with our ongoing commitment to excellence, resulted in a strong quarter.

Mary will now provide additional details on the quarter’s performance and then I’ll return to talk about the second quarter and the remainder of the year.

Mary Twinem

Our first quarter results demonstrate that we are on track to achieve our 2009 goals.

Starting with revenue, our first quarter increased 35.3% to $131.6 million, versus $97.3 million in the first quarter of 2008.

Company-owned restaurant sales for the quarter increased to $119.4 million, a 37.4% increase over prior year. Contributing to this increase was a strong same store sales increase of 6.4%, trending over prior year comps of 4.1% for the quarter. Franchised locations had an equally impressive quarter with a 6% increase in same store sales, comping over 2.1% in the prior year.

We had 41 additional company-owned restaurants in operation by the end of first quarter versus the same period last year, and average weekly sales increased by 10.0%, once again outpacing our same-store sales increases and by 360 basis points.

Our royalty and franchise fee revenue for the first quarter also showed strong growth of 17% to $12.1 million versus $10.4 million last year. An additional 33 franchised units were in operation at the end of first quarter compared to 2008.

Menu price increases over the past twelve months at company-owned restaurants, which include food and alcohol price adjustments, approximated 4%.

Now, let’s discuss in more detail the performance of our company-owned restaurants, which showed nice margin improvement year-over-year.

Cost of sales for the first quarter was 30.3%, 10 basis points lower than prior year, even though wings averaged $1.63 per pound, $0.30 higher than last year’s average of $1.33.

An operational focus on product preparation and waste controls, along with menu price increases, combined to helped offset the higher cost of fresh chicken wings.

The steady shift from traditional wings to boneless wings also positively impacted results. Traditional wings accounted for 20% of our restaurant sales, down from 22% in 2008. Boneless wings, which in first quarter were a better margin item than traditional wings, increased to 18% of sales, from 15% in the prior year.

Cost of labor for first quarter was 29.8% of restaurant sales, equal to first quarter last year.

Improvements in hourly and manager labor were offset by higher incentive pay and health insurance costs.

Restaurant operating expenses leveraged by 20 basis points, to 15.1% of revenue in the first quarter, mainly due to lower cable and televised sports package costs.

Our higher average unit volumes leveraged our occupancy expense in the first quarter, which was 6.4% of restaurant sales, improving 20 basis points over 2008.

Depreciation for the first quarter was 5.7%, up 30 basis points from last year. Of this amount, 10 basis points relate to amortization of intangibles related to the acquisition of the Las Vegas franchised restaurants in September of last year. The remainder is attributed to ongoing upgrades of our audio and video technology in our restaurants, remodels and patio additions at numerous locations, and higher depreciation associated with freestanding locations.

In summary, our focus on unit performance resulted in a 50 basis point improvement over first quarter last year. Restaurant-level cash flow, which is calculated before depreciation and preopening expenses, was $22.1 million, or 18.5% of restaurant sales, versus $15.6 million, or 18.0%, in the first quarter last year. This demonstrates our success in efficient growth.

Thank you to our operations team for kicking the year off strong.

General and administrative expenses grew to $11.4 million in the first quarter, or 8.7% of revenue, compared to $9.3 million last year, or 9.6% of revenue. Excluding stock-based compensation, G & A expenses for the first quarter totaled $10.6 million, or 8.1% of revenue, which is a 50 basis point decrease over prior year.

We opened ten new company-owned restaurants in the first quarter of 2009, compared to only four new locations in 2008. Preopening expenses for the quarter totaled $2.4 million versus $1.2 million last year. The $2.4 million includes $511,000 of preopening expenses for locations that will open in the second and third quarters of 2009, while in the first quarter last year we incurred $467,000 related to future openings.

Reflective of the current market, investment income declined to $76,000 for the first quarter of 2009, compared to investment income of $432,000 in 2008. Similar to fourth quarter, the interest income on our investment portfolio was reduced by an investment loss for funds that are set aside for future payouts under our deferred compensation program.

Our effective tax rate during the first quarter was 33.7%, compared to 34.3% in the prior year. Our full year 2009 tax rate is estimated to be about 34%.

In summary, our successful first quarter produced a net earnings increase 30.1% to $8.5 million and earnings per diluted share increased 30.6% to $0.47. A great start to 2009.

