Buffalo Wild Wings (BWLD) Sally J. Smith on Q1 2016 Results - Earnings Call Transcript

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Buffalo Wild Wings, Inc. (NASDAQ:BWLD)

Q1 2016 Earnings Call

April 26, 2016 5:00 pm ET

Executives

Heather Pribyl - Investor Relations

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

James M. Schmidt - Chief Operating Officer

Jeffrey B. Sorum - Chief Financial & Accounting Officer

Analysts

Keith R. Siegner - UBS Securities LLC

Michael Tamas - Oppenheimer & Co., Inc. (Broker)

Matthew Kirschner - Guggenheim Securities LLC

Will Slabaugh - Stephens, Inc.

Pratik Patel - Barclays Capital, Inc.

Andrew Strelzik - BMO Capital Markets (United States)

Robert Derrington - Telsey Advisory Group LLC

Brian M. Vaccaro - Raymond James & Associates, Inc.

David E. Tarantino - Robert W. Baird & Co., Inc. (Broker)

Nick Setyan - Wedbush Securities, Inc.

Stephen Anderson - Maxim Group LLC

Karen Holthouse - Goldman Sachs & Co.

Chris O'Cull - KeyBanc Capital Markets, Inc.

Alton K. Stump - Longbow Research LLC

Andrew Charles - Cowen & Co. LLC

Operator

Please stand by. Good afternoon, ladies and gentlemen. Welcome to the Buffalo Wild Wings First Quarter 2016 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 call over to Heather Pribyl, Director of Investor Relations for Buffalo Wild Wings. Please go ahead.

Heather Pribyl - Investor Relations

Thank you, James. Good afternoon and thank you for joining us as we review our first quarter 2016 results. I'm Heather Pribyl, Director of Investor Relations for Buffalo Wild Wings.

Joining me today is Sally Smith, President and Chief Executive Officer; Jim Schmidt, Chief Operating Officer; and Jeff Sorum, Senior Vice President and Corporate Controller. By now, everyone should have access to our first quarter earnings release. Copies are available on our investor website at ir.buffalowildwings.com.

Before we get started, I remind you that today's call will contain forward-looking statements, and actual results may vary materially from those discussed in the forward-looking statements due to many factors including the risks and uncertainties identified in today's earnings release, which we filed on a Form 8-K concurrent with this release, and in our other filings with the Securities and Exchange Commission. A few calendar items to note, our second quarter 2016 ends on June 26, and we tentatively plan to issue our earnings release after market close on July 27 with a conference call held at 4 PM central time. We will also be hosting our 2016 Analyst Day on August 16 in Denver, Colorado, and our next 53-week year is our fiscal 2017.

On today's call, Sally will provide an overview of our performance for the first quarter and our sales initiatives. After that, Jim will provide further detail on the quarter, comment on trends to-date in the second quarter, and our outlook for 2016. Sally will provide some final thoughts and then we'll then answer questions.

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

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

Thank you, Heather, and good afternoon, everyone. Our total revenue in the first quarter increased 15.4% when compared to prior year, resulting from continued unit development and franchise acquisitions over the last 12 months.

We're dissatisfied to report a same-store sales decline for Buffalo Wild Wings, and we're undertaking several sales driving initiatives. We were able to manage costs and improve our restaurant level margins, and our earnings per diluted share increased 13.5% year-over-year to $1.73.

There are a variety of factors that impacted our sales this quarter, but rather than talk about the weak macro environment, I'm going to share with you what Buffalo Wild Wings is doing to regain momentum. Our sales driving initiatives include; first, continuing to execute a strong takeout program and gain additional share; second, enhancing our FastBreak lunch with a speed-of-service guarantee; third, improve and promote our value occasion; and finally winning the market for Soccer.

As we see our takeout sales increasing, we're well-positioned to capture additional opportunity. Takeout remained strong and in the first quarter represented 16% of gross restaurant sales. Online and mobile order for takeout at company-owned restaurants was 14% of takeout sales compared to 8% in the first quarter of the prior year. We're also seeing an increase in average check for online orders versus call-in. We'll be highlighting takeout with a large order takeout package as we celebrate the road to UFC 200. This special large order package will be available for UFC 198, UFC 199, and UFC 200.

Our FastBreak lunch program delivers on the value and variety guests want at Buffalo Wild Wings. We're testing an enhancement to FastBreak to include a speed-of-services guarantee for guests who order of the FastBreak menu. We believe this combination of speed, value, and variety is an attractive offering to guests and when combined with additional advertising spend around lunch, it will drive incremental sales.

Wing Tuesdays are a great way for traditional wing lovers to enjoy our hot wings in one of our signature sauces at a discounted price. Historically, when we highlight wings and Wing Tuesdays, we see a lift in sales and we've planned to promote this value day with more advertising this year.

Our team is also exploring different pricing and bundling options to make Wing Tuesday even more appealing. On May 2, we launch a new Happy Hour menu, in addition to our current pricing on tall, domestic and craft beers, it will include discounts at pints, wine, and our House Margarita. When we tested the new Happy Hour offerings, we saw an increase in sales and traffic.

We'll promote our value offerings inside the restaurant and B-Dubs TV in the communities using our guest experience captains and through coordinated media campaigns. During the 2014 Men's World Cup and the 2015 Women's World Cup, we introduced the Buffalo Wild Wings brand to soccer fans and had success in driving traffic during those tournaments.

Our restaurants will be where soccer lives this summer during excitement of the Copa América and EURO Cup tournaments. We've partnered with Heineken to promote Buffalo Wild Wings as the place to catch all the action on the pitch, during the 80 games of the tournaments. Soccer will carry increase media weight this summer and we have a co-branded spot with Pepsi. As Soccer is a year-around sport, we intend to win the market for soccer viewership with our great food and beverage experience, and unparalleled sports viewing environment. We're confident Buffalo Wild Wings will regain sales momentum by focusing on these initiatives that are within our operational control.

