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Buffalo Wild Wings (NASDAQ:BWLD)

F4Q07 Earnings Call

February 12, 2008 5:00 pm ET

Executives

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

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

Analysts

Brian Viccaro - Raymond James

Destin Tompkins - Morgan Keegan

Paul Westra - Cowen & Company

Nicole Miller - Piper Jaffray

Conrad Lyon - FTN Midwest

Barry Stouffer - BB&T Capital Markets

Greg McKinley - Doherty & Company

Steve Rees - J.P. Morgan

Will Hamilton - Sanders Morris Harris Capital

Operator

Good afternoon, ladies and gentlemen and welcome to the Buffalo Wild Wings fourth quarter 2007 and year-end financial results conference call. (Operator Instructions) I would now like to turn the conference over to Mary Twinem, Chief Financial Officer and Executive Vice President of Buffalo Wild Wings. Please go ahead, Madam.

Mary J. Twinem

Good afternoon and thank you for joining us as we review our fourth 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 fourth 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 forward-looking statements based on a number of factors, including without limitation the number of locations opening during 2008 and beyond, with sales at these and our other company owned and franchise locations, our ability to successfully operate in new markets, the cost of fresh chicken wings, the success of our marketing initiative, our ability to control restaurant labor and other restaurant operating costs, and other factors disclosed from time to time in our filings with the U.S. Securities and Exchange Commission.

On today’s call, Sally will provide an overview of the fourth quarter and full year results for 2007. After that, I will provide further detail on our recent financial performance and comment on trends in the first quarter. Finally, Sally will share some thoughts about the first quarter and the year ahead. We will then answer questions. So with that, I’ll turn things over to Sally.

Sally J. Smith

Good afternoon, everyone. In October of 2006, we shared our annual performance target for 2007 of 15% unit growth, 20% revenue growth, and 25% net income growth, and I am pleased to report that we achieved each of these goals. Thank you to our franchisees and team members for another great year.

The fourth quarter was busy. We opened 14 company-owned and 19 franchise restaurants in 18 states. We ended the year with 493 restaurants in 37 states, of which 161 were company-owned and 332 were franchise, a growth in units of 15% over last year.

The strength of our new restaurant openings for the entire year has moved our 2007 annual average unit volume up 7.6% for our company-owned and 4.4% for franchise locations.

Total revenue in the fourth quarter of 2007 increased to $91.4 million and our same-store sales in the fourth quarter increased 3.4% at company-owned restaurants and 2.3% at franchise restaurants, comping over same-store sales increases of 13.2% and 6.5% in the fourth quarter of 2006.

For the full year of 2007, total revenue for the year increased 21.3% over 2006 on a comparable 52-week basis. Net earnings in the fourth quarter of 2007 equaled $6 million, or earnings per diluted share of $0.34, compared to $6.8 million or $0.38 per share for the 14 weeks of the fourth quarter 2006.

Taking into account the estimated $0.08 benefit for the additional operating week in 2006, fourth quarter earnings this year increased 12% over prior year, even with a $0.06 per share increase in pre-opening expense in 2007, due to the increased number of company-owned restaurant openings in the last three months of the year.

For the full year, we exceeded our net income growth target of 25%, increasing our full year earnings per diluted share to $1.10, an increase in net income of over 30% from 2006 on a comparable 52-week basis.

Operationally in the fourth quarter we concentrated on training and developing our team members in enhanced guest hospitality and responsible alcohol service, and our guest satisfaction rating collected through our computerized feedback system, are rising. We believe this is a leading indicator to continued same-store sales momentum in 2008.

Fourth quarter media featured our first ever national cable and network TV buy. In October, all our markets received coverage on 15 cable networks during primetime and on late night network programs. We supplemented those schedules with radio support in most of our top markets.

In late November and into December, we focused our message on our annual holiday gift card offer through in-restaurant displays and local media buys. We also continued our Big 10 Network and national ESPN radio partnership, while adding regional TV on Fox Sports.

Mary will now provide additional details on our fourth quarter performance and then talk about trends and expectations for the first quarter, and then I’ll return to share some of our plans for the first quarter, as well as look ahead into the rest of 2008.

Mary J. Twinem

Thank you, Sally. As Sally mentioned, total revenue in the fourth quarter increased 9.7% to $91.4 million versus $83.3 million in the fourth quarter of 2006. When factoring out the additional operating week in 2006, which contributed $6.4 million of additional revenue last year, the fourth quarter of 2007 increased 19% over the prior year.