From a balance sheet standpoint, on March 29th, our cash and marketable securities totaled $44.0 million, compared to $44.5 million at the end of 2008. We ended the quarter with $252.0 million in total assets and $181.0 million in stockholders’ equity.

Cash flow from operations was $19.3 million for the quarter, and we spent $18.9 million on capital expenditures. We remain debt-free.

Now, a few trends and details on the second quarter of 2009.

To date in the second quarter, our same store sales are about 1.8% for company-owned restaurants and about 3.6% for franchised locations, up over same store sales of 7% and 3%, respectively, for the same period in 2008. The strength of our franchised same store sales is due in part to strong matchups this year in our franchised markets throughout the college basketball tournaments that culminated in April.

Sales also include the effect of Easter shifting to April this year, which was a low volume weekend for us, and impacted our month-to-date trends by about 2.5%.

The combined potential benefit in the second quarter for food and alcohol menu price increases taken in the prior twelve months is about 3% for company-owned restaurants.

We have opened four company-owned and five franchised restaurants to date in the second quarter, and we expect to open an additional four company-owned restaurants and seven to eight franchised locations before the end of June. With eight company-owned locations opening in the second quarter, and numerous sites under construction for third quarter openings, we estimate preopening costs for the quarter to be about $2.2 million, compared to $1.8 million in second quarter last year.

For cost of sales, the anticipated average price per pound of fresh chicken wings for April and May is $1.72 versus $1.17 a year ago. If the second quarter averages at $1.72 per pound, we expect that the cost of sales percentage to be up slightly over prior year.

For the second quarter we believe our overall cost of labor percentage can be down slightly to last year as our year-over-year improvements in hourly and management labor should continue.

Restaurant operating expenses will most likely be flat to prior year.

We anticipate that our G & A expenses in the second quarter, exclusive of stock-based compensation, will be approximately $10.3 million. Additional equity grants for 2009 are expected to be finalized in May and we currently estimate the full year 2009 stock-based compensation expense to be approximately $5.2 million, with second quarter expense of $1.6 million. In second quarter of 2008, stock-based compensation expense was $904,000.

We are reiterating our annual growth goals for 2009 of 15% unit growth, 25% revenue growth, and 20 to 25% net earnings growth. The results of the first quarter are clearly above these targets. As a reminder, though, we provide annual growth goals and not all quarters will individually meet all of these goals.

We are ahead of our 2008 development pace, with more new company-owned and franchised locations expected to be open by the end of third quarter than we opened for the full year of 2008. We expect to have additional expense in the second quarter as a result of this accelerated opening schedule and the shift in stock-based compensation. Then, with more units open to take full advantage of the football season, we look forward to a strong second half of 2009.

Please review the risk sections outlined in our SEC filings, including our 10-Q for the first quarter, which will be filed in early May, as well as our safe harbor statement for factors affecting our forward-looking statements.

And with that, I’ll turn it back to Sally.

Sally Smith

As Mary stated, we are well underway to what we believe will be a strong and successful 2009. And our teams are solidly aligned to achieve our goals.

We have strategies in place to continue our momentum and drive our business forward. We remain focused on enhancing our unique Buffalo Wild Wings experience through engaged team members, new menu choices, national and local restaurant marketing activities, and facility upgrades that provide our guests new reasons to come and enjoy themselves more often at our restaurants.

To build sales we launched a new Lunch Madness program this week that features a variety of our menu choices that are priced and portioned for value and selected with speed of service in mind for our guests with time constraints at lunch.

We’ll continue our sales-driving efforts with our spring gift card promotion for Dads and Grads. They love Buffalo Wild Wings, so we believe our spring offer of a $5 reward with a $25 gift card purchase should build on the success of last year.

In June, we’ll focus on Night Hunger. We have just what is needed for this daypart: great food available until close and a fun, social atmosphere for gathering. In addition to local media that will support the majority of our sales, we’ll launch a new Night Hunger menu that features two new products: Chicken Taco Flatbread and Chicken Queso Dip, along with a returning favorite, BBQ Nachos.

Our operations team continues to build on our success, with a keen focus on hiring the right people and creating a great work experience for our team members that we believe is the foundation for providing a great guest experience. There’s a strong emphasis on executing local marketing and community events at the individual restaurant level. And from the facilities aspect, 13 targeted restaurant remodels and 25 patio upgrades will be completed in the next six months, as well as completing the planned HDTV upgrades.

