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Buffalo Wild Wings (NASDAQ:BWLD)

Q3 2009 Earnings Call

October 27, 2009 5:00 pm ET

Executives

Mary J. Twinem - Chief Financial Officer, Executive Vice President, Treasurer

Sally J. Smith - President, Chief Executive Officer, Director

Analysts

Jeff Farmer - Jefferies & Company

David Tarantino - Robert W. Baird

Analyst for Matt DiFrisco - Oppenheimer

Larry Miller - RBC Capital Markets

Bryan Elliott - Raymond James

Dustin Tompkins - Morgan Keegan

Paul Westra - Cowen & Company

Nicole Miller - Piper Jaffray

John Glass - Morgan Stanley

Brad Luddington - Keybanc Capital Markets

Greg McKinley - Dougherty & Company

Joe Fischer - Goldman Sachs

Greg Schroeder - Jesup & Lamont Securities

Stephen Anderson - MKM Partners

Operator

Good afternoon, ladies and gentlemen. Welcome to the Buffalo Wild Wings third quarter 2009 conference call. (Operator Instructions) I will now turn the conference over to Mary Twinem, Chief Financial Officer and Executive Vice President of Buffalo Wild Wings. Please go ahead.

Mary J. Twinem

Good afternoon and thank you for joining us as we review our third 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 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 our ability to achieve and manage our planned expansions, the number of locations opening during the remainder of 2009, during 2010, and beyond, the sales at these and our other company-owned and franchised locations, our ability to successfully operate in new markets, unforeseen obstacles in developing sites, the costs of commodities, such as chicken wings, the success of our marketing initiative, our ability to control restaurant labor and other restaurant operating costs, economic conditions, including changes in consumer preferences or consumer discretionary spending, 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. After that, I will provide further detail on our recent financial performance and comment on trends in the fourth quarter. Finally, Sally will share some thoughts about the remainder of 2009, as well as thoughts on next year. We will then answer questions.

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

Sally J. Smith

Good afternoon, everyone. Buffalo Wild Wings continues to deliver category-leading operational and financial performance as demonstrated by our outstanding third quarter results. Our revenue growth of 25% produced impressive net earnings growth of 50% over last year, achieving earnings per diluted share of $0.38. Even as the challenging economic backdrop continues to impact the lives of our guests, our results demonstrate we are providing them our compelling You Have to Be Here dining experience that brings them back.

Thank you to the entire Buffalo Wild Wings Team for their continued dedication to improvement which delivered these great results.

With our third quarter results, we are confident we will achieve our growth goals for 2009. We opened three new markets during the quarter: El Paso, Texas, Pensacola, Florida and Honolulu, Hawaii, which gives us a presence in 41 states. Our expansion continues in Southern California with 12 locations to date, and one more scheduled to open by the end of the year.

The strong sales performance of our new units is thanks to the tireless efforts of our development and new restaurant opening teams, who raised the bar even higher with a new opening week sales record at our franchised location in El Paso, Texas. In August, we also opened our first airport location in Houston Hobby, and we expect to open our second airport location in JFK’s International terminal by the end of the year.

Our third quarter same-store sales increased 0.8% at company-owned locations and 1.9% at franchised locations compared to last year, and though the late start of the NFL and college seasons negatively impacted our third quarter sales, our football season is off to a strong start with more marketing, advertising and operational programs in place than ever before.

And with thanks to our Las Vegas team members, we’re pleased to share that starting in September the Las Vegas market now has positive same-store sales, which is ahead of our goal of positive trends by year-end.

Our layered marketing strategy reinforces that we are the destination for football, and helps build momentum throughout the season that will carry on into 2010. We enhanced our fantasy football draft promotion with an interactive online component, and we launched a new PR campaign that enlisted ESPN football expert Trey Wingo and an All-Star list of fantasy football bloggers that will extend throughout the season.

In addition to our fantasy programs, we have an exclusive Football Challenge promotion that gives our guests and our team members a once-in-a-lifetime chance to play a game in Raymond James Stadium in Tampa, Florida and meet former pro football players. And we have a greater TV presence during NFL and college football games.

We’ve had many unique media integrations to capture the attention of fans including “Top College Football Plays of the last 30 Years” on ABC and the “takeover” of the home page of Sport Illustrated.com that reached over 30 million sports fans.

Our menu diversification continues to provide our guests with unique and flavorful options to enhance their dining experience while positively impacting our sales mix. While wing prices remained high, they were offset by strong sales of other products with more favorable margins and tightened controls at the restaurant level. In the third quarter, we continued our sauce development with a well-received, limited time offer for a new signature sauce, Pepper Infusion, along with our first ever dry-rub seasoning called Desert Heat. The expansion of our nonalcoholic beverages is another success story, as our specialty lemonades and sodas are a growing category for us.

I’m pleased with the exceptional efforts of our operations team to keep a keen eye on profitability and their constant diligence to control costs, which is evident in the 50% net earnings increase for the third quarter. The ongoing refinement of systems we’ve developed, including our theoretical food and alcohol system and our labor management program, are validated by our net earnings performance.

It is the combination of all of these factors, along with our commitment to superior execution that resulted in an impressive quarter.

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

Mary J. Twinem

Thank you. We’ve finished another great quarter and we are confident we’ll achieve all of our annual growth goals. Starting with revenue, our third quarter increased over 25% to $132.7 million, versus $106.1 million in the third quarter of 2008.

Company-owned restaurant sales for the quarter increased to $120.3 million, a 26% increase over the same period in the prior year. Contributing to this increase was a same-store sales increase of 0.8%, trending over prior year comps of 6.8% for the quarter.