Company-owned restaurant sales for the quarter increased to $81 million, or 9.1% increase over the prior year. Excluding the additional operating week in 2006, restaurant sales grew 18%.

Contributing to this increase was a same-store sales increase of 3.4% for the quarter, turning over prior year comps of over 13%. Menu price increases taken in the first quarter of 2007 account for 2% to 3% of our same-store sales increase. We had 22 additional company-owned restaurants in operation this quarter versus the same period last year and the strength of these openings is reflected in the average weekly sales volume increase of 4.3% for the quarter, 90 basis points higher than our same-store sales increase.

Our royalty and franchise fee revenue for the quarter increased 14.8% to $10.4 million versus $9.1 million in the fourth quarter of 2006. Factoring out the effect of the extra week of operations in 2006, the increase is 25%.

Franchise restaurants achieved 2.3% same-store sales for the quarter, comping over 6.5% same-store sales in the prior year and a net 42 franchise units have opened since the end of fourth quarter 2006.

Franchise locations had a 2.8% increase in average weekly sales volume for the quarter.

Now let’s review restaurant operating costs. As we discuss our results, I will make comparisons to the prior year’s results on a quarter over quarter basis, with fourth quarter of 2007 including 13 weeks of activity and 2006 included 14 weeks, as it was a 53-week year. Also, when it’s more meaningful to understand our current quarter’s results, I will highlight a 13-week comparison on our quarter over quarter results, which excludes the leveraging effect that occurred in 2006 with the additional operating week.

Cost of sales for the fourth quarter was 30.8%, 50 basis points higher than prior year and nearly identical to third quarter’s percentage. Fresh chicken wings averaged $1.24 per pound during the fourth quarter, $0.03 higher than last year’s average of $1.21. Wings were 23% of restaurant sales in the fourth quarter, down 1% from prior year.

Cost of labor for fourth quarter was 29% of restaurant sales, 10 basis points lower than fourth quarter last year and 35 basis points lower when you factor out the 25 basis point improvement with the additional week of operations in 2006.

Our hourly labor cost and health insurance were up about 80 basis points over prior year but were offset by a nearly 90 basis point drop in our self-insured workers’ compensation expense, a decline that is mostly one-time in nature.

Restaurant operating expenses were 16.7% of revenue in the fourth quarter, up 40 basis points over the 14 weeks of performance in fourth quarter 2006, but only 10 basis points higher on a 13-week basis.

Occupancy expense at 6.5% of restaurant sales for the fourth quarter was up 10 basis points from last year but down 40 basis points on a 13-week comparison as we continue to leverage this fixed cost with higher sales volumes at company-owned restaurants.

Depreciation was up 30 basis points but leveraged by 10 basis points on a 13-week comparison.

Restaurant level cash flow, which is calculated before depreciation and pre-opening expenses, was $13.8 million, or 17% of restaurant sales versus $13.3 million, or 17.9% in the fourth quarter last year. Excluding the additional operating week in 2006, cash flows for fourth quarter were equal in both years at 17%.

General and administrative expenses of $9.4 million in the fourth quarter or 10.3% of revenue compares to $8.3 million last year or 9.9% of revenue for the full 14 operating weeks.

Fourth quarter results in 2007 included stock-based compensation expense of $707,000 versus $1 million in the fourth quarter of 2006.

Other G&A expenses for the current quarter totaled $8.7 million, or 9.6% of revenue, up 90 basis points from similar G&A expenses in the prior year’s fourth quarter on a 14-week basis, which is a 70 basis point increase when you compare on a 13-week basis.

Fourth quarter 2007 had increased expenses for recruiting, new manager training, and new restaurant training team expenses, much of which is due to 13 incremental system-wide restaurant openings in the fourth quarter this year versus last year.

On an annual basis, we were successful in leveraging our G&A expenses, though only by 10 basis points.

Pre-opening expenses for the quarter were $2.2 million versus $801,000 last year. We opened 14 new company-owned restaurants in the fourth quarter of 2007 with pre-opening expenses averaging $189,000 compared to six new locations in fourth quarter last year with pre-opening expenses averaging $170,000.

In addition, we incurred $46,000 of pre-opening expenses in the fourth quarter for locations that are expected to open in the first quarter of 2008.

Interest income equaled $686,000 for the 13 weeks in fourth quarter of 2007 compared to $813,000 for 14 weeks in 2006. Interest rates for our cash investments have trended lower in the latter half of 2007.

Our effective tax rate during the fourth quarter was 25% versus 27.6% in the prior year. With the successful completion of several tax audits and a review of our tax reserves, it was necessary to reduce our reserves, lowering the income tax rate in the fourth quarter and bringing the annual rate to 31.1%. We don’t expect a similar benefit in 2008 and estimate our effective tax rate to be about 34%.

