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Buffalo Wild Wings, Inc. (NASDAQ:BWLD)

Q1 2008 Earnings Call Transcript

April 29, 2008 5:00 pm ET

Executives

Sally Smith – President and CEO

Mary Twinem – EVP, CFO and Treasurer

Analysts

Jeff Farmer – Jefferies & Co.

Paul Westra – Cowen & Co.

Larry Miller – RBC Capital

Brian Elliott – Raymond James & Associates

Destin Tompkins – Morgan Keegan

David Tarantino – Robert W. Baird

Nicole Miller – Piper Jaffray

Will Hamilton – SMH Capital

Barry Stouffer – BB&T Capital Markets

Brad Ludington – KeyBanc Capital Markets

Steven Rees – JPMorgan

Greg McKinley – Dougherty & Co.

Operator

Good afternoon, ladies and gentlemen and thank you for standing by. Welcome to the Buffalo Wild Wings, Inc. first quarter 2008 financial results conference call. During today's presentation all parties will be in a listen-only mode. Following the presentation, the conference will be open for questions. (Operator instructions) This conference is being recorded today, April 29, 2008. I'd now like to turn the conference over to Mary Twinem, CFO, please go ahead ma'am.

Mary Twinem

Good afternoon. Thank you for joining us as we review our first quarter 2008 results. I'm 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 first quarter earnings release, which went out after the market closed today. If you have not received the release, it is available on the Investor Relations section on our web site at buffalowildwings.com. A script of our prepared remarks will also be posted on our web site after the call.

Before we get started, I want to remind you that during the course of today's call, various remarks we make about future expectations, plans, and prospects for the company constitute forward-looking statements for purposes of the Safe Harbor provisions, under the Private Securities Litigation Reform Act of 1995. Actual results may vary materially from those contained in forward-looking statements, based on a number of factors including without limitation; the number of locations opening during 2008 and beyond, the sales at these and our other company-owned and franchise locations, the timing of closing of acquisitions, our ability to successfully operate in new markets, the cost of commodities, the success of our marketing initiatives, our ability to control 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 first quarter results for 2008. After that, I'll provide further detail on our recent financial performance, and comment on trends in the second quarter. Finally, Sally will share some thoughts about the second quarter, and the remainder of 2008. We will then answer questions. So, with that I'll turn things over to Sally.

Sally Smith

Good afternoon everyone. Today we released our first quarter earnings and we are very proud of our results including our same-store sales trends, the performance of our company-owned restaurants, and year-over-year net income growth, especially given the current economic environment. We opened four company-owned and nine franchised restaurants, in ten states and had one closure. We ended the quarter with 505 restaurants in 37 states, of which 165 were company-owned, and 340 were franchised, a growth in units of 15% over last year. Total revenue in the first quarter increased by over 21% to $97.3 million, and our same-store sales increased 4.1% at company-owned restaurants, and 2.1% at franchised restaurants comping over 8.7% and 3.3% same-store sales increases in the first quarter of 2007. Net earnings in the first quarter of 2008 equaled $6.5 million, or earnings per diluted share of $0.36, compared to $5.5 million or $0.31 per share for the first quarter 2007, a 16% increase. As expected with more company-owned restaurants opening earlier in the year, and the ongoing rent associated with the purchase and conversion of the eight Don Pablo's locations, our first quarter pre-opening expenses totaled $1.2 million, an increase of $867,000 over prior year. In addition, the accelerated depreciation and impairment for the upcoming relocation of three restaurants was $510,000 for the quarter. Without these year-over-year incremental costs, our net income would have increased over 30%.

As we reminded listeners in our March webcast, we do not provide quarterly earnings guidance, rather we provide annual growth goals for units, revenue, and net income, and not all quarters will individually meet all of these goals. With more of our development occurring earlier in 2008 than it did last year, as well as the increased costs related to the conversion of the eight Don Pablo's locations in the first two quarters, and with the purchase of the Las Vegas franchise locations not expected until the third quarter, we anticipate that more of our year-over-year net income growth will be realized in the last half of 2008.

First quarter media featured the largest buy in our history, a 27% increase over 2007. Our brand-building commercials aired during March madness on CBS, ESPN, and on national cable and PrimeTime. We focused our call to action message on our two signature promotions, Boneless Thursdays in January, and Wing Tuesdays in March, supported by local market media, mainly radio, and in-restaurant promotional materials. We also unveiled an innovative interactive e-mail and cell phone messaging campaign, where guests invited their friends to join them at our restaurants for these two value-oriented weekly events.

Operationally we are pleased with our unit-level execution and guest hospitality during NFL playoffs and the Super Bowl, selling over 4 million wings, system wide on Super Bowl Sunday. And the NCAA tournament provided great match ups across the Buffalo Wild Wings system. Our guest loyalty scores show quarterly improvement and we believe this is a leading indicator of future sales momentum.

