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Buffalo Wild Wings (NASDAQ:BWLD)

Q3 2007 Earnings Conference Call

October 30, 2007, 5:00 pm ET

Executives

Mary Twinem - EVP and CFO

Sally Smith - President and CEO

Analysts

Jeff Farmer - CIBC World Markets

Larry Miller - RBC Capital Markets

Destin Tompkins - Morgan Keegan

Bryan Elliott - Raymond James

Conrad Lyon - FTN Midwest

Barry Stouffer - BB&T Capital Markets

Greg McKinley - Doherty

Nicole Miller - Piper Jaffray

Operator

Good afternoon. My name is Holly, and I will be your conference operator today. At this time, I would like to welcome everyone to the Buffalo Wild Wings Third Quarter 2007 Conference Call. All lines have been placed on mute to prevent any background noise.

After the speakers' remarks, there will be a question-and-answer period. (Operator Instructions)

Thank you. It is now my pleasure to turn the floor over to your host, Mary Twinem, Chief Financial Officer and Executive Vice President. Ma'am, you may begin your conference.

Mary Twinem

Thank you. Good afternoon, everyone, and thank you for joining us as we review our third quarter 2007 results. I am Mary Twinem, Chief Financial Officer and Executive Vice President of Buffalo Wild Wings.

Joining me today is Sally Smith, our President and CEO. By now, everyone should have access to our third quarter earnings release, which went out after the market closed today. If you have not received a release, it is available on the Investor Relations section of our website at buffalowildwings.com. A script of our prepared remarks will also be posted on our website after the call.

Before we get started, I want to remind you that during the course of today's call various remarks we make about future expectations, plans and prospects for the Company constitute forward-looking statements for purposes of the Safe Harbor provision under the Private Securities Litigation Reform Act of 1995.

Actual results may vary materially from those contained in the forward-looking statements based on a number of factors, including without limitation the number of locations opening during 2007 and beyond, the sales at these and our other company-owned and franchised locations, our ability to successfully operate in new markets, the cost of fresh chicken wings, the success of our marketing initiatives, our ability to control restaurant labor and other restaurant operating costs and other factors disclosed from time to time in our filings with the US Securities and Exchange Commission.

As a reminder, Buffalo Wild Wings affected a two-for-one stock split on June 15, 2007. All applicable share and per-share data in our earnings release, this conference call and our financial statements retroactively adjusts to give effect to this stock split.

On today's call, Sally will provide an overview of the third quarter. After that, I will provide further detail on our recent financial performance and comment on trends in the fourth quarter. Finally, Sally will share some thoughts about the remainder of 2007 and the year ahead. We will then answer questions.

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

Sally Smith

Good afternoon, everyone. We're pleased with the third quarter and especially with out same-store sales with Company-owned restaurants up 8.3% and franchised restaurants up 5.9%. These increases are comping over 11.8% and 6.4% same-store sales increases in the third quarter of 2006.

Total revenue increased 20.5% over prior year to $82.4 million, and we ended the quarter with 461 restaurants in 37 states of which 148 were Company-owned and 313 were franchised, a growth in units of about 12% over last year.

In September, our strong national, regional and local media buys debuted our new Buffalo Wild Wings brand experience television commercial, while our radio messages invited guests to celebrate our 25th anniversary and highlighted one of our core events, boneless Thursdays.

Viewers watching ESPN, ESPN U and the new Big Ten Network where Buffalo Wild Wings is the exclusive halftime show sponsor, fans listening to NFL games on national radio and surfers logging onto ESPN and MySpace were bombarded with Buffalo Wild Wings messages.

This increased media presence was coupled with a multitude of local marketing events executed by our restaurant team, including a system-wide 25th anniversary party and sweepstakes. Our strong media presence combined with great operational execution delivered strong same-store sales and improved restaurant cash flow.

From a development standpoint, we opened three company-owned restaurants during the quarter one each in Illinois, Iowa and Texas. And we opened 12 franchised locations in nine states.

To date in the fourth quarter we have opened two company-owned locations and five additional franchised sites. With scheduled openings in November and December we should reach 162 total company-owned restaurants by year-end.