This is an exciting time for Buffalo Wild Wings. For March Madness and Super Bowl alone, Buffalo Wild Wings was mentioned or participated in more than 230 TV segments and interviews.

In late June we will open our 600th restaurant. I see the enthusiasm and passion of our guests and our team members everywhere I go. We’re energized and confident we can achieve our annual goals of 15% unit growth, 25% revenue growth and 20% to 25% net earnings growth.

We’re pleased with our first quarter success. We continue to invest in our future and our guest experience and are building the infrastructure to support the long-term growth of our system.

We’ve maintained our unit growth pace, even in these challenging economic times, and look forward to continuing to generate strong revenue and profitability for our shareholders.

Again, I applaud the entire Buffalo Wild Wings Team for a great quarter.

We look forward to sharing our second quarter results with you in July. We will now open the call to questions.

Question-and-Answer Session

Operator

(Operator Instructions) Your first question comes from Jeff Farmer – Jefferies & Company.

Jeff Farmer – Jefferies & Company

I wanted to get a better understanding of the timing of your theoretical food cost system roll out. When were the managers trained on the system and which quarter do you really think you first began to see the most meaningful impact from that system?

Mary Twinem

Jeff, that system is fully rolled out so our regional manager and our general managers in the store are completely utilizing that system now. I think we saw some of that improvement year-over-year in our cost of sales percent in the first quarter and we would anticipate seeing those same, the operational focus on product preparation and waste controls continuing throughout 2009.

Jeff Farmer – Jefferies & Company

You sort of answered the question, I'm trying to get to a sense of when you potentially might lap this benefit. So they were fully trained as of the end of the third quarter or the end of the fourth quarter? When were they fully trained?

Mary Twinem

I would say the first quarter of 2009.

Jeff Farmer – Jefferies & Company

And in terms of G&A dollars, again, you touched on this as well, but last year they grew by about 12% and I think it was even less than that if you control for stock-based compensation. It looks like Q1 2009 G&A was up about 23% so just curious, from a spending perspective, on the corporate side why that rate of growth would be higher, considering you are still putting up some extremely high revenue growth numbers.

Mary Twinem

You are talking on an annual basis?

Jeff Farmer – Jefferies & Company

Yes. So as relates to 2008. So for the full year I think you drew revenues somewhere along the line of 28%. Your G&A grew by about 12% so less than half of that. Q1 2009 revenues were 35%, G&A was 22% so it's about two-thirds of that. Just curious because again, you 're still delivering these enormous revenue numbers. What on the corporate infrastructure side are you still adding to the business that's not allowing you to see even greater leverage on the G&A line?

Mary Twinem

Obviously we have an overall commitment to leverage G&A and I think even in the first quarter we have shown that we are able to do that and control our growth and that we will be spending more dollars year-over-year in 2009. I think we're pretty strategic about how we spend them and we're mindful of making sure that we do leverage on an annual basis, but we don't put brackets around what that leveraging is going to be for the year. When we give our annual guidance of 20% to 25% and that earnings growth, it implies leveraging of the G&A dollars but we don't give you a range for it.

Jeff Farmer – Jefferies & Company

You mentioned the flat bread sales, that they were doing very well. I'm just curious, what percent sales mix can you achieve with a new product if you get it right.

Mary Twinem

You know, small. If we can get any product to become 1%, 2% of our sales we feel pretty happy about it. It's pretty unusual for a product like boneless wings to get to be 16% to 18% of our sales. Not impossible but most of what we have rolled out in the last couple of years have been in the 1% to 2% range.

Operator

Your next question comes from Bryan Elliott - Raymond James.

Bryan Elliott - Raymond James

I wanted to drill down a little bit on the food cost guidance for the second quarter. And I'm not sure I got it all but I think you indicated that COG should be up slightly as a percent of sales on $1.72 wings. Is that right?

Mary Twinem

Correct.

Bryan Elliott - Raymond James

And they were $1.63 this quarter.

Mary Twinem

Right, and we were down 10.

Bryan Elliott - Raymond James

And you were at 30.3 so up slightly implies sort of flat sequential, give or take, so wondering if you are seeing food deflation outside of wings and/or if you expect further mix shift away from the boneless wings. This sequentially would appear to be something else going on to hold this more or less flat sequentially while wings are up another $0.10 or so.

Mary Twinem

From a full basket of commodities, excluding the wings, we are neutral to 2008. And so when you look at menu price increases we have taken, our focus on waste and portion control, as well as the shift that we're seeing from traditional to boneless, we do believe we can neutralize that increase almost entirely year-over-year in the second quarter.

