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Buffalo Wild Wings, Inc. (NASDAQ:BWLD)

Q3 2012 Earnings Call

October 23, 2012 5:00 p.m. EDT

Executives

Mary Twinem – CFO, EVP

Sally Smith – President and CEO

Analysts

Bryan Elliott – Raymond James

Larry Miller – RBC Capital Markets

David Dorfman – Morgan Stanley

Jeff Farmer – Wells Fargo

Jason West – Deutsche Bank

David Tarantino – Robert W. Baird

Brian Bittner – Oppenheimer

Will Slabaugh – Stephens, Inc.

Jeffrey Bernstein – Barclays Capital

Matthew DiFrisco – Lazard Capital

Chris O'Cull – KeyBanc Capital Markets

Nick Setyan with Wedbush Securities

Conrad Lyon – B. Riley & Co.

Peter Saleh – Telsey Advisory Group

Greg Mckinley – Dougherty & Co.

Mark Smith – Feltl & Co.

Operator

Good afternoon, ladies and gentlemen. Welcome to the Buffalo Wild Wings third quarter 2012 conference call.

[Operator Instructions]. I would like to remind everyone that this conference call is being recorded.

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.

Mary Twinem

Goof afternoon and thank you for joining us as we review our third quarter 2012 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 Chief Executive Officer. By now everyone should have access to our third quarter earnings release.

Before we get started, I'll 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 based on a number of factors. Actual results may vary materially from those contained in forward-looking statements based on a number of factors, including but not limited to, our ability to achieve and manage our planned expansion, the sales and other growth factors that are company-owned and franchise locations, our ability to successfully operate in new markets including non-US markets, unforeseen obstacles in developing sites including non-traditional and non-US locations, the cost of commodities, the success of our key initiatives and our advertising and marketing campaigns, our ability to control restaurant labor and other restaurant operating costs, economic conditions including changes in consumer preferences or consumer discretionary spending and other factors disclosed from time to time in our filings with the US Securities and Exchange Commission.

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

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

Sally Smith

Good afternoon, everyone. We're pleased with our strong top line growth of nearly 25% in the third quarter. We focused on operational excellence at the restaurant level and our teams delivered strong same-store sales with increases of 6.2% at company-owned restaurants and 5.8% at franchise locations. In addition, we leveraged labor, operating and occupancy expenses. High cost of sales and incremental pre-opening expenses moderated our bottom line expansion, producing earnings per diluted share of $0.57 for the quarter, compared to $0.61 in 2011.

We focused on adapting to current wing market conditions. Our restaurants have transitioned to larger-size wings in response to the continuing shift in the poultry industry to larger bird production. We took many price increases in July and subsequent wing price increase in mid-August to compensate for the bigger wings and record-high wing costs. These adjustments are beginning to ease the pressure on our cost of sales.

We are currently testing serving our wings in flexible portions rather than fixed quantities, which will lessen the cost of sales impact from future fluctuations in wing size. We're monitoring the impact of this test on sales, margins and guests' perceptions in about 60 restaurants, and based on the results, we'll incorporate these changes at our remaining locations in the first half of 2013.

In the third quarter we made investments in our future as we upgraded our technology infrastructure, continued our international expansion, and worked towards purchasing additional franchise locations.

We had successful marketing campaigns in the third quarter. The Summer Olympics provided opportunities for friends to gather in our restaurants and cheer our athletes onto the gold. On the heels of the closing ceremonies, we shifted our focus to the gridiron and more football fanatics filled our restaurants for our annual Fantasy Football Draft Promotions than ever before.

In the third quarter we had two menu inserts to highlight our ongoing new menu offering. We featured three new flatbreads, Thai curry chicken, Caribbean barbecue pork, and five cheese italian pepperoni. We also featured two refreshing new Summer Salads. Guest response to these new items was commended, and based on their popularity, our pepperoni flatbread and chopped salad will become permanent menu items in 2013.

Our expanded retail gift card program continued to generate revenue throughout the third quarter and produced nearly 50 basis points of incremental same-store sales. We're pleased with the success of this program and its potential to introduce the Buffalo Wild Wings brand to new guests.

Our operations teams focused on providing our guest with a great football experience to encourage repeat visits throughout the season. In addition, they worked diligently to manage costs and certify additional training restaurants to support our ongoing new restaurant openings.

Mary will now provide additional details on the third quarter as well as the fourth quarter to date. Then I'll return to talk about the remainder of the year and beyond.

MT:

Thank you, Sally. Our revenue in the third quarter grew by 24.8%, increasing to $246.9 million. System-wide, sales that are company-owned and franchise restaurants were $592.9 million for the quarter, more than 16% higher than the same period in the prior year.

Company-owned restaurant sales for the third quarter increased to $228.4 million, a 26.2% increase over the same period in the prior year. Same-store sales were 6.2% for the quarter compared to the 5.7% last year. Menu price increases and adjustments taken during the past 12 months at company-owned restaurants were about 4%. We had 55 additional company-owned restaurants in operation at the end of this quarter versus third quarter last year, a 19% unit increase.

Average weekly sales increased by 6.3%, slightly higher than our same-store sales percentage for the quarter. The average weekly sales calculation benefited by about 50 basis points from the closing of older lower-volume locations during the last 12 months. Company-owned locations opened during the last 15 months contributed an increase of 30 basis points. The 17 locations that we purchased from franchisees in the last 15 months are performing in line with our expectations but lowered our weekly average by 70 basis points.

Our royalty and franchise fee revenue for the third quarter grew by 10.2% to $18.4 million, versus $16.7 million last year, with an additional 13 franchise units in operation at the end of the third quarter versus a year ago. As a reminder, we have purchased 15 franchise locations in the 12 months preceding the end of this quarter, which lowers the year-over-year increase in franchise units.

Same-store sales at franchise locations increased by 5.8% in the quarter, compared to a 4.2% increase in third quarter last year. Average weekly sales volumes for the quarter increased by 8.3%, a 250-basis-point increase over same-store sales. About 170 basis points of the increase is attributed to the closure of locations and our acquisition of the 17 franchise units.

The following comments will focus on the performance of our company-owned restaurants. Cost of sales for the third quarter was 31.2% of restaurant sales compared to 28.5% in third quarter last year, a 270-basis-point increase. Traditional wings were $1.97 per pound this quarter, $0.81 or 70% higher than last year's average of $1.16. Added to this increase is the lower wing per pound yield as a result of poultry producers moving production to larger birds. And the result is that our cost per wing by the end of the third quarter was about 90% higher than the unusually low wing cost of last year.

Traditional wings accounted for 21% of our restaurant sales this quarter, up from 20% last year, and boneless wings were 19% of sales in both years. Food and non-alcoholic beverage sales were 79% of restaurant sales compared to 78% last year.

Cost of labor for the third quarter was 30.1% of restaurant sales, 20 basis points lower than third quarter last year, with proportionately lower payroll tax and workers' compensation expense. In the third quarter, restaurant operating expenses as a percentage of restaurant sales were 15.2%, a decrease of 60 basis points, with the continued benefit of lower natural gas expense and lower debit card fees. Occupancy costs were 5.9% as a percentage of restaurant sales compared to 6.2% last year, a 30-basis-point improvement.

In summary, restaurant-level cash flow, which is calculated before depreciation and pre-opening expenses, was $40.3 million, or 17.6% of restaurant sales, versus $34.9 million or 19.3% in third quarter last year. By leveraging our other expense lines by 100 basis points, we offset the impact from higher cost of sales to 170 basis points.

Depreciation and amortization for the third quarter was 6.8% of total revenue, 40 basis points higher than the prior year. The result of both the incremental amortization for intangibles acquired for 2011 franchise acquisition and the incremental depreciation for freestanding locations and technology infrastructure.

General and administrative expenses were $21.8 million in the third quarter or 8.8% of total revenue, compared to $18.3 million or 9.3% in the prior year. Excluding stock-based compensation of $2.3 million, G&A expenses for the third quarter totaled $19.5 million or 7.9% of total revenue, the same percentage as last year.

The investment income from funds set aside for future payouts under our deferred compensation plan that was recorded in the current quarter, when compared to the investment loss that we recorded last year, increased our general and administrative expenses by 30 basis points in the third quarter.