We estimate the shift of NFL and college football starting a week later in our fiscal quarter this year negatively impacted our quarterly same-store sales results by about 40 basis points, and that the Las Vegas market negatively impacted same-store sales for the quarter by 30 basis points. Menu price increases taken over the past twelve months at company-owned restaurants were approximately 3%.

We had 33 additional company-owned restaurants in operation by the end of third quarter versus the same period last year, and average weekly sales increased by 0.5%, slightly less than our same-store sales of 0.8% for the quarter. The primary reason is that numerous restaurants opened in 2008 with very high sales that have now settled into more sustainable sales levels. While the average weekly sales at these restaurants remains significantly above the overall company-owned average, the drop from their strong opening numbers in the prior year pulled down the average weekly sales increase for the quarter. We expect this trend will end as these units enter the same-store sales group in the fourth quarter of 2009 and first quarter of 2010.

Our royalty and franchise fee revenue for the third quarter also showed growth of 17.7% to $12.5 million versus $10.6 million last year. Franchised locations had a 1.9% increase in same-store sales, comping over 2.1% in the prior year. Also, an additional 52 franchised units were in operation at the end of third quarter compared to 2008.

Now let’s discuss the performance of our company-owned restaurants, which again showed nice margin gains year over year.

Cost of sales for the third quarter was 29.8%, equal to the same period of the prior year, despite the significant increase in cost for traditional wings to $1.67 per pound for the quarter, which is $0.50 or 43% higher than last year’s average of $1.17. Our company-owned restaurants continued to focus on product preparation and waste controls, and that effort, along with menu price increases and neutral or slightly lower costs for other commodities, combined to offset the higher wing cost. Traditional wings accounted for 21% of our restaurant sales during the third quarter of 2009, similar to the same period in 2008. Boneless wings, which during 2009 have been a better margin item than traditional wings, increased to 19% of sales, from 17% in the prior year. New products like Slammers, Wild Flatbreads, and alcohol-free beverages also provide better margins than traditional wings.

Cost of labor for the third quarter was 30.2% of restaurant sales, 50 basis points lower than third quarter last year. We again saw the impact of our labor management program through efficiencies in hourly wages that were the primary contributor to this year-over-year improvement.

Restaurant operating expenses as a percentage of restaurant sales decreased by 30 basis points to 16.1% of restaurant sales in the third quarter. As has been the trend throughout 2009, lower utility costs aided this improvement.

Occupancy costs as a percentage of restaurant sales were up 30 basis points over the prior year.

In summary, our field management’s focus on profitability strengthened our unit-level performance and resulted in a 40-basis point improvement in restaurant-level cash flow over the third quarter of last year. Restaurant-level cash flow, which is calculated before depreciation and preopening expenses, was $20.4 million, or 17% of restaurant sales, versus $15.8 million or 16.6% in the third quarter last year.

Depreciation and amortization for the third quarter was 6.2%, up 60 basis points from last year. Of this amount, 10 basis points relates to the amortization of intangibles acquired as part of the purchase of the Las Vegas franchised restaurants at the end of September last year. The remainder is attributed to ongoing upgrades of our audio and video technology in our restaurants, remodels and patio upgrades at numerous locations, and the higher capital investment associated with freestanding locations.

General and administrative expenses grew to $12.9 million in the third quarter, or 9.8% of total revenue, compared to $10.7 million, or 10.1% last year. Excluding stock-based compensation, which was $1.8 million this year compared to $1.3 million last year, G&A expenses for the quarter totaled $11.2 million, or 8.4% of revenue, a 40-basis point decrease over prior year as we better leveraged our wage-related expenses and travel costs against higher revenue.

We opened five new company-owned restaurants in the third quarter of 2009, compared to twelve new locations in 2008. Pre-opening expenses for the quarter totaled $1.1 million versus $2.5 million last year. The $1.1 million includes $320,000 of pre-opening expenses for locations that are in construction, while in the third quarter last year we incurred $516,000 related to future openings. For the five openings in the quarter, we averaged under $200,000 of pre-opening expenses per location.

Investment income totaled $379,000 for the third quarter of 2009, compared to investment income of $264,000 in 2008. Due to better market conditions, investment earnings from funds set aside for future payouts under our deferred compensation plan increased to $280,000, compared to a loss of $173,000 last year. This was partially offset by investment income from our excess cash in marketable securities of $99,000, which is down from $437,000 last year, primarily the result of lower interest rates.

Our effective tax rate during the third quarter was 31.8%, compared to 31% in the prior year. Our full year 2009 tax rate is estimated to be between 33% and 34%.

In summary, another very successful quarter. We produced a net earnings increase of over 50% and delivered earnings per diluted share of $0.38.

From a balance sheet standpoint, on September 27, 2009 our cash and marketable securities totaled $52.4 million compared to $44.5 million at the end of the 2008 fiscal year. We ended the quarter with $297 million in total assets and $199 million in stockholders’ equity. Cash flow from operations was $58 million for the first nine months of 2009, and we spent $51.3 million on capital expenditures.

Now, a few trends and details on the fourth quarter of 2009. For the first four weeks of the fourth quarter, our same-store sales reflect the momentum we have built during football season, with same-store sales trends of nearly 6% for company-owned restaurants and just under 4% for franchised locations, up from same-store sales of 3% and 2% respectively for the same period in 2008. We expect the combined potential benefit in the fourth quarter for food and alcohol menu price increases to be slightly less than 3% for company-owned restaurants.

The Las Vegas market negatively impacted company-owned same-store sales performance during the first eight months of 2009, but beginning in September Las Vegas met our goal of becoming same-store sales positive prior to year-end and continues that trend into October.

We expect to open twelve new company-owned restaurants in the fourth quarter, with four of those units opening yesterday. We also opened nine franchised restaurants to date in the fourth quarter and expect at least eight more franchised locations to open before the end of the year.