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

Mary Twinem

Thank you, Sally. As Sally mentioned, total revenue in the first quarter increased 21.7% to $97.3 million versus $79.9 million in the first quarter of 2007. Company-owned restaurant sales for the quarter increased to $86.9 million, a 22.3% increase over prior year. Contributing to this increase was a same-store sales increase of 4.1% for the quarter, turning over prior year comps of nearly 9%. Many price increases taken in the first quarter of 2007 and 2008 account for about 3.5% of our same-store sales increase.

We had 25 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 5.6% for the quarter, 150 basis points higher than our same-store sales increase. This is our tenth quarter in which average weekly sales volumes increases have exceeded our same-store sales increases. Our royalty and franchise fee revenue for the first quarter increased 17.2% to $10.4 million versus $8.8 million last year. Franchised restaurants achieved 2.1% same-store sales for the quarter, comping over 3.3% same-store sales in the prior year, and a net 41 franchised units have opened, since the end of first quarter 2007. Franchise locations had a 3% increase in average weekly sales volumes for the quarter.

Now let's review restaurant operating costs at company-owned locations. Cost of sales for the first quarter was 30.4%, 60 basis points lower than prior year, and 40 basis points lower than fourth quarter's percentage with increased menu pricing and plattering which is serving French fries without orders of burgers, sandwiches and combos, providing some of the leveraging. And a decrease in the cost of fresh chicken wings neutralizing cost creep in other commodities. Wings averaged $1.33 per pound during the first quarter, $0.07 lower than last year's average of $1.40. Cost of labor for the first quarter was 29.8% of restaurant sales, 10 basis points higher than first quarter last year. Higher hourly and management labor costs were offset by a decrease in our self-insured Workers' Compensation expense.

Restaurant operating expenses were 15.3% of revenue in the first quarter down 80 basis points from prior year, mainly the results of lower general liability insurance, and local store marketing costs, on a year-over-year basis. Occupancy expense was 6.6% of restaurant sales for the first quarter in both 2008 and 2007. Depreciation was up 50 basis points, 10 basis points, or $115,000 of which is related to the acceleration of depreciation, for our upcoming three relocations, as part of the acquisition of Don Pablo's sites. Additional depreciation for recent facility remodels, and HDTV upgrades, combined with higher construction costs for new restaurant openings in 2007 and 2008 will most likely cause depreciation to run higher as a percentage of revenue in 2008, than it did in 2007.

Restaurant level cash flow which is calculated before depreciation and preopening expenses was $15.7 million or 18% of restaurant sales versus $11.7 million or 16.5% in the first quarter last year, a 150 basis points improvement. General and administrative expenses of $9.3million in the first quarter or 9.6% to revenue, compares to $8.6 million last year or 10.8% of revenue. First quarter results in 2008 included stock based compensation expense of $1 million versus 1.3 million in the first quarter of 2007.

Other G&A expenses for the current quarter totaled $8.3million or 8.6% of revenue, down 60 basis points with a lower wage expense as a percent of G&A expenses than in the first quarter of last year.

Preopening expenses for the quarter were $1.2million versus $318,000 last year. We opened four new company-owned restaurants in the first quarter of 2008 with pre-opening expenses of $688,000 in the quarter compared to only one opening in first quarter of 2007. We also incurred $467,000 of preopening expenses for locations that are expected to open in the second and third quarters of 2008 including the ongoing rent associated with the purchase and conversion of the eight Don Pablo's locations. We took a $395,000 one-time impairment charge for the upcoming relocation. The remaining loss of $358,000 on disposal and impairment is mainly attributable to the facility and HDTV upgrades at various company-owned locations during the quarter.

Interest income equaled $432,000 for the first quarter of 2008, compared to $700,000 in 2007, a reflection of the decline in interest rate. Our effective tax rate during the first quarter was 34.3% versus 33.6% in the prior year. Our estimated effective tax rate for 2008 continues to be around 34%.

In summary, first quarter 2008 net earnings of $6.5 million or earnings per diluted share of $0.36, compared to $5.5 million or $0.31 for the first quarter 2007, a 16% increase over prior year. Without the incremental $867,000 of preopening expenses or the $510,000 of accelerated depreciation and impairment from the upcoming restaurant relocations, our net income would have increased over 30%.

From the balance sheet standpoint as of March 30, our cash and marketable securities balance was $73 million, compared to $68 million at the end of 2007, and we've no debt. We ended the quarter with over $200 million in total assets, and nearly $150 million in stockholder's equity. Cash flow from operations was $16 million for the quarter, and we spent $10.4 million on capital expenditures. The strength of our balance sheet will serve us well in the current economy, and will allow us to take advantage of development opportunities on our way to becoming a national chain of more than 1,000 units in the United States.