Jim will now provide additional details on the first and second quarters.

James M. Schmidt - Chief Operating Officer

Thank you, Sally. Our revenue in the first quarter reached $508.3 million, increasing 15.4% over the same period last year. System-wide sales at our company-owned and franchised restaurants were $967.3 million for the quarter, an increase of 4.8% over the first quarter of 2015. Company-owned restaurant sales for the first quarter increased to $483.9 million, a 16.6% increase over the same period in the prior year. Same-store sales at company-owned Buffalo Wild Wings restaurants decreased 1.7% from the first quarter, compared to an increase of 7% for the same period last year. Same-store sales were negatively impacted by 50 basis points from the Easter shift into March.

Menu price increases and adjustments taken during the past 12 months at company-owned restaurants were about 3.1%. We had 100 additional company-owned Buffalo Wild Wings restaurants in operation at the end of this quarter versus first quarter last year, a 20% unit increase. Average weekly sales decreased by 3.1% in the first quarter, 140 basis points lower than the same-store sales percentage. This is attributed to a 90 basis point decline from company-owned locations opened during the last 12 months and a 60 basis points decline from the locations acquired from franchisees in the past year. This was partially offset by 10 basis points from the closing of older, lower volume locations. Our royalty and franchise fee revenue for the first quarter decreased 5% to $24.3 million versus $25.6 million last year, with seven fewer franchised Buffalo Wild Wings units in operation at the end of the first quarter versus a year ago due to our franchise acquisitions.

Same-store sales at franchised Buffalo Wild Wings locations decreased by 2.4% compared to a 6% increase in the first quarter last year. Franchised average weekly sales volumes at Buffalo Wild Wings locations in the United States for the quarter, decreased by 2.1%, 30 basis points higher compared to the same-store sales percentage. There was a 30 basis point benefit from franchised locations sold to the company in the last 12 months. The 10-basis point benefit from the closing of older, lower volume locations was offset from franchised locations opened during the last 12 months.

Cost of sales for the first quarter was 29.7% of restaurant sales, compared to 30.3% in the first quarter last year, a 60 basis point decrease. Traditional wings were $1.97 per pound in the first quarter, $0.05 or 3% higher than last year's average of $1.92. Traditional wings as a percentage of cost of goods in the first quarter was 25.9%. Our pricing agreement on traditional wings provided a savings of over $1 million for the Buffalo Wild Wings system in the first quarter. Excluding traditional wings, we had favorability in the remainder of our commodity basket.

Traditional wings were 21% of restaurant sales, flat compared to the same period last year; boneless wings were 22% of restaurant sales, also the same compared to the prior year. Food and non-alcoholic beverage sales were 81% of restaurant sales in the first quarter compared to 80% in the same period last year. Cost of labor for the first quarter was 30.8% of restaurant sales, 60 basis points lower than first quarter last year. In the first quarter of 2015 we had higher bonus payouts on stronger same-store sales compared to the most recent quarter.

Our restaurant teams managed their hourly labor well in a challenging sales environment. In the first quarter, restaurant operating expenses as a percentage of restaurant sales were 14.4%, an increase of 30 basis points resulting from deleverage on the same-store sales decline. Occupancy costs were 5.5% as a percentage of restaurant sales, 20 basis points higher compared to the same quarter last year, also deleveraging on same-store sales.

In summary, restaurant level cash flow, which is calculated before depreciation, amortization and preopening expenses, was $94.6 million or 19.5% of restaurant sales. This compares to restaurant level cash flow of $78.4 million or 18.9% in the first quarter last year. This increase in cash flow is a result of leveraging cost of sales and labor.

Depreciation and amortization for the first quarter was $37.5 million or 7.4% of total revenue, 100 basis points higher than the prior year, resulting from increased amortization of re-acquired franchise rights and higher depreciation and deleveraging.

General and administrative expenses were $31.7 million in the first quarter or 6.2% of total revenue, compared to $30.5 million and 6.9% in the prior year. Excluding stock-based compensation of $1.4 million in the first quarter and $2.7 million in the prior year, G&A expenses for the first quarter would have totaled $30.3 million or 6% of total revenue, compared to 6.3% last year.

We opened six new company-owned Buffalo Wild Wings during the first quarter and one R Taco; this compares to three new Buffalo Wild Wings restaurants opened in the first quarter of 2015.

Preopening expenses for the quarter totaled $1.9 million versus $1.3 million last year. The $1.9 million includes $554,000 of preopening expenses for future openings that are under construction; and in the first quarter last year, we incurred $513,000 related to future openings.

Preopening cost for company-owned Buffalo Wild Wings averaged $288,000 for new restaurants during the quarter compared to $329,000 in the first quarter last year. The loss on asset disposals for the first quarter totaled $1.2 million compared to last year of $605,000. The increase is primarily due to an increase in the number of remodels as we remodeled 14 company-owned restaurants in the first quarter compared to six company-owned restaurants in the prior year. We reported other income of $27,000 for the quarter, compared to other expense of $75,000 in 2015. This included a $1.1 million benefit for the valuation of a contingent consideration related to a 2015 franchise acquisition, offset by interest expense of $885,000. Our effective tax rate during the first quarter was 29.9%, compared to 33.3% in the prior year. We estimate our effective tax rate in 2016 will be about 30.5% based on federal and state tax rates and credits currently in effect.