For cost of sales, the anticipated average price per pound of traditional chicken wings for October and November is $1.77 versus $1.27 for fourth quarter last year. We highlight the cost of traditional wings because it remains one of our primary commodities but as our results to-date this year attest, the significance of the volatility in this cost and the importance of isolating this factor continues to lose relevance. For the first nine months of 2009, the cost of traditional wings has been substantially higher than prior year, yet we have improved restaurant-level performance and should achieve our net earnings growth goal for the year.

We expect ongoing hourly labor efficiencies in the fourth quarter but our overall cost of labor percentage in the fourth quarter may be flat as we anticipate that health insurance costs will be higher than in 2008.

In restaurant operating expenses, lower natural gas costs continue in the fourth quarter-though the gap is tightening, so restaurant operating expenses as a percentage of sales may be down only slightly from prior year.

We anticipate that our G&A expenses in the fourth quarter, exclusive of stock-based compensation, will be approximately $11 million. We estimate the full year 2009 stock-based compensation expense to be approximately $6 million, with fourth quarter expense of $1.7 million. In fourth quarter of 2008, stock-based compensation expense was also $1.7 million.

In summary, consistent with the strong performance throughout the year, we are confident we will achieve our 2009 goals of 15% unit growth, 25% revenue growth, and 20% to 25% net earnings growth, with net earnings likely to be at the higher end of our stated goal.

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 statement for factors affecting our forward-looking statements.

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

Sally J. Smith

Thank you, Mary. Our performance, especially during a tumultuous economic year, validates our team’s ability to achieve our goals, and the power of this brand. The fourth quarter will be exciting for Buffalo Wild Wings with at least 29 new restaurants opening. The excitement of football season is here and we’re experiencing same-store sales increases of nearly 6% in company-owned locations and just under 4% in franchised locations in the first four weeks of this quarter. To build on that momentum, we have new product offerings, a new drink menu, and an expanded national media presence.

Our fall media plans, which began late August and include a mix of TV, radio and digital media are stronger than ever, with a 22% increase in spending over fourth quarter last year. We’re showcasing our TV spots, which emphasize the camaraderie and fun in our restaurants, with more spots in NFL and college football games this season. And our football sponsorships on ABC, the Big Ten, and Versus networks will air throughout the season and culminate with commercials airing in the first quarter of 2010 during premiere games like the Rose Bowl.

Yesterday we launched a limited time menu that features an extension of our popular Flatbreads and a new dessert. Our three new Flatbread Flips -- the Steak and Potato, the Southwest Chicken, and the Smokestack -- are hearty sandwiches that are paired with our signature sauces to create a unique taste profile that is sure to satisfy any game-day appetite. The new shareable dessert, Sweet Cinnamon Bites, is an indulgence that is a great finish to any meal.

Yesterday, we also launched a new drink menu that will enhance the product offerings for our guests. Our operations team will remain focused on profitability with an intense dedication toward delivering a fun and unique dining experience that shows our guests we are not just another place to eat, but a high-energy, social gathering spot where sports helps them make connections to friends, family and our team members. We’ll continue our emphasis on training and optimizing systems for labor and cost controls, and we’ll work toward sharing the results and best practices for ongoing improvements throughout our system.

The launch of a new retail gift card program will generate additional exposure for us. This holiday season we’ll begin selling our gift cards in select retailers including bookstores, convenience stores, regional grocery stores and Army and Air Force commissaries. And plans are in progress to enhance the program this spring.

As a successful 2009 draws to a close, it’s time to look forward to 2010. For 2010, based on our current development pipeline, we believe we can achieve 13% to 15% unit growth, with about 40% of the units being company-owned and somewhat back-weighted in the year. Achieving our unit growth goal, along with strong restaurant-level performance and leveraging our infrastructure, should translate into net earnings growth of 20% in 2010.

We are continuing our long-term strategies that invest in building the future of our brand. We remain focused on enhancing the You Have To Be Here experience for our guests, improving our facilities and creating a rewarding work experience for our team members that will uphold our position as a leader in the casual dining category.

The vitality of the Buffalo Wild Wings brand is evident and it fuels our determination to achieve our vision of becoming a restaurant chain of more than 1,000 units in the United States. There is passion at every level of the organization to continually improve and a desire to bring the Buffalo Wild Wings experience to more guests. Combined with the excitement of untapped opportunities for international expansion, we are enthusiastically building the strategic foundation for a global brand. We’ll continue to make investments for the long-term strength of Buffalo Wild Wings and look forward to sharing more of our 2010 trends and initiatives with you in February.

Again, I applaud and thank the entire Buffalo Wild Wings Team for an impressive quarter and year. Operator, we will now open the call to questions.

Question-and-Answer Session

Operator

(Operator Instructions) Our first question comes from the line of Jeff Farmer with Jefferies & Company.

Jeff Farmer - Jefferies & Company

Just looking for an early read on 2010 cost of goods sold. I guess up, down, flat versus 2009 -- how are you guys thinking about that line and what does pricing look like right now for 2010 for you guys?

Mary J. Twinem

From an overall commodity standpoint, wings out of the equation, everything else looks like it will be either flat or down so from an overall commodity side, it looks pretty good. Again, we don’t know what wings will do but otherwise it looks really nice.

Jeff Farmer - Jefferies & Company

Okay, and then I guess assuming or I guess based on the fact that you basically offset what’s going to be more than 40% wing cost inflation this year with 2% plus pricing, then looking into next year if everything else is flat and assuming we don’t get anywhere near the same type of inflation and potentially could you see COGS favorability next year?