For franchise locations we believe 15 more will open in the remaining two months including three locations that are scheduled in the final days of December. This brings us to our targeted 15% unit growth mark, a busy two months to be sure.

Mary will now provide additional detail on our third quarter performance and then talk about trends and expectations for the fourth quarter. Then I will return to share some of our plans for the remainder of 2007 as well as a look into 2008.

Mary Twinem

Thank you, Sally. As Sally mentioned, total revenue in the third quarter increased 20.5% to $82.4 million versus $68.3 million in the third quarter of 2006. Company-owned restaurant sales increased to $73.3 million, a 20.5% increase over prior year.

Contributing to this increase was a same-store sales increase of 8.3% for the quarter trending over prior year comps of 11.8%. Menu price increases taken in the first quarter of 2007, account for 2% to 3% of our same-store sales increase.

We had 14 additional company-owned restaurants in operation during this quarter versus the same period last year and the strength of these openings is reflected in the average weekly sales volume increase of 8.8% for the quarter, 50 basis points higher than our same-store sales increase.

Our royalty and franchise fee revenue for the quarter increased 20.4% to $9.1 million versus $7.5 million in the third quarter of 2006. Franchised restaurants achieved 5.9% same-store sales for the quarter, comping over 6.4% same-store sales in the prior year and a net 35-franchised units have opened since the end of third quarter last year. Franchised locations had a 6.8% increase in average weekly sales volume for the quarter.

I will begin the discussion on third quarter expenses with a review of restaurant operating costs. Cost of sales for the third quarter was 30.7%, 20 basis points higher than prior year with a cost of fresh chicken wings averaging $1.24 per pound during the quarter, $0.10 higher than last year's third quarter average of $1.14.

The increase in the cost of sales percentage is a result of both the higher cost per pound for wings, as well as, larger sized wings than in prior year and in second quarter of this year.

Cost of labor for third quarter was 30.2% of restaurant sales, 20 basis points higher than third quarter last year. Our hourly labor costs on a percentage basis increased over prior year.

Self-insured health and workers compensation programs improved over second quarter as a percentage of sales and were slightly better as a percentage of sales to last year's third quarter.

Restaurant operating expenses were 16.7% of revenue in the third quarter, down 20 basis points from third quarter last year. We saw improvements in credit card fees and utility costs but our sports programming, insurance and local marketing expenses increased on a year-over-year basis.

Occupancy expense at 6.9% of restaurant sales for the third quarter was down 40 basis points from last year as we continue to leverage this fixed cost with higher sales volumes at company-owned restaurants. Depreciation was also down 10 basis points.

Restaurant level cash flow which is calculated before depreciation and preopening expenses was $11.3 million or 15.4% of restaurant sales versus $9.2 million or 15.2% in the third quarter last year, a 20 basis point improvement.

General and administrative expenses of $9.1 million in the third quarter or 11.1% of revenue, compares to $7.6 million last year, also 11.1%. Third quarter results in 2007 included stock-based compensation expense of $715,000 versus $669,000 in the third quarter of 2006.

Other G&A expenses for the current quarter totaled $8.4 million or 10.2% of revenue, up 10 basis points from similar G&A expenses in the prior year's third quarter and almost $1 million higher than second quarter.

The third quarter includes about $500,000 of expenses related to benefits and meeting expenses that will not be recurring in the fourth quarter. However, we do have incremental expenses for headcount additions and opening the anticipated 34 new restaurants in the quarter that will make leveraging over prior year's fourth quarter difficult.

Preopening expenses for the quarter were $988,000 versus $755,000 last year. We opened three new company-owned restaurants in the third quarter of 2007, compared to five new locations in third quarter last year and we have incurred $479,000 of preopening expenses for locations that have or are expected to open in the fourth quarter.

Interest income exceeded prior year by $212,000 primarily as a result of higher interest rates and a larger cash and marketable securities balance. Our effective tax rate during the third quarter was 33.2% versus 32.6% in the prior year. For the year, we expect our effective tax rate to be between 33% and 34% compared to an effective tax rate of 31.7% last year.

In summary, third-quarter net earnings of $4.3 million compares to $3.5 million last year, a 21% increase. Third-quarter earnings per diluted share equals $0.24 on 17.8 million shares compared to $0.20 on 17.5 million shares in the prior year.