In summary, our net earnings in the first quarter of 2016 increased 12.8%, $32.8 million, producing earnings per diluted share of $1.73, compared to $1.52 in the prior year. Our balance sheet on March 27, 2016, our cash and cash equivalents totaled $11.7 million, compared to $11.2 million at the end of 2015. Our unsecured line of credit had a balance of $7.6 million as of the end of the quarter. Under our share repurchase authorization, we repurchased nearly 174,000 shares during the first quarter of 2016 for $25 million. We ended the quarter with $971 million in total assets, and $664 million in total equity. Cash flow from operations was $77.1 million for the quarter. We spent $34.1 million for property and equipment capital expenditures in the first quarter of 2016. And we estimate that our annual capital spending will be $190 million, including the $3.9 million we spent on franchise acquisitions in the first quarter of 2016. Free cash flow in the first quarter, which is cash flow from operations less capital expenditures and acquisitions was $39.1 million compared to $7.7 million in the prior year.

Now, I will highlight a few trends and provide some comments on the second quarter of 2016. Menu price increases and adjustments taken in the last 12 months is expected to be 3.5% in the second quarter. This includes a minimal price increase of 0.6% on our May 2 menu.

In the second quarter, we expect to open six company-owned Buffalo Wild Wings restaurants, three of which are already opened. As a reference point, in the second quarter of 2015, we opened nine new company-owned Buffalo Wild Wings locations and closed two restaurants. We also expect that Buffalo Wild Wings franchisees will open 12 restaurants during the second quarter.

For cost of sales, our cost for traditional chicken wings, for the first two months of the second quarter averages $1.93 per pound. This compares to the average cost for the full second quarter last year of $1.79 per pound. Our outlook for the cost of traditional chicken wings for the full year 2016 has increased compared to our view in February.

We anticipate labor as a percentage of restaurant sales in the second quarter to be slightly over 32%. In the second quarter, we anticipate that G&A expenses exclusive of stock-based compensation expense, will be approximately $31.5 million. Second quarter stock-based compensation expense is estimated to be $4 million, a $500,000 increase compared to second quarter last year, and will vary depending on the level of net earnings achieved for 2016, as well as for estimates of net earnings in future years. Depreciation and amortization is expected to be $38 million in the second quarter.

Turning to the full year 2016, we're adjusting the opening days for several fourth quarter opening to first quarter of 2017 to ensure our restaurants open strong. Our new restaurant openings for company-owned Buffalo Wild Wings in 2016 is now anticipated to be around 40 locations.

We anticipate improving sales trends throughout 2016 with a return to positive same-store sales by fourth quarter, if not sooner. Our expectations for earnings per diluted share in 2016 is $5.65 to $5.85.

Our outlook does not contain any changes for the valuation for the contingent consideration from franchise acquisitions for the remainder of the year. Please review the risk sections outlined in our SEC filings, including our Form 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 thoughts on our company initiatives.

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

Thank you, Jim. During spring and summer, our guests are energized by the hockey and basketball playoffs and the start of baseball season. Our limited time offerings will feature items to enjoy while watching the game. Sauce Lab updates with two new – include two sauces this summer, a Summer Shandy and a Spicy Strawberry Sriracha. We also feature a bacon double cheeseburger, Mexicali Street Corn and loaded garlic fries.

Blazin' Rewards, the Buffalo Wild Wings loyalty program is expanding to additional pilot markets in the second quarter. We're currently in 50 locations, and expect to expand to at least another 90 restaurants. Feedback back on the program has been positive, and we're gaining valuable insights on guest behavior.

The number of loyalty transactions is increasing in the pilot market, and we're encouraged by the progress of Blazin' Rewards. I'm happy to report the much-anticipated test of tablet order and payment is underway. Our full food menu can be ordered on the tablet in test locations, and guests can pay on the tablet as well.

In addition, the payment on guest device test through PayBDubs.me is progressing well. B-Dubs TV will finish up implementation in nearly all company-owned restaurants at the end of our second quarter. Our franchisees are beginning their deployments, giving guests the opportunity to see differentiated content from our partners, such as the 20 years of UFC highlights to celebrate UFC 200.

We're pleased with how well our international franchisees are growing the Buffalo Wild Wings brand; new locations recently opened in Mexico, Panama, and the Philippines. Today, there are 17 Buffalo Wild Wings locations outside the United States and Canada. R Taco is expanding this year, and we plan to open six new locations offering fresh street-style Tacos.

PizzaRev continues their development in Southern California and through franchising. A Buffalo Wild Wings franchisee has signed up as a PizzaRev franchisee, and their first location of PizzaRev is opening in Mexico shortly.

We're looking forward to sharing more details on these and other longer-term initiatives at our Analyst Day on August 16 in Denver. We thank our team members, our franchisees, and our vendor partners for their passion and their continued dedication to our success. We thank our shareholders for the confidence in our company and our guests for their passion for Buffalo Wild Wings.

I'll now turn it back to Heather.

Heather Pribyl - Investor Relations

Thank you, Sally. We will now move to the question-and-answer session of our first quarter earnings call. Jeff Sorum, Senior Vice President and Corporate Controller will be joining us for Q&A. 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. Operator, please open the call for questions.

Question-and-Answer Session

Operator

Thank you. And we'll take our first question today from Keith Siegner with UBS.

Keith R. Siegner - UBS Securities LLC

Thanks. I was – could you please talk a little bit about, where you are seeing some of the sales weakness, we haven't a comp like this from you folks in quite a few years, and in seeing that two of the four sales driving initiatives, one is for lunch, one is for your promo nights, is that the area where you're seeing the most weakness, is this the intuition at launch, like talk – could you please talk a little bit about – by daypart, by day of the week, where are you seeing the weakness the most? Thanks.

James M. Schmidt - Chief Operating Officer

Keith, Jim Schmidt. Yeah, the – I think, we're actually seeing kind of an overall weakness. I think as we look at – the key trend we've been following has been – we've seen a shift to takeout occur, where our takeout has continued to grow quicker than in restaurant, and I think because of that, we understand that there is a price sensitive consumer out there right now. And I think, we're trying to capture that opportunity with takeout and meet that need, and that's why we are focusing on I think those dayparts and promoting those dayparts that really speak to that value price conscious consumer. And so that's why we're focusing on Lunch, Takeout, Happy Hour, Wing Tuesday, those promotions, because we really haven't talked about those dayparts and really advertised them a lot for a while. So we're just refreshing those opportunities, but that's not to say that we always focus on creating that differentiating guest experience around sports.

