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Buffalo Wild Wings, Inc. (NASDAQ:BWLD)

Q1 2014 Earnings Conference Call

April 28, 2014 5:00 p.m. ET

Executives

Heather Pribyl - Investor Relations

Sally Smith - President and CEO

Mary Twinem - CFO

James Schmidt - COO

Analysts

Keith Siegner - UBS

Jeff Farmer - Wells Fargo

Jeffrey Bernstein - Barclays

David Tarantino - Robert W. Baird

Mike Tamas - Oppenheimer

Jason West - Deutsche Bank

John Glass - Morgan Stanley

Matt DiFrisco - Buckingham Research

Will Slabaugh - Stephens

Alvin Concepcion - Citigroup

Bob Derrington - Wunderlich Securities

Chris O'Cull - KeyBanc

Greg McKinley - Dougherty

Diane Geissler - CLSA

Mark Smith - Feltl & Company

Operator

Good afternoon, ladies and gentlemen. Welcome to the Buffalo Wild Wings First Quarter 2014 Conference Call. At this time, all participants are in a listen-only mode. Following the presentation, we will conduct a question-and-answer session. Instructions will be provided at that time for you to queue up for questions. I would like to remind everyone that this conference call is being recorded.

I will now turn the conference over to Heather Pribyl, Investor Relations of Buffalo Wild Wings. Please go ahead.

Heather Pribyl

Good afternoon, and thank you for joining us as we review our first quarter 2014 results. I'm Heather Pribyl, Investor Relations of Buffalo Wild Wings. Joining me today is Sally Smith, President and Chief Executive Officer, and

Mary Twinem, Executive Vice President and Chief Financial Officer. By now everyone should have access to our first quarter earnings release, and copies are available on our Investor Web site at ir.buffalowildwings.com.

Before we get started, I 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. Actual results may vary materially from those contained in forward-looking statements based on a number of factors, including, but not limited to our ability to achieve and manage our planned expansion; the sales and other growth factors at our company-owned and franchised locations; our ability to successfully operate in new markets, including non-U.S. markets; unforeseen obstacles in developing sites, including non-traditional and non-U.S. locations; success of acquired restaurants, success of investments in new or emerging concepts; the cost of commodities; the success of our key initiatives and our advertising and marketing campaigns; 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 our performance for the first quarter. After that, Mary will provide further detail on the quarter and comment on trends to-date in the second quarter. Finally, Sally will share some additional thoughts of the second quarter and year ahead. We will then answer questions.

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

Sally Smith

Good afternoon, everyone. Our first quarter was a great start to 2014. We are pleased with our strong revenue growth of 20.9%.

For the quarter, same-store sales at company-owned restaurants increased 6.6% and same-store sales at franchise locations increased 5%.

Sales momentum grew during February and March with the excitement of the Winter Olympics and March Madness, bringing guests into our restaurants.

Our net earnings increased 72.9%, outpacing the top line growth. Strong net earnings growth is primarily attributable to 46 additional company-owned restaurants compared to the prior year. The strength of same-store sales and a 40 basis point improvement in cost of sales that was the result of significantly lower traditional chicken wing prices and our July 2013 transition to selling wings by portion.

In the first quarter, our team focused on engaging our guests, particularly during major sporting events like the NFL playoffs and Super Bowl, college football bowl games and college basketball. We launched a unique approach to March Madness brackets this year, where guests picked their bracket online, receiving points for wins, and additional points for checking in at our restaurant. The Blazin' or Bust Bracket Challenge winner received a trip to the 2015 NCAA Final Four tournament.

Our restaurant growth continued in the first quarter with the opening of 19 new company-owned and franchise Buffalo Wild Wings restaurant. The restaurant opened in Rhode Island marking our 50th state, and two new franchise partners in Mexico each opened their first restaurant.

The Guest Experience business model provides a vehicle for our team to deliver the ultimate social experience for our guests, and further differentiate our brands. In 2014, we will continue to rollout the Guest Experience business model to our company-owned restaurant, and our franchise partners will begin to roll it out as well.

At the end of the quarter -- at the end of the first quarter, the Guest Experience management structure and Guest Experience Captains were in size at about 240 company-owned restaurants. We had tabletop tablets in 200 company-owned and 55 franchise locations. Tablets currently have trivia, arcade, and new stand and poker functionality. We are testing music and premium arcade, and we will begin testing tablet ordering in the third quarter.

2014 is the year filled with many exciting initiatives by continued implementation of the Guest Experience business model. All future company-owned restaurants will open with the Stadia restaurant design, and our partnership with Pepsi and NCAA will provide exciting marketing opportunity.

Mary will now provide additional details on the first quarter as well as the second quarter to-date, and I'll return to talk more about the second quarter and the remainder of the year.

Mary Twinem

Thank you, Sally. Our revenue in the first quarter reached 367.9 million increasing 20.9% over last year. System-wide, sales at our company-owned and franchise restaurants were 804.3 million for the quarter, an increase of 17.9% over the first quarter of 2013.

Company-owned restaurant sales for the first quarter increased to 344.9 million, a 21.3% increase over the same period in the prior year.

Same-store sales at our company-owned restaurants were 6.6% for the first quarter compared to 1.4% for the comparable period last year. Easter shifting out of the quarter and after the NCAA tournament benefited same-store sales by 60 basis points.