We opened or relocated 15 new company-owned restaurants in North America during the third quarter compared to 10 new locations in the third quarter of 2011. Pre-opening expenses for the quarter totaled $4.5 million versus $3.9 million last year. The $4.5 million includes $1.4 million of pre-opening expenses for future openings that are under construction, and in the third quarter last year we incurred $1.6 million related to future openings. Pre-opening costs averaged $274,000 per new restaurant during the first nine months of 2012 compared to a $279,000 average for 2011 openings.

The loss on asset disposals and store closures for the third quarter totaled 788,000 compared to 612,000 last year. Of this amount, 395,000 was related to the rollout of the new point of sale and back-office systems at company-owned locations during the third quarter. Similar expenses to complete the rollout are expected in the fourth quarter.

We reported investment income of $418,000 for the quarter compared to a loss of $374,000 in 2011. Investment income from funds set aside for future payouts under our deferred compensation plan totaled $390,000, compared to a loss of $404,000 in the prior year. Investment income from our excess cash and marketable securities was approximately $30,000 in both years.

Our effective tax rate during the third quarter was 29.4% compared to 28.1% in the prior year. For the full year of 2012, our effective tax rate is estimated at 32% to 32.5%, which is higher than last year's rate of 30.8% due to fewer available job credits for the current year.

From a balance sheet standpoint, on September 23, 2012, our cash and marketable securities totaled $83.8 million compared to $60.5 million at the end of 2011. We ended the quarter with $550 million in total assets and $366 million in stockholders' equity. Cash flow from operations was $107 million for the nine months, and we spent $79 million for capital expenditures.

For the full year of 2012, we estimate capital expenditures, including completed and planned franchise acquisitions, to be approximately $175 million. We completed the purchase of nine franchise locations in Wisconsin in early fiscal October and are positioned to acquire an additional nine units before the end of the year.

Now I will highlight trends and provide some additional comments on the fourth quarter of 2012. For the first four weeks of the fourth quarter, our same-store sales were about 3.8% at company-owned restaurants and 5.6% at our franchise locations as compared to same-store sales trends for the four weeks in the fourth quarter last year of 6.6% at company-owned restaurants and 5.3% at franchise locations. For the fourth quarter of 2011, our same-store sales were 8.9% at company-owned locations and 5.9% at franchise locations.

In the fourth quarter we expect to open 24 new company-owned restaurants in North America. four of these units have already opened. In addition, two of our older company-owned locations will close. As a reference point, in the fourth quarter of 2011, we opened 18 new company-owned locations. We also expect that our franchisees will open 20 restaurants during the quarter.

For cost of sales, the traditional wing market is trending higher with the price of chicken wings for the first two months of the fourth averaging about $2.07 per pound. This compares to last year's average price for the fourth quarter of $1.42. The potential menu price benefit for increases and adjustments taken in the last 12 months is about 6% for company-owned restaurants in the fourth quarter.

Regarding commodities for 2013, we have renewed our breast meat contract which includes boneless wings through March of 2014 at current pricing. For commodities other than traditional wings, we estimate 30 basis points of cost pressure in 2013. We have signed a new distribution contract that covers food, paper and non-food products and will begin transitioning locations to the new provider in December with full rollout to be completed by June of 2013. We estimate that the cost savings to our restaurants once implementation is complete to be about 40 basis points, with additional savings to come from inbound freight consolidation.

We anticipate slightly higher labor cost as a percentage of restaurant sales in the fourth quarter compared to prior year to train for the rollout of our new point-of-sale system and staff for our new service strategy to further differentiate our brand. Conversely, operating, occupancy and depreciation expenses should leverage due to higher average weekly volumes and the benefit of the 53rd week.

We anticipate that our G&A expenses in the fourth quarter exclusive of stock-based compensation expense will be approximately $19.4 million. Fourth quarter stock-based compensation expense is estimated to be $2.6 million, the same amount as fourth quarter last year. Fourth quarter stock-based compensation expense will vary depending on the level of net earnings achieved for 2012 as well as for estimates of net earnings in future years.

In summary, in the third quarter we produced net earnings of $10.7 million, delivering earnings per diluted share of $0.57. For the first nine months of the year, earnings per diluted share totaled $2.17 and net earnings grew 10%. Our expectations for the full year of 2012 based on the factors just discussed and the benefit of a 53rd week is net earnings growth of 15%.

Please review the risk sections outlined in our SEC filings, including our 10-Q for the third quarter which will be filed shortly, as well as our Safe Harbor Statement for factors affecting our forward-looking statement.

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

Sally Smith

Thank you, Mary. We are a vibrant and resilient brand. The economy and marketplace are presenting challenges for every business. We continually monitor and adapt to these changes and have a strong track record of developing strategies that produce successful long-term outcomes. We have passionate loyal guests, and we're confident in our ability to continue to provide them a rewarding dinning and sports viewing experience.

This quarter we'll open the first of our new prototype restaurants. We've refined the restaurant design to make the game a focal point, and create an atmosphere that feels like being in a stadium. We're eager to begin rolling the new design into future opening and remodels in 2013.

Our restaurants will continue to focus on maximizing sales opportunities throughout the football season. In November, we'll have a new menu insert that will feature six share-a-bowls that are great to snack on throughout the game. We'll also begin our holiday gift card promotion in November. Last year, we had great success with this program and it drove about a 2% increase in same-store sales. This November we're beginning our promotion earlier and we're expanding our gift card distribution with placements in 11,000 grocery locations. We expect this program will help drive incremental visits in the future and particularly in the first quarter.

We'll have a strong presence in national media this quarter with both NFL and college games throughout this season. In addition to our commercials, we'll have numerous program integrations on TV along with network radio sponsorships. Our advertising presence will also continue to increase in the coming year.

As the college bowl season approaches, we'll be center stage with our new Buffalo Wild Wings Bowl in Tempe, Arizona. We plan to bring the Buffalo Wild Wings experience to this exciting game for Big Ten and Big Twelve teams. The Bowl will generate widespread exposure for our brand and provide new opportunities to engage our guests.

Our football promotions will carry into the first quarter of 2013 with the focus on college bowl games and the NFL playoff games leading up to the Super Bowl. A new menu insert in January will feature three hearty stacked burgers, including our new Italian burger. And if our guests plan to gather with friends at home for these high-stakes games, we'll remind them that wings and the game are a perfect matchup, and our takeout is a great option.

Buffalo Wild Wings fans are passionate and they like to interact with our brand. This month we surpassed 9 million Facebook fans. Our BuffaloWildWings.com traffic also continues to increase. And in November we'll launch a new website that will ensure a better user experience across all digital and mobile platforms.

This quarter we'll introduce exclusive content and fun and social gaming opportunities to our guests through interactive TV screens, mobile apps and tablet-like devices. These new entertainment options will create more reasons for guests to come to Buffalo Wild Wings and will enhance the social and competitive atmosphere in our restaurants.

To help engage our guests with these new entertainment choices, we've created the new Guest Experience Captain position within our restaurants. Their role is to focus on interacting with guests in a way that helps customize each experience based on individual needs and interests. They'll encourage guest interaction with our new content, promotions and technology to create a truly unique experience. We expect to have about 100 company-owned restaurants using this new service model by the end of the year.

As we look ahead, we're excited about 2013. We'll begin to realize the benefit of strategies we've been working on over the past year. Our restaurants will begin to have a new look, we have an enhanced guest service strategy, and we'll have new innovations in food, beverages and technology that will help drive future sales growth.

And our unit growth will continue. We're on track to achieve the milestone of 1,000 Buffalo Wild Wings restaurants by the end of 2013. With the success of our recent restaurant openings on the coast, we now anticipate we can become a chain of 1,700 locations across North America in the next five to seven years. Our international growth will also continue as we open new restaurants in the Middle East and Puerto Rico next year, and we'll pursue additional opportunities for expansion across the globe. With this growth and financial diligence, we have a goal of 2013 to achieve 20% net earnings growth on a 52-week basis.

We have an outstanding team with a strong record of achievement. We thank our franchisees, vendor partners and especially our team members for their passion and their continued dedication to the future success of our brand.

Now, operator, we'll 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].

And our first question comes from the line of Bryan Elliott from Raymond James. Please go ahead.