Now, a few trends and details on the second quarter of 2008. To date in the second quarter, same-store sales were over 7% for company-owned restaurants, and about 3% for franchise locations. We estimate that both the shift of Easter to March, and the additional NCAA tournament week in April, provided a 2% benefit to our quarter to date same-store sales trends. The potential benefit in the second quarter from the previous menu price increases is estimated at 3.5% for company-owned restaurants. We are pleased with our same-store sales trends, especially given our strong second quarter same-store sales last year. We've opened three franchise locations to date in the second quarter, and anticipate opening an additional seven restaurants before the end of June. We expect to open five-company owned locations in the second quarter, one of which will be a replacement for an older Columbus, Ohio location that closed about a week ago. Of the eight Don Pablo's locations, one is included in our second quarter openings, and the others are anticipated to open in July and August. Related to cost of sales, we expect our cost of sales percentage to be mostly neutral to prior year. Year-over-year we've seen slight increases in the cost of our sauces, shortening, and for the price of chicken, which is being offset by menu price increases, and favorable price increases in the jumbo wing market. Our Wing purchases remain based on market pricing, and the cost of Wings for April and May will average about $1.20 a pound.

As a reference point, Wings in second quarter of 2007 averaged $1.25. For the second quarter we anticipate labor will be neutral to the prior year. Our local store marketing costs will increase over first quarter. However, we believe it is possible to have some leveraging of our overall restaurant operating expenses over the prior year.

Our equity incentive compensation plan for 2008 was finalized in mid-march, and we expect that the second through fourth quarters will have a slightly lower stock-based compensation expense than the first quarter. With the full year expense anticipated to be about $3.7 million. Based on our anticipated second quarter new restaurant openings, as well as the opening occupancy costs for all the locations that are in construction, we estimate preopening costs in the second quarter to be about $1.2 million. We are moving ahead in the licensing process for the Las Vegas purchase, and we are aggressively working to get the deal closed. Based on where we are today, we believe that this will most likely be a third quarter transaction. Please review the risk sections outlined in our SEC filings, including our 10-Q for the first quarter, which will be filed in early May, as well as our Safe Harbor statements for factors affecting our forward-looking statements.

With that, I'll turn it back to Sally.

Sally Smith

Thank you, Mary. Second quarter is a (inaudible) and there are a number of exciting things happening. We are very pleased with the sustained strength of our same-store sales, and rest assured, we've an intense operational and marketing focus on driving guests into Buffalo Wild Wings, and delivering a great experience.

Following the excitement of the NCAA tournament, we now turn our guests' attention to a new drink menu, a spring gift card offer, limited time menu offerings, and a focus on the after-dinner day part. Our new drink menu debuted across the country yesterday, featuring an expanded lineup of adult beverages. We also introduced three new limited time salads, Honey barbecue, Asian Zing, and Jerk, all featuring our seasonal grilled chicken.

In May and June gift cards take center stage as the perfect gift for grads and dads. The after-dinner day part will be spotlighted in local marketing radio, in-restaurant promotional materials, and through a special late-night menu. This ad campaign will highlight the fact that our kitchens don't close until we do.

In addition to media, we will strengthen our connection within our communities, through sponsoring thousands of local sports teams, and participating in numerous festivals and events throughout the country. Looking ahead to the third quarter we will be unveiling a new signature sauce, Southwest Chipotle, a fire-roasted chipotle chilly sauce with a southwestern flair, which will be available for a limited time, starting in July.

In August we will once again entice fanatical football fans to our restaurants with the sponsorship of fantasy football leagues. Then in September we will hit the air waves with two new brand building T.V. commercials that will air during our fall national media campaign. We are excited about our new restaurant developments, and have seen some impressive new unit sales performance. Both of our new company-owned restaurants in the Virginia Beach market have opened strong, with the most recent location setting a new opening week sales record for our system.

We've enhanced the selection and training process for our general managers. We've developed a new general manager training class, which focuses on building sales and controlling costs. To date in 2008, 110 managers in the Buffalo Wild Wings system have completed this training program, and we plan to have all general managers of our company-owned restaurants attend this class by year end. We remain focused on enhancing the leadership skills for both our field management and home office leaders, and will continue to build our brand strength. To this end we are introducing a new shift leader training program, as we view it as a critical component in developing hourly team members to managers.

As I said earlier, we are very proud of our performance to date in 2008. We believe that the strength of the Buffalo Wild Wings brand, an active development pipeline, and strong unit level performance will help us achieve our annual growth goals, and we look forward to sharing our second quarter successes with you the week of July 28.

In closing, thank you to all the members of the Buffalo Wild Wings family, our team members, franchisees, vendors, shareholders, and of course our loyal guests, for your continued commitment, passion, and dedication to building the Buffalo Wild Wings brand.

Now operator, we will open the call to questions.

Question-and-Answer Session

Operator

Thank you. Ladies and gentlemen, we will now begin the question and answer session. (Operator instructions) Our first question comes from the line of Jeff Farmer, Jefferies & Company. Please go ahead.

Jeff Farmer – Jefferies & Co.

Thank you. Now that your 25% EPS growth appears to include the benefit of the Las Vegas accretion, can you give us some color on what you might think that would be for either the full year or the back half of the year?