Menu price increases and adjustments taken during the past 12 months at company-owned restaurants were about 2.1%, which include the 1.1% increase on our February 24 menu rollout.

We had 46 additional company-owned restaurants in operation at the end of this quarter versus first quarter last year at 11.6% unit increase. Average weekly sales increased by 7% in the first quarter, 40 basis points higher than the same-store sales percentage. The average weekly sales calculation benefited by 30 basis points for newly opened locations during the last 15 months, and the remaining 10 basis point increase is from the closing of older lower volume locations during the last 12 months.

Our royalty and franchise fee revenue for the first quarter grew by nearly 15% to 22.9 million versus 19.9 million last year with an additional 55 franchise units in operation at the end of the first quarter versus a year ago. Same-store sales at franchise locations increased by 5% in the quarter compared to a 2.2% increase in the first quarter last year.

Average weekly sales volumes for the quarter increased by 6.3%, 130 basis points higher than the same-store sales percentage. The average weekly sales calculation benefited by 100 basis points from newly opened franchise locations during the last 15 months, and the remaining 30 basis point increase is from the closing of older lower volume franchise locations during the last 12 months.

The following comments will focus on the performance of our company-owned restaurants. Cost of sales for the first quarter was 28.3% of restaurant sales compared to 32.7% in first quarter last year, a 440-basis point improvement. Traditional wings were $1.36 per pound this quarter, $0.74 or 35% lower than last year's average of $2.10. Cost of sales also benefited from our July 2013 transition to selling Wings by portion.

Traditional and boneless wing, each accounted for 21% of our restaurant sales this quarter, both up from 20% last year. Food and non-alcoholic beverage sales were 79% of restaurant sales in the first quarter, up from 78% last year.

Cost of labor for the first quarter was 30.5% of restaurant sales, 30 basis points higher than first quarter last year. Labor expense as a percentage of restaurant sales was higher than last year as we incurred higher management incentive compensation. We added Guest Experience Captains at 57 existing company-owned restaurants, and hourly wages as a percentage of restaurant sales was flat as we optimized hourly labor at restaurants that rolled out Captains last year.

In the first quarter, restaurant operating expenses as a percentage of restaurant sales was 14.2%, a decrease of 30 basis points from the prior year. Occupancy costs were 5.5% as a percentage of restaurant sales compared to 5.7% last year.

In summary, restaurant level cash flow which is calculated before depreciation and preopening expenses was 74.1 million or 21.5% of restaurant sales versus 48.3 million or 17% in the first quarter last year. This 450 basis point increase in cash flow is primarily a reflection of strong same-store sales and lower traditional wing crisis. Our goal for restaurant level cash flow is 20%, and we were clearly over this target for the quarter.

Depreciation and amortization for the first quarter was 6.2% of total revenue, 40 basis points lower than the prior year. General and administrative expenses were 28.2 million in the first quarter or 7.7% of total revenue compared to 21.3 million or 7% in the prior year. Excluding stock-based compensation of 3.6 million in the first quarter and 870,000 in the prior year, G&A expenses for the first quarter would have totaled 24.5 million or 6.7% of total revenue, the same percentage as last year.

Given our strong financial performance in the first quarter, we accrued additional expenses for our incentive compensation plan as compared to the first quarter last year.

We opened nine company-owned restaurants during the first quarter compared to 14 locations in the first quarter of 2013. Preopening expenses for the quarter totaled 2.6 million versus 4.3 million last year. The 2.6 million includes 446,000 of preopening expenses for future openings that are under construction. And in the first quarter last year we incurred 1.1 million related to future openings.

Preopening costs averaged 330,000 per new restaurant during the quarter compared to 285,000 in the first quarter last year. Five of the nine openings were in California and Washington, and we incurred higher preopening cost for these states. We estimate that average preopening expenses for openings in second quarter through the end of the year will be about 290,000.

The loss on asset disposals and impairment for the first quarter totaled 787,000 compared to 571,000 last year. We reported another loss of 127,000 for the quarter compared to other income of 345,000 in 2013. Included in the other loss line is the loss from our minority investment in PizzaRev. In the prior year, other income benefited from higher investment income from our deferred compensation plan.

Our effective tax rate during the first quarter was 33.4% compared to 26.5% in the prior year, which included the favorable impact of the American tax payer release tax asset 2012 that was inactive in early 2013. We estimate our effective tax in 2014 will be about 33% based on current tax law and would decrease to 32% if congress renews the employment credit similar to last year. As of today, the House has passed the employment credit, but the Senate has yet to vote.

In summary, our net earnings in the first quarter of 2014 grew an impressive 72.9% to 28.3 million producing earnings per diluted share of $1.49 compared to $0.87 in the prior year.

On our balance sheet on March 30, 2014, our cash and cash equivalents totaled 72.5 million compared to 57.5 million at the end of 2013. We ended the quarter with 696 million at total assets and 497 million in stockholders' equity.

Cash flow from operations was 48.1 million for the quarter, a 72.9% increase over last year. We spent 26 million for capital expenditures in the first quarter of 2014, and we estimate that our annual capital spending will be 146 million, which does not include funds that we may spend for franchise acquisitions or emerging brand investments. We also have available $100 million unsecured line of credit through January 2016 that provides us flexibility for future acquisitions and investments.