From the balance sheet standpoint as of September 30, our cash and marketable securities balance was $72 million compared to $64 million as of the end of the year. Year-to-date we have spent $23.1 million on capital expenditures, $2.4 million of which relates to the relocation of our Minneapolis home office in September.

Now a few trends in details on the fourth quarter of 2007, to date in the fourth quarter, same-store sales are at 4% for Company-owned restaurants and about 2.5% for franchised locations. The potential benefit from any price increase is taken in prior quarters is 2% to 3% for Company-owned restaurant sales.

We're pleased with our same-store sales given that the prior year's fourth-quarter same-store sales hurdles are 13.2% for Company-owned and 6.5% for franchised locations. As Sally stated earlier, we have already opened two Company-owned and five franchised locations in the fourth quarter and anticipate 12 additional Company-owned and 15 more franchised openings before year end.

Relating to cost of sales, we expect wings for the fourth quarter to average about $1.24 per pound based in part on the pricing agreement we have in place for our Company-owned restaurants. We anticipate small increases in some of our commodities in the fourth quarter but estimate that our cost of sales percentage will be similar to the third quarter.

At this point, I should remind everyone that 2006 was a 53-week year with the extra week occurring in December. To summarize, our fourth-quarter 2006 earnings per share benefited $0.08 due to the fourteenth week including $6.4 million of additional sales, labor cost improvements of about 25 basis points, operating expense leveraging of about 30 basis points, occupancy expense leveraging of about 50 basis points, depreciation leveraging of about 40 basis points, and general and administrative expenses leveraging of about 20 basis points.

In stating our annual growth targets of 20% revenue and 25% earnings growth, the effect of the extra weeks should be factored out. For general and administrative expenses, stock-based compensation in the fourth quarter should be about $720,000. We expect free opening cost for new store openings to be about $180,000 per Company-owned restaurant with $479,000 already incurred in the third quarter for fourth quarter opening.

Fourth quarter results will have some pre-opening expenses related to 2008 openings as we expect five of the 2008 locations to be under construction by year-end. On a year-over-year basis, pre-opening expenses in the fourth quarter could be more than $1 million higher than last year.

To summarize our third quarter earnings per diluted share increased 21% over prior year to $0.24 per share. Although third-quarter earnings taken separately are less than our annual EPS growth target of over 25%, our year-to-date results remain significantly above our annual target.

In achieving our annual target, certain quarters may fall below the target due to several factors such as the timing of new restaurant openings and related pre-opening expenses and non-recurring expenses. Our same-store sales are first-class and our focus on our guests, our facilities and hospitality is spot on.

We remain committed to our strategic initiative, enhance the guest experience, optimize performance, one system, one voice and open strong, stay strong and have seen great new restaurant performance and improved unit level cash flow.

With a 50 basis point improvement in our restaurant level cash flow year to date and what most would consider a difficult year with numerous cost pressures we are well above our 25% annual earnings growth target. The performance delivered by our restaurants and home office team is to be commended.

Please review the risk sections outlined in our SEC filings including our 10-Q for the third quarter, which will be filed shortly as well as our Safe Harbor Statement for factors affecting our forward-looking statements. And with that I will turn it back to Sally.

Sally Smith

Thank you, Mary. Fourth quarter is well underway and we have a number of exciting things happening in our marketing and advertising program during the fourth quarter of 2007. As we shared in our second-quarter conference call, our strong same-store sales have given us additional advertising funds to enhance our 2007 media plan allowing us to increase our fourth-quarter spending by 40% over prior year.

To further engage our guests in the brand in September, we unveiled our new Buffalo Wild Wings website. The site is fun, engaging and extremely interactive encouraging visitors to play games, explore links and also view new videos from the Buffalo Wild Wings film school.

In October, we had our first ever national cable and network media buy with all of our restaurants receiving TV coverage on 15 different stations during prime time and late-night programs.

In late November and into December we will promote our traffic building holiday gift card offer both in-store and with local media. We will continue our Big Ten network and national radio partnership while adding regional TV on Fox sports.

During the fourth quarter we are also inviting our guests to create and submit their own Buffalo Wild Wings commercial with the top commercials playing on our website where visitors will vote for the winner.