Sally Smith

You know, Jeff we are going to wait on that until we get that transaction closed and then we could talk more specifically about the accretion for 2008. You know, we had mentioned in the conference call that it would occur in the third quarter, or that's what we anticipate for the closing. But based on our unit growth, our revenue growth, as well as the leverage and P&L, we feel confident about hitting the 25% net income target.

Jeff Farmer – Jefferies & Co.

Just a sort of follow-up on that. Is it not overly material then?

Mary Twinem

Correct, right.

Jeff Farmer – Jefferies & Co.

Just on the beer, what percent of your costs of goods sold is beer, and then what type of cost pressure are you seeing there?

Mary Twinem

We don't separate– segregate out of our costs of sales how much is the beer component versus the rest. From a sales standpoint, alcohol sales was 27% of our sales in the first quarter, versus 28% last year. But from a cost of sales percent, we actually stayed neutral year-over-year. We did take some alcohol price increases in our stores, and that's included in our 3.5% menu price for the first quarter, and we also have spent a lot of time at the unit level on cost controls and waste controls, so we were able to stay neutral in the first quarter on the cost of sales component piece.

Jeff Farmer – Jefferies & Co.

Last question for me, I think you are planning to accelerate your remodels this year. Can you talk about how many you are planning in 2008, and then essentially the timing, and do you expect any closure weeks to potentially impact same-store sales?

Sally Smith

We don't think there will be a same-store sales impact in the way that we calculate it if you have a store that closed for three days consecutively in a month, we will take it out of that month's calculation. From a number of locations that we are targeting for remodel, we've 11 of them, and our intent is to have those completed before football season.

Jeff Farmer – Jefferies & Co.

Okay. Thank you.

Operator

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

Paul Westra – Cowen & Co.

Just curious on the $510,000 what I think should be considered one-time charges, is it right given your comments that $358,000 is the impairment, and $152,000 is in the depreciation? Is that where we should look to if we want to exclude it?

Mary Twinem

Almost correct. $115,000 is in the depreciation line, and $395,000 are in the impairment line.

Paul Westra – Cowen & Co.

Okay. Then question on the depreciation. I know your comments seem a little bit– on a higher run-rate level or sequential growth level. Is that going to stay with us going forward, or is that a function of the more quicker depreciation of the higher end TVs?

Mary Twinem

A little bit of both. As it relates to the difference in the first quarter, 10 basis points was related to the additional $115,000 accelerated on the relocation. That $115,000 will repeat itself again in the second quarter. In addition to that, we do have the HDTV upgrades, which we take on a pretty aggressive depreciation schedule, as well as the other remodels that we've going on in the year. So it does feel like on a basis point basis we will be up year over year in 2008.

Paul Westra – Cowen & Co.

Okay. I had a comment on your G&A, obviously some great leverage, even ex stock comp of 60 basis points, ex stock comp. Can you talk about where the leverage compared to prior years run rates sort of coming from? I know you mentioned better wages. Obviously performance has been spectacular. Are you not accruing full bonuses or –?

Mary Twinem

Well, the wage line for us includes head count as well as incentive accrual and benefits accrual, and that is a component piece of the G&A that was down, on a percentage basis year-over-year.

Paul Westra – Cowen & Co.

So we could expect comparable leverage going forward, assuming?

Mary Twinem

I think there is some component piece to that, that will continue into the next couple of quarters, but I don't know if it would be to the extent it was this time.

Paul Westra – Cowen & Co.

Okay. Then last question and I'll let someone else on. The question on the operating line, you mentioned some lower workers' compensation. Again, the outlook for that line item, leverage also showed pretty strong leverage, and trying to find out what percentage of that might be of any one-time nature, and what that might be ongoing going forward?

Mary Twinem

Regarding the restaurant operating expenses?

Paul Westra – Cowen & Co.

Yes.

Mary Twinem

It was 80 basis points difference over prior year. It was a combination of lower general liability insurance, and lower local store marketing costs. We made a comment later, that we think those local store marketing costs on a percentage basis will be higher in the second quarter. So we wouldn't expect that same leveraging occurring in the next quarter.

Paul Westra – Cowen & Co.

Great. Thank you.

Operator

Our next question comes from the line of Larry Miller, RBC Capital. Please go ahead.

Larry Miller – RBC Capital

Just one clarification. You are using $0.36 for your 25% growth in 2008 right? You are not excluding the charge?

Mary Twinem

Correct.

Larry Miller – RBC Capital

Just wanted to make sure. Then what would be the reason that maybe wouldn't want to lock Wings down, right now given that they are lower, and corn prices seem to be hitting a new high every day?

Mary Twinem

Well, it could be that they are not all lining up to want to do it. You know, we will continue to look at it. Obviously the market has worked in our favor here the last couple of months which is very nice to see. And if there is potential, in the next couple of months in order to lock into something that is on the lower side, and goes out for a period of time we definitely would give it a look.

Larry Miller – RBC Capital

Are people telling you, you are going to have to pay a huge premium because no one is taking risk, is that part of it?

Mary Twinem

It's just different philosophies than where people think the market will go in the future. And the longer you typically go on something they do put some kind of premium in for the uncertainty of that. Right now we are pretty happy with where we sit.