Now, I'll highlight trends and provide some comments on the second quarter of 2014. So, the first four weeks of the second quarter, our same-store sales are trending at about 5.7% at company-owned restaurants and 4.4% at our franchise locations as compared to the same-store sales trends for the first four weeks in the second quarter last year, a 5.2% at company-owned restaurants and 5.8% at franchise locations.

We estimate that Easter occurring in the first four weeks of the second quarter of 2014 had a negative impact of 90 basis points. For the full second quarter of 2013, our same-store sales were 3.8% at company-owned and 4.1% at franchise locations. The potential menu price benefit for increases in adjustments taken in the last 12 months is about 2.6% for company-owned restaurants in the quarter.

In the second quarter, we expect to open seven new company-owned restaurants with two of these already opened. One older company-owned location closed at the beginning of the quarter. As a reference point in the second quarter of 2013 we opened 10 new company-owned location. We also expect that our franchises in the United States will open about 10 restaurants during the second quarter.

The cost of sales, the traditional wing market has risen slightly since February resulting in our cost for chicken wings for the first two months for the second quarter to average about at $1.41 per pound. This compares to last year's average cost for the second quarter of $1.61. As a reminder, the cost per pound that we pay is calculated in the average of the prior month's wing market plus markup for processing and distribution. The second quarter of 2014 is the final quarter we'll have the year-over-year cost of sales benefit from the July 2013 launch in wing side portion.

We anticipate flat labor cost as a percentage of restaurant sales compared to prior year. We are adding Guest Experience Captains at 85 existing company-owned restaurants in the second quarter, and we believe this cost will be offset by optimization and hour to labor for restaurants that add a Guest Experience Captains last year, and the continued rollout of our guest experience management structure.

We anticipate that our G&A expenses in the second quarter exclusive of stock-based compensation expense will be approximately 24.5 million. Second quarter stock-based compensation expense is estimated to be 4.4 million compared to 3.1 million in second quarter last year. Stock-based compensation expense for the year is estimated to be approximately 15 million and will vary depending on the level of net earnings achieved for 2014 as well as for estimates and net earnings in future years.

Based on the our first quarter results, second quarter trends in same-store sales and anticipated food cost, we believe we will achieve net earnings growth of 25% for 2014, an increase from our previous goal for the year. Please review the risk sections outlined in our SEC filings including our 10-Q for the first quarter which will be filed shortly as well as our Safe Harbor Statement for factors affecting our forward looking statements.

Now, Sally will share some additional thoughts about the second quarter and the year.

Sally Smith

Thank you, Mary. As we shared at our first Analyst Day that we hosted in New York City at the beginning of April, we are committed to being a growth company. Our net earnings expectations for 2014 are a clear illustration of this commitment, and we are building for long-term earnings growth by investing in Buffalo Wild Wings in the United States and Canada, international franchising and emerging brands. These investments will allow us to achieve our vision of being a company of 3,000 restaurants worldwide creating the ultimate experience for our guests and providing sustained growth for our shareholders.

In the United States and Canada, we continue to open new Buffalo Wild Wings restaurants and anticipate opening 45 company-owned restaurants and that our franchise partners will open 40 locations in 2014. To help drive guest traffic and engage our guests in the second quarter, we have several limited time offerings. B-Dubs Sauce Lab will launch two flavors starting with Honey Ginger Kick, which is currently in our restaurants. Limited time offerings also include a Buffalo grilled cheese sandwich and a Prime Rib Philly and other flavor for sandwiches.

We're featuring unique beer cocktails, including a Dos Equis Margarita. Our popular Dads & Grads gift card promotion is back and we will run from May 5th through June 15th. Guest repurchase of $30 gift card receive a $5 bonus card.

During the second quarter, sports fans continued their enthusiasm with a growing excitement around the NBA and NHL playoffs. Additionally we will have an opportunity to drive traffic that comes along once every four years of World Cup. We will promote Buffalo Wild Wings as the place to watch the 2014 FIFA World Cup tournament through increased advertising spend, and we partnered with Budweiser and Heineken to create two unique games centered on the World Cup.

International franchising for Buffalo Wild Wings continues. We anticipate that our franchise partners around the globe will open nine restaurants in Mexico, Saudi Arabia, United Arab Emirates and the Philippines. We are in active discussions with potential franchise partners in other countries. International opportunity for Buffalo Wild Wings is just beginning, and we believe that we will achieve 400 international Buffalo Wild Wings restaurants in the next 10 years.

As part of our long-term growth strategy, we are actively looking for additional concept to invest in to build a portfolio of emerging brand. Our first company in the portfolio is California-based PizzaRev, and it's exciting to be part of their growth. We are opening our first PizzaRev location next month in Minnesota and are looking forward to sharing the brand with the Twin Cities market.

We thank our team members, our franchisees and our vendor partners for their passion and their continued dedication through our success. I'll now turn things back to Heather.

Heather Pribyl

Thank you, Sally. We will now move to the question-and-answer session of our first quarter earnings call. We will end the call promptly at the top of the hour. In order to get to as many participants as possible, please limit yourself to one question and queue up again if you have additional questions.