In 2008, our commitment to increasing awareness continues while driving frequency with our core brand events such as wing Tuesdays and boneless Thursdays and by our You Have To Be Here experience.

We will continue our ESPN partnership, enhance our exposure during the CBS March Madness campaign and also add a second national television media play in September with spots during NFL, major league baseball and NASCAR events.

Our Web presence will also increase by adding online media in March, June, September and October on websites like YouTube, Myspace and UFC. From an operation standpoint we will continue our focus on delivering a great guest experience.

In the third quarter we invested training dollars as part of our July menu rollout to retrain recipes and food preparation, guest hospitality and responsible alcohol service at our Company-owned locations.

We're actively upgrading audiovisual systems to HDTV and have begun remodeling older locations, the newest look and will continue to update our restaurants during 2008.

We are establishing new recruitment and training programs for our unit and multi-unit managers and expect that these programs coupled with our initiatives for controlling restaurant operating costs will positively impact our unit level performance.

As we stated in our press release, we continue to work through the gaming license process necessary for the purchase of our Las Vegas franchise location. This process is taking longer than expected and although we cannot determine the exact closing date we anticipate that the acquisition upon satisfaction of the remaining contingencies will be completed in 2008.

In September, we filled an open position on our leadership team with the addition of Mounir Sawda as Senior Vice President of Franchise and Development. MO is responsible for both franchise and Company-owned development including franchise sales, real estate development and construction.

We're excited to have MO on our team, as he will be key in establishing the processes necessary to achieve our unit growth plans. We remain committed to achieving our annual targets for 2007 and also for 2008, a 15% unit growth, 20% revenue growth and 25% earnings growth.

As we approach the 500-unit mark we feel as strongly today as we did in November 2003 when we became a public company. We will build this brand to over 1000 restaurants in the United States and with proper focus and thousands of employees and franchisees, who feel as passionately as I do about Buffalo Wild Wings we will achieve our goal.

Thank you for listening to our prepared remarks and I look forward to sharing our year-end results with you in early February. Operator, we will now open the call to questions.

Question-and-Answer Session

Operator

At this time I would like to remind everyone. (Operator Instructions) Thank you. Our first question is coming from Jeff Farmer of CIBC World Markets.

Jeff Farmer - CIBC World Markets

Great, thank you. You talked on this briefly but your year-over-year wing cost pressure fell sequentially. You had a greater amount of pricing this year versus the first two quarters but you still saw cogs pressure this quarter versus the benefit in the first two quarters?

Can you just provide a little bit more color on what was going on there in the food cost line other than sort of bigger wings?

Sally Smith

Yes. I mean bigger wings actually is what we think is the biggest factor in that. In the second quarter we were able to bring down cost of sales year-over-year even though our wing price had gone up.

In the third quarter here we had less of an increase in our wing price than we did year-over-year than we did in the second quarter yet we had our cogs go up about 20 basis points.

And the thing we can point to mostly on that is that the size of the wings coming in through August and September is bigger than it had been and our producers are saying we're going to get that down going here into the fourth quarter.

But you know, if you have even one less wing per pound it's a pretty big difference as it relates to your cost of sales. On other commodities just a little bit we think boneless -- we saw a little bit of an increase a little bit in apps.

But really wings price per pound and number of wings per pound we think is the biggest contributor.

Jeff Farmer - CIBC World Markets

Okay. And then just in terms of the pricing structure on your current chicken wing contract I believe it's based on a trailing three-year average.

As you get closer to March '08 and you have to renegotiate, can I just assume that it's going to be based on sort of the same trailing three-year average pricing structure?

Sally Smith

No. You really can't, Jeff. As it relates to the cost that we have seen through wings or the market for wings overall this year we really won't know what that contract will look like until we get closer to the end of this one.

Jeff Farmer - CIBC World Markets

But -- so, we can't even assume that it is based on the same structure though? I mean, I understand you don't know where wing prices are going but in terms of the actual structure itself…

Sally Smith

Yes. I mean, we’ve had conversations with all of our producers, I wouldn't say to date that we could say what it will be.