Larry Miller – RBC Capital

Okay. Great. I was just trying to get some additional color on how sales jumped up so much in April? It looked like a massive increase in the G&A run rate, even excluding the Easter and NCAA week. Are people coming in and just trying to drown their recession– is that what's going on? Are you getting a huge benefit from the combo meals? What can you point to, that says we did something in April that caused people to come in, and spend more money?

Sally Smith

Well, I think there are a couple of things. One we pointed out that we did benefit by an extra week in the NCAA tournament in April, as well as the fact that Easter occurred in March instead of April. So I think that provided some leverage. We are continuing– there is just a real focus on guest hospitality, continuing to upgrade the facilities. We put in HDTV in a number of– really ramped that up before March madness, and I think our ability to deliver really brought people back in through April. Certainly the plattering helped, the plattering by adding French fries provides a little higher ticket average as well.

Larry Miller – RBC Capital

That's helpful. So that should be ongoing, then. Maybe I can ask something about Las Vegas in a different way, because I'm just trying to think about how it might help you guys. It's a 55,000 a week store, or group of stores and how much of that comes from gaming revenues, and how much– what's the margin on that particular side of the business?

Mary Twinem

That's not a separate factor that we've disclosed, Larry, and I doubt that we will in the future. We've shared where the average weekly volumes were back in May of 2007, when we entered into this deal. Again, we can be more specific about our expectations for 2008, once we actually get the deal closed.

Larry Miller – RBC Capital

Okay. That's fine. Ex the gaming they would be not to far off I am guessing – Las Vegas is a weird market everything seems to be higher. One final question, since you won't answer that one, yes. The pricing effective for Q2 you said 3.5%, right? Is that correct?

Sally Smith

Yes.

Larry Miller – RBC Capital

Thanks, guys. Nice quarter.

Operator

Our next question comes from the line of Brian Elliott, Raymond James. Please go ahead.

Brian Elliott – Raymond James & Associates

Good afternoon, a couple of questions. A clarification first. Did I hear it right, Mary, did you say the head count at headquarters is actually down year-on-year?

Mary Twinem

No, the head count is up, Brian. And on a percentage basis the total wage incentive and benefit expense is down, year-over-year on a percentage basis, but we are definitely spending more money year-over-year.

Brian Elliott – Raymond James & Associates

All right. Also, I was just curious what you are hearing from your suppliers, as to what's going on in the Wing market. We are seeing announcements of chicken processing reductions across the industry, and it has been mentioned corn continues to hit new records and where's the supply or increase– either supply increase or demand fallout that sort of explains the big collapse in prices here?

Mary Twinem

I don't know that I have a great answer for that. We know that the Wing market, Jumbo Wing market had fallen off in March and April. The regular Wing market is beginning to follow as well. We haven't seen the same thing as related to our further processed chicken, and that's on a flat pricing through the rest of the year. So I don't know from a supply and demand standpoint if there is any wisdom out there as it relates to why the market has fallen like it has. We are just happy that it has. And we will continue to watch it going forward.

Brian Elliott – Raymond James & Associates

All right. That's helpful. Thank you.

Operator

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

Destin Tompkins – Morgan Keegan

Good afternoon. My first question is on the impairment line, charges there, I think you mentioned the $358,000 you mentioned for the HDTV upgrades. Can we assume that there is going to be a similar amount that continues, as you continue to upgrade those restaurants?

Mary Twinem

Yes, I think as we go through the remodel process, as well as just normal upgrades of any nature, that there's going to be some piece on that lots on asset disposals that will continue on a quarterly basis.

Destin Tompkins – Morgan Keegan

Also another question on the Las Vegas franchise acquisition. Will there be any charges associated with that acquisition?

Mary Twinem

There would potentially be some one-time acquisition charges that we would have to book on closing, and we can be more specific about that once we get the deal closed, and all of the costs allocated.

Destin Tompkins – Morgan Keegan

But you would also be assuming that in your guidance for the impact it would have on your 25% EPS growth?

Mary Twinem

We would be excluding any one-time acquisition charge-offs, as it relates to meeting our 25% net income target.

Destin Tompkins – Morgan Keegan

Okay. And then your average weekly sales trend, it seemed as though it accelerated– the gap increased in terms of its out performance of same-store sales trend. Any reason you can explain that, or– what’s your expectation for that trend?

Sally Smith

You know, we've really continued to focus on opening strong, and I think we pick the markets that we did open at, in the first quarter as well as throughout last year, are good strong markets, densely populated. We've a couple of those open, were the converted Don Pablo's. So hopefully can push through a little more unit volume. But really a focus on being ready when we open, and then sustaining that operational excellence throughout that first 90, 120, up to a 180 days. So it's just a process that we've put in place, and to really try to limit any kind of fall-off we would have after the first few weeks of opening.

Destin Tompkins – Morgan Keegan

Given the slow down and development across the industry, do you feel like you are getting more attractive sites proposed to you?