Jim Schmidt, Chief Operating Officer for Buffalo Wild Wings will join us for Q&A today. Operator, please open the call for questions.

Question-and-Answer Session

Operator

Thank you. (Operator Instructions) Our first question comes from the line of Keith Siegner with UBS. Please go ahead.

Keith Siegner – UBS

Thank you very much. It sounds like in the quarter that the -- some of the competitive gaming options around the online NCAA tournament was well received, and I was just wondering if you could talk a little bit more about how you are going to approach the World Cup? You had mentioned at the Analyst Day some options for doing similar type of fantasy World Cup. What's the update on that? How often do you try or plan to leverage the Budweiser tie-in? Some more details around the World Cup, and how you might approach it; that would be very helpful. Thank you.

Sally Smith

Okay. Well, we are very excited about the opportunity to partner with Budweiser and Heineken for the World Cup. It's been four years, and we are certainly a different company than we were four years ago. We think we have that same opportunity that we have had with March Madness or the Super Bowl or bowl games. We will have two dedicated games that can be played in restaurant and online, certainly with prices awarded.

I think what really helps this year is the fact that the hours or the games will be played very close to our time zone after we -- four years ago, we had some benefit, but really look forward to being able to take advantage of what we offer our guests in terms of viewing, so a lot of the same things that we do, but definitely focus on soccer.

Operator

Thank you. Our next question comes from the line of Jeff Farmer of Wells Fargo. Please go ahead.

Jeff Farmer - Wells Fargo

Thank you. You guys did touch on it, but just looking at March and April trends especially when controlling for the Easter headwind, same-store sales accelerated, it looks like on a one- and two-year basis, so is there anything that you can point to in terms of media promotions even the Guest Experience Captains, anything else in terms of potentially a key same-store sales driver in play?

Mary Twinem

Well, from same-store sales trends in first four weeks of the second quarter, we did talk about the negative impact that Easter had about 90 basis points. And so, we have great same-store sales for the first four weeks. We also have -- the NHL playoffs are two weeks earlier this year versus last year, so a little bit of timing difference for the first four weeks versus what it was last year. As we go through the rest of the second quarter, most of our stuff lines up really well with the World Cup being the incremental 16 days at the end of June.

Jeff Farmer - Wells Fargo

Okay, thank you.

Operator

Thank you. Our next question comes from the line of Jeffrey Bernstein with Barclays. Please go ahead.

Jeffrey Bernstein - Barclays

Great, thank you. Two quick ones, one, the wing costs, I am just wondering whether there is any reason to believe there is going to be a meaningful change from current levels either up or down. I was wondering what your industry contacts are saying for the balance of the year, and maybe what you are assuming therefore in your '14 guidance?

And separately, just any incremental color on the tablets whether you can directionally quantify the benefit to sales or labor costs based on any stores that have enough data to talk about or what might be the most -- what's more meaningful to you or good learnings from that would be great?

James Schmidt

Okay. On the tablets, I think we are just early in test on that. Obviously, as we in the second half of the year will be introducing additional functionality, we’ve got revenue drivers. I think we are really excited about the opportunities for the tablet, but I don't think we are quite ready to give any projections on what we expect from revenue, but we definitely believe it will enhance the overall guest experience, which always helps to drive sales.

Mary Twinem

As it relates to Wings, the first quarter average was $1.36, and when shared for the first two months of the second quarter we are at $1.41. So we have seen it go up a little bit. Historically, you do tend to see it go up as we get later into the year. Hard to know what this year will look like. There are cost pressures on both beef and pork, and so that may play well for holding wing prices down a little lower than we have seen in previous years, but we will have better insight into that in our next earnings call.

Jeffrey Bernstein - Barclays

Thank you.

Operator

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

David Tarantino - Robert W. Baird

Hi, good afternoon, and congratulations on a great start to 2014. Mary, my question is about the full-year guidance for 25% net income growth or earnings growth. Given the strength you had in the first quarter, it implies fairly modest growth for the rest of the year, I think about 11% is the math. So, could you talk about some of the factors that might weigh on that or would you characterize the guidance as being relatively conservative given maybe how early we are in the year, maybe talk about some of the puts and takes there?

Sally Smith

Yeah, I think - This is Sally. I do think that the fact that we are one quarter in probably weighs heavily on what we want to give for guidance. We had great same-store sales and we are seeing some of lowest cost of sales that we have seen in quite some time. Those factors can change. During our fourth quarter earnings call, we did talk about that we expected things to moderate throughout this year. We still expect that, but we really did obviously have a very strong first quarter and felt comfortable raising our guidance to 25%. There is a lot of factors that go into how we could get there. If you have significantly strong same-store sales and very low wing prices, we probably could achieve that, but conversely we think that with modest same-store sales gains, and what we expect in [terms of] (ph) wing prices, we are comfortable at the 25%.

David Tarantino - Robert W. Baird

Okay, that's helpful. And then maybe one line in particular that you could help with is the G&A line, and I think the commentary suggested something around 29 million in the second quarter. Is that the type of run rate you are thinking, maybe it would carry over into the back half or is there anything unusual in that number that might lead to maybe a less spending in the second half relative to that rate that you are expecting for the second quarter?