And really the highlight of Q2 as we move in and to me is our promotions around soccer. We're really excited about the soccer promotions. There's three things going on in soccer right now, you've got the Champions League playoffs going on currently that I think in May 28-29 in Madrid; you've got the EURO Cup in June and July, and the Copa América, and we've really got to push around those a lot of media and attention around those events.

And in addition, we're doing some promotions around UFC 198, UFC 199, and then UFC 200 which actually falls in early July. So, I – we're pushing both ways to both meet the price sensitivity of the current consumer, but continue to be who we are about Wings, Beer and Sports.

Keith R. Siegner - UBS Securities LLC

Actually if I may just have a follow-up off of that please. You mentioned the price sensitive consumer a couple times there.

James M. Schmidt - Chief Operating Officer

Yeah.

Keith R. Siegner - UBS Securities LLC

One thing we often hear from investors is that maybe you've taken more pricing than a lot of the peers, and that's happening again this quarter, price increases in 2Q are going to be a little higher than in 1Q, how do you come to the decision to raise prices a little more in 2Q than in 1Q? What's behind that decision? Do you believe your pricing is appropriate, do you – or have you done analysis on your value proposition, as a whole? How do you come to the conclusion to raise the prices that way? Thanks.

James M. Schmidt - Chief Operating Officer

I think that it's a little deceptive, the price increase, because really what it is Keith is – it's a few targeted areas where we think we can go up a menu tier specific to a restaurant or a market. And then the other piece of that is our Happy Hour, we've raised the price on some beer, but we expanded our Happy Hour to cover wine, our margaritas, and then our pint beers, and actually in test that was extremely well received by our customer. So, we don't think it will have an adverse impact – for the vast number, the majority of our customers will not noticeably see any price increase at all.

Keith R. Siegner - UBS Securities LLC

Thank you.

Operator

Next, we'll hear from Brian Bittner with Oppenheimer.

Michael Tamas - Oppenheimer & Co., Inc. (Broker)

Great, thanks. This is Mike Tamas on for Brian. Just one quick follow-up and another question. Did you say that the plan is for comps to improve throughout the year, and be positive by the fourth quarter implying that negative same-store sales for 2Q and 3Q is what we should be expecting? And then I have another question. Thank you.

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

I think, we're just being very cautious in our forecasting. We wanted – we did some sensitivity analysis and it doesn't imply negative. It's – but we know that – but we forecast out at flat same store sales.

Michael Tamas - Oppenheimer & Co., Inc. (Broker)

Okay. So, flat for 2Q and 3Q, and then positive in the fourth quarter, is that correct?

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

That's correct.

Michael Tamas - Oppenheimer & Co., Inc. (Broker)

Okay. And then the real question is, can you just talk about the EPS guide down after only the first quarter, maybe what the biggest buckets are as you're looking at the model from here? That'd be helpful. Thank you.

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

It really is a decrease in same store sales and then higher traditional wing prices, is our outlook for the remainder of the year for wing prices has changed, since we would have updated last February.

Michael Tamas - Oppenheimer & Co., Inc. (Broker)

Okay. Great. Thank you.

Operator

Next, we'll hear from Matthew DiFrisco with Guggenheim Securities.

Matthew Kirschner - Guggenheim Securities LLC

Hi, this is Matt Kirschner on for Matt DiFrisco. I was just wondering if you could talk a little bit more about the Blazin' Rewards and just any possible restrictions to a further rollout or any timing to a national rollout.

James M. Schmidt - Chief Operating Officer

Well – oh, go ahead.

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

Well, I'll start then Jim can add some color to it. But no, we've – we wanted to make sure, one, we got it right and so any tweaks we have been through that the last probably six months as we rolled it out in 50 locations. We're adding now another group, because again, the training that goes behind it, making sure that servers, guest experience captains, anyone associated with, would really understand how it works, to continue to gather guest feedback on the program and make tweaks, so that you don't have to make tweaks after you have a national rollout. That will – this next rollout will be over the next quarter or two quarters, and we're hoping that by early 2017, it will be a national rollout. We will – we're going to expand it to another 90 restaurants in the next quarter or two quarters.

Matthew Kirschner - Guggenheim Securities LLC

Okay. And then as far as the future development, Jim said that you aim to do 40 company stores in 2016, down from the 40 stores to 50 stores. Do you see a particular area where the market might be oversaturated or what kind of drew you to that conclusion to open 40 locations in 2016?

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

We...

James M. Schmidt - Chief Operating Officer

The pushing in the locations was really just a factor; we were getting back-weighted in the fourth quarter and we just decided to kind of manage how many openings we're going to have in fourth quarter. And we had some delays as a result of some landlords just not delivering timely on their obligations. I think we feel good about that 40 stores to 45 stores pace still for the next several years. Just as you fill out markets you're bound to have some be more cautious about possibly impacting other restaurants, but that has not been a significant issue for us.

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

Yeah. I mean, it really has to do with just the bulk of restaurants that we're going to be opening in November and December, and decided that we'd rather push those a little bit to make sure that we are opening as strong as we can, those restaurants that we do open this year.

Matthew Kirschner - Guggenheim Securities LLC

Okay. And is there any regional strength or anything you'd point to as far as the different store openings or where you guys are focusing and developing?

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

No, where we have most of our development opportunities remains the same. We have opportunities certainly on the coasts, the northeast and in California. But that's just some fill-in throughout and we're very deliberate about where we locate our restaurants. We do know that sometimes there will be cannibalization. We monitor that so that we can try to anticipate that as we do get – as we gather guest feedback. One of the comments that we hear is there's not a restaurant close enough to me. So, we think there's still opportunity to fill-in.