Bryan Elliott - Raymond James

And when you say boneless is up to, I think you said 18, 17 something like that and traditionals are in the high-teens as well, are you talking percentage of total sales or percentage of food sales?

Mary Twinem

I'm talking percent of total sales and I will just verify those numbers for you. Our wings in the first quarter were 20% versus 22% last year. Our boneless in the first quarter was 18% versus 15% last year. And that's on total restaurant sales.

Bryan Elliott - Raymond James

And refresh my memory, alcohol and maybe total bev are what percent of sales?

Mary Twinem

In the current year the food was 75% of our sales in the first quarter and alcohol was 25%. Last year food was 73% and alcohol was 27%.

Bryan Elliott - Raymond James

So you don't sell any Coke?

Mary Twinem

We include that in our food.

Bryan Elliott - Raymond James

Oh, that includes non-alcohol beverages in food. Okay.

Mary Twinem

Correct.

Operator

Your next question comes from Destin Tompkins - Morgan Keegan.

Destin Tompkins - Morgan Keegan

My question is on development. It sounds as though the development is very well on track and potentially could be even above the 15% unit growth target, and I think previously we had talked about company development being a little bit higher to make up for any potential short fall you will see on the franchise side, given the credit environment.

I just wondered if you could update us, is the franchise development more accelerated than you had previously expected? And could we see overall development of the system above that 15% unit growth target?

Sally Smith

I think achieving 15% is probably the sweet spot for us. That does anticipate a few more company stores so that our percentage growth on the company side will be closer probably to the 17% or 18% and then closer to 14% on franchise.

We do, however, have a very nice pipeline of franchisees with deals in the works that will open in 2010 and beyond. We just came out of our quiet period with our franchise agreements being registered and we did just sign an airport deal. We will open in JFK in September. We have a 20-store airport deal that—up to 20 stores over the next five years.

I don't think any of the current franchisees that we signed in will be accelerated into 2009 growth. But that said, I think given this credit environment 15% we think is still very realistic for us.

Destin Tompkins - Morgan Keegan

And then on the Q2 to date sales, were the advertising weights any different during these first few weeks and what do you expect over the full second quarter and then as we go through the full year what should we expect from any potential further benefit from TV advertising?

Sally Smith

In the first quarter our weights were about the same. We were able to renegotiate some or our radio spot rates and some of those buys. We were able to deploy some dollars back in. But from a weighting standpoint, we have been pretty consistent quarter-over-quarter. We would anticipate the same thing happening in June, which is the next time that we have media. Not on TV but radio.

And then of course September and October we will be both TV and radio. Big pushes for us. But nothing significantly from a percent of total revenue or a total spend in those months being any different than prior year.

We will have more dollars to spend on an aggregate basis because our sales have risen in total, but percentage-wise it will still be about the same in September and October.

Operator

Your next question comes from David Tarantino - Robert W. Baird.

David Tarantino - Robert W. Baird

Mary, I have a question on the labor line in the first quarter and the lack of leverage there on such strong average unit volumes. Could you talk a little about what might be going against you on that line? I know you mentioned unfavorable insurance costs, could you quantify the impact of that and is that something you might expect for the balance of the year and is there anything else going on in that line that we should be aware of?

Mary Twinem

As we said in the script, we did see improvements in both hourly and manager labor, to the tune of about 50 basis points to 60 basis points for the quarter. They were completely offset by higher self-insured medical insurance in the quarter and then as well as higher incentive pay at the unit level based on the strong results that they had.

So although we counted on leveraging hourly and manager labor and they have done a really nice job of that, you can't always predict what medical is going to do. And the incentive piece is just up because the quarter was strong.

David Tarantino - Robert W. Baird

And that medical drag, do you think it will continue as the year goes on or is there any way to predict that?

Mary Twinem

You can't really predict it. I think we've seen quarters as high as this before but it's not predictable from a long-term basis.

David Tarantino - Robert W. Baird

Could you quantify the benefit you might have seen from the Easter shift in Q1?

Sally Smith

Actually, the Easter shift was a determent to our sales in April. Of about 2.5%.

Mary Twinem

You could imply that over the first quarter but then you would have to spread it over three months. So, I would say somewhere in the 50 basis point range.