Mary Twinem

We got into the second quarter on G&A ex stock comp is 24.5 million and our stock-based comp guidance is 4.4 million and then as in overall for the year we do anticipate leveraging on our G&A expenses.

David Tarantino - Robert W. Baird

So may I -- for the year inclusive of stock comp you would expect leverage as a percentage of sales. Is that …

Mary Twinem

Ex stock comp.

David Tarantino - Robert W. Baird

Ex stock comp. Which stock comp -- would you expect to get leverage or not?

Mary Twinem

I haven't looked at in that manner. We really focus on the G&A piece of ex stock comp.

David Tarantino - Robert W. Baird

Okay, that's helpful. Thank you very much.

Operator

Thank you. Our next question comes from the line of Brian Bittner with Oppenheimer & Company. Please go ahead.

Mike Tamas - Oppenheimer

Great, thanks. This is Mike Tamas on for Brian. Just two quick questions, can you just tell us what the basis point impact was for selling wings by the quotient? And then the second question is, are there any impact from gift cards on the comp? Thank you.

Mary Twinem

The impact on the wing side portion was about 50 basis points for our cost of sales, and we have not separately stated any gift card in tact on our same-store sales.

Mike Tamas - Oppenheimer

Okay. Thank you.

Operator

Thank you. Our next question comes from the line of Jason West with Deutsche Bank. Please go ahead.

Jason West - Deutsche Bank

Yeah, thanks. Just want to circle back to the comp strength, which you guys have seen has just been pretty remarkable particularly going into April. Just didn't know if you could tease out any of the key things that have changed in your business whether it's just the weather getting better has been a big driver of the comp acceleration or you think something really clicked in terms of the marketing or the other things you guys are doing?

Mary Twinem

Well, this is Mary. I will talk about the event differences between 2014 and 2013 and then Jim and Sally will have some comments as it relates to guest experience. In the first quarter in 2014 we are seeing no Easter, so that was a positive 60 basis points for us. There was a few more bowl games earlier in the year over prior year as it relates to USC, those are both equal year-over-year from an event standpoint. And then we had Winter Olympics this year, which did give us some positive sales on -- additional same-store sales during the week that it ran.

James Schmidt

I think in March Madness we hit some nice advertising. We had some great exposure to the over time advertising that we did during the tournament. We continue the rule to Guest Experience model through our company restaurants. On that point where almost over half of our restaurants almost two thirds they have Guest Experience Captains. We definitely think that is having an impact. I think sports are lining up well too. I think last week both the NBA playoffs and the NHL playoffs have been off to a good start, which has helped to drive [traffic] (ph). So, there is a lot of things I think coming together right now for us.

Jason West - Deutsche Bank

Okay, that's helpful. And then just one on the margins; I guess if you could remind us, Mary, if the pricing outlook it's still the same as it was? On the last call I think you said what it would be by quarter based on where you are now. I am assuming that's still unchanged unless you have got some more pricing coming. Then just a comment around the 20% restaurant margin which ties into the pricing question, is that a level you guys want to sort of hold at that kind of level. You don't want to see margins going significant above 20 or is that not really the way to think about it.

Mary Twinem

First on the menu price discussion for second quarter we shared that it would be 2.6%. If we take no additional menu price and we roll our menu on September 1st without that Q3 would be 1.7% and Q4 would be 1.6%. As it relates to our goal to be a 20 % -- at a 20% cash flow level at our restaurant, that is a goal for us on an annual basis and on a quarterly basis. And obviously in quarters where we have low cost of sales we exceeded in quarters last year when we had higher cost of sales we didn't hit it. But I think for our long-term goal for us we think it's pretty accurate and we think we are getting very close to being there consistently.

Jason West - Deutsche Bank

Thank you.

Operator

Thank you. Our next question comes from the line of John Glass with Morgan Stanley. Please go ahead.

John Glass - Morgan Stanley

Thanks. I want to just go back to the labor line. I wanted to make sure I understood the pushes and pulls. So maybe there you can just talk about what was the underlying labor if you parsed out the guest experience and maybe I don't know if you quantify the bonus piece, how much was that as a pressure?

Mary Twinem

Well, we did talk about being still in the second quarter or in the first quarter. We are up 30 basis points. And that really what's that relates to the management incentive compensation accrual year-over-year based on the great results that we had in the first quarter. When we added the additional Guest Experience Captains in our restaurants, in the first quarter that was the 57 locations that we talked about, we were able to hold our overall hourly labors flat. And so we did see optimizations for the units that had rolled last year with the Guest Experience Captains. So in total we were able to hold that flat. In our guidance for the second quarter then is to be overall flat in cost of labor.

John Glass - Morgan Stanley

And then just thinking forward in the back half, then why wouldn't you get labor leverage, assuming comps are reasonable enough to do that? In other words you are going to be more than half way done right, so you should be getting the benefits from all that you have rolled out the pricing issues or assumptions you get labor leverage after the second quarter?

Mary Twinem

The one factor that will be affecting us as we go through the year is increases in fixed credit and minimum wages in two states in particular and then Florida. Those are going to affect. So in the third quarter, from an overall standpoint, that would have a $3 million impact on our annual basis and $2 million impact for us in 2014. We are still deciding for our September 1st menu roll out, what kind of menu price we take if any.