Bryan Elliott – Raymond James

Thank you. Good afternoon. I'd like to drill down a bit on the average weekly sales new unit sales performance. It's pretty apparent there's been a slowdown in new unit volumes. You were opening new units that were consistently doing $60 million, $65 million a week back in 2011, and that seems to have slowed here despite maybe 15, 20 in a row at that sales level. Can you help me understand why that seems to be happening?

Sally Smith

I think there's -- the other factor that's affecting the delta we have in our average weekly volume growth, Bryan, is how many weeks are going into that calculation. So like if you go back to the first quarter when we had about a 290-basis-point difference in what was attributed to NROs, they also contributed nearly 25% of the total operating weeks that go into that calculation. By the third quarter, because our openings are so delayed into the fourth quarter, new restaurant openings only contribute about 15% or 16% to the calculation. So I think it's more of a reflection of the number of weeks that are going into there and the reason why that percent is lower versus the performance of our units.

Bryan Elliott – Raymond James

Okay. So I would conclude from that then that you are still in the 60k plus run rate for the stores not yet in the comp base, x-ing the acquisitions, growing the acquisitions?

Sally Smith

Yes. Yes.

Bryan Elliott – Raymond James

Yeah. Okay.

Sally Smith

Yes. And then when we look at the fourth quarter, because we obviously have a lot of openings happening in the fourth quarter, from our estimation of how many weeks will be in that calculation, about 20% of the weeks will come from new restaurant openings. So we would expect to see a bigger delta again between our average weekly volumes and our same-store sales.

Bryan Elliott – Raymond James

Okay. If I could sneak a quick one in, could you -- I missed a little bit, I was distracted from hearing a little bit about the service change. It sounds like, did I hear it right, that you kind of have -- going to have a hospitality manager on the floor? Is that right?

Sally Smith

Yeah, we're not calling it a hospitality manager; we will still have the front of the house manager. This person really is -- depending on the time of the day and the day of the week, we may have actually more than one Guest Experience Captains on the floor. But if you think about Buffalo Wild Winds, people come in to watch the game, there is different games they want to watch. And as we've gone back and we looked, by asking our servers to attend to the games, change the channel, explain Buzz Time Trivia, we're trying to take them off of the things that they're best at, which is taking the orders, the drinks, getting the food, all of the things that make for a great experience. So we do have, depending again, anywhere from one to four, probably, Guest Experience Captains, that will be in restaurants to assist with whatever the guest needs. And we also talked a little bit about some of the interactive programming that we're going to be doing in restaurants. So the need for that has become very evident.

Bryan Elliott – Raymond James

Well, that's great. So when I go in to watch the Slippery Rock State University game, I'll be able to get it turned on faster, I appreciate that. Thanks.

Sally Smith

We'll do our best, Bryan.

Bryan Elliott – Raymond James

All right.

Operator

Thank you. And our next question comes from the line of Larry Miller from RBC Capital Markets. Please go ahead.

Larry Miller – RBC Capital Markets

Yeah. Hey, guys. I just wanted to drill down into the October comp. It looks like traffic slowed and I'm kind of at a loss to explain that. Can you help me with that? You know, I would've thought October was the big month for having some incremental NFL games. Can you address that?

And can you also talk about the pricing? Was there a pushback? It sounds like you're running 4% in the third quarter. Did you get, you know, was there some pushback on pricing that maybe caused traffic to slow?

Sally Smith

Bryan -- sorry, Larry, I'll try to answer first and then Mary can fill in. But as we take a look at the pricing, we have not seen resistance to the price increases. In fact, what you'd expect, our wing sales as a percent of total revenue is actually up. Part of that is due to price increase, but we have not seen a falloff in same-store sales on wings.

There are a couple of things from a matchup standpoint. We would have had about two-and-a-half weeks of NHL hockey that is delayed at least until November, certainly not a huge driver, but adding sales in restaurants. And then if you take a look at the baseball playoffs, last year we had a number of company markets with Texas in and this year the games are primarily in franchise markets. So we've seen that as well.

The other thing is, as we look at our advertising in the fourth quarter as compared to prior year, October is flat to slightly up on the spend, partly due to the election campaign, election ads that you're seeing and not being able to buy or even get time on. And so we have a bigger weighting in November and December, a bigger dollar spend in November and December on our advertising. Mary?

Mary Twinem

Yeah, I'll just go through the events I got the events; Sally covered some of them. But you're right, from an NFL games, we did have four more Thursday games in October, which would be an up for us. On the UFC side, we had equal games -- or equal pay per view events in this year and last year in October.

Sally mentioned the NHL. There are some market setback matters and then so we're two-and-a-half weeks of missed games in October. And then from the MLB, last year Milwaukee was in the National League Championship games. Texas obviously was and then went on to win the World Series. Texas, being a big company market for us. This year, the four teams that were in the championship and then going on now to the World Series, they're all franchise markets. So that's really more of, I think, an explanation of why we're at 3.8 and they're at 5.6. I think you have some trade-off of sales there.

Some of a couple of other things that stood out for us in October, that had stood out for other concepts, we do see non-alcoholic beverages being down a bit. I think that's something that other people are seeing in the industry. One area in October where we were particularly strong last year was in the menu panel that we had that highlighted appetizers in our table-gate strategy. We found that our menu panel this year we don’t think is drawing as much sales, and so we are swapping that out and putting in a new menu panel for November. And we think that there's some benefit we'll see from that.

And then something that we noticed in the second quarter that we are addressing through some media here in the fourth quarter is that the unlimited wings program that we ran this summer, we ran from July to -- 4th of July until Labor Day, last year we ran at Memorial Day through Labor Day. We felt like that did a better job of building sales for the fall. And so we are doing some of our national radio being tagged with the [inaudible] as we go into November and December.

Larry Miller – RBC Capital Markets

And then just if you can give me a sense of the fourth quarter because the comparison is getting a lot tougher now, but you are going to be running some more price and you have some of these, you know, you're addressing some of these issues. I know you don't likely have comp guidance, but do you think we'll be seeing at least positive comps again? Because the two-year trend would imply that it wouldn't be positive.

Sally Smith

Yes. I think we firmly believe that we will see positive comps. I mean we're still -- we're positive in the four weeks into October. And again with the additional -- with the staff-weighted advertising spend in the fourth quarter, that should certainly drive, as well as the ability to tag the radio content. So we are anticipating positive comps.

Larry Miller – RBC Capital Markets

Okay. That's very helpful. Thanks a lot, guys. Appreciate it.

Operator

Thank you. And our next question comes from the line of David Dorfman from Morgan Stanley. Please go ahead.

David Dorfman – Morgan Stanley

Thank you. I just wanted to dig into the guidance for 2013 a little bit, maybe just a couple questions on it. One is, when you say 20%, is that more of a general restatement of how you think about the long-term guidance or is it really specific to your view of the dynamics next year? And then sort of building on that, when you think about the impact of the extra week, we're trying to actually get to a dollar number next year, what is the magnitude you see in the fourth quarter so we see what sort of base to build off? And then finally, if you can talk about your wing price assumptions. I know you've talked about trying to get the cost of sales lines below 31% again and even lower long term, and you have a lot of pricing now, so how do you see that playing out, and maybe some of the sensitivity of wing prices to your guidance. Thanks.

Sally Smith

Sure. As we look at the 20% number, I think it's both. I think it's both long-term aspirational but that we believe that we can achieve 20% given some of the programs that we've put in place this year. We don't know what the effect of the 53rd week will have yet this year. That's why we did put the caveat in there, 20% on a 52-week average, depending on how that 53rd week comes in.

We have a number of restaurant openings in the fourth quarter this year. We'll have about the same number of restaurants opening next year, but we've had a real conscious focus on pre-opening expenses, and we've seen that come down a little bit. One of the things that we did talk about in the third quarter -- or the second quarter conference call was working hard to get our new restaurant opening labor into line. Offsetting that of course will be the Guest Experience Captain. And we look at rolling those, that guest experience program, as very similar to the labor that we see in the new restaurant openings, so.

With regard to chicken wing prices, I think I'll let Mary talk about that.