David Tarantino - Robert W. Baird

Okay, great. So you think you did see a benefit there. So if you were to look at the underlying business trends, do you think you've seen a change in the pace of business from Q1 to Q1, when you ex out all the shifts related to the calendar and the roll off of the pricing?

Mary Twinem

Well, you know we shared our first quarter to date trends in our February earnings call. At that point our company stores were at 8% and our franchisees were at 7%. Obviously March trend is down from that because we ended the quarter at 6.4% for our company stores and 6% on the franchise side.

We did have good sales during the tournament time. They weren't quite to the heights that we had seen in January through the college football series time.

Sally Smith

Our March sales, I know during tournament time last year, were very high. And so we are comping over some high costs there. From about 4% of the same store sales for the quarter comp to menu price was going up over 3% this year. Typically you will see second quarter tends to be one of our lighter quarters in terms of total revenue. But I don't think we're seeing a shift. As the month has continued we have continued to see strong sales.

Operator

Your next question comes from Paul Westra - Cowen & Company.

Paul Westra - Cowen & Company

Could you talk a little bit about your strategy with your big cash balance. Obviously you are in a very positive position with cash now, and tell us what your thoughts are on how you best apply that going forward?

Mary Twinem

Well, the current plans are to use it for developing more company-owned stores. I think from an overall capex spend for 2009 we think we are going to spend about $75.0 million in total on capex and that's about what our cash flow from operations would be. So you know, the remaining balance or the $44.0 million that we have we feel pretty comfortable leaving that on our balance sheet currently.

Paul Westra - Cowen & Company

What is the potential acquisition opportunity, maybe for franchisees, share repurchase program and I guess the appetite, from your perspective, on maybe pressing the envelope on those two?

Sally Smith

Well, certainly if a franchisee is interested in selling back stores, we would always take a look at it. We don't have any deals pending right now. It's usually on a case-by-case basis. If anything, we have franchisees that are looking to continue to grow. They want more stores and more territory. But we would look at it.

I think what the cash balance also does is it really allows us to run our business. You know, we're not worrying about having refinance debt. It allows us to stay very focused on our segment, on the sports grill and bar, still providing a great value, and with that value, being able to hold our pricing.

Paul Westra - Cowen & Company

[inaudible] share repurchase?

Sally Smith

We haven't had any. You know about buying back stock. As we take a look at the best use, we found that we really believe that continuing our company-store development, taking advantage of some of the real estate deals that are out there will serve the shareholders best.

Paul Westra - Cowen & Company

And how about a little bit more about your Las Vegas acquisition now that you've had the chance to run it for 100+ days now. Can you talk about the pros and cons?

Sally Smith

I think a couple of things. You know, our Las Vegas locations, like many around the country, struggled a bit in sales. Those numbers are now reflected in our company same store sales, but we are excited about Las Vegas.

We had all of the general managers and assistant general managers in last week for training. We've got the stores operational, we have redone all of the audio visual work. We have done the remodeling and operations [inaudible] people in place really to help grow that business.

What we anticipate now, over the next three to six months, is starting to leverage up some of the marketing. We did not want to start marketing right away, until we knew our operations were absolutely tight, which was what we've done. And I'm very optimistic about the Las Vegas market.

The stores look great and it's a great group of managers.

Paul Westra - Cowen & Company

Do you have all the food costs, labor costs, systems, and things like that.

Sally Smith

Those have all been rolled out to those locations as well.

Mary Twinem

From a unit standpoint those stores operate very well from a cash-flow standpoint. They performed very well. I think what we are really focused now on is to continue to drive additional sales into those units and get their same store sales back up.

Paul Westra - Cowen & Company

On pricing, I think you said 4% effective pricing for the first quarter and you're running 3% effectively for the second quarter. Correct me if I'm [wrong] and then looking forward, obviously wings are higher than normal. And when would be your potential choice to taking more price?

Mary Twinem

You are correct. In the first quarter our menu price increase was running at 4%. It will run at 3% in the second quarter and then a wind-down to 2% in the third, and then 1% in the fourth quarter, if we don't take any additional menu price.

We don't have any plans in the second quarter for menu price increases currently. We do have a few of our company markets that are operating at $0.45. Otherwise most of the other ones are at $0.40. We are reviewing that to see if we want to move some markets up.

And then we have our next menu roll out in July/August time period. And at that point we will make a decision on whether we take additional menu price.