John Glass - Morgan Stanley

Okay. Thank you very much.

Operator

Thank you. Our next question comes from the line of Matt DiFrisco with Buckingham Research. Please go ahead.

Matt DiFrisco - Buckingham Research

Thank you. I was just wondering as far as a little follow up on that. Could you just go into more of I guess where you see anything as far as in the other line items as well, other operating expenses or anything. I think we are all seeing somewhat of the -- if you will even took a slow down in the comp it looks a little conservative there on the outlook. I just want to make sure that there is no timing of marketing dollars or anything else we -- other operating expense line that might come through or planning or conferences or anything of that nature that might be embedded in one of those numbers.

Mary Twinem

There isn't as it relates to what our operating expense leverage that we had in the first quarter of 30 basis points and then occupancy cost as well. That really is a reflection of leveraging on the same-store sales. Levels that we achieved, really the leveraging on both of those lines is dependent on what we see in same-store sales in the future.

Matt DiFrisco - Buckingham Research

And then as far as D&A, was there anything unique in the quarter that it looked like even on an absolute dollar basis, it was probably below what most had been expecting.

Mary Twinem

No. It's trending very similar. We did see similar origin on that obviously with the higher same-store sales percent. We still don't have standard depreciation and amortization going on.

Matt DiFrisco - Buckingham Research

So there is no one-time benefit or anything of that nature in there?

Mary Twinem

No.

Matt DiFrisco - Buckingham Research

Thank you.

Operator

Thank you. Our next question comes from the line of Will Slabaugh with Stephens. Please go ahead.

Will Slabaugh – Stephens

Yeah, thank you. I wonder if you could dig a little bit more into the Guest Experience Captains program and how you gave that impact sales wise in the participating stores so far. And also when you think you will be able to hit that point where it's going to be accretive at the restaurant level across the company?

James Schmidt

As far as Guest Experience Captains began I think we are in -- actually, as of the end of April we will be in about [200 big] (ph) company restaurants. We are seeing overall sales that in restaurants with Guest Experience Captain particularly those where I think we have the model fully implemented. We are very pleased with what we see. And I think we are pleased with our overall flow-through in those restaurants right now. So I think all indicators are positive on Guest Experience model.

Will Slabaugh – Stephens

Thank you.

Operator

Thank you. Our next question comes from the line of Alvin Concepcion with Citigroup. Please go ahead.

Alvin Concepcion – Citigroup

Hi, just a couple of quick ones. It doesn't seem like you saw much pushback on the 2.6% price increase in the quarter. Does that make you feel good that there is more room for taking price if wing cost increase more significantly?

And second, in regards to the traffic drivers in the quarter, in unit April, how impactful were the LTOs versus the core menu items in terms of driving that strong traffic?

Mary Twinem

As it relates to the menu price that we took in February, it was about 1.1% at that time. So cumulative, we are in that 2% to 2.5% range. Same-store sales are strong. I think we build that, we were very thoughtful in the amount of menu price increase that we took. We will obviously look at our same-store sales trends with all those other commodities in sales items as we go through the middle of the year as we make our determination on what to do for the September 1st roll out. Even on the LTO, our metrics started the LTO that we talked about in the 0450 has started in April.

Alvin Concepcion – Citigroup

All right, thank you.

Operator

Thank you. Our next question comes from the line of Bob Derrington with Wunderlich Securities. Please go ahead.

Bob Derrington - Wunderlich Securities

Yeah, thank you. Mary, can you give us a little bit more color on the -- of the cost specifically the commodity outlook, not only as it relates to particularly beer cost and how those are fluctuating. Those things beyond wings, if you can give us any -- little bit of color that would be helpful.

Mary Twinem

Right. So we have seen some increases in commodities [season four] (ph), so they are a pretty small part of our overall commodity basket. And then we have seen some declines in commodities like soy oil. So overall when you exclude bone-in wings, which we have contracted flat year-over-year through March of 2015 bone lift wings. I'm sorry; bone lift wings. Our commodity basket is relatively flat year-over-year. And then obviously replace that our traditional wings are -- fallen below where we set out last year's time.

Bob Derrington - Wunderlich Securities

Are you pretty well contracted to the balance of the year? For those things, is it reasonable to expect that flat is reasonable expectation?

Mary Twinem

When you take everything else together, yes, we believe flat is reasonable for the year.

Bob Derrington - Wunderlich Securities

Great. Thanks, Mary.

Operator

Thank you. Our next question comes from the line of Chris O'Cull with KeyBanc. Please go ahead.

Chris O'Cull - KeyBanc

Thanks. I just had a couple of questions. Mary, you indicated the company is targeting 20% total margin. But I think in the past you also mentioned targeting 30% cost of sales. So as the company changes its gross margin target or do you think other line items may see some cost improvements?

Mary Twinem

On the cost of sales piece we think somewhere between 29% and 305 is a longer term range for us. And that's when we look at menu pricing. That's where we plan cost of sales to be at. As it relates to the 20% target, I think that that's a target we had for several years, again, we have quarters where we exceeded, we have quarters where we don't. And as we develop out on the cost and we have higher volume locations and we continue to evolve our Guest Experience model, we sure like to see moving that 20% even higher.