Jeff Farmer - CIBC World Markets

Okay. And just finally quickly, obviously you've seen some of the best same-store sales and average weekly sales growth numbers in the sector, but G&A leverage has been sort of slow to present itself. As you get into '08, do you think that you'll be able to see a little bit more G&A leverage?

Sally Smith

Yes. It's definitely our commitment when we put our growth targets for 2007 and for 2008 of 15% unit growth, 20% revenue growth and 25% bottom-line growth, that definitely is because we believe we can get it leveraged on our G&A line.

Jeff Farmer - CIBC World Markets

Okay. Thank you.

Operator

Thank you. Our next question is coming from Larry Miller of RBC Capital Markets.

Larry Miller - RBC Capital Markets

Hey guys. Can I just clarify something first? You guys are planning to contract, is that how it stands for wings for '08 or are you just feeling things out and you are not sure yet?

Sally Smith

Your question is if we're planning a contract?

Larry Miller - RBC Capital Markets

Yes. I mean, is the intention to do contracts for '08? I just wasn't clear on that?

Sally Smith

Yes. It definitely is, just can't say yet until we get finished with negotiations on what that will look like.

Larry Miller - RBC Capital Markets

No. I get it. I just want to make sure that was the intention. And then another thing I didn't understand, is how variable are the size of the wings particularly, can you specify a certain size, I would have thought that would be the case?

Sally Smith

We typically -- we have -- we certainly have a product spec and we like to think that we can be within that products spec. As you go through the year depending on weather conditions and you know, different producer's growth targets we will see some variability in it. We have seen certainly bigger wings than we have had it last year at this time.

Larry Miller - RBC Capital Markets

Is there an ability of price for that, flexibility if that happened you're going to take a little bit of extra price on larger size wings or not really?

Sally Smith

Yes. No. There hasn't been to date and what's unique a little bit this year versus last year is the weather has been milder in the South. And so the producers again are working on getting the size of those birds down but it just takes some adjustment time as it relates to the growing cycle.

Larry Miller - RBC Capital Markets

I guess they got stuff in. And my question also is on, you know, the October sales, it sound like you had a lot more media coming in October and not at that those market comps maybe we can’t tell because of the comparison in October maybe being more difficult than maybe November and December maybe that’s the case, that will help to understand that?

But I would have thought with the media presence, you know, you would have had maybe potential even more positive traffic than maybe one or two points. Can you comment, do a little bit of expose -- an expose factor on the effectiveness of that media that you put in place, do you think it's working?

Sally Smith

Well, we think all of our media works. As it relates to the trends in October to date, we are hitting in the fourth quarter our highest hurdles for same-store sales. So we had same-store sales last year in the fourth quarter of 13.2% in pretty much all months were high.

So we do have pretty big hurdles to go over and being even at 4% for the month brings us to great two-year comps. The one thing that we can point to though -- I can't quantify the effect of it is that World Series and the baseball playoffs this year weren't quite as compelling as they have back, they were last year with Detroit and St. Louis going to the World Series.

So from that match we can see some differences in store or market same-store sales trends year-over-year.

Larry Miller - RBC Capital Markets

So maybe you saw some regional weakness in the Ohio Valley and that area, is that explain that?

Sally Smith

Definitely Detroit not being in the series would change the same-store sales trends that they have and then the games only went four instead of longer, so.

Larry Miller - RBC Capital Markets

Okay. That's helpful. But generally speaking the comparisons in the fourth quarter to a year ago are pretty even?

Sally Smith

No. Yes. They're high all the way through.

Larry Miller - RBC Capital Markets

Okay. Thank you, guys. I am done. Thanks.

Operator

Thank you. Our next question is coming from Destin Tompkins of Morgan Keegan.

Destin Tompkins - Morgan Keegan

Thank you. Mary, I just want to clarify the guidance a little bit. When you talked about the '07, 25% growth it is excluding the extra week of sales in 2006, so it would be off a base of $0.84 instead of $0.92, correct?

Mary Twinem

Correct.

Destin Tompkins - Morgan Keegan

Okay. And then as we look at FY08 with the franchise acquisition whatever accretion you would get from that acquisition would not be included in your 25% growth, is that correct?

Mary Twinem

That is correct.

Destin Tompkins - Morgan Keegan

Okay. And then on the Las Vegas acquisition, could you give us a -- do you expect it to close in the early part of 2008 or could it be delayed more into the middle to later part of the year?