In summary, fourth quarter 2007 net earnings of $6 million, or earnings per diluted share of $0.34, compares to $6.8 million or $0.38 per share for the 14 weeks of fourth quarter 2006. Taking into account the estimated $0.08 benefit for the additional operating week in 2006, fourth quarter earnings this year increased 12% over prior year, even with $0.06 of additional pre-opening expenses in 2007 due to the increased amount of new company-owned restaurants opening in the fourth quarter.

For the full year, we exceeded our net income growth target of 25%, increasing our full year earnings per diluted share to $1.10, an increase of over 30% for 2006 on a comparable 52-week basis.

From a balance sheet standpoint, as of December 30th, our cash and marketable securities balance was $68 million, compared to $64.6 million at the end of 2006 and we have no debt.

We ended the year with over $140 million of stockholders equity, cash flow from operations was $43.6 million for the year of 2007, and we spent $41.4 million on capital expenditures. We feel the strength of our balance sheet will serve us well in helping us achieve 15% unit growth in 2008.

Now, a few trends and details on the first quarter of 2008 -- to date in the first quarter, same-store sales are at 4.1% for company-owned restaurants and 1.3% for franchise locations. The potential benefit in the quarter for menu price increases is estimated at 3% for company-owned restaurant sales, which includes our first quarter 2007 increase of 2% to 3% that rolls off at the end of February and a new 3% to 4% menu price increase that will take affect when we roll our new menus at the end of this month.

We are pleased with our same-store sales trends, given that the prior year’s first quarter same-store sales were 8.7% for company-owned and 3.3% for franchise locations. As we look ahead to March, we note that the timing of the NCAA tournament varies from last year. In 2007, we had the first three weeks of the tournament in our first quarter results and Easter was a second quarter event, following after the NCAA tournament was over. This year, only two weeks of the tournament fall in the first quarter and Easter is the Sunday of the first tournament weekend.

We have opened two franchise locations since the beginning of the year and anticipate eight to 10 more franchise restaurants and three or four company-owned restaurants before the end of the quarter, putting us ahead of the pace of openings last year. With the conversion of the seven Don Pablo’s locations that we acquired in January, along with our other new restaurant construction projects, we believe we will have more second and third quarter openings than last year.

Relating to cost of sales, we expect wings for the first quarter to average about $1.24 per pound, based in part on the pricing agreement we have in place for our company-owned restaurants, which we expect to remain in effect until the end of March. If we were paying market price during the month of February, wings would cost $1.45 per pound.

We have not determined if we will enter into a long-term pricing contract for chicken wings for the remainder of 2008 and may return to market pricing as we have for 24 of the 25 years that Buffalo Wild Wings has been in existence.

Although the equity grants for 2008 have not yet been finalized, we expect stock-based compensation expense for 2008 to be slightly higher than last year, given effect to additional headcount.

We expect pre-openings costs in 2008 for new store openings to average in the $180,000 to $190,000 range per company-owned restaurants, though the pre-opening occupancy costs for the seven Don Pablo’s locations that we are converting to Buffalo Wild Wings Grill and Bar Restaurants will cause pre-opening costs to run higher than if all openings were new construction. We estimate first quarter pre-opening expense to be approximately $1.1 million.

Please review the risk sections outlined in our SEC filings, including our 10-K for 2007, which will be filed in the next few weeks, as well as our Safe Harbor statement for factors affecting our forward-looking statements.

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

Sally J. Smith

Thank you, Mary. First quarter is well underway and we have a number of exciting things happening in operations and marketing. With the excitement of the NFL playoffs and the Super Bowl behind us, our restaurants are gearing up for the upcoming college basketball conference championship games and the tip-off of the NCAA tournament. In the meantime, a new menu is being trained and will roll into all units by the end of the month. This menu includes the introduction of French Fries, which allows us to platter all orders of hamburgers, sandwiches, and combos with a serving of fries.

In the first quarter, we are committed to driving traffic by promoting two call to actions branded events. The first, Boneless Thursdays, was promoted in January and the second, Wing Tuesdays, will be featured at the end of February and into March. These value-priced events will be promoted via local market media, mainly radio, and within restaurant displays. We’ve also added a fun, interactive messaging component to each campaign using both Internet and cell-phones so guests can invite their friends to Buffalo Wild Wings on these special days.