Matthew Kirschner - Guggenheim Securities LLC

Thank you very much.

Operator

Will Slabaugh with Stephens, Inc has our next question.

Will Slabaugh - Stephens, Inc.

Thanks. I wanted to ask on the cost side, you managed that a little bit better than we would have thought given the comp. Can you talk a little bit more about any room you may see to continue to improve on the labor front, which actually leveraged year-over-year? And then what exactly you're doing there? And then lastly, what sort of flexibility you may see to continue to find either G&A improvements or other expenses that you could maybe find some savings on that we didn't notice previously?

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

Yeah, I'll talk a little bit first about the G&A. I mean, we're always watching G&A, and looking at what we can – how you spend your dollars. And sometimes you – sometimes it's a short term spend, sometimes it's a long term – what can you push off without impacting yourself significantly long term. We've always said that we expect to leverage slightly year after year. Not necessarily on a quarterly basis, but on an overall year after year basis and considering the sales, we're very pleased with where G&A came in.

On the labor front, same thing. I think the stores did an amazing job being able to manage their labor in light of slow sales and we were able to leverage on hourly labor, and it's just a heightened focus, and it has been. Particularly, we had end of 2015 – or throughout 2015 and even end of 2014, we've seen labor start to climb. But we've put in – did some forecasting on labor wages; that was part of why we took the price increase. It's not just commodity. We're seeing labor wage pressure there.

And so I think operations just has had a strong focus on it. We expect that in the second quarter, it will increase as a percent of total restaurant sales slightly, mainly because of sales. And we always tend to see the second quarter as going up a little bit more than the first quarter. Again a heightened awareness, taking a look at all aspects, from turnover to retention – or hiring, recruiting, and how we can move the needle there.

Will Slabaugh - Stephens, Inc.

Thank you.

Operator

Next, we'll hear from Jeff Bernstein with Barclays.

Pratik Patel - Barclays Capital, Inc.

Hi, great. This is Pratik for Jeff. Just wondering if you could talk about new unit performance, kind of how the coastal markets have been performing relative to the core markets? Thanks.

James M. Schmidt - Chief Operating Officer

Well, the – if you look at the mix of restaurants, it's – we still have a fair amount of development on the coast. We have more I think in strong coastal markets in 2014, but we do still have development, a fair amount of development on the coast, and we do tend to see higher volumes there, but also you're starting to see a mix of more small-town units, so we've combining small-town units in, and really the mix of openings will be I think pretty similar last year to a mix of both coastal, small towns, and then a lot of – a fair amount of fill-in as we complete penetration of markets throughout the United States. I do think as we look at the end of the last year that we felt we did have an opportunity to improve performance in some of our new restaurant openings and we're very focused on that this year.

Pratik Patel - Barclays Capital, Inc.

Great. That's very helpful. Thank you.

Operator

Next, we'll hear from Andrew Strelzik with BMO Capital Markets.

Andrew Strelzik - BMO Capital Markets (United States)

Hi. Good afternoon. I wanted to follow-up on an earlier question on the initiatives, they do seem like they're pretty targeted at specific occasions, so I'm wondering my question is, have you looked at from a brand maturation perspective, where the brand sits on that maturation curve. And not from a unit growth perspective but from an operating perspective, if maybe you need to more aggressively evolve or broaden those traffic driving initiatives to more everyday type of occasions, whether it's the marketing levels or the way you speak to the guests or anything like that, that maybe a more broad change in how you drive traffic on an everyday basis?

James M. Schmidt - Chief Operating Officer

I don't think we're anticipating any significant shift in how we approach. I mean, what differentiates our brands is the events and the experience we create in the restaurant that centers on sports and other activities in the restaurant. Again, I think, we're focusing on – we've always had value propositions, we're just enhancing them, reinvigorating them and talking about them a little more in this current environment, but our brand will always be – the focus on what will drive our brand into the future is sports such as soccer, that are an emerging sports.

We're exploring the role that each sports will play over time in our restaurants. I think, it is those types of differentiating experiences that will drive our brand into the future.

Andrew Strelzik - BMO Capital Markets (United States)

Great. Thank you.

Operator

We'll now move on to Robert Derrington with Telsey Advisory Group.

Robert Derrington - Telsey Advisory Group LLC

Yeah. Thank you. If I could ask a quick question about the acquired restaurants, Sally, that you purchased this last year. Can you give us any kind of an update on the regional trend you're seeing out for example the large group of Texas restaurants, which had seen some weakness earlier? Any kind of trends there, you can update us on?

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

Sure. Well, you can, by the script you could see that our – that they contributed to a decline in our average unit volumes of – I think, it was 30 basis points. Certainly, again this is part of a macro trend, some of those oil areas, Houston, Midland, that area is – are seeing some challenges in same-store sales, but we're not far off of what we expected the stores to do. It typically takes a year plus for us to go in, do the remodeling, retraining, hire people, hire additional people, perhaps just continue bar discounting, that kind of thing So it's across the board in Texas is what I would say. It's more hard-hit in oil areas, certainly not in other areas of Texas, New Mexico and Hawaii.

Robert Derrington - Telsey Advisory Group LLC

Got you. And when do those roll into the same store sales base, is it 12 months after the acquisition itself closes?

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

It will be 15 months after the acquisition.

Heather Pribyl - Investor Relations

That will be November of 2015.

Robert Derrington - Telsey Advisory Group LLC

Got you. And then, Sally, do you have any kind of color on we're – we're watching a pretty sizable increase in wings in cold storage, and I'm just wondering if you have any view on – I suspect that's probably contributing to a higher wing price, any kind of color you can provide on that?