:

Right. And chicken wing prices, our thoughts on that for next year is that we're going to continue to see it high in the first quarter. It's trending to 207 for the first two months of the fourth quarter and we think it's going to get higher than that as we go into Super Bowl. But then most industry reports are saying that there should be some moderation in the latter half of next year. So I think that we can get to the net earnings at a 20% in a variety of ways, but obviously a little bit of help on the cost of sales line makes it easier.

David Dorfman – Morgan Stanley

It would just seem to me that if that's your view, I don't know if that's your baseline view in the 20% number, but you should have a lot of upside to that, you know, to 20% of a 52-week basis, if you consider that you had -- it looks like you're trending something over 60% wing inflation this year and next year, if you assume -- I don't know if you're saying it may be flat, but you have some offsets in the cost of sales line. It just seemed like if you actually were able to achieve flat or even some leverage on that line, which it sounds like you may be shooting for, for the full year, whatever 20% turns to be, it could actually be well above that if that line cooperates. I mean, do you see that sort of upside or do you think it will actually be a struggle to get to 20%?

Sally Smith

Well, I think we'll have a much better insight into that when we get into the February call because obviously we'll know our results for our 2012 year. And I think what we were looking at for 2013 as moderate same-store sales increases in the 3%, 4%, 5% range versus what we saw last year. So I think again when we look at this, there is different sales ranges as well as different cost of sales assumptions that you can make and still get to an answer that looks like 20% is an achievable goal for 2013.

David Dorfman – Morgan Stanley

Okay. Thank you.

Operator

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

Jeff Farmer – Wells Fargo Thank you and good afternoon. I think a lot of us have heard this over the quarter, but could you just walk us through again how you actually got up to 6% pricing, what the major pricing actions were over the last couple of months to get you there?

Mary Twinem

Yeah, we took three different events in the third quarter. We took a menu price increase in July. We took another one in August that rolled a different market at a different timing, so there was not just a set point, August through September, that set regular menu pricing for our wings and our boneless wings higher. And then we also raised our Wing Tuesdays pricing from $0.50 to $0.60 at our company stores. And again that rolled at different times and different markets, many times timed at the point that that market was seeing the larger wing being delivered into their stores.

Jeff Farmer – Wells Fargo

Okay. So as of today you're at 6%, it's not that you're going to work your way up to 6% but you're at 6% right now.

Mary Twinem

We are, yes, starting at the beginning of fourth quarter we were at a 6% mark.

Jeff Farmer – Wells Fargo

And is it fair to assume that there is probably nothing else coming?

Mary Twinem

Nothing certainly planned. I mean Sally talked about the tests that we're doing that is more the flexible portion sizing on the wings. And so that's not so much a menu price increase as it is a different way to get the cost of sales piece under control. But that is a different look of a menu that some of our stores have and we're working through that test and we'll see what we can implement in 2013.

Sally Smith

I think the other thing is the rest of our commodity basket looks pretty flat as we go into 2013. I think Mary said we'd have an increase exclusive of wings of about 30%.

Mary Twinem

Thirty basis points.

Sally Smith

Thirty basis points, excuse me, with an offset of about 40 basis points from our new distribution contract.

Jeff Farmer – Wells Fargo

And then just going back to your test, I think earlier this summer in I think the Colorado markets, you were looking at the 5, 10, 15, 20 wing counts. It looks like consumers, for lack of a better word, rejected that fairly quickly. Does this sort of volume test look like it could be a little bit more of a keeper and look like it could have a little bit more legs?

Mary Twinem

Well, we tested -- when we tested the 5, 10, 15, 20, the feedback we got at that time was we would rather have six, charge us more. I think at that point we still didn't have the larger wings in our restaurants, so we were, at this point, six is really a big order. So we are looking at different points at which that same menu price would have five wings instead of six, or seven, depending on what the size is. So we think it's a more fair way, because we've had issues both ways, smaller wings in the past as well as bigger wings.

Jeff Farmer – Wells Fargo

Okay. And then just coming back to one of Bryan's earlier questions on unit productivity, it wasn't clear to me. So, as you get out to 2013, is there an opportunity for that new unit development tailwind to make a return, or is it sort of gone now, we think?

Conrad Lyon – B. Riley & Co.

Well, definitely fourth quarter we get some of it back. You have to x out the franchise acquisition piece that we have that will be affecting us here for the next quarters ahead. But first quarter, when we look at our pipeline of deals, we have we think about ten, maybe in the 15 range, that will open in the first quarter. So we're definitely more weighted the front of the year than we had been this year. So I think we have the potential to see that delta stick around for a while.

Jeff Farmer – Wells Fargo

Okay. But I guess more in terms of sort of just development in these higher penetrated markets that sort of give you those higher volumes, is the class of 2013, as it's constituted right now, look like that could be a higher volume class?

Sally Smith Yeah, they're still on the coast, so dense population. And I think as Mary said in answering Bryan's question, we're still north of an average in volume on new restaurant openings of 60,000. And as we look at the remainder of the fourth quarter, a lot of that development is still coming from the coast.

Jeff Farmer – Wells Fargo

Okay. And just one more. Obviously about half of your development for '12 is going to come it looks like in the Q4. So, just from that perspective, it sounds like you're pretty confident you can get those restaurants open, but also from a restaurant-level margin perspective, do you expect to see some pretty material headwinds associated with inefficiencies either in the fourth quarter or rolling into 1Q '13?

Mary Twinem

Well, new restaurant opening, new restaurants do tend to run a little higher on the labor side. I think what we have seen this year is that we've done a really nice job of bringing them back into line quicker, and so they do march that labor back down. So, from those stores, I think we could see a little bit of labor -- we have accounted for that in our conversation about the fourth quarter labor, saying that we think we'll be slightly up the prior year.

Jeff Farmer – Wells Fargo

All right. Thank you.

Operator

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

Jason West – Deutsche Bank

Yeah, thanks. I just want to come back to the same-store sales trend you guys saw in October. I guess it was surprising that it slowed that much given I think the NFL would have had the biggest impact of anything within the overall makeup at the top. So, was there any broader slowdown that you guys felt kind of took place through the quarter on the consumer side, if you saw it in September and then that kind of continued into October?

Mary Twinem

I think when I, you know, specifically you're talking about the Thursdays in October where we would think we would have big ups on the NFL games, a lot of those Thursdays also ended up being Texas Ranger game nights. So we were up on those days, just not up as much as we thought we would have been.

Jason West – Deutsche Bank

But is there any way to tease out if there was sort of a more underlying slowdown in traffic and sort of consumer spending kind of away from the schedule?

Sally Smith

Nothing that comes to mind. I think we did call out that beverage sale are flat or down, did not contribute to same-store sales. As I said -- as we said, we think the consumer is fine with the price increase as we've seen still many sales on wings, but nothing really -- I can't really call out anything. The menu insert that had more sharables last year really drove appetizers and sharables which had a higher price. The first six weeks of the football season with that menu panel probably wasn't as robust in suggesting sharables and appetizers. That is, we are changing that menus panel out, I think it happens in November.

Jason West – Deutsche Bank

Okay. And then you mentioned tagging lunch again in November/December. Is that going to be an unlimited wing promotion that you didn't do last year or you just mean sort of reminding people about lunch?

Mary Twinem

Yup, just reminding people about lunch. And then we do have co-op media that's being placed in the fourth quarter. There is conversation about accepting the message that goes from the co-op radio.

Jason West – Deutsche Bank

Okay. And then one other quick one on the inflation, you guys mentioned 30 basis points of non-wing inflation. Do you mean margin pressure there of 30 basis points or is that actually the percentage increase year over year that you're referring to?

Mary Twinem

It would be what we would think our cost of sales percentage would change on a year-over-year basis.

Jason West – Deutsche Bank

What would the actual inflation -- I think normally you talk about, Mary, sort of like whether it's low single digits, mid single digits, if you could put it in those terms for us.

Mary Twinem

Yeah, I don't, I don't have that in front of me. That's pretty -- I'm going to say 1.5% maybe, 1.5%, 2%.

Jason West – Deutsche Bank

Okay.

Sally Smith

Especially when you take out the breast meat.

Mary Twinem

The breast meat being flat year over year.

Jason West – Deutsche Bank

Okay. So, the very low single digits on everything else.

Mary Twinem

Yup.