Our first quarter media buy will be the largest in our history and represent a 22% increase over 2007. We will continue our ESPN national partnership and the CBS March Madness package while adding two weeks of national primetime cable. We feel the mix of call to action promotions, coupled with national brand awareness, will continue to fuel guest frequencies while enticing new guests.

We continue to progress through the gaming license process necessary for the purchase of our Las Vegas franchise locations and anticipate that the acquisition upon satisfaction of the remaining contingencies will be completed in the first half of 2008. Exclusive of any one-time acquisition charges, these units should be accretive to our bottom line. We will provide more details once the transaction is closed.

When we were presenting at an investor conference in New York a few weeks ago, Mary and I were asked about our view on 2008 and whether we were going to alter our plans for 2008 due to the current economic climate.

As we stated in our press release today, despite an uncertain economy, we are committed to a 15% unit growth target for 2008. We are financially strong with $68 million of cash and no debt and will continue to build our brand awareness across the United States, taking advantage of opportunities like the acquisition and conversion of the Don Pablo’s locations that present themselves and fit into our development strategy.

While no one can predict how the consumer will react in a changing economy and the extent of commodity increases are still unknown, we believe that Buffalo Wild Wings is a brand that appeals to the value-focused consumer and our system-wide Wing Tuesdays and Boneless Thursdays promotions have been core to our business for many years. More importantly, we deliver on an experience and an experience that we believe will continue to attract the consumer to our restaurants for wings, beer, and sports -- a great combination in any economy.

Rest assured that we are focusing on continuing our four-year trend of positive quarterly same-store sales and our eight-year trend of average weekly sales volume growth. We believe that with our unit growth, along with continued sales strength and an emphasis on cost controls, we can achieve our net income growth target of 25% in 2008.

We look forward to sharing our first quarter results with you the week of April 29th. Operator, we will now open the call to questions.

Question-and-Answer Session

Operator

(Operator Instructions) The first question comes from the line of Brian [Viccaro], Raymond James. Please go ahead.

Brian Viccaro - Raymond James

Good afternoon. I had a quick question regarding your food costs and in particular, obviously you mentioned the wing component is locked in through March and don’t know where that’s going to settle out but can you give us a sense of where you stand on some of your other contracts, in particular the boneless chicken? But also where you guys see your beer costs and I’ll have a follow-up as well.

Sally J. Smith

Brian, what we saw starting in the fourth quarter was that we are seeing increases in our beer costs coming in the back door. We did take beer price increases starting in January to counteract that. Our boneless wings, we don’t expect much if any increase in that on a year-over-year basis. Wings for us is still the unknown as it relates to what that price will be after we roll off that March contract. And the rest of the commodities, we don’t see much of a year-over-year increase, and not anything that would not allow us to hold flat on our cost of sales with the menu price increase that we took in the first quarter.

Brian Viccaro - Raymond James

Okay, and also just quickly, I’ve been hearing there’s an all-you-can-eat special at certain stores around the country. Can you give us any kind of update on maybe how many stores on the company side are having that but also what the impact of that might be and any other color you can give on that, please?

Sally J. Smith

Sure. All-you-can-eat is a lunch special that we’ve promoted in certain markets to drive our awareness of lunch and I can’t give you an exact idea of how many company restaurants -- it’s both franchise and company and it has been -- that’s been going on for probably 18 to 24 months, on and off as the stores decide whether or not they want to promote that.

Brian Viccaro - Raymond James

Okay. Thank you.

Operator

Our next question comes from the line of Destin Tompkins, Morgan Keegan.

Destin Tompkins - Morgan Keegan

Thank you. Mary, I have a quick question on wing prices. Obviously that’s a big issue. I think you quoted $1.45 was what the February price was averaging. Can you remind us what the delivery charge -- when we look at spot market price, how does that translate to what price you guys experience?

Mary J. Twinem

Destin, we don’t break out the difference there but it does trend in relationship to what you’d see on the spot price. The only difference as it relates to the calculation that would be helpful is that it is a prior month average price that then is used for calculating the future month. So if we were doing something similar to what we were doing in ’06, if we did that again in ’08, that’s how it would work but again, we haven’t set a contract either as it relates to monthly or for a longer term pricing yet for the rest of the year.

Destin Tompkins - Morgan Keegan

Okay, and as we look at your longer term growth target of 25% and looking at 2008, it would imply that you guys would see some meaningful operating margin expansion in 2008 and just given what you’ve mentioned about cost of sales likely being flat and obviously with minimum wage rates up again, it looks like there’s some labor pressure. Can you give us some color on where you expect to see that margin, that operating margin expansion?