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

Sure. I'll start, and then Heather can jump in. We've heard the same thing that cold storage wings – wings cold storage is up. So, we're expecting that one of the bigger players perhaps that will have some sort of a promotion, we've seen that in the past, and I do think that it has what's kept wing prices elevated in a time when we would normally see it decline a little bit. We've built all of that into our forecast for the rest of the year and certainly the collared contract that we've put in place has helped. We're working with our suppliers as important as price is, supply is very important as well. And so, we've been working with our suppliers and are very comfortable that we'll have all the wings that we need throughout 2016. Heather, your additional comments?

Heather Pribyl - Investor Relations

Yeah. I mean, what we've heard is demand for wings remains very strong out there in the market, and that some people may be putting wings in cold storage a little early for promotion in the fall.

Robert Derrington - Telsey Advisory Group LLC

Great. Thank you.

Operator

Next we'll hear from Brian Vaccaro with Raymond James.

Brian M. Vaccaro - Raymond James & Associates, Inc.

Yeah. Good afternoon, just a couple from me. I wanted to circle back on the shifts in advertising that we're going to be making here in 2016 or how you're adjusting your strategy? Can you give us a sense of the relative weights of your ad spend that will emphasizing value in lunch, as we move through and how that compares to the prior year? And are you making any changes in terms of the mix of national versus local or the overall spend level?

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

So, the – we're not seeing a significant change what we're – what we have seen is perhaps a spacing out, so more even advertising throughout the year. As we've grown, we certainly have dollars that's available, we don't see a significant shift from 2015 to 2016. What we do have is in some of the TV commercials or some of the advertising that we have nationally, we can do a – it's a 20-10 (41:08) where you have a tag at the end of that commercial. So, you actually can say get lunch or wings.

And our radios typically are called to action where we would advertise a specific daypart or a specific promotion such as Wing Tuesday or Lunch. But from a national advertising, from a TV, radio and social not a significant change over 2015.

Brian M. Vaccaro - Raymond James & Associates, Inc.

Okay. That's helpful. And just given the near term comp volatility and the calendar shifts for Easter and spring break and other things, wanted to see where – are you willing to give sort of a quarter-to-date update on your comp trends?

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

No. We're not. We announced in February that we were going to discontinue giving the quarter-to-date. This happens to be first quarter-to-date that that happens, but we can talk about our overall that we expect for the year, which we expect it to be positive by the end of the year – end the year with positive overall annual same-store sales.

Brian M. Vaccaro - Raymond James & Associates, Inc.

All right. Fair enough. And then last one from me. If you if you took no – on menu pricing, if you took no additional pricing, can you help us with the pricing cadence rollout through the rest of the year. I know you said 3.5% for Q2, but help us with third quarter and fourth quarter, please?

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

Yeah, no problem, Brian. Third quarter will be 3.6%. Fourth quarter 1.8%, and 2016 for that whole year will be 3.0% with no additional pricing taken after the May 2 adjustment.

Brian M. Vaccaro - Raymond James & Associates, Inc.

All right. Thank you.

Operator

Next we'll hear from David Tarantino with Baird.

David E. Tarantino - Robert W. Baird & Co., Inc. (Broker)

Hi, good afternoon. I want to come back to the sales weakness that you're seeing, and perhaps Sally or Jim, if you could maybe comment on how much of that do you think is more driven by the macro environment we're in versus perhaps some internal issues with the brand, and specifically, I'm interested to know kind of what you're seeing on your perceived value scores, to whatever extent you measure them. What's the trend been like, and do you think there are some issues with the brand value proposition, or is this all responding to...?

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

Yeah. David, I'll start, and then Jim can add in. From – it's – we like to think and talk about the things that we can control, when it comes to sales or costs or those kinds of things, but certainly the macro environment for casual dining has had a rough quarter, and rough couple quarters probably. So my guess is we're impacted by it as well. From a consumer standpoint, I just don't think that there is a robust consumer out there, whether they're getting delivery, whether they are certainly trending towards fast casual, we have that.

From a brand perspective, I don't look at any internal issues that we have, I think that our GEM scores are still strong. Our – while we saw a slight dip in value in November, when we did our price increase, it did rebound to former levels by January, and that's remained there. We're in the process of doing some guest research on value, we'll have more information on that. But, that hasn't been a comment really that we've heard from guests as we are constantly out there pulsing our Buffalo – the Buffalo – that's a Buffalo Circle, but the MVPs, where we're – what – where we're gathering information. So, Jim, other comments on perception or value within the brand?

James M. Schmidt - Chief Operating Officer

No. I just would reiterate, we certainly don't think there is any fundamental brand issue, and we think we have an opportunity, we are very focused on saying we have to make sure every restaurant is operating at a high level. We added a lot of restaurants in the last year and we want to make sure we are functioning and operating at high-level, and we think that combined with the sales initiatives that we have underway, we feel confident we'll regain momentum.

David E. Tarantino - Robert W. Baird & Co., Inc. (Broker)

Great. That's helpful. And then on the focus on the promotional Wing Tuesdays, I think, Sally, you mentioned that there would be differentiated pricing and bundling, I mean, if I heard that correctly. Could you maybe elaborate on what you're thinking there and how soon may we start to see the increased advertising emphasis on specifically the promotional days?

James M. Schmidt - Chief Operating Officer

So, in June, we're going into market, testing a few different options for the promotion and that's why we aren't talking about exactly what's going to be, because we're going to test a few variations. To be honest, as soon as we feel comfortable with what we're seeing from the test, we're going to go – at the latest by the start of football season.

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

And in those targeted markets we will have – some will be supported with advertising to see if that moves the needle, just as you test some without advertising to see the effect of that.

David E. Tarantino - Robert W. Baird & Co., Inc. (Broker)

Great. Thank you very much.

Operator

We'll now hear from Nick Setyan with Wedbush Securities.

Nick Setyan - Wedbush Securities, Inc.