Sally Smith

No, I don't think we've seen that yet. A lot of what we are opening in 2008, we probably committed to, or entered into agreements in 2006, or maybe into early 2007, just like we've got a pipeline already filling for 2009, where we don't have a signed lease, we will go back and take a look at our position in the development, to see if we can improve on it at all. But we like to think that in the last couple of years we've improved our position, in most developments, regardless of the slow down.

Destin Tompkins – Morgan Keegan

Great. Thank you.

Operator

Our next question comes from the line of Steven Tarantino, Robert W. Baird. Please go ahead.

David Tarantino – Robert W. Baird

Hello, good afternoon, this is David Tarantino. Congratulations on a nice start to the year. The question on the worker's comp and general liability insurance, can you clarify, was that a one-time benefit, or is that a lower-run rate that you would expect to see for the balance of the year?

Mary Twinem

You know, on that line it's really hard to say. We see it move around a little bit on a quarterly basis, the worker's compensation and general liability lines both were down year-over-year for us this quarter, and our health insurance was neutral, and I think if you went back on a quarterly basis you would see them moving both directions. So I can't say that we will see both trend down in the next quarter, but I do know that we've a heightened emphasis on controlling the costs within those plans.

David Tarantino – Robert W. Baird

Okay. Great. That's helpful. And then another follow-up question on the G&A, which seemed very well controlled. The up 8% year-over-year in dollars, is that kind of the run rate you might expect to see for the rest of the year, or would you expect that to be higher?

Mary Twinem

I don't know– I guess I won't quantify it specifically on a year-over-year increase obviously with the 20% revenue growth and then the 25% bottom line growth, we imply some type of leveraging on the G&A line in between there, but from how many basis points that is, I won't say.

David Tarantino – Robert W. Baird

Okay. And then could you give us an update on some of the labor productivity initiatives, and theoretical cost initiatives at the unit level?

Sally Smith

Sure. I can talk a minute about labor. We are continuing to emphasize proper labor scheduling. I know that the operations group has gone back and reviewed all of the restaurants to take a look at all of their par levels, with regard to their management teams, and what sales volumes you need to add an extra manager, and when can you utilize that shift lead position, which I talked about our emphasis on that during the conference call.

With regards to the food theoretical costing, we've trained it in the first quarter, really with our regional managers. Our restaurants have it. All of our regional managers are coming in, in June, and we are still in the process – I think we've got some nice pieces in place, our general managers and their teams are bonused on their theoretical versus actual food costs, instead of actual to budget. So they really want to understand it, and it's really– it probably took us a couple of years to roll out the cost management program, on the alcohol and beer side, and we are seeing some nice improvement there. As Mary indicated, we were able to hold our cost to sales despite price increases for beer and alcohol, and I think over the course of 2008, we will continue to refine that theoretical costing. But we are working to achieve that, and to achieve similar results that we achieved with alcohol.

David Tarantino – Robert W. Baird

Great. Thank you.

Operator

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

Nicole Miller – Piper Jaffray

Thanks. Good afternoon.

Sally Smith

Hi, Nicole.

Nicole Miller – Piper Jaffray

I just wanted to ask about the menu price increases you are anticipating for the rest of the year. What price per pound on chicken wings does that cover you for? What is your anticipation?

Sally Smith

Are you talking about the price increase that we took in February?

Nicole Miller – Piper Jaffray

That and also what you are considering doing for the rest of the year. So I think you had even talked, maybe it was last time, about– well, maybe that's all you have given on color on price right now, I don't know what you are thinking for the fall. But just as you internally run like your own scenarios, assuming that commodities are a driving factor on price, one of the driving factors, does the current price insulate you to the current $1.25 per pound, and if chicken wings go up you need to take more price, or is there some cushion there?

Sally Smith

I don't know if I can answer it in the same order that you are asking it, but from a menu price increase to input, we do have 3.5% in effect now. We will look at whether we take menu price increases in the third quarter, when we roll out our new menu design, and if we choose to do it at that time, obviously we will share that in our next conference call. As it relates to where commodities will move, it's hard to say where wing prices would go through the rest of the year. We obviously know where they sit today. From other commodity areas, we've all of our contracts they are fairly well locked, so that we felt comfortable sitting at 3.5% in the first quarter, and then waiting, and perhaps taking a little, if any, in the third quarter.

Nicole Miller – Piper Jaffray

On the media expenditures, I think you had said the first quarter was up 22% in dollar amount. Could you let us know how that compares to the four quarters, or the same period in '07, and then what you are looking for increases for the remainder of the year? Like an increasing percent or a decreasing, and how does that compare to the 2007 periods?

Sally Smith

As you know, we spend our media during six planned media campaigns during the year. Both our company stores and our franchisees contribute 3% to a national advertising fund, and that's a consistent 3% of sales throughout the year. So that's how we expense the advertising fund. And then those dollars get allocated to the different campaigns, as our sales increase, and as more restaurants open, we've more dollars to spend, and it's probably pretty consistent with the revenue increases year-over-year. I don't know if you have – Mary, if you have anything you want to add to that.