Mary J. Twinem

I think from cost of sales, that for us and for many people is still somewhat of an unknown as it relates to leveraging in 2008. On the labor piece, I think we do have some ability to leverage there still as we work through the labor scheduling module and our hourly labor component piece.

We don’t have much minimum wage impact and nothing that wasn’t take care of with our menu price increases in the first quarter, not anything on a minimum wage that was similar to the extent that we saw in 2006.

You know, as it -- other lines, OpEx, G&A, I think there’s still ability. It would be little pieces throughout. I think what you can look at is that in 2007 on a 20%, 22% revenue increase we were able to increase our bottom line by 30%.

Destin Tompkins - Morgan Keegan

Okay, great. And then -- let me see. I had one more question -- just curious on the -- it sounds like the pipeline for the franchisees is still very strong. Can you just give us an update there?

Sally J. Smith

Sure, yes. I’m very happy with the pipeline. We have more than 225 units committed for. In the fourth quarter, we signed an area development for three in California, for six in Idaho, and for three in Dade County, Florida, which will be our first entrance into that market.

Destin Tompkins - Morgan Keegan

Great. Thank you.

Operator

Our next question comes from the line of Paul Westra, Cowen & Company.

Paul Westra - Cowen & Company

Good evening. Just a question on pricing. I just want to make sure I get that correct. You mentioned 3% to 4% pricing on your new menu and when is that going to roll out?

Sally J. Smith

On the -- February 25th.

Paul Westra - Cowen & Company

February 25th, okay. And then you also just mentioned you took some alcoholic beer pricing in January -- is that in addition or is that sort of part of the --

Mary J. Twinem

That is factored into that.

Paul Westra - Cowen & Company

That’s into that. So an effective year-over-year basis starting basically February 26th, you’ll have a 3.5% year-over-year price --

Mary J. Twinem

Correct.

Paul Westra - Cowen & Company

And then I just want to verify your tax rate guidance for 2008 is 34%, you said?

Mary J. Twinem

Correct, 34.

Paul Westra - Cowen & Company

That’s all my questions for now. Thanks.

Operator

Our next question comes from the line of Nicole Miller, Piper Jaffray.

Nicole Miller - Piper Jaffray

Good afternoon. I just want to understand what month in the first quarter of ’07 was the best and why? And I think that might relate back to your comments about tournaments and where things are falling. Can you just first answer that question but then can you also go over what you were seeing where the weeks are falling between the NCAA and then Easter?

Mary J. Twinem

Nicole, we don’t break out our individual monthly same-store sales, so we probably made a comment in last year’s fourth quarter script as it related to what our same-store sales were to date at that time, and I don’t have that in front of me but you can refer back to that.

Sally J. Smith

With regard to the NCAA tournament, this year we have two weeks of the tournament that are occurring in the first quarter versus three weeks last year. In addition, Easter for us, Easter falls in our first quarter this year and it fell in the second quarter last year. It also happened that Easter is the first Sunday of the NCAA tournament weekend.

Nicole Miller - Piper Jaffray

Okay, so two weeks in the first quarter versus three last year and Easter in the first quarter versus the second quarter, so do those two things net out then?

Sally J. Smith

Well, we’re not real sure. We haven’t had Easter on the first week of the tournament for any years that I can remember, so Easter should be a stronger day but we’re not sure what the offset will be because it happens on that first week of the tournament.

Nicole Miller - Piper Jaffray

But you are suggesting one is sort of positive and one’s a negative?

Sally J. Smith

Correct, yeah, but we’re talking about one day.

Nicole Miller - Piper Jaffray

Okay. I also -- I’m sorry, I didn’t catch the development, you went so quickly. So how many company and how many franchise stores are open to date? And then I think you mentioned how many you expect to have by the end of the quarter.

Mary J. Twinem

We have two franchise locations open so far and we are anticipating eight to 10, and then three or four company-owned restaurants opening up in March.

Nicole Miller - Piper Jaffray

And when do the Don Pablo’s stores convert?

Mary J. Twinem

We have taken possession of the properties. We believe it is going to be somewhere mid-year in that June, July, August timeframe.

Nicole Miller - Piper Jaffray

So you’re saying -- that’s when pre-opening should also be higher in the middle part of the year for that conversion?

Mary J. Twinem

We’ll also have some ongoing pre-opening as it relates to those locations because we are in possession and paying the occupancy costs for that, and that was reflected in the $1.1 million expense estimate for the first quarter.