Chris O'Cull - KeyBanc

Okay. And then last question was just related to the cash on hand. Our model shows the cash really building over the next couple of years. How does the company plan to use excess cash?

Mary Twinem

Well, we are fortunate that we do generate sufficient cash to fund our growth in the U.S. and Canada to do what we want to do, and it's developing internationally as well as investing in emerging brands. And we would use our line of credit as necessary to fund any franchise acquisitions or emerging brand investments that would come our way.

I think, longer term if we do have excess cash and we don't need it for our growth strategies, we would consider either share buybacks or cash dividends, but for the current time investing in our business is where we think is appropriate.

Chris O'Cull - KeyBanc

Do you have -- can you remind us what's the share buyback program today?

Mary Twinem

We don't have a buyback program in place.

Chris O'Cull - KeyBanc

Right, okay. Thanks.

Operator

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

Greg McKinley - Dougherty

Yeah, thank you. I'm wondering if you can give us some color on how the Guest Experience Captains rollouts that you're doing today differ at all from what that program may have looked liked six to 12 months ago? Have there been any learnings or changes there?

And then regarding the tablets, what are you seeing in terms of either average ticket or maybe duration that a customer spends in the store when that program is available to them? And what's your opinion of the changes you're seeing?

James Schmidt

Well, as far as Guest Experience Captains, we've continued to refine that program since rolling it. And we will continue to refine it in the future. We certainly -- we started out with Guest Experience Captains 14 more hours because we wanted to have them available during all shifts in all day parts. And over time we refined that, optimized it, and again we continue to refine the program, get better at the program and its execution. I think an important part of the program is that we are also now delivering the tools to the Guest Experience Captains through our Guest Experience technology.

As far as the tablets, they're still tested in the functionality. We are still testing additional functionality. What I can tell you though is we've seen a dramatic increase in the usage of the new buzz time tablets versus the old buzz time tablets and how long it get utilizes than while in restaurants. So that does tell us that I think as we add functionality we believe there is a real opportunity for them to enhance our guest experience and ultimately drive traffic.

Greg McKinley - Dougherty

Okay, thank you. And then, maybe just some historical context, how important potentially is a World Cup event given changing interest in soccer in the U.S., I don't know if you can share with us what you've seen in the past. What were your wings as a percentage of COGS in Q1? Thank you.

Sally Smith

Well, I can address the -- with regard to the World Cup, we haven't centralized; I'm looking back at what happened four years ago. And again it's very hard to call out unless it's a one-day event, no Super Bowl over Super Bowl, very difficult to call out what's the impact of certain sporting events are. It depends on the match-up. It depends on the day of the week. What World Cup gives us is another reason for people to come in -- for our guests to come in, and experience Buffalo Wild Wings. I certainly think that the increased interest in soccer across the United States doesn't hurt nor the fact that we are on this time, much closer to this time zone than we were four years ago. So, we're excited about it.

Mary Twinem

As it relates to the question what were wings as a percent of our cost of sales dollars in the first quarter, they were 20.5%.

Greg McKinley - Dougherty

Thank you.

Operator

Thank you. Our next question comes from the line of Keith Siegner with UBS. Please go ahead.

Keith Siegner - UBS

Thanks. Just one follow-up, at the Analyst Day, one thing I thought was interesting was hearing a little bit about the lunch and happy hour focus that was in the plans. I'm just wondering if you can talk a little bit about maybe what's going on there now and how are those day parts doing, lunch and happy hour specifically in terms of contribution to same-store sales? Thanks.

Mary Twinem

We do have happy hour and lunch programs remaining in test and we're further refining those, looking for something that we could rollout later this year. From our day part strategy we didn't separate out any of our same-store sales by day part. So with the kind of trends that we have I would assume all of them are pretty good.

Keith Siegner - UBS

Thank you very much.

Operator

Thank you. Our next question comes from the line of Diane Geissler with CLSA. Please go ahead.

Diane Geissler - CLSA

Hello. I wanted to ask about your cash position. When you talk about your store openings for this year on a company-operated basis, I know you're looking for additional brands to invest in, but the cash position is building pretty meaningfully here. Can you talk a little bit about the market for repurchasing some of our franchisees or even accelerating some of your company openings this year above the level that you've already telegraphed?

James Schmidt

We're always interested in acquiring franchisees. We are in constant discussion with franchisees. So we certainly will look as appropriate at acquiring franchisee restaurants. I think you'll see more of that occurring throughout the year, this year.

So that is one opportunity to deploy the cash. As far as accelerating company restaurants, they're probably moving about as fast as we feel we reasonably can on development of …

Diane Geissler - CLSA

Is that a function of personnel or just you require certain number of people in-house to develop it or is that more a function of available real estate in the right locations?

Sally Smith

It's more of a function of the time that takes to go through the entire process from finding the site, negotiating the lease and then the permitting, and getting approval from various cities. That can really be the unknown.

With regard to the number of people we have on the team doing that I think we are appropriately staffed, and at this point even if we double that staff you couldn't add more restaurants in 2014 into the buildup.

Diane Geissler - CLSA

Okay, thanks for those comments. And then I just wanted to ask about loyalty program, what you envision in terms of building the loyalty program?

James Schmidt

Well, I think we believe that's a real opportunity for us. We are right now in the design stages of that. I think we'll be doing limited testing later this year, and with the expectation we'll be rolling out a loyalty program across the system in the back half of 2015.