Mary J. Twinem

You know, it really depends on the menu price conclusion we make in the future. We will for the fourth quarter of 2009 we’ll be slightly less than 3% on our menu price increase for what’s in effect to date. As we go into 2010, first quarter based on pricing taken so far, we’ll be slightly under 2%. Then we’ll be down to 1% in the second quarter and then almost or none, no menu pricing in effect for the third and fourth quarters, so we’ll make decisions on what we do from an overall menu price standpoint as we get closer to our first quarter menu rollout.

Jeff Farmer - Jefferies & Company

Okay, and then final question from me, you touched on this but are your new restaurants entering the comp base as a drag on same-store sales? You sort of illustrated for us some of the big volumes and then declines you are seeing there but 15 months later as they enter the comp base, are they a drag on same-store sales now and is that different from what you have seen in prior quarters or prior years?

Sally J. Smith

A couple of things -- one, we have our -- [we go to our comp group within 15 months] is a pretty short period of time. I think overall our goal is -- well, our goal certainly overall is to have them enter the comp group positive and I think they are entering the comp group at about at no impact to same-store sales for the third quarter.

With regard to the specific openings we were going up against last year, their volumes were just so high but they are entering the comp group at break-even or even same-store sales.

Jeff Farmer - Jefferies & Company

Thank you.

Operator

Your next question comes from the line of David Tarantino with Robert W. Baird.

David Tarantino - Robert W. Baird

Mary, a question on the guidance for this year -- you are pointing to the upper end of the plan, which is 25% earnings growth yet you’ve exceeded that pretty soundly for the first three quarters. Is there something in Q4 even with the higher comps that makes you concerned on the cost side? Maybe if you could clarify those comments, that would be great.

Mary J. Twinem

When you looked at what we have for net earnings year-to-date through the third quarter we are at 33% growth over prior year. Our goal initially was 20% to 25% and today we said that we were comfortable at that higher end of the range.

When we look at the fourth quarter, I mean, obviously we have great same-store sales trends going to date and whether or not those will continue through the full quarter, we sure hope they do. We do have 12 pre-opening charges coming in for the stores that are opening on the company side. Stock comp at $1.7 million, we pointed out. Wings right now for October and November trending at $1.77 and in November or October we saw that, their price go up so I don’t think we see much happening from an improvement for the rest of the year there, so it really isn’t our intent usually to raise levels but we are pretty confident in that 25% mark.

David Tarantino - Robert W. Baird

Great, thank you and then the comment on 2010 earnings growth of 20%, could you give us a flavor for what type of comps you might need to hit that goal?

Mary J. Twinem

We didn’t give specifics on that. Obviously we expect positive. We would never go into a year thinking we’d be anything but. Menu price probably being pretty low as a component piece of that, expecting to have our new restaurant openings continue to pull up our average weekly volume average. So I think we feel very good that from 13% to 15% style unit growth that we can leverage that with G&A leveraging and improvement at our store level to 20% net earnings.

David Tarantino - Robert W. Baird

Great. Thank you very much.

Operator

Your next question comes from the line of Matt DiFrisco with Oppenheimer.

Analyst for Matt DiFrisco - Oppenheimer

This is Rachel [Schaecter] in for Matt DiFrisco. Is there anything driving your G&A that it came in higher than your prior expectations?

Sally J. Smith

Yeah, there were a couple of things. One, and the biggest component has to do with additional crude bonus expense throughout the company. Obviously being at the higher end on net earnings and our results to date, we have increased our bonus expense, our incentive compensation. And then we did have some reorganization costs related to the departure of a senior vice president of human resources in the third quarter.

Analyst for Matt DiFrisco - Oppenheimer

Okay, thanks and do you expect to see a negative impact on the fourth quarter same-store sales from the Halloween and Christmas weekend shift?

Mary J. Twinem

I don’t think too much from the Halloween side because Halloween for us isn’t too much of a different day overall. We do think when we look at Christmas, Christmas in 2008 was a Wednesday/Thursday. This year it is a Thursday/Friday and Thursday and Friday tend to be bigger days for us, so I think we do have the potential for that match-up to be not as good as it was last year.

Analyst for Matt DiFrisco - Oppenheimer

Okay and one last question -- did you quantify, maybe I missed it, the impact that the one less week of football had on the third quarter same-store sales?

Sally J. Smith

Yeah, I think we said we anticipated that it affected us by about 40 basis points.

Analyst for Matt DiFrisco - Oppenheimer

Okay. Thanks very much.

Operator

Your next question comes from the line of Larry Miller with RBC Capital Markets.

Larry Miller - RBC Capital Markets

Just a clarification first -- it sounds like with the margin favorability, you are guiding revenues to about a 20% next year and that’s probably more due to the back half weighted opening schedule -- is that a fair statement?

Sally J. Smith

I think that’s fair, Larry, yes.

Larry Miller - RBC Capital Markets

Okay, great, thanks. And then I just wanted to get a sense of where you think the chicken mix might shake out over time. The bone-in has been decreasing at a pretty rapid rate and the boneless has been increasing at a rapid rate and as you kind of think about the business model, what is the steady state?

Sally J. Smith

Boy, I would love to have it stay right about where it’s at. I think it highlights our ability to deliver a great taste profile no matter what you choose. Obviously with wing prices so high, having that shift to boneless has helped and -- but at some point it’s traditional [inaudible] you know, boneless -- more equal boneless but again, I think anybody -- I want as many people buying wings as possible and as much as I like the mix being pretty even, I’ll take any sales.

Larry Miller - RBC Capital Markets

Will you consider pushing or promoting one over the other, given pricing in the fourth quarter?