Paul Westra - Cowen & Company

Your preopening expense per store, I know things shift giving the timing, but is your per store preopening cost change from your roughly $2.25 or so?

Mary Twinem

It averages about $2.30 in the first quarter for the new stores that opened.

Paul Westra - Cowen & Company

Would you venture that seems to be consistent throughout this year?

Mary Twinem

I would like to see it come down a bit but I don't think we can argue with the success we've had with the stores that we've opened. So somewhere in that 200 to 230 range is probably where it will be for the year.

Operator

Your next question comes from Larry Miller – RBC Capital Markets.

Larry Miller – RBC Capital Markets

Can you talk about, I think your plan was initially to have about 40% of your stores open the first half of the year and more 60% in the second half, what we might see in terms of the quarterly pacing here. And did I hear you say you opened 10 in the first quarter, 10 companies and you closed one. Is that right?

Mary Twinem

We did close one. We had an older location in Columbus that the lease was up for renewal and because we had put two other newer locations in the vicinity of that store, we ended up closing that one.

Larry Miller – RBC Capital Markets

And what's a good number to use at least for the year, or at least quarterly, if you have a quarterly, estimate for the company side?

Sally Smith

I think we anticipate for the second quarter opening about 9 company stores, which would give us real close to that 40% or 50% of total units open on the company side, for the quarter. And I would have to look to see what franchise is. But by the end of the third quarter, we will have opened more stores on the company side than we opened last year.

So again, really trying to hit that 40/60 and we look very good there, if not a little better.

Mary Twinem

And that would be about 28 locations through the end of the third quarter for our company stores and then about 40 to 45 open for our franchises.

Larry Miller – RBC Capital Markets

I wanted to ask about the regional sales you might have had. I'm just thinking about how things slowed during the quarter. Is there economically in some of the regions that may have changed or anything sports-related where you had a tough comparison that didn't show up for you guys?

Sally Smith

From a regional sales standpoint, I can't really comment about that; nothing stands out.

As we look at the final games of the NCAA tournament the match ups were quite better for our franchisees than they were for company. Last year I believe that four markets on the company side were in that elite 8 versus I don't know if there were any company markets in that elite 8 this year. The final two games played out very well for Michigan and our franchisees there versus last year we both Kansas City and Memphis, both very strong company markets. So I guess North Carolina was in both years so that would have been a benefit for both company and franchise.

That's really the only thing from a tournament standpoint that we can point to. And the fact that last year our sales were up significantly during the tournament.

Operator

Your next question comes from Nicole Miller - Piper Jaffray.

Nicole Miller - Piper Jaffray

I had a question, I was at the Eagan store last night and actually the conversion looks good but we were actually getting into these touch tune games, and I was wondering if you could walk through a couple of metrics. How many stores have it? Maybe what it is, for those that aren't aware, but what is the revenue sharing stream and do you have exclusivity because people certainly were playing the games and it looked to be adding, potentially, incremental sales.

Sally Smith

They've been very well received and we're just rolling them out throughout the company stores and franchise. They are in production. They are exclusive to Buffalo Wild Wings, at least for the short term. And I think we have 40 stores that have rolled out roughly, on the company side.

For those that haven't had a chance to have a play for it, it's a portable electronic game. You plug your credit card and you get a certain number of credits and there's a whole host of games you can select to play from.

We think it's another reason that people will stay at Buffalo Wild Wings. It does keep adults and kids alike very entertained and we see a strong demand for them.

I think it is just incremental revenue. When we rolled it out it wasn't a focus of really generating revenue but rather another people would want to come to Buffalo Wild Wings.

I'm glad you liked the game. They are fun.

Nicole Miller - Piper Jaffray

We got a little bit addicted.

Does touch tunes pay back to you like a license fee or something. I guess license fee wouldn't be the right word, but like a revenue share?

Sally Smith

It's a revenue share similar to what a vending machine would be. And because we haven't rolled out that many yet and there's a kind of a learning curve or the usage tends to build over time, and it comes with a whole in-store marketing piece where we actively put them on people's table and show them how to play the game, that piece will roll out here in the second and the third quarter so I think we will be at a better point and time at the end of the third quarter to talk about what kind of upside potential on our sales we can get out of having the play ports fully utilized.

Nicole Miller - Piper Jaffray

Is there any risk? As I ask myself that same question, maybe the table turns don't turn as fast but that's never been what you have pushed anyway. I mean, that's not your concept. So is there any risk to this?