Diane Geissler - CLSA

Would that be solely limited to stores that have tablets or can you do -- are you thinking about in terms of having some kind of app or whatever on your phone that has some kind of functionality in the restaurant?

James Schmidt

Yeah, I think it be a multi-channel loyalty program, and it will be available at system-wide by that time …

Diane Geissler - CLSA

Okay, great. Thank you.

Operator

Thank you. Our next question comes from the line of Mark Smith with Feltl and Company. Please go ahead.

Mark Smith - Feltl and Company

Hi, guys, I just want to look at alcohol sales, I first want to confirm that you're 21% versus 22% last year? And I want to see can you get that back to the mid 20s where that ran maybe five years ago?

James Schmidt

Yeah, I don't think we have a specific goal to return it to a particular level. I mean we always try to make sure that we're meeting our guest's needs when it comes, and that we keep a vibrant bar business. We think that's part of the overall guest experience that drives our business. But we don't have a specific goal to increase the alcohol percentage. I think it's just naturally a decline really with the increase in our sales. So I don't think it's a case of we're selling less alcohol. I think it's a case that we're really seeing food sales increases our volumes go up.

Mark Smith - Feltl and Company

Right, thank you.

Operator

Thank you. Our next question comes from the line of Jeff Farmer with Wells Fargo. Please go ahead.

Jeff Farmer - Wells Fargo

Thanks. Just following up on development, I think at the Analyst Day you acknowledged that with the thousand restaurants in operation, it's become increasing challenging to find sites. Is there really any reason to believe that might change or is it really realistic to think of this -- the absolute number of unit openings that we're seeing this year might be the high-water mark, and it could potentially just slowdown steadily as you move forward?

James Schmidt

Yeah, I don't think it's so much that it's all that difficult finding sites. It's just the number of opportunities. Obviously the pool isn't quite as great as it once was, but we're able to find sites. And it does get a little more challenging when you're on the coast. We're developing the Boston area, and areas like that, they're little more challenging to find site. But we're doing a great job of finding good site and opening really strong restaurant.

I really think the pace; I think it will stabilize now for the next several years. I don't think you'll see any dramatic decline over the next few years. Right now, we believe can stay in the current pace for the foreseeable -- for at least the next few years.

Jeff Farmer - Wells Fargo

Thank you.

Operator

Thank you. (Operator Instructions) Our next question comes from the line of Greg McKinley with Dougherty. Please go ahead

Greg McKinley - Dougherty

Thanks. Sal, you made a comment about nine international franchise locations opening. Over what period of time was that referring to?

Sally Smith

That's this year. That's between now and the end of 2014.

Greg McKinley - Dougherty

Okay. And then, as you look back to Q1, are there any regional comments that you can make that in terms of things you thought stood out, obviously people focused a lot on weather, but whether it was regional impacts from the basketball tournament or other conditions, anything worth noting there?

Sally Smith

We don't make typically comments regionally. We usually keep our comments about weather to a pretty much minimum, because weather happens every year. Just great match-up, I think the fact that there have been some great over time games both during the NCAA and as we've gone into hockey and some real close games with NBA playoffs, all bodes well for us. But nothing stands out from a regional standpoint.

Greg McKinley - Dougherty

Thank you.

Operator

Thank you. Our next question comes from the line of Matt DiFrisco with Buckingham Research. Please go ahead.

Matt DiFrisco - Buckingham Research

Thank you. There has been a couple of questions about the use of cash, and I think also at the Analyst Day you talked about a goal of getting to 50-50 company-owned and franchise. I guess can you give us an update on that sort of that timeframe? I'm curious if how the strong comparable sales and strong profitability probably be ensured by the franchisees as well; maybe reduces their appetite to sell or changes that dynamic. Should we still be expecting over the next two years or so the skew to change, so you're 50-50 company-operated and franchised?

James Schmidt

I think that's not a goal we've set. I think it's more of just the natural progression that we see when you look at what development we have going on the company side and the franchise side. And then our expectation is we will be acquiring a certain number of franchisees along the way.

Sally Smith

I think the fact that the sales and profitability maybe marks a good time [that they'll] (ph) think about liquidating. And there's different life stages that our franchisees are in. They've been with us for well over -- some of them for well over 20 years now, and maybe don't have that next generation to pass it on to. And we are open to it, and they know that we're a good acquirer, the franchisees that we have acquired, talk about the process, talk about our ability to go in and assume operations and work with the teams they have. So I think that has a favorable light on some potential acquisitions coming up.

Matt DiFrisco - Buckingham Research

And your guidance does not include any acquisitions, correct?

Sally Smith

No, it does not.

Matt DiFrisco - Buckingham Research

Thank you.

Operator

Thank you. I'd like to turn the conference back over to Sally Smith for any closing remarks. Please go ahead.

Sally Smith

All right. Well, we're very excited to share with you our first quarter results. As I said at the beginning, we are off to a great start. We look forward to talking with you at the end of July when we share our second quarter results. Thank you so much for your questions and your interest in Buffalo Wild Wings.

Operator

Thank you. Ladies and gentlemen, this does conclude our conference for the day. Thank you for your participation. You may now disconnect.

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