Sally J. Smith

Not in the fourth quarter. I know that we have a -- we will be promoting both at various times throughout 2010 and again, we don’t -- from a promotion standpoint, we don’t typically talk about price in our promotions but just reminding our guests that it’s either a great value or come in for -- reminding them about boneless Thursdays or Wing Tuesdays but I do know they are both plated for 2010, and our goal of course is to manage the cost implications around that.

Larry Miller - RBC Capital Markets

Great, and then just two quick ones for me -- the $200,000 in pre-opening, is that a below average number or should we be thinking about that as kind of a trend from now on? And if you can give us any color about some of the regions, the Midwest I think has been struggling with some unemployment rates but how is that holding up for you?

Mary J. Twinem

From a pre-opening standpoint, we had been in about a $220,000, $230,000 average the last five now are at around 200 or slightly under. We definitely have a focus group looking at that. We think that you should be able to open a store correctly at about $200,000. So when we look at 2010, we are definitely focused on trying to control that pre-opening expense line.

Sally J. Smith

The second part of your question?

Larry Miller - RBC Capital Markets

Was about any sort of regional trend or flavor for sales.

Sally J. Smith

Regional trends for sales -- no, nothing comes to mind.

Mary J. Twinem

-- at Las Vegas because we are all pleased at their return of sales there.

Larry Miller - RBC Capital Markets

Okay, thanks, guys. Great job.

Operator

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

Bryan Elliott - Raymond James

I just wanted to get a better sense maybe what you might be attributing the improved comps in October to be from kind of flattish summer to a very strong plus 6 here in October. Obviously football season plays a role but we had football last year as well, so you’re getting a lot more people in this year to watch games than last and A, is that the case? Is it Saturday/Sunday or are you doing better during the week? Is there some marketing that has kicked in? Maybe you could give us a little more color on what you think has driven that.

Sally J. Smith

Okay, well, one, it’s certainly football and we are seeing some great match-ups this year throughout football season. I think that as we look back on July and August, if our guests had been taking advantage of discounts at perhaps our competitors, I think that with the return of football, we’ve seen the return of our guests or a strengthening of our guest count, I guess I would say. Again, as I mentioned, there have been some key matchups in some of our markets, certainly the Vikings and the Packers, Colorado is doing really well this year. From a baseball standpoint, we saw the Twins have a very exciting finish to their regular season. And so there’s a lot of great team stories out there and I think we are taking advantage of it.

Bryan Elliott - Raymond James

So the demise of Ohio State hasn’t hurt the Ohio stores?

Mary J. Twinem

We’ve got the Bengals.

Sally J. Smith

Yeah, we’ve got the Bengals going in there.

Bryan Elliott - Raymond James

All right, thanks.

Operator

Your next question comes from the line of Dustin Tompkins with Morgan Keegan.

Dustin Tompkins - Morgan Keegan

Thanks. The negative impact you saw from the one week shift of the football season, does that reverse in the first quarter of 2010? I’m just curious as you look at the rest of the quarter and you look at the comparisons that you just lapped in October and what you got upcoming and you kind of factor in some of the things like the NFL network now being available on Comcast. You know, what is your -- how do you handicap your ability to sustain the trend that you just put up?

Mary J. Twinem

Well, on the NFL college football effect, for September we -- or for the quarter we thought it affected us by about 40 basis points. From the NFL component piece of that, we do get an extra week of football in the first quarter of 2010, so we do have some upside sales potential coming there. From the college side, all those games get caught up here within the fourth quarter, so I think that can be a sales driver for us in the fourth quarter.

Dustin Tompkins - Morgan Keegan

Okay, so you think you can sustain the momentum through the rest of the quarter?

Sally J. Smith

Well, we certainly -- we anticipate sustaining momentum. I don’t know that it will be at the 6% range. It’s hard to tell but we definitely feel very comfortable with our results to date and as we continue and close to 2009, yes.

Dustin Tompkins - Morgan Keegan

Do the comparisons in November and December differ from what you just lapped in October?

Mary J. Twinem

Well the October of last year we had highlighted had been like in the 3% range for company stores, and our quarter last year ended at 4.5%. But from a quarter standpoint, it’s one of our lower quarters to get over same-store sales.

Sally J. Smith

For the year.

Dustin Tompkins - Morgan Keegan

Okay, and on the depreciation, I think you noted the ongoing upgrades and remodels that had driven a portion of the increase in depreciation -- can you kind of give us some timeline of upgrades and remodels? Is that an ongoing thing that we’ll continue to see or is there an endpoint where you think the upgrades and remodels might tail off a little bit?

Mary J. Twinem

Well, for 2009 we had 10 remodels. Most of them would have been done here in the summer getting ready for the football season. From an overall CapEx standpoint for 2009 when we look at the remodels, as well as the remaining HD TV upgrades we did, and other overall maintenance CapEx, we ended up -- we will end up spending about $19 million in 2009. When you look forward to 2010, we do plan to increase our remodels up to 20 next year but we don’t have the HD TV upgrade expense that we had in the current year.

So from a dollar standpoint, we anticipate we’ll be spending $20 million to $22 million next year, so a little bit more than what we did this year but I think with bigger impact as you look at us doing from 10 to 20 remodels.

When we get to the end of 2010, we’ll have about 30 or so of our company stores. They are still not up [inaudible] and so we would anticipate then in 2011 we’d try to finish those up.

But I don’t know from an update standpoint, I don’t know if you ever --

Sally J. Smith

I don’t think you ever stop remodeling or adding patios, you know, the audio visual upgrades which has been over the course of the last couple of years has -- I think has been an important factor in the continued success of the brand and the continued success of sales and our ability to deliver on that. And so as we enter -- as leases come up for renewal, that is typically when we take a look or within the 24 month period before they come up for renewal is when we take a look at what we are going to remodel or if we are going to relocate. And so I think it’s an ongoing expense that we need to be prepared to spend, spending it wisely is our job as well. And so as we look at what per remodel costs, we’ll want to take a look at -- is this the best, are we getting the best remodel for the dollar?