Hi. Thanks, guys. You guys are differentiated by your sports obviously and so can you maybe comment on what you think any impact was from the fact that there were – the Big Ten wasn't very well represented in the March Madness tournament this time around. And then potentially also, to what extent some of the weather that we've seen recently in Texas and Colorado, et cetera, is impacting your comp commentary?

James M. Schmidt - Chief Operating Officer

Yeah. On March Madness, obviously matchup to match. (47:15) And it certainly is a more favorable March Madness when you have more of the established teams, be they Big Ten, ACC, SEC. When you have those big name established teams doing well, that always helps. And so, this year, it wasn't from a matchup perspective, wasn't the best March Madness that we've seen.

On weather, I mean, I think, we saw a little impact in Houston recently with the rain there. We did see some impact though – with the one week we had additional – got an additional NFL week, there was a winter storm that impacted us. So, we've seen a little bit weather-wise, but we really don't tend to focus all that much on the weather.

Nick Setyan - Wedbush Securities, Inc.

So, there is no way you guys can kind of maybe, at least direction-wise talk about those big states, obviously Ohio, Indiana, and Minnesota, et cetera, to what extent they trailed the overall system comp, et cetera?

James M. Schmidt - Chief Operating Officer

No. We usually don't break it down into regional.

Operator

We'll move on to Steve Anderson with Maxim Group.

Stephen Anderson - Maxim Group LLC

Yes. Good evening. I just wanted to talk a little more about the wing prices. I know that there has been an increase in some of the cold storage, and as referenced earlier on the call, that there may be fall promotion going on. But in looking at the – some of the other forwards (48:47) here, it looks like supplies are maybe flattish, maybe up a percent, down a percent from the excess in the check placements? (48:53) But wanted to see if there is any other factor you're seeing with wing cost increase? Clearly, as you're seeing some of the other proteins are down, particularly for beef on a year-over-year basis. So, I was interested to see if you can give me any color on that?

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

Well, we don't sell much in terms of beef in our menu; we do have burgers, but it does not make up a big percentage and everything ex traditional chicken wings is slightly deflationary for us year-over-year. And what we're seeing is just strong demand for wings in the market right now, resulting in a little bit more elevated pricing of that $1.94 for the first two months of second quarter here, where typically after March Madness you see that start to decrease.

Stephen Anderson - Maxim Group LLC

And can you speak about like your boneless breast contract as well, like when that was reset and what kind of advantage you're seeing there?

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

Our new boneless contracts went into effect at the beginning of April and we will see a cost savings on that of around 10 basis points per quarter going forward.

Stephen Anderson - Maxim Group LLC

Okay. Thank you.

Operator

Karen Holthouse with Goldman Sachs has our next question.

Karen Holthouse - Goldman Sachs & Co.

Hi. Thank you for taking the question. So, I have a broader question of just sort of looking at where the targeted advertising and promotions are happening. It seems to be away from what I would think of as the core of the business, of in-house going to watch football, basketball, and hockey. So, it seems – and just I guess curious what the logic is for not more actively targeting what I would consider the majority of your business. For how much of an increase do you have to drive in Wing Tuesdays to really move the needle on the overall?

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

Yeah. Karen, you'll still see our focused brand advertising. Certainly, you've got during March Madness; you'll see it for Fall football. When we talk about promotional advertising, you'll typically see that in radio and that is not a change; radio has always been our call to action, where we talked about lunch, where we talked about Wing Tuesdays. We just have not promoted via advertising Wing Tuesdays for some time, and it's just a good reminder in this price sensitive environment, that we have a compelling offer. So that was the decision behind it. But, not moving away from that Buffalo Wild Wings, the sports viewing experience, gathering with friends and family et all. It is – that is still strong, that's still the message. We'll be able to tag that with an additional message, but it will be focused and you'll see a new creative campaign in the fall for that.

Karen Holthouse - Goldman Sachs & Co.

And then one other quick one, with the test of tablet technology is that – is what's in market something that's built around the Buzztime platform, the internally developed platform, or working with an external partner?

James M. Schmidt - Chief Operating Officer

We have both going in test. One is the Buzztime tablet and another one is another external partner.

Karen Holthouse - Goldman Sachs & Co.

All right. Thank you.

Operator

Chris O'Cull with KeyBanc has our next question.

Chris O'Cull - KeyBanc Capital Markets, Inc.

Thanks. Good afternoon, guys. Sally, the segment has been more aggressive with value message the past few months, and Buffalo Wild Wings has struggled to grow traffic during that same time. So I'm trying to understand why the company has been slow to respond with a value message? And why should we expect much improvement until we see the new value bundled promotions that are being tested in June?

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

Okay. I didn't – the first part of your question is that somebody – someone has been doing value promotions?

Chris O'Cull - KeyBanc Capital Markets, Inc.

The category has clearly been more aggressive with value promotions.

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

The category, right.

Chris O'Cull - KeyBanc Capital Markets, Inc.

And so I'm trying to understand why you guys have been a little slower to respond to the need for value?

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

Sure. I think that – I think that certainly as we go into March Madness we want to focus on what the brand is, and that it is about where Buffalo Wild Wings, sports lives here. So that was the decision there. Again, having a – perhaps advertising throughout the year allows us to do some of that. And you're right, you probably, until we have a test and we have that Tuesday message, you're not going to see a lot of change, but certainly, our lunch promotion and our advertising around lunch and the FastBreak lunch has been going on.

James M. Schmidt - Chief Operating Officer

And we start a new Happy Hour promotion in early May.

Chris O'Cull - KeyBanc Capital Markets, Inc.

Okay. And then, just as a follow-up regarding the takeout opportunity, you mentioned that takeout sales have – or the online ordering has grown as a percentage of the overall takeout sales. But I'm assuming you're seeing takeout sales growth, is that coming from additional transactions or just primarily from the larger ticket?