Nicole Miller - Piper Jaffray

Okay, great. And then my last question, as it relates to the contract on the chicken wings, I guess I’m trying to understand first if you even have the ability or option to renew that contract. And then second, if you do, can you help us just understand what management is thinking behind it? I don’t want to put words in your mouth but are you thinking let’s not contract and then you’re just hopeful prices go down? Or is the goal to control the price or is the goal to reduce volatility I guess is what I’m asking.

Sally J. Smith

I’ll attempt to answer that. We’d always have the -- most likely have the ability to contract and enter into a fixed price contract. However, with prices where they are today, as we look back historically we don’t like the prices that we’re being offered. So our goal has always been to maximize the price, not as much the volatility and we have floated for -- we floated for 24 of 25 years and in I believe I can address probably the last eight to 10 and in the last eight to 10, it was better to float.

So we’ll see where wing prices end up in March and if it looks like something not necessarily favorable but where both suppliers and Buffalo Wild Wings both win, then we would enter into a long-term contract.

Nicole Miller - Piper Jaffray

And just a part B and then I’ll hop off -- can you pick the percent you contract? I mean, I understand this year it was about 80% to 90%. Can you contract more or less?

Sally J. Smith

We probably could, depending of course on how much we want to pay.

Nicole Miller - Piper Jaffray

Okay. Thank you very much.

Operator

Our next question comes from the line of Conrad Lyon, FTN Midwest.

Conrad Lyon - FTN Midwest

Good afternoon. I’ve got to get my wing question in here too -- how about this; what would you consider a favorable rate? Are we talking $1.40 per pound or --

Mary J. Twinem

You know, Conrad, we really can’t say. There’s still plenty of time between now and the end of that contract, so we’ll use all of the best of our information down to the date, I have no doubt, on making the call on whether or not we think it makes sense to lock and if so, for how long and at what price. And it isn’t a all-or-nothing and it isn’t 12 months or no months. I think there’s a lot of different ways we could potentially slice it but to give any indication on where we think it’s going to end would be way premature.

Conrad Lyon - FTN Midwest

All right, fine. Let me circle back -- Vegas; do you guys have an update on Vegas on when that’s going to close, no?

Sally J. Smith

First half of the year, we hope.

Conrad Lyon - FTN Midwest

Okay, and that -- I think you may have said this, the Vegas accretion is not factored into your guidance, the 25%?

Mary J. Twinem

It was not.

Conrad Lyon - FTN Midwest

Okay. Jumping over --

Mary J. Twinem

So based on the current market that we have and the wing piece being unknown, it definitely will help us feel secure about reaching the 25%.

Conrad Lyon - FTN Midwest

Actually, you know, that brings me up -- speaking of the market, how has that Vegas market held up actually with all the foreclosures that people have been talking about? Any color with respect to that?

Sally J. Smith

Well, we’re still very pleased about the acquisition.

Conrad Lyon - FTN Midwest

Okay. Let me talk about Don Pablo’s -- did you say that the Don Pablo’s are going to be all incremental units or are they just replacing the existing units?

Sally J. Smith

We have a couple that will be relocation. Of the seven that we acquired, two are relocation and five really count toward our 15% unit growth. It gives us -- it makes us feel pretty good about reaching that target as well.

Conrad Lyon - FTN Midwest

Okay. And then because the Vegas acquisition is not included in your 25% earnings growth, I’m assuming that’s also not included in your 15% unit growth?

Sally J. Smith

That would be a flip -- it’s just a flip from our -- the 15% remember is on a system-wide basis and so we would have I think nine or 10 coming out of the franchise units, nine or 10 going into the company unit. And then you also referenced something about the net income growth with Las Vegas being included. I think the combination, as Mary said, of Las Vegas and then the unknown about wing contracts, gives us some guidance, I guess, on our 25% earnings growth target.

Conrad Lyon - FTN Midwest

Okay. Mary, did you talk about a benefit from workers’ comp to this quarter?

Mary J. Twinem

We said about 90 basis points.

Conrad Lyon - FTN Midwest

Ninety basis points, okay -- and what was that from exactly?

Mary J. Twinem

Reviewing the calculation and we had just finished up an audit of the fixed premium piece of that plan and it ended up that it came in favorable and we were able to reduce on our fixed costs.

Conrad Lyon - FTN Midwest

Okay. All right. Thank you very much.

Operator

Our next question comes from the line of Barry Stouffer, BB&T Capital Markets.

Barry Stouffer - BB&T Capital Markets

Good afternoon. I just have one question -- can you discuss the rationale for doing the Don Pablo acquisition in a little more detail?