Dustin Tompkins - Morgan Keegan

Great, that’s helpful and then just lastly, on the investment income, I think you mentioned $280,000 related to better performance I can't remember in one of the plans, do you anticipate that continuing? Should we think about that as more the $99,000 driven by your cash and marketable securities? How do you see that going forward?

Mary J. Twinem

I think what you should focus on is the investment income on our excess cash, so more the $99,000 as that other -- you know, the investment earnings for the funds that will fund our deferred comp in the future, that’s really an offset on our P&L, so as we see an increase in the investment income line, we would also see an increase in our SG&A expenses, so the next effect on the bottom line isn’t anything at all.

Dustin Tompkins - Morgan Keegan

Okay, great. Thank you.

Operator

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

Paul Westra - Cowen & Company

Just a follow-up to a question on pricing strategies next year. Assuming times are at least tough for everyone else and your comps continue to be industry leading but in light of a still soft consumer, what would be your philosophy if you had some up-tick in labor and food? Would it be to defend year-over-year margins or give me an idea of what it would take for you to take additional pricing next year.

Sally J. Smith

We have great debates over pricing before we ever implement a price increase. We would take a look at what are the commodity costs, are there any other ways to [inaudible]. Same with labor. Now we are going to see some slight decreases, and we’re just talking a few cents, on minimum wage in minimum wage states where there’s a tip credit. But I think as always on a case by case basis, we did raise the price of our Wing Tuesday from $0.40 to $0.45 in July and August, so we do have that ability in between menu rollout.

I don’t know that -- I mean, of course we would like to cover commodities but we also want to be very aware of what is happening to the consumer. I think more importantly is the fact that we haven’t gone out there and discounted and so we’ve been able to maintain our pricing margins as a result of not discounting, so it’s not something that we have to go through and lap again. So we’ll look at price as we roll out that [inaudible] menu but again, haven’t decided anything at this point.

Paul Westra - Cowen & Company

And then more of a philosophical question on your marketing -- first, as you penetrate markets more and more, I sense anyway obviously a lot of the messaging is to introduce the brand of beer, sports, and wings that you obviously own but I also know you’ve talked about in the past the transition into going after more traditional casual dining, dining out, for instance, occasions and I was wondering if there is going to be a slight shift to some different messaging. And then sort of relatedly, I assume that there’s no plans to change or debate the shift of adding more marketing dollars --

Sally J. Smith

No, for 2010 we’ll still spend about 3.5% on our -- contribute to our national ad fund. It was a 0.5% [inaudible] at the local level. And then we will be developing a new TV commercial but it still will be focused on the brand and experience, and you might be thinking about our radio campaigns typically which do focus on a promotion or a promotion like our Wing Tuesdays or Boneless Thursdays or one of our takeout late night or any -- you know, another product offering that we might have. So that might be what you are thinking about from a brand messaging standpoint versus a promotion messaging standpoint.

But 2010 will be -- it feels like it will be very similar to 2009.

Paul Westra - Cowen & Company

Great. Thanks and congrats.

Operator

Your next question comes from the line of Nicole Miller with Piper Jaffray.

Nicole Miller - Piper Jaffray

With the openings for fiscal 2010, would it be the same split, like 40% company, 60% franchise?

Sally J. Smith

That is what we are targeting, yes.

Nicole Miller - Piper Jaffray

And I think somewhere in the Q&A you talked about them being back-end loaded. Could you just give us kind of a percentage opening first half and then back half?

Mary J. Twinem

From a back-weighted standpoint, it’s really the company stores that look like they will -- there will be more opening in the second half of the year. We haven’t given specifics on that but just based on the pipeline today. On the franchise side, they look like they are pretty even first half and second half.

Nicole Miller - Piper Jaffray

And is it still the context of about $75 million in CapEx for this fiscal 2009?

Mary J. Twinem

Yes.

Nicole Miller - Piper Jaffray

And so next year it sounds like we can obviously compute the store growth and then you were talking about remodels and things of that nature, so will it be a little bit higher next year?

Mary J. Twinem

Well, depending on what you are putting in there for the number of company stores -- probably $1.7 million would be a decent average for the CapEx, with a blend of both end caps, that would be slightly lower than that as well as freestanding, that would be slightly above that. And then an additional $20 million to $22 million, which would really cover everything else as well as home office infrastructure stuff.

Nicole Miller - Piper Jaffray

Great. Thank you very much.

Operator

Your next question comes from the line of John Glass with Morgan Stanley.

John Glass - Morgan Stanley

Thanks. A couple of follow-ups -- first, just the average weekly sales phenomena, can you just define that a little bit more? Why do you think that trend will settle down? Maybe what has the performance of new stores been in the first couple of quarters of this year? Are they lower than the first quarters of last year, by how much?

Mary J. Twinem

Well, when you look at our average weekly volumes and you separate out the same-store sales component piece of it and then what you would be getting from the incremental average unit volume increases, we’ve had about 300 basis points that really kind of started with the opening of our stores in June of 2008, with some of the higher volume, new markets that we entered into, the bigger units, high density and so there’s a fair amount of what you’ve seen that really has to do with this group of 2008 and even 2009 beginning to come through that have increased. That’s the point where they are lapping themselves but they still are three or four months -- or they are three months from being part of our same-store sales group. They are negatively impacting the average unit volume calculation because they had such phenomenal opening week sales. So in the case of -- you know, our Virginia Beach stores, we’d be in the 80, 90, 100 or more sales per week and now they’ve fallen back from that. They are still in the class of 2008 as a whole, as well as the class of 2009. They are both significantly above what our average weekly volume is. It’s just that they are starting to lap their own great results from the prior year.