Jason West – Deutsche Bank

Okay. Thank you.

Operator

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

David Tarantino – Robert W. Baird

Hi, good afternoon. First, a clarification on the October comp trend and perhaps, you know, maybe you don't have a frame of reference for this, but I was just curious to know if there's ever been in the recent history, months in the past where you've had flattish type advertising year over year and what you think the impact of maybe not having the growth in advertising that you're used to having might have had on the trend line here in October. And perhaps the answer to that might lead you to make a projection about what would happen if you start to resume healthy growth in November, December.

Mary Twinem

I don't know that we'll make a projection about what will happen with comp sales in November and December, but this is an election year, so we were proactive and not placing media -- I mean we have media, obviously you see it in football in October, but it's -- and it's up slightly over last year. Last year was probably a very high medium for October. We back-weighted it because of the election for November and December.

As we look at our comp, certainly media drives it, drives some of the same-store sales. More media doesn't hurt. So I would think that given this asset that media will be up significantly over prior year in November and December, that we should see that translate to sales.

David Tarantino – Robert W. Baird

Okay. And then maybe a follow up to that, if you think about the guidance you have for the year of 15% earnings growth, what type -- maybe I'd give it a shot of sort of what type of comp range might be required to hit that level as you think about Q4?

Mary Twinem

Right. Well, I think we could stay where we're at today, David, and we would still hit our 15% goal for this year.

David Tarantino – Robert W. Baird

Okay, that's helpful. And then I guess maybe back to a question that was asked on the cost of sales line for next year, Mary. I guess if you take the 30 basis points of pressure that you talked about, I assume that contemplates the pricing that you've already taken recently. Does that factor in any additional pricing that you might take as you move into next year, or the change in the way you sell the wings?

Mary Twinem

No, it doesn't. Yeah, and it also doesn't take in the savings that we'll have on the distribution contracts. I think our point was that when you take wings out of the equation, there isn't anything that we look at from a commodity standpoint that we think is going to be effective next year. We're going to be pretty flat other than wings. And if wings do what the industry reports say and go down later in the year, we'll actually see some upside on our cost of sales line, which is probably the opposite of what a lot of other people are talking about for next year.

David Tarantino – Robert W. Baird

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

Operator

Thank you. And our next question comes from the line of Brian Bittner from Oppenheimer. Please go ahead.

Brian Bittner – Oppenheimer Awesome, thanks. Hi, guys. Real quick, Mary, I'm sorry I have to correct you, the Rangers played in all seven World Series game while my Saint Louis Cardinals did win it all. We got knocked out last night, so, being the 2011 World Series Champions is the only thing keeping me from falling of the deep end today. So I just have to make sure that everyone knows that we won in --

Mary Twinem My apologies. Yeah, my apologies.

Brian Bittner – Oppenheimer

We won game seven.

Mary Twinem

Yes. Seven games is good though, in either case, whether it was you or Texas. Seven games would be great for this year as well.

Brian Bittner – Oppenheimer

And I think that is a good segue into my question, because, I'm sorry to keep -- everyone has been asking about this, but the comp trends. I mean with 6% year-over-year pricing, it just seems as though traffic has turned negative a couple of hundred basis points. And I guess the question is, is that not broad-based, is it really all because of the 37 company-owned stores in Texas? Is that really the primary reason for a negative 2% traffic trend?

Mary Twinem

I don't know that we can just point the Texas Rangers only for that. I mean obviously if we have a menu price increase, that's at a 6% level, and we have slightly under 4% from same-store sales, we would say that probably traffic, there has been some lost traffic. When you take all of the event stuff, I mean that does get a little complicated for us when we're in our peak sporting season, how did NHL matter per game, how much does it change, and who plays in games matter. At the end of the day, we really can't change any of that.

I think what we've focused on are the things that we can change for the future. So, looking at lunch trends which we think are not quite as vibrant as we'd like them to be, what can we do about that? And we think some media behind that is effective. Looking at the panel, the appetizers and the change that we've seen in our sales there, making a change on our LTO panel for November and seeing what we can push, working on the whole guest experience side of it. So as we roll out the guest experience captain, and we'll have 100 of those restaurants in place by the end of the year, we think there are incremental sales that come along with that. Otherwise, why put the effort behind it? So I think we're really focused on that piece of it.

From Sally's comments, which does hold us from, you know, are we getting guest feedback related to pricing? Do we see negative guest comments come in because of it? We don't. And we're not hearing that from our operators either. So we do think you just have to watch your hospitality really close, look at your media plans, making checklists where you need to, and stay focused on getting another guest in the door.

Brian Bittner – Oppenheimer

Okay. And can you just comment on -- just help us understand why we should be so confident about why the higher pricing isn't causing some type of push-off at all? I mean what's the commentary around pricing not causing any push-off? What's the analysis that kind of suggests that?

Sally Smith Well, I don't know that -- I would say that it's not driving traffic out of the restaurant. People -- the comp sales on -- or the sales on our wings exceed the price increase by a significant amount. Our operators and the managers in the stores are the first ones to raise their hand if they start hearing comments about pricing. And as we said, we rolled that wing pricing at various times through August and September, both the on-the-menu and the Wings Tuesdays. I think that the fact that we rolled over time and didn't hear pushback that related back from our guests through our managers gives us confidence that it wasn't and isn't price.

And then as we take a look at our guest comments and with the guest comment line, in the past -- this goes way back because we've only taken minimal price increases in the past. In the past, we would have heard about it.

Brian Bittner – Oppenheimer

Okay. And one last one, on 2013 -- and again I know this was asked earlier and I'm still a little bit confused. On the 2013 guidance, when we kind of put out our 2013 earnings estimates here, as far as that actual EPS number, 20%, I mean, how do we try to triangulate to that without knowing what the 53rd week impact is going to be on 2012?

Mary Twinem

Yeah, it does make your job harder, and we haven't given a specific estimate on that, because from a sales standpoint that does for us tend to be a pretty big week. And really until it happens we won't know what the total impact to the bottom line is. So I'm afraid on that piece you're going to have to make some guesstimates on what you think are full year, you know, we've said the full year ought to be up 15% in growth. You're going to have to make some guesstimate on how much that is attributable for the 53rd week.

Brian Bittner – Oppenheimer

Okay. And then I'll just sneak in one last one, did you guys provide an assumed comp for next year? Because I know that you have, at least in the first quarter, some very tough comparisons. So I'm just trying to gauge what type of comp you're expecting to get there.

Mary Twinem

Yeah. You know, just from a basic numbers on how to get to the 20% net earnings growth, I think you can take some moderate low digit same-store sales and get an answer that says 20% on the bottom.

Brian Bittner – Oppenheimer

Got it. Okay, thank you. Go Cardinals.

Operator

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

Will Slabaugh – Stephens, Inc.

Yeah, thanks. Wondering if you could just talk a little bit more about the testing of the flexible portions in the 60 restaurants that you mentioned. And then any sort of commentary around the cost of goods sold benefit that you may have seen in those restaurants?

Sally Smith

Yeah, I don't know that we can break out the cost of sales what we've seen in the 60 restaurants. But part of the testing it is certainly the guest feedback on their perception of the [non-quantity] and training our team members to talk about how many a snack is serving today. Our goal of certainly this test is to see, do we need to -- we've got a pretty wide grid as to, okay, so at this ounce, it should be six wings per snack order, and not, of course -- and wanting to really kind of stay at that, or do we take a look at the per the number of ounces in the, you know, trying to target an ounce amount each day. So I don't know that we -- our goal, as we said, is to recoup some of the loss margin and cost to sales by moving to this flexible portions.

Will Slabaugh – Stephens, Inc.

But at least safe to say, without getting in too much detail there, that you're seeing some of the benefit there as you implement that in the testing phase?

Mary Twinem

Well, we just -- it just rolled, so we have a couple of weeks on it. So, from a guest feedback standpoint on the sales side, we have just some initial comments. But we haven't done the full piece on that. And then we have both company and franchise restaurants testing it, and we have different weight points at which the decision to put either five or six or seven into order happens. So we are testing variations on that as well to see if there's a different consumer perception. It's really going to take us through the end of the fourth quarter to get a feel for trends, because you have to have multiple visits for somebody to really understand how it's going to affect their behavior.