Mary Twinem

As it relates to the first quarter our media was up 27% year-over-year. In the second quarter, we've a smaller media campaign, typically. We will be spending more than 50% over prior year, but it's a smaller weight as it compares to our spending, which is really biggest in the third and the fourth quarters. We do have two new T.V. commercials that will be running in the third and fourth quarters, we will have incrementally higher media spend year over year, I don't have those percents of the top of my head, but we'll also have better efficiency in the September, October time periods, as we transition more of our spend to a national cable format.

Nicole Miller – Piper Jaffray

Okay. Then what is your CapEx projections and how much of that is maintenance?

Mary Twinem

About $18 million of what we'll spend in 2008 will be in the maintenance CapEx as it relates to HDTV and the remodels, and then for our new restaurant openings, they will average about $1.4 million with the Don Pablo's locations being maybe slightly higher than that because they are a little bit bigger.

Nicole Miller – Piper Jaffray

Just a final question, looking back to 2001, and 2003, how did tax rebates impact your business?

Sally Smith

That's a question I don't think that we've analyzed.

Mary Twinem

I don't have my same-store sales in 2008 in front of me, to know if we considered it to be a driver. I mean, typically we don't comment on macro conditions type of things like that. So I don't know if we would have been able to say it was a direct contributor to our same-store sales trends then.

Nicole Miller – Piper Jaffray

Thank you so much.

Operator

Our next question comes from the line of Will Hamilton, SMH Capital. Please go ahead.

Will Hamilton – SMH Capital

Good afternoon. Mary, I was wondering, did you say Wings were $1.33 or $1.23 in the first quarter?

Mary Twinem

$1.33.

Will Hamilton – SMH Capital

So that incorporates some of– rolling off the contract?

Mary Twinem

It did, we had about three weeks in March where we were on the market.

Will Hamilton – SMH Capital

Okay, and the percentage of cost of sales, or percentage of sales– how did Wings run in the quarter?

Mary Twinem

Wings from a sales percent were 22% of sales in the first quarter, versus 23% last year. And a cost of sales percent, I don't have that in front of me, but I believe we will disclose it in the 10-Q.

Will Hamilton – SMH Capital

During the quarter, and I guess maybe more recently, have you seen any change in the check average, or your late-night business? Has that shifted at all?

Mary Twinem

We don't disclose a separate check average, so I can't really speak to that. As it relates to the late-nighter, what we would call the after dinner day part, we definitely feel it is a component of our business that we should focus on. It's a big focus for us in the second quarter, as we kind of brand that piece, and try to own the late-night component piece. But I don't know that on a year-over-year basis we've seen much difference.

Will Hamilton – SMH Capital

Okay. Lastly, I was wondering, given where same-store sales are running to date at the company, and some of the pricing you have put in, why not more leverage maybe in the second quarter, just looking off of what you are indicating with labor and cost of sales, and some of your operating?

Mary Twinem

Well, from a cost of sales standpoint we know where wings are for April and May, but we don't know where the market will go for June. On the labor side, and on the other operating piece, I think part of it will just be the fact that our first quarter is really our highest volume average weekly volume quarter, so the leveraging on a percent basis tends to be greater, and it's whether or not we can continue that in the second quarter, to the same extent or even to a lesser extent, as we've these additional stores being built out.

Will Hamilton – SMH Capital

Okay. Thanks.

Operator

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

Barry Stouffer – BB&T Capital Markets

Just two questions. I wanted to revisit the G&A, I assume that the decrease sequentially from the fourth quarter is a function of lower bonus accruals?

Mary Twinem

Yes, I'd say that the incentive paid piece in the first quarter, would have been down year-over-year.

Barry Stouffer – BB&T Capital Markets

I'm talking about sequentially from the fourth quarter to the first quarter G&A was down in absolute dollars, went from $8.7 million to $8.3 million.

Mary Twinem

Yes, you know that– I'd say that, that is right, because we had a pretty nice fourth quarter.

Barry Stouffer – BB&T Capital Markets

Okay. Do you have your average hourly wage rate change in the quarter?

Sally Smith

I don't have it in front of me, but from a minimum wage standpoint, we would say that there would have been very little impact in our first quarter results, because of that.

Barry Stouffer – BB&T Capital Markets

Okay. Thank you.

Operator

Our next question comes from the line of Brad Ludington, KeyBanc Capital Markets. Please go ahead.

Brad Ludington – KeyBanc Capital Markets

Good afternoon, just have a couple of quick questions. Just a clarification, earlier, I think I heard, and I want to make sure I'm right, you said you have sort of flat pricing contracts for boneless chicken. Is that correct?

Mary Twinem

That is correct.

Brad Ludington – KeyBanc Capital Markets

Then just a little bit more clarification on the shift lead role. Is the main function of that to kind of cut back on some of the management labor, by having a waiter do checkouts, and some sort of management-type roles?