Sally Smith

You know, I wish we could answer that. We are working diligently to submit all of the information. We are working with I believe nine different municipalities they have, each city has its own requirements as well as state requirements and our attorney just can't comment -- or commit to a date when we think it will close.

Destin Tompkins - Morgan Keegan

Okay. And then Mary, could you just review the menu pricing the 2%, 3% when does that roll off?

Mary Twinem

I mean it will roll off in February.

Destin Tompkins - Morgan Keegan

Okay. And are there plans to take some additional pricing at that point or have you even looked at it at this point?

Sally Smith

We have looked at it. We do plan on taking menu pricing we don't know exactly what that will be yet. We're going to wait until we have more of our commodity contracts finalized for next year and that will help guide us a little bit on what we take for menu.

Destin Tompkins - Morgan Keegan

Any additional outlook on, you know, what either the prime cost -- either cost of sales or labor you know look like? Do you expect those to be up in 2008 on a percent of sales basis or is that something you're going to try to price to protect?

Sally Smith

Yes. We will do our best. We will have some more visibility as it relates to minimum wage increases would be and hopefully we will be able to menu price to neutralize any of that as it relates to commodities. It's just too early to tell.

Destin Tompkins - Morgan Keegan

Great, thank you.

Operator

Thank you. Our next question is coming from Bryan Elliott of Raymond James.

Bryan Elliott - Raymond James

Good evening. I wanted to get a sense for your cost flexibility. You've had very big comps here for some time. Labor, G&A costs have risen on a per-store basis somewhat in line with those big sales gains.

If we are hypothetical entering a period of lower single digit same-store sales, what kind of flexibility does the system have to bring down the growth rates that we continue to see both on the per-store labor line and on the G&A line?

In other words, they're growing high-single digits, big picture and if sales are now low-single digits and sustained there because we're in a recession or whatever environment might unfold here what can you do to protect your margins under that hypothetical scenario?

Sally Smith

Well, certainly on the labor line we always want to be cognizant of our scheduling and efficiently scheduling the labor in the restaurants. And we -- that weakened -- that has lot of flexibility on an hour-to-hour basis as we plan out our same-store sales.

From a G&A standpoint, I think we always use the cautious approach about adding any type of overhead as we have stated that with a target of 25% earnings growth it implies some G&A leveraging.

And as we look at our plans for 2008, we will take a look at kind of what we forecast for our same-store sales and plan our G&A accordingly with the thought that if same-store sales are moderating so will our G&A.

Bryan Elliott - Raymond James

Are there -- what's the system at the store level? What's the incentive for the store managers? How flexible are they on labor scheduling? Does that get sort of pushed down from above? Refresh my memory on that.

Sally Smith

Labor scheduling is all done at the store level by the general manager and submitted to the regional manager and director of operations for review. The regional manager and DO will take a look at anticipated sales dollars for the day and for the week.

We have got a program that then calculates out for that general manager how to staff the various positions of the restaurant; how many people they need in the kitchen, heart of house how many in the bar, servers, that kind of thing.

It breaks it down on a sales basis by day. So the first thing of course, is to look at and challenge your sales assumptions and then really let the program do its work in telling you how people should be assigned.

If for example you have a snowstorm and obviously the sales aren't going to be there that day, the general manager can then at that time cut labor throughout the day if necessary.

Bryan Elliott - Raymond James

How are -- those procedures and systems work here in October with the fairly abrupt slowdown in sales that you have seen? How's labor cost look for the first few weeks of the quarter for example?

Sally Smith

No, I don’t -- we don't comment on trends that we see in October and November and December. So I really can't say.

Bryan Elliott - Raymond James

All right. Thank you.

Operator

Thank you. Our next question is coming from Conrad Lyon of FTN Midwest.

Conrad Lyon - FTN Midwest

Hi. Just want to see how you guys stack up against sort of the casual dining bar and grill group. In September there was a big slowdown in the area. Did you guys see any type of slowdown between your third-quarter comps at all towards the tail end?

Sally Smith

For the tail end? Yes. I think we were slightly lower we gave it in July -- when we had our July conference call we gave you our same-store sales through the end of July and then.