Will Slabaugh – Stephens, Inc.

Got you. Fair enough. And then I wanted to ask you, I think you were asked a little bit earlier about pricing to next year. I just wanted to get your willingness on continuing to hold that relatively high pricing through 2013. I know you have some rolling off beginning at the first of next year. But just kind of talking about how you expect that pricing to trend next year, assuming wings were to stay where they are, and then if we were to have inflation, if you would become sort of holding pricing in, in that sort of mid-single type range?

Mary Twinem

Yeah, I mean I don't think we've come to the point to make any pricing decisions for 2013. Obviously the test we have on the flexible portion may play into whether or not we take additional price increases where wings go in the first quarter and whether we think there is going to be any falloff from that will affect our decision as well. So I don't think at this point we can give you accurate guidance on what we think menu pricing will be for next year.

Will Slabaugh – Stephens, Inc.

Got you. Thank you.

Operator

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

Jeffrey Bernstein – Barclays Capital

Thank you. Just a couple of follow-up questions. One, just on that flexible portions that you were just discussing, I'm just wondering, I heard you said 60 units have it now. It sounds like you said the system would get it in the first half of '13. I just want to make sure it's not dependent on success or failure with this test. It sounds like you feel confident enough that this is being rolled out in the first half of '13 across the system or is there -- is it dependent on the test and therefore it might not happen if you see enough pushback or what not?

Sally Smith

No. I think we are committed to the flexible portion. What we want to make sure is that we train it correctly, and that means in the heart of the house and the front of the house. So, the cook time, do you weigh the wings once a day, twice a day, are you shooting for, let's say, a number of ounces in a portion versus the -- what you ultimately are, but we have a pretty wide range that the stores can use in determining if it should be five, six or seven in the snack. But no, we are committed to rolling this out system-wide. And we just want to make sure we do it the right way. And part of that involves guest research and listening to our guests, training that today a snack served six or today a snack is seven, today a snack is five. I think letting that guest know ahead of time is important so they have expectations of what they're going to get.

Jeffrey Bernstein – Barclays Capital

Got you. Okay. But there's no sensitivity in terms of how much traffic you're willing to lose if you found that it was losing some traffic because of it? It sounds like it's a go regardless.

Sally Smith

I think it's a go regardless, and I don't think we're going to get pushed back on it from our guests.

Jeffrey Bernstein – Barclays Capital

Great. Okay. And then just on the unit side of things, I know you gave us some color on the 2013. I'm just wondering if you could talk a little bit about, well, '13 and beyond. One, just on the constraints that face the growth, I don’t know if it was related to people, real estate. I mean it sounds like you raised your target to 1,700. I'm just wondering what the constraints are, if anything. And perhaps what you envision in terms of the company-operated versus franchise mix. Obviously there's been some acquisitions recently. So, is there some sort of a target, or where would you like to end up a year or two from now?

Sally Smith

Yeah, I guess I have to go out beyond a year or two when we talk about the percentage of company versus franchise. We're north of 40% and I think anywhere between 40% and 50% on the company side. Again it has to make sense for us strategically to purchase franchise locations. We have other franchisees that we'd like to also purchase some of those locations. And so I think if we're shooting for 50%, that's a longer range number.

When we talk about ramping up growth, I think opening 100 restaurants is pretty robust growth. Obviously that percent of unit -- the unit growth ends up declining over time because you've got a bigger denominator. I don't know that we want to take on additional headcount, whether it be in real estate or training, and all the things that support your development pipeline just to get an additional 10 units in a year. Right now we're pretty comfortable with that 100 units a year. It makes sense for us. And I think as importantly as the number of units is how you drive average unit volumes in the restaurants both in existing restaurants. I mean we've had success in the average unit volumes in some of the new openings, but now let's go back and make sure we're driving average unit volumes in the stores that have been opened for a year or 30 years.

Jeffrey Bernstein – Barclays Capital

Got it. And then just my last question relates to kind of reiterating what people were talking about with the 53rd week, obviously you're not giving specific color, although there must be some range that you have to come up with that 15%. But is it reasonable to extrapolate, you know, it would seem easy enough to extrapolate the 2006 impact which I know you guys quantified, which would push it to north of, I mean you talk about $0.20, $0.25 of earnings. I mean is it not reasonable to assume a similar level of lift kind of on a percentage basis versus where it was in '06? Any reason why that wouldn't work?

Mary Twinem

Yeah, I think just we're a different company than we were back in 2006. And based on our size and -- yeah, I would say that it would be -- I wouldn't necessarily have that as a proxy for what the amount would be for this year.

Jeffrey Bernstein – Barclays Capital

So you don't necessarily want to share what's in the 15%.

Mary Twinem

No -- yeah, we don't. We're going to, you know, it really depends on what kind of revenue ends up coming in. We have shared that from a expense standpoint, occupancy, depreciation doesn't have any extra expense for the 53rd week. A lot of our G&A does, because it's mostly head counts and we do pay people for that extra week. So, you don't get leverage down there. There will be some at the operating expense level -audio gap- restaurants, but really until the week happens it's hard to know how different that week, that holiday kind of week timing acts to a normal week. So I think it's even hard for us to estimate internally how big the week will be.

Sally Smith

I think the other thing to point out is we have, as I mentioned, we have two additional franchise acquisitions totaling we could acquire up to nine additional stores between now and the end of the year. If that happens in the last week of December, we're going to have some expenses related to that as we get the team down there for the transition.

As we looked at revenue in the third quarter, we did anticipate in the third quarter closing on the acquisition that we made that actually ended up happening on the first day of the fourth quarter we thought that would happen closer to the beginning of September. The deals all take time. It's not that we don't want to quantify that 53rd week, but I think there is still just a number of unknowns that we don't have in order to give any kind of guidance that would be reliable.

Jeffrey Bernstein – Barclays Capital

Understood. We'll have to do some analysis. Thank you.

Operator

Thank you. And our next question comes from the line of Matthew DiFrisco from Lazard Capital. Please go ahead.

Matthew DiFrisco – Lazard Capital

Thank you. I apologize but I'm going to try and beat a dead horse from a different angle. I'm just looking at, as far as I know, a couple of other companies that have had this 53rd operating week not only affected the fourth quarter, it's also actually had an adverse effect to the first quarter of the next year. Looking at that sort of on a comparison basis, you're not going to have a -- the weeks leading up to New Year's eve, for instance, falling into your first quarter as you did this year in 2012. On a comparative basis, should -- I mean, I guess exposure. I would think that you'd want us to be a little cautious as far as some adverse -- a basket of adverse holiday shifts, not only the weather in 1213. It that sort of correct to characterize that?

Mary Twinem

Well, I think what -- when you look at the first quarter of next year what we'll have is one week left of NFL, regular season. So that is the -- 53rd week is week 17, I believe, is the season. So we will have one week left of NFL for our first quarter. And then, timing on March Madness actually is the same. So we do end up with two weeks of March Madness in our first quarter in both 2013 and in 2013. So that piece stays the same.

Some of the other stuff that you mentioned, New Year's eve is not a big night for us. Easter, typically the bigger -- biggest thing for us for Easter is whether it's within the March Madness, first two weeks of the tournament. Otherwise where other people have big sales on an Easter Sunday that isn't typically what happens on our, unless it's a basketball weekend.

Matthew DiFrisco – Lazard Capital

No, I'm thinking school vacations. And I was just thinking of the week leading up to New Year's. I know that New Year's isn't big, I'm just saying that the week leading up to it with the holidays.

Mary Twinem

Yeah, definitely. That typically is a big week for us. We have the big gift card -- retail gift card program that we're expanding this year. We had big redemptions right after Christmas. We would expect to have a big week with bowl games and NFL and the whole deal going on in the 53rd week. So yeah, that is a week what we will not have as our first week in our first quarter next year.

Matthew DiFrisco – Lazard Capital

Right. And then just as far as pricing, you're running 6% now and you did through all of October, correct?

Mary Twinem

Yes. Yes.

Matthew DiFrisco – Lazard Capital

And when is the first lap of a increase you took that's contributing to this 6%? Is it in the fourth quarter or the first quarter?

Mary Twinem

I believe it's in the first quarter.