Sally Smith

No. It's really a bridge between if you have a three-manager store, or four-manager store, or five-manager store. When you might not be quite at the sales level, to justify that five-manager, shift lead is someone that may be getting ready to go into the management program. They are trained in all of the duties, and they can handle some of the slower times in the restaurant. It wouldn't be like a waiter doing management type duties, no.

Brad Ludington – KeyBanc Capital Markets

Okay. That's all I have. Thank you very much.

Operator

Our next question comes from the line of Steven Rees, JPMorgan.

Steven Rees – JPMorgan

Hello thanks. I wanted to ask quickly about the after dinner day part strategy. I think that's quite interesting. Is this the first time you have really focused on that, and if you could provide some color in terms of how big that day part currently is, where you think it could go? A lot of the quick-service guys have been very successful with extending their hours. Do you think that's an opportunity for you?

Sally Smith

Well, you know, we've always been open late typically, whatever local liquor licensing allows. Currently that day part is about 25% of our total sales and that's defined as 8:00 P.M. on. I think it's important to remind our guests, that our kitchens are open as late as we are, and that by introducing a special late-night menu, which has a couple of things on there that won't be on our regular menu, although you can get it during the day, it might bring to mind some of the great things that we think you can offer late at night. I believe it is the first time that from a campaign or in-store, local marketing point of view, that we've focused on the late night, or the after-dinner day part.

Steven Rees – JPMorgan

Will it be part of the television ad campaign as well yet?

Sally Smith

Right now it will be confined to radio, in both regional and local radio.

Steven Rees – JPMorgan

Okay.

Sally Smith

Typically for our T.V., our television, we typically use T.V. as branding, as a branding opportunity. And we use radio as the call to action, giving a guest a reason to come in.

Steven Rees – JPMorgan

The franchisees they are doing it as well?

Sally Smith

Yes, absolutely. It is a system-wide campaign.

Steven Rees – JPMorgan

Then just finally on the– did you talk about the franchisee comp quarter to date in April. Did it see a nice sequential acceleration like the company? Do you expect it to continue to lag going forward?

Sally Smith

On the franchisee same-store sales, there is a couple of reasons for the difference. We contend to take menu price at a different time. They do have higher average unit volumes than we do, so that same – let’s say they increase their average weekly volumes by $2000, and we do the same. Ours is going to be larger because it's a lower sales point. And I think that last year during the Super Bowl, the match-up was particularly good for the franchisees, and really the games leading up to it, and the finals we had Chicago and Indianapolis. This year we had the Giants and the Patriots, so there wasn't as– we don't have as many locations as we did last year for that. And we've some additional franchisees in I think in may be some of the harder hit economies, Florida, Arizona and the West Coast.

Steven Rees – JPMorgan

Okay. Great. Thank you very much.

Operator

Our next question comes from the line of Brian Elliott, Raymond James. Please go ahead.

Brian Elliott – Raymond James & Associates

Can you– this thought on economic sensitivity, whatever. Are you saying significant declines in your turnover rates at all, hourly?

Mary Twinem

No, I'd say that they are either the same as last year, or up a little bit, on a rolling 12 months through the end of the first quarter, partially because of the number of new store openings that we had in the fourth quarter, and we tend to get a fair amount of turnover that happens in those first couple of weeks. So, yes I'd say that – I don't think it's gone down.

Brian Elliott – Raymond James & Associates

All right. And you said you don't have your wage inflation number handy?

Mary Twinem

From a minimum wage standpoint?

Brian Elliott – Raymond James & Associates

Just the hourly, what's the market?

Mary Twinem

I don't have that off the top of my head.

Brian Elliott – Raymond James & Associates

I'll get that offline. Thank you.

Operator

Our next question comes from the line of Greg McKinley, Dougherty & Company. Please go ahead.

Greg McKinley – Dougherty & Co.

Yes, thank you. Just a quick numbers question on your CapEx, I know you indicated $18 million or so as your expectation this year for maintenance. Can you remind us what your full year expectation is for CapEx, and then maybe help us understand whether a large portion of maintenance and other upgrade activity will occur again next year, or would we expect to see that decline? Thanks.

Mary Twinem

As it relates to the $18 million, that would be remodel HDTV upgrades on normal R&M maintenance kind of stuff in 2008. I'd expect that would the same reason or even slightly higher in '09 as we continue to remodel our older stores. From a total CapEx in '08, Greg, you are going to have to do the addition for me, but it would be that $18 million, and then plus $1.4 million for each of the new units that we opened during the year.

Greg McKinley – Dougherty & Co.

Okay. Thank you very much.

Operator

Ladies and gentlemen, that does conclude our question-and-answer session. I'll turn the conference back to management for closing remarks. Please go ahead.

Sally Smith

I appreciate everyone calling in for the questions. Once again I want to thank the entire Buffalo Wild Wings team for an outstanding quarter, and I look forward to sharing our results with you at the end of July. Thank you.

Operator

Ladies and gentlemen, that does include the Buffalo Wild Wings, Inc. first quarter 2008 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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