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

I'm not sure, I understand your question there? Additional – larger ticket or additional, I guess, it's both. So, the ticket is larger on online sales and then there are more transactions.

Chris O'Cull - KeyBanc Capital Markets, Inc.

Okay. Okay. Are you going to be supporting the takeout opportunity with TV advertising or any other media advertising to try to drive takeouts there?

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

Probably not, probably not TV advertising unless it's a tag. You might have a tag in the fall with it, but again takeout with – almost that call to action is almost always both online and radio.

Chris O'Cull - KeyBanc Capital Markets, Inc.

Okay. And then I apologize, if I missed this earlier. But Jim, if you exclude the bonus impact during the first quarter, how did the labor cost compare year-over-year?

James M. Schmidt - Chief Operating Officer

It was favorable year-over-year, I believe on – we did a nice job of managing our hourly labor particularly in light of the fact that sales were softer than anticipated. Obviously, we would have delevered on our management labor which was at a fixed salary rate.

Chris O'Cull - KeyBanc Capital Markets, Inc.

Okay. Okay. Great. Thanks guys.

Operator

Our next question comes from Alton Stump with Longbow Research.

Alton K. Stump - Longbow Research LLC

Thank you and good afternoon.

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

Hello.

James M. Schmidt - Chief Operating Officer

Hello.

Alton K. Stump - Longbow Research LLC

Yes, I think. Yeah, sorry, can you hear me now?

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

Yes.

James M. Schmidt - Chief Operating Officer

Yes.

Jeffrey B. Sorum - Chief Financial & Accounting Officer

Yes.

Alton K. Stump - Longbow Research LLC

Okay. Sorry about that. Just on the comp front, I want to dig just questions or concerns I've got from investors just how choppy that your comp results have been over the last call it 12 months here, even here in the first quarter, obviously, a pretty good two-year stack in January, and it suddenly turned for the worst over the last couple months of the quarter. And so, in the late – is there anything going on either externally or internally that would explain, as to why comps have been even more choppy than usual over the last 12 months? And sort of in that vein, what gives you confidence now that we could see a more consistent improvement to get back the positive comp by the end of the year?

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

You are chopping up a little bit, so I'm going to do my best to answer. Certainly, we look back at the first quarter, prior year, our January was very, very strong, so redeem the gift cards I think was the first year of the new game champions – BOWL game championship, we might have had an extra week of NFL, I have to go back and look. So, our January is very strong and that moderated throughout the year or throughout the quarter, but still ended the quarter very strong.

Looking at our two year stack, that is one of our lower stacks over the last couple of years, I don't expect, I mean we think that we can get back to – I don't want to say normalized comp because it can be quite choppy, depending on what's going on. Certainly Men's World Cup doesn't repeat except every four years and same with Women's World Cup. Again, we're looking at what can we do off of big events to help drive traffic. So be that soccer, certainly is – is we want to be the place for soccer all year around, again how you drive Happy Hour lunch and takeouts, so that you can ease some of that choppiness, but big matches are still going to cause that, when you have a seven game series, whether it's hockey, basketball or even baseball, that bodes well for us and can really help drive same-store sales.

James M. Schmidt - Chief Operating Officer

Yeah, and I don't think we really saw any concerns with same-store sales last year until – around October, it was when we started to see what we considered a softening that caused us some concern.

Alton K. Stump - Longbow Research LLC

Okay. Jim, I have one quick follow-up. Just on the pricing front, as mentioned 3.5% for Q2, does that include what I presume is going to be a bit more discounting whether behind the Tuesday Wings and/or the value bundles that you're looking at over lunch, is that inclusive of that effort?

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

Yeah, that 3.5% is what we've taken over the last – we'll have taken over the last 12 months. And so, I'm trying to figure – I'm trying to determine the Wing bundle, how that will – it shouldn't affect it – one, from a pricing standpoint, one way or the other.

James M. Schmidt - Chief Operating Officer

But May added up 0.6% into that 3.5%.

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

Right.

Alton K. Stump - Longbow Research LLC

Okay. Great. Thanks. I appreciate it.

Operator

Our final question will come from Andrew Charles with Cowen & Company.

Andrew Charles - Cowen & Co. LLC

Great. Thank you. Just on FastBreak, what gives you the confidence for the initiative, given that it goes head to head with fast-casual dominant daypart? In this I know that the menu was originally designed to be more operationally friendly, but just with the guarantee, was there something that went wrong with the execution there as well? Thanks.

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

No, we just think it's a great opportunity to remind people of that you can get in and out of a Buffalo Wild Wings as fast as – just about as fast as you can from fast-casual. And so, if you wanted an alternative to the sandwich or something like that, Wings are a great alternative. And so, we've first launched the FastBreak menu and then by having the guarantee, it's really – there's is really a focus. And so stores will kind of earn that right to have that guarantee, that to show that they are operationally able to handle it and by putting some media behind it, we think it's a compelling message.

Andrew Charles - Cowen & Co. LLC

Okay. And we seeing the success in the early – the first year of it, just obviously it does go up to head to head against fast-casual. I was just curious about the results you've seen in the first year with it?

James M. Schmidt - Chief Operating Officer

We're certainly seeing some positive results from our FastBreak lunch. I don't – but this is an opportunity, I think to really put some media behind it, and a service guarantee to make it more attractive and we are hoping to lure some new customers and in bringing back customers who want that good quality fast lunch.

Andrew Charles - Cowen & Co. LLC

Thank you.

Operator

That will conclude the question-and-answer session. I'll turn the conference over to Sally Smith, for any additional or closing comments.

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

Sure. Thank you all for joining us on our first quarter 2016 conference call. We look forward to speaking with you again in July, when we have our second quarter and hope you'll consider coming to our Analyst Day in Denver on August 16. Thank you all.

Operator

That does conclude today's conference. Thank you for your participation.

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