Sally Smith

Yeah, I believe it's the first quarter as well. We had a -- I think we had a menu rollout in January last year.

Mary Twinem

Yeah, it was mid-January of last year. So there will be a piece that we'll roll off by February.

Matthew DiFrisco – Lazard Capital

And that's -- was that 1.8% -- I have down in my notes?

Mary Twinem

I think it's about -- yeah, it is about -- yeah, about 1.8.

Matthew DiFrisco – Lazard Capital

And then the $2.07 number for wing prices. I just want to understand that. Is that a current price that you're running now and you're buying on an average cost basis that you're sort of extending through the first two months of 1Q '12 -- 1Q '13?

Mary Twinem

The $2.07 is the average for October and November and the market has actually gone up since.

Matthew DiFrisco – Lazard Capital

So we should actually be even more conservative looking into 1Q?

Mary Twinem

Potentially. I mean you never know exactly what wings are going to do, but industry reports are saying that they think there will be higher prices into the first quarter and then some moderation for the second through the fourth quarter.

Matthew DiFrisco – Lazard Capital

Okay. And then two last questions, I promise. Just as far -- did you give any guidance on the increases that you're getting from these acquisitions or looking at them on an annualized basis increasing that they'll be towards your 2013?

Mary Twinem

We haven't, no. I would say that the stores that we bought in Wisconsin are about similar to what our average is for the stores that are in a more mature market and then some of the other stores that we have queued up to the remaining nine for this quarter are slightly higher than that. So the way that they would respond is from a cash flow stand point, would be pretty similar to our base.

Matthew DiFrisco – Lazard Capital

Okay. So they are accretive in contributing to both 2012 and 2013?

Mary Twinem

Yeah, you know we have a little bit of regional manager infrastructure that will go with them. We'll have a little bit of transition expense, not like the preopening that we have for new restaurant openings, but there will be a little bit of expense that goes along with making that transition to our stores, but they are cash flow positive and will act like our other stores do.

Matthew DiFrisco – Lazard Capital

Okay. So I'll just do the math and figure out the pending profit, I guess. And then looking at the COGS, as far as you've given in the past how much sometimes the selling in numbers, buying in ounces, how that is effected, rather than just doing the raw math of 19% of your costs are sold, going up 70%, you've also given us that basis point hit from the adverse behavior of buying in ounces and selling in units. Can you just tell us what that trend is right now? Or what it was in the current quarter?

Mary Twinem

Yeah --

Matthew DiFrisco – Lazard Capital

How much that hurt your business?

Mary Twinem

Yeah, I'll give you two -- well a couple of points. We were at $1.97 in the third quarter versus $1.16, so that would've been a 70% increase year-over-year, but with the size difference, we ended up being about 90% cost year-over-year and then the other point that helps some people is that some are cost of sales. The percent of that that is wing related in the third quarter is 28.2% and that compares to third quarter last year of 18.1%.

Matthew DiFrisco – Lazard Capital

Excellent. That is very helpful. Did the beverage mix also, given that your loss of percent of the Alcohol mix, did that also have an adverse effect in costs and should we set a trend that continues to go throughout October?

Mary Twinem

I think that's more of the effect that our menu price increases that we took in August were specifically wing and boneless wing related. So we went up from 20% to 21% on our wings, but we had a significant menu price increase that went along with that. So I think it's more a reflection of the menu price.

Matthew DiFrisco – Lazard Capital

That's good to know. So you're not seeing lower drinking occasions?

Mary Twinem

No. Yeah. Yeah. We didn't. I don't believe so. And our pricing is pretty static on that year-over-year.

Matthew DiFrisco – Lazard Capital

Okay. Well, you'll have some Texas Ranger fans and Cardinal fans drinking. So that will be good. Okay. Take care.

Operator

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

Chris O'Cull – KeyBanc Capital Markets

Thanks. Sally, based on the way the flexible menu is structured, is it reasonable to assume it would be neutral to the average check?

Sally Smith

Based on the, with the six wing versus the number?

Mary Twinem

It is based on the way that we're currently testing it. So we did leave the pricing for the smallest order, six wings in the past versus a snack, as we're calling it on the test menu. We did leave the menu pricing similar. In the future, you could make a menu price increase on that if you chose to. But the test is being done more from a cost of sales side, not from a menu price side.

Chris O'Cull – KeyBanc Capital Markets

So, right. So the average check, in terms of menu exchange and just the effect of price increase, you really shouldn't see an average check lift from this new menu.

Sally Smith

I don't believe so unless it changes people's buying habits for some reason. And again, we won't know that until we get the tests done.

Chris O'Cull – KeyBanc Capital Markets

Okay. And Mary, if you don't take any additional pricing in 2013, what would be the amount that the company stores would average just from the increases take this year that would roll into 2013?

Mary Twinem

Well it would start rolling off during the year, so we would start the year with the 6%. And then I think it was about 1.5 rolls off in the first quarter. And then you'd see that go down to zero, obviously, by the time you got to September.

Chris O'Cull – KeyBanc Capital Markets

Okay, okay. And then lastly, the increased gift card distribution that you're expecting this year. Is that because you've joined the Blackhawk Network or?

Mary Twinem

It is. Yes. We've been able to add the grocery piece to our distribution which we're really excited about. So it's about another 11,000 locations that we'll be in. We might be in there now. But definitely for the holidays.

Chris O'Cull – KeyBanc Capital Markets

Most of the redemptions typically occur in January? Or do you see quite a few now in December?

Mary Twinem

We will -- this year we'll have a few that will hit the 53rd week of December. Otherwise, like last year our fiscal December ended on Christmas week. So it was mostly a first quarter event. We quantified about 2% last year that was a lift in same-store sales in the first quarter. Heavier in January and February than in March. But we also saw additional sales in the third quarter --

Sally Smith

This year.

Mary Twinem

Yeah. Really coming from the Grads and Dads kind of time period. So we think it's just a nice uplift throughout the year. And obviously when we can increase by the kind of units that we're going increase this year for Holiday, we think it will be really helpful for the first quarter.

Chris O'Cull – KeyBanc Capital Markets

Great. Thanks, guys.

Operator

Thank you. And our next question comes from the line Nick Setyan with Wedbush Securities. Please go ahead.

Nick Setyan – Wedbush Securities

Hi. Thanks. Just -- you kind of mentioned that the tax rates were a little bit lower this year, or at least in October, than last year's. So can you maybe partial out what the transaction sort of impact was or transaction acceleration was versus, like mix?

Sally Smith

I think I have -- well, we couldn't quite hear you. Were you talking about tax rates?

Nick Setyan – Wedbush Securities

No, no. What I was saying was that the tax rates you guys mentioned in terms of the appetizers and the non-alcoholic beverages not being as high as they -- last October. Could you maybe partial out the mix versus the transaction acceleration that we've seen in October? So it's clearly not all transaction acceleration. Maybe you could -- what part of that was maybe mix?

Mary Twinem

No. Yeah, and I don't know that we can give you a great breakdown on that. I know last year in our third quarter skirts we did call out the increased appetizer sales that we had from our menu panel and this year when we were looking at the appetizer category particularly in October we didn't think that we were staying. We didn't see as good a trend as we did last year. And we had focused more on shareable appetizers that had a higher price point and we weren't seeing as many of those being sold this year. So we have adjusted for that with the November panel and so I think we're going to see that trend turn around. But I don't know that I can give you a specific as related to sales mix or sync sales component of that.

Nick Setyan – Wedbush Securities

Got it. Got it. And do we have sort of some timing expectation for the closure of these new franchise acquisitions in Q4?

Mary Twinem

We don't. Yeah, a lot of it for us depends on liquor license approval and that piece of the transaction isn't always timeable. The nine locations that we bought in Wisconsin we had thought we would be able to close on earlier in September and it didn't end up happening until the first day. It happened in September, but it was the first day of our fiscal October. So we do feel confident that these nine will get done before the end of the year because they're highly motivated with the fiscal cliff out there. So they will hit our operations sometime before the end of the year, but timing that is pretty hard to predict right now.

Nick Setyan – Wedbush Securities

Got it. And lastly, you guys mentioned some of the industry publications around wing cost. At least one of them hasn't really shown an increase in wing cost, going back all the way to July. So could you maybe sort of talk about the difference between what that's indicating and what you guys saw in Q4, which is Q3 -- the increase in price of the wings?