Sally J. Smith

Sure. I’ll give it a try. We, as you know, [bought a brand] went through a, it filed for bankruptcy and a number of locations -- I guess all of them that were up for acquisition, if you want to call it that. What it means is assuming the leases. We took a look at the list and there were seven on that list that we felt complemented our real estate strategy very well. They were in existing markets for us and in locations where we weren’t -- didn’t have a restaurant or were close to a restaurant, as well as the two that I mentioned that will be relocations. We had leases coming up for renewal, felt like these as well being in the same trade area, provided a stronger site.

Barry Stouffer - BB&T Capital Markets

And are you anticipating that all-in, your costs will be similar to, less than, or higher than if you did just ground up?

Sally J. Smith

It definitely meets with our economic model and our real estate model that we look at, so it is -- there were favorable leases attached to that and it definitely made economic sense for us to do it, even with the dollars that we spent on the conversion costs.

Barry Stouffer - BB&T Capital Markets

Any comment on how those Don Pablo locations did revenue wise versus the rest of the system?

Mary J. Twinem

No, and I don’t know that you can make any correlation between their performance was and what we would have had for expectations.

Barry Stouffer - BB&T Capital Markets

Okay. Thank you.

Operator

Our next question comes from the line of Greg McKinley, Doherty & Company.

Greg McKinley - Doherty & Company

Thank you. Could you comment a little bit on the early feedback on your labor control system that I think you implemented last year, as well as I understand a new food portion control system? Can you give us a sense for how those are impacting cost controls, please?

Mary J. Twinem

Well, we [inaudible] both of the systems, the labor scheduling module as well as the food portioning or what we would call theoretical food costing, which includes a portioning and procedures piece to it. It’s all been fully implemented at the store level and --

Greg McKinley - Doherty & Company

How long have those been in effect?

Mary J. Twinem

Labor scheduling has been in effect for most of the fourth quarter and parts of the third quarter of ’07. Theoretical food costing has been worked on for a period of time but it actually has been fully used in the stores as of the first of the year. And to pair those to systems with our bonus plan, we also have incentive compensation at the store level is based on how well stores perform against the labor and the theoretical costing target.

Greg McKinley - Doherty & Company

Okay. Have you seen that change any store level behavior yet or is it too early to measure that?

Mary J. Twinem

It’s too early.

Greg McKinley - Doherty & Company

Okay. In terms of your new store outlook for ’08, can you give us a sense for how much of that breaking down between existing and new markets?

Sally J. Smith

I would say that from a company standpoint, almost all of our growth will be in existing markets. We did open our first location in Virginia Beach, Virginia in the fourth quarter. We have another one or two opening there this year and expect that sixth over the next couple of years but that’s really the only new market on the company side.

On the franchise side, I guess every time we open in California it’s probably a new market because we only have three or four there. We did open one in the fourth quarter. We have some more coming in 2008. Opened our second one in Portland, but otherwise most of our growth will be in existing markets.

Greg McKinley - Doherty & Company

Okay. In terms of your core G&A, excluding the stock compensation expense, I know you commented maybe some of the accelerated store growth in Q4 added to that a little bit. But when you look going forward, what are going to be some of the sources of cost increases there or other opportunities maybe for mitigating growth in that line?

Sally J. Smith

With regard to the G&A, while I didn’t -- while it wasn’t quantified, we did the number of store openings with the travel, the new restaurant opening teams, the components that aren’t included in pre-opening, did cause that number to go up. I think we are going to always -- I mean, we always take a look at what we can leverage, how we can control G&A costs and our goal is to have continual improvement in that line.

Greg McKinley - Doherty & Company

Do you think there are leverage opportunities there for ’08 versus ’07?

Mary J. Twinem

I think there are, Greg, but I think they’ll come at the latter part of the year. From a total dollars standpoint, my estimate for the first quarter would be that the dollar amount of G&A that we spend, which would be ex the stock comp piece, would be very similar to the fourth quarter, the $8.7 million.

Greg McKinley - Doherty & Company

Ex stock comp, okay. And then finally, can you tell us your alcohol and food mix? I know you gave us your wing sales mix.

Mary J. Twinem

Currently alcohol represents about 29% of our sales.

Greg McKinley - Doherty & Company

Okay. All right. Thank you.

Operator

Our next question comes from the line of Steve Rees, J.P. Morgan.

Steve Rees - J.P. Morgan

Thanks. I just wanted to ask about the same-store sales performance year-to-date. It looks quite strong on the company side but the franchisees are a little bit softer and I was just wanting to know what you -- why the disparity between the two? Was there something on the promotional side or geographic that explains that?

And then what is your initial comp outlook for 2008 that’s implied in your 25% earnings growth target?