Sally Smith

I think the only risk is not having enough play ports. We want to get more of them produced because they really are addictive and fun. And from the table turn standpoint, we have always managed that. We manage it during games and we just this is a great opportunity, on a Monday night, to drive people in.

Operator

Your next question comes from Brad Levington - KeyBanc Capital Markets.

Brad Levington - KeyBanc Capital Markets

Sally, I think you mentioned something at the end that I missed on expectations for the numbers of remodels and upgrades this year, am I correct?

Sally Smith

Yes, that was at the end of the script. Let me go back and look. I think we have 13 remodels and 25 patio additions that will happen throughout the year.

Brad Levington - KeyBanc Capital Markets

25 patio additions and how many remodels?

Sally Smith

13.

Brad Levington - KeyBanc Capital Markets

And then looking at comps here in this quarter, I am assuming with the stimulus checks rolling out last year and everything, they maintain, or actually probably get a little bit more difficult, in the coming months. Is that correct?

Sally Smith

It's hard to say whether the stimulus checks that came out in May and June last year did anything. I know that, from my understanding, is that we've stimulus check in the form of reduced withholding in checks now. So, it's hard to say.

Our goal, of course, is to have compelling reason for the guest to come in. And so we do our best to create and event. Summer is a great time for us to partner with local sports teams, really get involved in the community, stimulus check or not.

Brad Levington - KeyBanc Capital Markets

Can you comment on any contracts that you may have in place for commodities right now?

Sally Smith

Yes, we have most of them in place, other than wings, for all of 2009. So when I talked about our full basket being neutral for 2009, those contracts are pretty much locked in for the entire year, excluding the wings, which still [inaudible] with the market.

Operator

Your next question comes from Matt DiFrisco – Oppenheimer & Co.

Matt DiFrisco – Oppenheimer & Co.

My question is with respect to your implication that the 2.5 effect from Easter. Is that then implying you are seeing currently now that we're just from the Easter effect that you are running around a normal beta 4.3?

Mary Twinem

Yes. I mean, and just to make sure, on the 2.5 for the Easter shift that's related to this period of time obviously as the full quarter winds up, that continues to diminish as we get more days behind us. But from an overall kind of trend standpoint for the month of April, we are running in that 4 to 5.

Matt DiFrisco – Oppenheimer & Co.

So on a normalized basis the 4 to 5 now the kids are back in college and not on spring break and everything else, where it was maybe a little lumpy as far as vacation-oriented travel.

And then also in relation to our model, you actually came relatively in line on the comp but it looks like your new store volumes and your stores up by the comp base are a little stronger. I guess that would imply that it seems like—are you getting a longer tail for our honeymoon period now that you are one of the fewer guys growing and you're seeing new competition maybe not coming on as fast, so are you seeing a longer tail to the honeymoon?

Mary Twinem

We think we are. We have had very strong new restaurant openings at higher volumes. When you look at those coming into the comp period, which now for us is after 15 months, and we see that 16th, 17th, to 18th month, we don't see the same kind of same store sales increased percentages that we used to see when our overall average volumes were lower.

So I would without a doubt take the higher volumes in a heartbeat versus the same store sales increase.

Matt DiFrisco – Oppenheimer & Co.

With respect to as far as looking at where the boost that you were expecting to get from the remodel campaign or from the audio/visual enhancement, what are you getting about off of that on a comp and is that in line with plan?

Mary Twinem

That's a hard one to answer. And doing it on a store-by-store. I mean, we certainly have gotten a boost in the most cases on those stores that have been completely remodeled for generations for rolling out to HDTV was really a defensive move, I think. I think you had to have an upgraded audio/visual. And I think the fact that we do have it has kept our comps strong.

Matt DiFrisco – Oppenheimer & Co.

If I look at that 1.8, was that what you expected to do or was that a surprise. Were you able to hold back costs in line with if that was in your plan and control the costs?

And then on the same sort of line, you mentioned that—it sounded like you alluded to March. Maybe internally you were expecting to be modestly stronger than it was. Was some of the labor deleverage, maybe that versus relative to some of our models, was some of that due to maybe a little bit of quicker drop off in sales than you had anticipated?

Mary Twinem

Speaking in the first quarter I think we were overall very happy with the way our labor worked out with the January/February/March same store sales trends. We ended up leveraging 50 basis points to 60 basis points, even though you would have declining trends in same store sales in the month of March, I think we were very pleased with that.