Mary Twinem

We were also going up against progressively harder comps through the -- month-by-month through the third quarter of '06.

Conrad Lyon - FTN Midwest

Okay. So, you're kind of feeling what the industry is feeling as well then?

Mary Twinem

A little bit. And we ended with over 8% for the quarter.

Conrad Lyon - FTN Midwest

Yes. I know, it was a great comp. And then how about in terms of geography -- there's a lot of talk about California, Florida and even -- Nevada is having some trouble. Have you guys seen any issues in those regions at all?

Sally Smith

Now, we have two restaurants in California so…

Conrad Lyon - FTN Midwest

Yes. But you -- are you feeling anything in kind of, some of the weaker areas or is there any kind of geographic distribution to your sales that you have noticed?

Sally Smith

No we don't, typically comment about geographically and I don't think anything stands out. Certainly, the World Series in those two markets as compared to prior year certainly would have been different from a year-over-year basis. But from strength of sales throughout the system nothing stands out.

Conrad Lyon - FTN Midwest

Okay. Let me shift gears. Let me shift towards the franchise system. Average weekly sales growth has been great there. How have profits held up and consequently how is the franchise pipeline looking?

Sally Smith

Well, from a franchise pipeline standpoint, we just signed in the last four months, three area development agreements for California for an additional 16 stores. I have another large one for the Northwest that should be signed here in the next month or so. So we have more than 225 locations under contract so we feel really good about the 15% unit growth pace.

I think from a profitability standpoint, we don't spend time reviewing the financials of our franchisees. But they're probably feeling some of the same cost pressures, we certainly do with minimum wage and wing prices. But I think overall we've got a nice strong healthy system, always looking at ways to leverage the system as a whole in providing places and things that our franchisees can do similar to company stores.

Conrad Lyon - FTN Midwest

Got it. Last question, how is the -- in terms of your prototype how is the development cost looking these days?

Sally Smith

Our development cost -- we're spending somewhere around 1.2 to $1.3 million on a per store basis.

Conrad Lyon - FTN Midwest

Okay.

Sally Smith

It's really kind of our new look and we will continue. We always will continue to go through and say how do we re-engineer and what can we do better and smarter so that we spend our capital most cost effectively.

Conrad Lyon - FTN Midwest

Got it. Okay. Thank you.

Operator

Our next question is coming from Barry Stouffer of BB&T Capital Markets.

Barry Stouffer - BB&T Capital Markets

Good afternoon. Can you quantify the average hourly wage rate increase in the quarter?

Sally Smith

Not specifically. It is up year-over-year but we think from a menu price increase that we have pretty close to neutralized that for '07. So as it relates to our cost for labor, we don't think minimum wage is the impact as much as just making sure that we're proper scheduling at our stores.

Barry Stouffer - BB&T Capital Markets

And do I hear you correctly that you expect an increase in labor rates in '08 that are not quantifying that?

Sally Smith

Correct. Yes, some of them we still have to wait on and some states have automatic adjustments to minimum wage and so as those get announced, we're modeling those out and then we will take that into consideration when we do our February menu price increase.

Barry Stouffer - BB&T Capital Markets

Can you give us an update on turnover rates for management and hourly employees?

Mary Twinem

I think they're very similar to what they have done this past year and in 2006; somewhere in the 130% range for hourly and management, probably runs in the 30 to 35% range.

Barry Stouffer - BB&T Capital Markets

That's all. Thank you.

Mary Twinem

Okay.

Operator

Thank you. Our next question is coming from Greg McKinley of Doherty.

Greg McKinley - Doherty

Thank you. Would you mind telling us to the extent that it occurred, was there any distortion in operating cost this quarter due to the headquarter relocation? Might that have explained some of the G&A cost?

Sally Smith

No, very little impact. We didn't move in here until almost the last two weeks of September. So the rent, the differential in rent expense won't really take into effect until the fourth quarter and there was very little expense as it relates to the moving that affected us in the third quarter.

Greg McKinley - Doherty

Okay. How should we think about that for the fourth quarter? Will there be a sizable change in occupancy for corporate?

Sally Smith

There will be an increase year-over-year as it relates to the rent piece. We haven't separately broken that out.