John Glass - Morgan Stanley

And did lapping Las Vegas this quarter have anything to do with that as well, or not material?

Mary J. Twinem

You know, not really. It’s still positive to the overall average weekly sales. They are in our same-store sales group, so they have a smaller impact. It’s really the class of 2008 that are working their way through. I think as we see them become a part of the same-store sales group in the fourth quarter, and then as well as in the first quarter of 2010, we are going to see this average weekly volume in the same-store sales be pretty close together. It’s our intent always to have it a little bit higher but I think this 30 basis point difference you saw is really unique to that third quarter piece.

John Glass - Morgan Stanley

Okay, and then thinking about your growth for 2010, even if you didn’t have a later store openings in the year, 13% to 15% unit growth combined with whatever comp estimate you want to put out there, it would seem like maybe your revenue growth is going to be less than 20% next year, or 20% or less and then earnings growth at 20%. Are we hitting an inflection point just as the company gets larger that maybe we are starting to think of a 15% to 20% revenue growth model and a 20% earnings growth model? Or is that not the case?

Mary J. Twinem

Well, we haven’t given specific revenue piece -- I think what we do have to remember about 2009 is that we had the 9 Las Vegas stores as part of our overall revenue growth this year, so when we had our goals for this year of 15% unit growth, 25% revenue and 20% to 25% net earnings, part of that revenue piece was coming from the purchase of the Las Vegas stores. I think when you are doing a 13% to 15% unit growth and you are able to leverage that into 20% on bottom line, obviously it’s talking about very successful sales levels from the same-store sales as well as great new restaurant performance, and I think that’s pretty good leveraging.

John Glass - Morgan Stanley

And then you talked about some pressure in labor in the fourth quarter. I think it was healthcare related. Is that a one-time event or have you taken a step up in the contract and renegotiated some costs in that item that were persistent into 2010?

Mary J. Twinem

Well, we’ve seen health insurance for all of 2009 be higher than 2008 pretty much when we look at Q4 of 2008, we don’t see any other up-sides happening this year that will be able to offset that difference. So I think we are going to see it be higher for fourth quarter 2008. We are looking at making a move in our provider for our health insurance. Hopefully that will help us in 2010 but I think we’d have to -- that’s a wait and see.

John Glass - Morgan Stanley

So health insurance isn’t higher in the fourth quarter than the third quarter -- it’s just a comparison to the fourth quarter of last year?

Mary J. Twinem

Correct.

John Glass - Morgan Stanley

Okay, thanks.

Operator

Your next question comes from the line of Brad Luddington with Keybanc Capital Markets.

Brad Luddington - Keybanc Capital Markets

I wanted to start off asking, you know, you got asked about regional performance and just more specifically, we’ve heard a lot of companies say that Texas has softened for them. Have you all seen any -- I mean, it’s still probably positive, I’d imagine, but any softening in the Texas market?

Sally J. Smith

Again, we typically don’t talk about states specifically or state specific, but our overall performance has been pretty consistent throughout the country, so nothing comes to mind as Texas being significantly different than the rest of the country.

Brad Luddington - Keybanc Capital Markets

Okay. And I recently had the pleasure to go down to Harlan’s in Texas and I saw I think a franchise unit down there. It still had the older TVs in that unit. Is there a big lag in franchisees upgrading to the high def? And should we expect if there is that lag that they will start upgrading in the coming years a little more rapidly?

Sally J. Smith

You know, I don’t know about that unit specifically. We’ve had a lot of franchisees that have made the shift to HD TV. That one could be perhaps scheduled or they didn’t want to disrupt the football season, so I don’t -- but there has not been a reluctance for franchisees. Actually, they are very proactive about making that switch.

Brad Luddington - Keybanc Capital Markets

Okay, good to hear. And then I think you mentioned before considering market by market price increases on bone in wings -- is that something that you have been doing or are still looking at?

Sally J. Smith

I am not sure -- are you talking about our Tuesday promotional day or just bone-in wings on our menu?

Brad Luddington - Keybanc Capital Markets

On the menu.

Sally J. Smith

On the menu? We already do that. We look at our markets. There are tiers. So it’s not just an individual market but it might be a region and so those vary, those could vary by market -- not significantly but yeah, we have different menu tiers for bone-in wings.

Brad Luddington - Keybanc Capital Markets

Okay, thank you very much.

Operator

Your next question comes from the line of Greg McKinley with Dougherty.

Greg McKinley - Dougherty & Company

Just a quick follow-up on occupancy costs -- are you seeing any loosening up in required rent rates as you open up new stores? Those have stayed fairly steady year over year on your P&L. Any thoughts there?

Sally J. Smith

I think that -- no, I’m not seeing a loosening up. I’m seeing landlords or developers come back to us for maybe perhaps space that we looked at six, nine, 12, 18 months ago and passed on because of rental rates. And so it actually -- our rents are more closely meeting our model than they have previously. But we also have the discipline to say no thank you, we can't do that.

Greg McKinley - Dougherty & Company

Okay.

Mary J. Twinem

I think too we were up 30 basis points in our occupancy for third quarter and part of that I think is a reflection of the same-store sales level we were at. If we were in what we had been traditionally in the 4%, 5%, 6% same-store sales level, we would have seen flat occupancy.

Greg McKinley - Dougherty & Company

Okay, that’s helpful. And then just getting back to the AUV comments for a moment -- I mean, I understand the simple math in the sense that some of those real openings next year transition into the comp base in Q4. That’s why you expect that spread between the comp and AUV growth to narrow. Will it narrow or will it actually get back to parity or even a positive spread? How quickly do you think that could happen?