Mary J. Twinem

From a same-store sales standpoint, company versus franchise, they have less of a menu price increase in their amount in the first quarter, so they are probably about a 1% menu pricing for fourth quarter, so they are probably about a 1% menu price increase, where we’re at the 2% to 3% range.

From a same-store sales, we don’t give an annual guidance piece of it but in order to get from 15% unit growth to 20% revenue growth, it does take both positive same-store sales as well as higher performance on the new units in the average weekly sales volume.

Steve Rees - J.P. Morgan

Okay, and the new units look like they continue to perform very well. Is there any difference between new units in new markets versus existing markets, or are they both performing pretty much in line?

Mary J. Twinem

I can’t speak to any noticeable differences. I think we’ve had both. We’ve had a great new store opening in Virginia Beach, which is a new market for us, and we’ve had great store openings in --

Sally J. Smith

Northern New York, Watertown, New York.

Mary J. Twinem

And in the Dallas and Columbus markets, so I don’t think there’s a distinguishable difference.

Steve Rees - J.P. Morgan

Okay. And have you seen any noticeable consumer trends or changes in terms of your occasions during the week, or versus the weekend or by day part?

Sally J. Smith

You know, we don’t typically comment specifically about day part. I don’t think anything significantly changed. We, as we’re presenting at investor conferences, we usually break that out but day of the week hasn’t been something that we’ve commented on either. But there is nothing that comes to mind that’s noticeable.

Mary J. Twinem

From a media strategy in the first quarter, we have both the brand’s message being conveyed as well as highlighting the two value options, the boneless Thursdays and the Wing Tuesdays, so we think we have a pretty good message out there to draw in customers, whether they are consumers who are more in the value mind or they are just wanting to hang out.

Steve Rees - J.P. Morgan

Okay, and then just finally, in terms of the advertising, I think you said that the total spend was up 40% in the fourth quarter -- is that right? And then it was up 22% in the first quarter, and then perhaps you could just comment what you expect advertising to be up year-over-year in 2008.

Sally J. Smith

I’d have to go back and look at the fourth quarter, but yes, we did -- we expected that advertising expense, or our spend, not the expense but the spend will be up 22% in the first quarter. We haven’t changed, we haven’t altered our mix at all in terms of when we are advertising. We’ll have March, June, September, October, and kind of that November/December timeframe.

I would expect that the total dollar spend will be similar to the revenue increase.

Steve Rees - J.P. Morgan

Okay. Thank you very much.

Operator

(Operator Instructions) Our next question comes from the line of Will Hamilton, Sanders Morris Harris Capital.

Will Hamilton - Sanders Morris Harris Capital

Good afternoon. Just a quick question -- gross alcohol sales, did that stay similar to previous quarters, around I guess 29% or so, 27%?

Sally J. Smith

Yeah, it’s always been between 29%, 30%, right in there.

Will Hamilton - Sanders Morris Harris Capital

Okay. And Mary, I was wondering if you could give us a ballpark or a guideline for CapEx in 2008?

Mary J. Twinem

In 2008? Between $50 million and $55 million, which should cover new stores as well as the remodel, refreshes, and ongoing R&M CapEx for our existing base.

Will Hamilton - Sanders Morris Harris Capital

Do you mind breaking that down at all between the remodels and then maintenance?

Mary J. Twinem

From just a basic, a new store construction would be somewhere in the $1 million, $2 million range, and then all the rest of it would be CapEx for existing stores, and a small amount is for infrastructure at the home office.

Will Hamilton - Sanders Morris Harris Capital

Okay, but how much maybe might you spend on the Don Pablo’s, to remodel those? Would it be similar to $1 million?

Mary J. Twinem

Very similar, in the $1.3 million range, yes. The additional expense on the Don Pablo’s will be hitting the pre-opening line as it relates to the occupancy costs.

Will Hamilton - Sanders Morris Harris Capital

Thanks.

Operator

Ladies and gentlemen, that is all the time we have for the question-and-answer session. I will now turn the conference back over to management for any closing remarks.

Sally J. Smith

Well, I’d like to thank everyone for their continued interest in Buffalo Wild Wings and for taking the time to listen to our conference call. As I mentioned, we will hold our first quarter conference call the week of April 25th. Thank you.

Operator

Ladies and gentlemen, this does conclude the Buffalo Wild Wings fourth quarter 2007 and year end financial results conference call. We would like to thank you for your participation. Have a pleasant day. You may now disconnect.

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Source: Buffalo Wild Wings F4Q07 (Qtr End 12/30/07) Earnings Call Transcript
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