Greg McKinley - Doherty

Okay, was there any impact experience from smoking bans enacted in Ohio? Do you see that have any effect on traffic particularly in the alcohol sales or bar?

Sally Smith

We've had smoking bans enacted really over the last couple of years both in Ohio and Florida and certainly Minnesota here. We typically see a little drop-off in sales and then continue to grow. In areas where we can, we try to have a patio to accommodate smokers. But I think all in all as long as it's an even playing field throughout the state that we haven't seen much of an impact.

Greg McKinley - Doherty

Okay. And then finally, can you give us just some ballparks to think about your sales mix between alcohol, chicken wings and then I guess non-wing food, if you will?

Sally Smith

I think we're trending somewhere around 71% food, 29% alcohol and I don't see that changing significantly in 2008. From a wings sales standpoint, we are at 23% this year versus 24% last year. We have seen the boneless go up about 0.5 point to 1% of our sales.

So from a year-over-year basis, there's not too much difference as it relates to either our food to alcohol split or our wing split or our boneless split.

Greg McKinley - Doherty

Okay and then the CapEx jump in the quarter, I'm assuming that was essentially off or a bulk of that change was due to fixturing etcetera for the headquarters?

Sally Smith

About $2.4 million of the total year-to-date CapEx is related to the headquarter piece and then the rest of it is as it relates to stores opened to date as well as the construction in progress costs we have already incurred for the stores that are going to open yet in the fourth quarter.

Greg McKinley - Doherty

Okay. So what you expecting for your CapEx to end up around?

Mary Twinem

I'd have to do it in my head quick. But from an individual store cost they would be about 1.2 to 1.3 million per each new store opening. We will have 23 of those in 2007 and then we will have some additional costs we'll incur for the five that will be in construction in the end of the year.

Greg McKinley - Doherty

Okay. Thank you.

Mary Twinem

You’re welcome.

Operator

Thank you. Our next question is coming from Nicole Miller of Piper Jaffray.

Nicole Miller - Piper Jaffray

Good afternoon.

Mary Twinem

Hi, Nicole.

Nicole Miller - Piper Jaffray

Well, on 2008 development look like on a quarterly basis? Will it be spread similar to 2007 or should we expect some short of shift?

Mary Twinem

I think, it's going to be a little more typical in 2008. This year and for company stores we were about 75% of our openings during the last half of the year with only 25% in the first half. It looks like 2008 will be more like what we have been historically which would be 40% in the first half and 60% in the last half.

And then as the franchise pipeline looks currently, it's going to be pretty equal first half and second half. So not quite as bunched up as we had it this year.

Nicole Miller - Piper Jaffray

What is the current company pre-opening per unit?

Sally Smith

$180,000.

Nicole Miller - Piper Jaffray

Okay. And on the commodities have you -- I forget if that contract comes up December or February, I can't remember right now but your 80 to 90% contracted on your chicken wing needs where do you stand on that and when will you renew?

Sally Smith

It goes through March of 2008 and we have not renewed yet. We're talking with our producers and we will share that with you in our February conference call.

Nicole Miller - Piper Jaffray

Okay, great. And then from a systems standpoint is there anything, any new initiatives we should be taking into consideration into next year.

Whether it's labor scheduling or anything back off house or, I mean it could be a number of things, but I'm just trying to think if there's anything we should be factoring in.

Sally Smith

Nothing in particular. We continue with our four initiatives, although we did talk about in July we spent some time investing training dollars on our recipes and food preparation as well as responsible alcohol service.

From a capital standpoint we will continue to upgrade our audiovisual package throughout 2008.

But from an initiative standpoint that would be expense next year. Nothing comes to mind. We will probably spend more time talking about that in February at the end of the fourth quarter conference call.

Nicole Miller - Piper Jaffray

Thank you.

Operator

Thank you. I’d like to turn the call back over to the speakers for any closing comments.

Sally Smith

Okay. Thank you very much for calling in for today's conference call. We look forward to meeting you either on the road or again at the end of our fourth quarter and 2007 conference call sometime in mid-February.

Operator

Thank you. This does conclude today's conference call. You may now disconnect.

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Source: Buffalo Wild Wings Q3 2007 Earnings Call Transcript

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