Mary J. Twinem

I haven’t modeled out all of the next quarters. We were pretty darn close this time. The other thing we had affecting those same-store sales as well is that they were going up with one less week of football in the --

Greg McKinley - Dougherty & Company

Okay.

Mary J. Twinem

-- numbers, and so that part of the effect we won't see in fourth quarter. So I mean, again, we sure would like to see that average weekly volume return and stay above the same-store sales.

Greg McKinley - Dougherty & Company

Thank you.

Operator

Your next question comes from the line of Joe Fischer with Goldman Sachs.

Joe Fischer - Goldman Sachs

Just kind of curious on 2010, there seems to be some implicit margin improvement in that EPS growth or the earnings growth number? And just kind of curious what the balance is there between restaurant level versus leveraging, like fixed cost G&A?

Sally J. Smith

That’s a good question. I mean, our goal is -- as we look at our model, as we look at the P&L, as we look at putting together our budget for 2010, we expect where we can control it, particularly in G&A, that we will see continued leveraging in G&A. Now, we also want to invest in the future and so we are going to be taking a look at how can we afford to take a look -- start looking internationally. From a cost of sales and labor, again continued small improvements. Cost of sales was the -- back to the commodities at flat or a slight improvement, and if we see any improvement in wings and traditional wings, that should help. And the labor just continuing to monitor labor schedules, watch stores as they come out of their new opening and making sure that our management levels are right.

So I would say as -- if it implies leverage, we are going to see it in a variety of areas and little increments in a lot of places.

Joe Fischer - Goldman Sachs

Sure. I mean, it has to imply leverage though, right? Unless you are expecting 5% to 7% comps?

Sally J. Smith

It does.

Joe Fischer - Goldman Sachs

And then just one other question -- on the Wing Street launch from Pizza Hut, clearly hasn’t affected October very much but I’m curious if it affects the wing market and if it puts pressure on wing prices or the supply.

Sally J. Smith

You know, from a sales standpoint, and then I’ll address the wing prices, but from a sales standpoint, we think the occasion is different for the person that is going to Wing Street versus coming to Buffalo Wild Wings. You know, wing prices have stayed uncharacteristically high, so I don’t know if the Wing Street product is a frozen product or if it’s a fresh product. If it is a frozen product, it does allow the supplier to stockpile wings, which could keep wing prices high for a while. But again, I haven’t -- we haven’t had much color on what that product is.

Joe Fischer - Goldman Sachs

Sure, okay. And then just real quick, I missed your fourth quarter cost of sales guidance -- could you just repeat that for me?

Mary J. Twinem

For the fourth quarter, what we talked about was the -- where our cost of sales for -- or the cost of wings are, which is $1.77 average for October and November, and then we don’t give specifics as what we think the overall cost of sales will be, up or down.

Joe Fischer - Goldman Sachs

Okay, great. Thanks.

Operator

Your next question comes from the line of Greg Schroeder with Jesup & Lamont Securities.

Greg Schroeder - Jesup & Lamont Securities

You mentioned the two openings in airports the second half of this year and I guess I was wondering, is that a specific franchisee that is getting access to that channel or are these just opportunities and there is not much behind it?

Sally J. Smith

Well, the first one, which is Houston Hobby, that is a franchisee that has access in just a couple of airports. The JFK airport is part of a 20-store or 20-unit development in 20 airports across the country over the next five years.

Greg Schroeder - Jesup & Lamont Securities

Okay, I got it. And then in terms of the loss on disposals and impairments, it looks like the third quarter each year is about half of the full year on that line. I just wondered, do you take a harder look at assets in the third quarter, just as far as modeling it in the future?

Mary J. Twinem

I don’t think so. I think in our third quarter this year, most of it is related to the remodels and finishing up the HD TV upgrades before we got into football season, so there isn’t any true asset impairment as it relates to writing down an asset.

Greg Schroeder - Jesup & Lamont Securities

Okay, and final question, I noticed on the balance sheet, restricted cash is up $11 million, it doubled. I’m just wondering what that was held for.

Mary J. Twinem

That’s part of our national ad fund and that’s held to fund the media that we spend in September and -- or that we place in September and October, so that will work its way quickly down here as we go through the rest of the year.

Greg Schroeder - Jesup & Lamont Securities

Okay. Thank you.

Operator

Your next question comes from the line of Stephen Anderson with MKM Partners.

Stephen Anderson - MKM Partners

I just wanted to ask about your play port initiative and if you are seeing any effect on earnings as recently as this past quarter and what you think any kind of effect it will have going into fiscal 2010?

Sally J. Smith

I think that play port offers our guests a reason to come in and perhaps stay a little bit longer but I don’t know that we ever thought it would have a significant earnings. It’s available in our company stores and they are getting utilized but I don’t think it’s meaningful. If it was, we would have certainly included in the comments.

Stephen Anderson - MKM Partners

Thank you.

Operator

Thank you. Our final question is follow-up question from the line of Dustin Tompkins with Morgan Keegan.

Dustin Tompkins - Morgan Keegan

Just one quick one -- on the G&A, you mentioned $11 million in the fourth quarter. Can you clarify -- was that including stock options expense or was that excluding?

Mary J. Twinem

That’s excluding.

Dustin Tompkins - Morgan Keegan

Thank you.

Operator

Thank you. There are no further questions in queue. I would like to turn the call back over to management for closing remarks.

Sally J. Smith

I want to thank everyone again for calling in for our third quarter 2009 conference call. We are looking forward to a great fourth quarter, certainly it’s football season and we are anxious to share our results with you, which we will be doing in February 2010, so thank you very much.

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Source: Buffalo Wild Wings Q3 2009 Earnings Call Transcript

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