I think when you look forward the first quarter I think we can leverage or efficiently use our labor, even in smaller same store sales increase times because our labor scheduling system has you proactively adjust on a day-day-basis, based on what trends you are currently experiencing.

Matt DiFrisco – Oppenheimer & Co.

So it's safe to say then that that 1.8 isn't going to be, when we do see the second quarter report, it's not as though labor was unexpectedly deleveraged, because that was a surprise, the 1.8.

Mary Twinem

Right. Some management labor would be deleveraged slightly because that's more of a fixed cost, or part of it.

Operator

Your next question comes from Will Hamilton - SMH Capital.

Will Hamilton - SMH Capital

Just a question on labor again, too. The final phases of federal increase, should that much of an effect in the second half? Or Q3?

Mary Twinem

We don't think so.

Will Hamilton - SMH Capital

And on the lunch menu, the new lunch menu. Did you say that that has already rolled out, or will be shortly?

Sally Smith

It rolls out this week.

Will Hamilton - SMH Capital

How many items are there on that and what is kind of the price point for those items. I mean, you said it was supposed to be a little more value-oriented.

Mary Twinem

We are highlighting six items with a starting price of $5.99, that would be without a beverage. And they are items that we currently have on our menu but they're proportioned for a lunch size, so for example, our pulled-pork slammers are on there but you're served two those instead of three of them like you would in a typical entrée. But you have your choice of wings with fries and chicken tender slammers, so we think pretty easy. Quick to make from service standpoint and then prices and portions to what people are looking for lunch.

Will Hamilton - SMH Capital

And the Night Hunger menu, what percentage of sales is that now, or maybe you can update us the late night business overall, how that might have shifted recently.

Mary Twinem

I don't know that we have seen a big shift in the last quarter as it relates to our day part mix. On the Night Hunger menu, it's a menu that highlights some of our items that are more shareable. But there isn't a price point difference associated with that menu right now.

Will Hamilton - SMH Capital

But as a percentage of the total sales, is that?

Sally Smith

Well, the day part for late night, I think it's around about 20%. I think lunch is about 20, dinner is around 50, at times from 2-to-5 is somewhere in the 14% to 15% range, and the remainder 9 p.m on, would be late night.

Operator

Your final question comes from Greg McKinley - Doherty Company.

Greg McKinley - Doherty Company

Your $75.0 million capex view for 2009, can you give us a sense how that breaks down between growth-oriented expenditure and remodeling?

Mary Twinem

For the 35 new company-owned stores that we plan to open, we would anticipate they would average about $1.5 million a piece, so that would be about $52.0 million of the money. We think we are going to do between 13 and 15 remodels this year. They tend to be about $0.5 million a piece. And then we have the patio additions, the maintenance capex, you know, all the rest of it. The HDTV upgrades that will continue to roll through for the year, that bring you up to the $75.0 million in total.

Greg McKinley - Doherty Company

And regarding your cost to sales I was just trying to look at how margins performed their wing-related costs versus non-wing related costs. Can you share with us what portion your cost of goods sold was represented by chicken wings? I know 20% from a sales standpoint but from a cost of goods sold.

Mary Twinem

I don't have that in front of me. That will be disclosed in our 10-Q when we file it next week. So you can pull it out of there.

I would like to make a comment on wings though and I think as it relates to how we were able to lever down our cost of sales by 10 basis points even though our wings went higher. You know, because that's kind of the back of the envelope that's out there is that a $0.01 on wings equaled about $0.008 per share on an annual basis, if your wing prices were to increase. When we look at our Q1 and our Q4 on how our cost of sales acts now with the menu price increases and the shift of traditional wings to boneless, we think it's probably closer to about $0.005 EPS impact for a $0.01 per pound on our wings.

And then I was able to pull out the fresh chicken wings for the first quarter and they would have been 23.6% of our cost of sales.

Operator

There are no further questions in the queue.

Sally Smith

We really appreciate the opportunity to share our first quarter results with you. Again, we were very pleased with our quarter and good questions. We look forward to talking with you again at the end of July.

Operator

This concludes today’s conference call. This conference will be available for replay through May 5, 2009. If you would like to access the replay system at any time you may do so by dialing 303-590-3030 or 1-800-406-7325 and using the access code 4056035.

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Source: Buffalo Wild Wings, Inc. Q1 2009 Earnings Call Transcript
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