Mary Twinem

Yeah, I can't really account for that. I know there's some free publications out there that people use in order to try to get a gauge on where wing prices are headed for us. We have talked that ours is very specifically from a contract standpoint based on the [Ernerberry Industry] statistics. And I think you'd find that our trends on wings follow very closely to that.

Nick Setyan – Wedbush Securities

Okay. Thank you.

Operator

Thank you, and our next question comes from the line of Conrad Lyon from B. Riley & Company. Please go ahead.

Conrad Lyon – B. Riley & Co.

Hey, Mary and Sally. Hey, I'll be quick here. Just want to talk about the actual amount of protein added on the menu with the wings with the new price increase. I know you talked about taking up the price considerably so the traditional wings -- can you give an idea how much more protein was added or perhaps the yield per pound?

Mary Twinem

Oh, the different -- meaning the --

Conrad Lyon – B. Riley & Co.

I'm be more specific. For instance, the calorie count, at least in the market I'm in went up by about almost 50%. Does that necessarily mean that the wing size went up 50%, or the amount of protein?

Sally Smith

I -- actually I think it went up and again, now I'm -- we looked at this back in July, August. I think the -- thinking of that menu, the traditional wing was -- at the smaller size, was about 1.25 ounces and I think the calorie counts on the new -- on the jumbo wing is somewhere at the 2.25 ounces. But again that's just picking a number. So it did go up, and it could have gone up by about 50%.

Conrad Lyon – B. Riley & Co.

Got you. Let me ask it this way. Was the menu price increase intent to protect margins or be accretive?

Mary Twinem

Well the intent of us taking that August price menu price increase and then the Wing Tuesday price is that we were assuming that wing prices were going to stay high, that we were able to get our cost of sales back under 31%. And we were at 31.2% in the third quarter. Wings have gone up from an average since then and so I'm not sure if we're going to be successful at that at a $2.07 per pound price point. But that was really the initial intent, thinking that if wings would fall back down to $1.90 or $1.85 or something that was more normalized that we would get closer feedback to where 30% sort of cost of sales range.

Conrad Lyon – B. Riley & Co.

Got you, got you. Let me shift towards the boneless. They, at least again in this market, I mean experienced a nice increase too in price, but I think there the [inaudible] accounts did not. I just want to make sure, was there any change in the portion sizes with the --

Mary Twinem

No, or the way that that is related to stay the same.

Conrad Lyon – B. Riley & Co.

Got you, okay. Last question, also the time between July and August, if I remember correctly, those menu prints, ribs were taken off the menu. Any sense if that was a net positive tick for the month?

Mary Twinem

You know they were just a very sales volume item for us, so I think we think we can do ribs better in the future in some way and sales, I don't think were impacted one way or the other by taking it off.

Conrad Lyon – B. Riley & Co.

Got you, okay. Thank you.

Operator

Thank you. And our next question comes from the line Peter Saleh from Telsey Advisory Group. Please go ahead.

Peter Saleh – Telsey Advisory Group

Great, thanks. So I guess my question is on the costs line. I know you had talked about getting back to that 29% to 30% range. Is there some timing on that? Do you still expect to get there by the first quarter of 2013?

Mary Twinem

Well, I think it's difficult if wings stay where they are to get back to a 29% to 30% cost of sales in the first quarter, but I think that that is a longer term average for us and so if you'll look at how you'll see wings prices reacting and other commodities as well and see what kind of menu pricing you can save. But for us to get back to the 29% to 30% in the first quarter would take either a significant drop in wing prices, which isn't what most people are predicting or a significant increase in menu prices, which I don't think we're willing to do.

Peter Saleh – Telsey Advisory Group

Okay. And then on the advertising side, can you quantify, I guess maybe how many less impressions you've had on the year-over-year basis in October versus last year?

Mary Twinem

We don't, and I'm sure that we've had a mix in the way that our media runs versus TV, radio, and interactive, so I can just talk from a dollar standpoint. It's very similar year-over-year in October and then we do have significant dollar spends in November and December.

Peter Saleh – Telsey Advisory Group

Do you know how much installation as the dollars were the same? Do you know how much inflation you were seeing in October in media?

Mary Twinem

I would say we're probably -- I don't know off hand, I would say we get more efficient in our media as we get bigger, because our buys are bigger and we're able to get more value for those buys, but I don't know if there is an underlying change in overall media costs on a year-over-year basis.

Peter Saleh – Telsey Advisory Group

Okay. And then on the holiday gift card, you said I think 11,000 locations. Is that incremental 11,000 locations? Or is that total of 11,000 locations?

Mary Twinem

No. That is incremental.

Peter Saleh – Telsey Advisory Group

That's the incremental. Okay. Great. Thank you very much.

Mary Twinem

You're welcome.

Operator

Thank you. And our next question comes from the line of Greg Mckinley from Dougherty & Company. Please go ahead.

Greg Mckinley – Dougherty & Co.

Yeah. Thank you. Just two quick follow-ups. The gift card distribution, what was the base off of, please? And then also, when all is said and done, what do you think your dollar expenditures for advertising will be up year-over-year in Q4? Thank you.

Sally Smith

The number of gift card outlets that we had last year was about 30,000.

Greg Mckinley – Dougherty & Co.

Okay.

Sally Smith

So we're adding 11,000, a little over 25%, the number of units. And the advertising spend year-over-year in the fourth quarter we don't typically give that. It's expensed throughout the year. And then we group those dollars together at 3% of sales.

Greg Mckinley – Dougherty & Co.

But you don't give the actual cash outlays?

Mary Twinem

We don't.

Greg Mckinley – Dougherty & Co.

Okay. Thank you.

Operator

Thank you. And our next question comes from the line of Mark Smith from Feltl & Company. Please go ahead.

Mark Smith – Feltl & Co.

Hi, guys. Real quick. How many franchise restaurants opened during this quarter?

Sally Smith

That we opened in the third quarter?

Mary Twinem

Third quarter?

Mark Smith – Feltl & Co.

Yes.

Sally Smith

We opened up seven.

Mark Smith – Feltl & Co. Seven, okay.

Sally Smith

And then one closed.

Mark Smith – Feltl & Co.

One closed, okay. Looking at kind of the openings for this year for franchisees and next year on franchisees, we're down that 45-plus, down from where franchisees had been opening in '09 through 2011. Is there anything to read into that, or are franchisees healthy and have an appetite to continue opening more restaurants?

Sally Smith

Yeah. Actually it's about the same as it's been in prior years. Again it just depends partly on timing. We've seen a slowdown in permitting, both at the company and the franchise, and the fact that we have nearly 900 restaurants, the number of locations that they have to select from, whether we're holding some for corporate development or in their own market is less. We have gone through and looked at smaller towns and introduced that to franchisees at regional meetings throughout September and October. They're very excited about that. But no, we have franchisees, as I mentioned earlier, that want to acquire other franchisees and are looking to develop any areas they can.

Mark Smith – Feltl & Co.

One more question. On the 6% price increase here through October, how much have you taken off alcohol?

Mary Twinem

We've taken very little price increase on alcohol. The increases that we put in, in July and August, none of that had an alcohol increase on it.

Mark Smith – Feltl & Co.

And I think you said earlier that that may be part of the reason that went from 22% to 21% of the mix of sales here in the quarter. Is there an opportunity to get more aggressive on pricing at the bar?

Mary Twinem

We are reviewing our pricing strategy for alcohol for 2013 right now because typically at the end of the year some of the bigger producers do put through price increases on their craft beer. And so we're looking at how we do our pricing to account for that as well as how do we have a value strategy in our beer and how do we more effectively market and promote on our craft beer selection.

Mark Smith – Feltl & Co.

Great. Thank you.

Operator

Thank you. And at this time, I would like to turn the conference back over to management for closing comments.

Sally Smith

Okay. I would like to thank everyone again for dialing in to our third quarter conference call for 2012. We look forward to sharing our year end results with you in February of 2013. Again, thanks for calling in.

Operator

Ladies and gentlemen, this does conclude our conference for today. We thank you all for your participation. And at this time, you may now disconnect.

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