Annual Report Project: Buffalo Wild Wingsd2oqb2vjj999su.cloudfront.net/users/000/064/102/766/...Annual Report Project: Buffalo Wild Wings 2011 2 | P a g e Key Facts of the Company

Annual Report Project: Buffalo Wild Wings

December 8

2011 By Vesselin Dotkov, Adam Dykstra, and Kay Chen Phase 4 & 5

Annual Report Project: Buffalo Wild Wings 2011

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Buffalo Wild Wings Grill and Bar Inc., a medium-sized publicly held company is one of the

fastest growing full service restaurant chains in the country. The project group has

selected Buffalo Wild Wings as our research company and thoroughly studied and

reviewed the company’s most recent( fiscal year 2010) annual report.

In our research paper, we have gathered key operational, managerial, and financial

information on the company; conducted financial ratio analysis and assessed the

company’s profitability, financial flexibility, earnings quality and the investment potential.

The History and Development of BWLD

(Answers question#1)

Buffalo Wild Wings Grill and Bar Inc., also known as BW3 to its patrons, was founded in

1981 by Jim Disbrow and Scott Lowery.i The restaurant was originally opened as a wing

joint in Columbus, Ohio to serve authentic Buffalo-style chicken wings. Throughout the

years, the business has successfully evolved from a wing joint into a family- oriented

restaurant and sports bar featuring a full menu from appetizers to salad, burgers,

sandwiches and variety of specialty items.

To further grow its business, in 1999, the company rolled out its franchising program

and only few years after the company franchised its business, it completed an initial public

offering and became a publicly held company in 2003.ii As of the end of 2010, the Buffalo

Wild Wings has 732 company-owned and franchised restaurants in 44 states. iii

Food service industry is a highly competitive industry. Since its inception, BWLD has

well positioned itself for continued business expansion and growth even under the current

economic downturn. It is one of the Top 10 fastest-growing restaurant chains in the

country.iv On Wednesday, November 16, 2011, Buffalo Wild Wings announced that it plans

to buy 15 restaurants in Ohio and South Carolina from a franchisee group. The acquisition

is viewed as a deployment of the company’s growth strategy—having 1,000 Buffalo Wild

Wings restaurants in North American by 2013. v With the steady growth in domestic

market, the company has started its expansion into the international market. In 2010, BW3

announced an expansion into Canada with the goal of opening 50 units over the next 5

years. vi

At the end of the fiscal year ending December 26, 2010, Buffalo Wild Wings reported

$380 million in total assets and $613 million in total revenue. vii


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Key Facts of the Company

(Answers question#4, 5, and 7)

Buffalo Wild Wings is headquartered in Minneapolis, Minnesota. It is an established

restaurant chain and franchisor of restaurants featuring a variety of boldly-flavored and

unique menu items including its famous Buffalo, New-York style chick wings, popcorn

shrimp, specialty hamburgers and sandwiches, wraps, soft tacos and salads. To appeal to

sports fan, the restaurant also features a full bar with wide selection of domestic and

imported beers, wine and liquor.

Sally J. Smith has been the Chief Executive Officer for the company since July 1996. Ms.

Smith was a licensed CPA and worked at the KPMG LLP, a “Big Four” accounting firm in the

early years of her career. She then joined Dahlberg, Inc and served as Chief Financial

Officer from 1983 to 1994. viii

Mary J. Twinem has served as the Chief Financial Officer for Buffalo Wild Wings since July

1996. Ms. Twinem started her career in the public accounting and was a licensed CPA.

Prior to join the company, she was the director of Finance/Controller of Dahlberg, Inc. ix

James M. Darmin has served as the Chairman of the Board of Directors since February

2008. Mr. Darmin had held key positions in Best Buy’s Enterprise Design Group, Howard

Sant Partnerships (a London architectural firm), and Harvey Nicols (a London based luxury

retailer). x

Buffalo Wild Wing’s annual shareholder meeting is historically held in May. Its most

recent annual meeting was held at the Marriott Minneapolis West on May 4, 2011. xi

Company in the News


Due to its most recent 3rd quarter strong earnings, the company has drawn lots of media

attention. Recently, the Nation’s Restaurant News has interviewed Jim Schmidt, the Chief

Operation Officer of Buffalo Wild Wings. Below is a summary of the interview.

The Minneapolis based Buffalo Wild Wings has grown aggressively its locations in the

States and even expanded internationally with a couple of locations in Canada. The chain

announced its 500th location in October this year, which is an important milestone. The

company targets the sports and casual dining market and tries to expand its franchises and

own locations based on geography and logistics, however the company avoids opening own

locations where they already have a franchisee operating.


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The Buffalo Wild Wings is part of the 800 locations portfolio that the company owns.

The brand strategy is to open 1,400 locations in the United States, and the plan for this year

is a mix of 55 owned locations and 60 franchised restaurants. The strong growth has

allowed future franchisee to secure their own capital for expansion without the assistance

of the franchisor in most cases even in a sluggish economy with limited financing options

for new businesses. This is evidence of the strength of the franchisee operators and the

brand as Chief Operation Officer, Jim Schmidt pointed out. The company prefers to sign

franchisees that will operate multiple locations in certain markers, not single store

business owners. The next potential markets for owned location expansion are California,

Seattle, and Philadelphia. The plan for this year calls for 13 percent year-over-year location

growth, with which the company feels comfortable and has no plans of slowing down.

Please refer to Appendix A for a copy of the interview.

Annual Report and SEC Filings

(Answers question#2, 3, 6, 9, 10, and 16)

Investors can easily access and download the company’s past and the most recent annual

report and various SEC filings including 10-K, 10-Q and 8-K through company’s official

website at http://www.buffalowildwings.com/. If you desire a hard copy of the company’s

financial report, you can submit the request via E-form provided in the Investor Relationship

section of the company’s website.

Buffalo Wild Wings utilizes a 52 or 53-week accounting period that ends on the last

Sunday in December. Its 2010 fiscal year end falls on the December 26, 2010. The company

filed 2010 10-K with the Securities and Exchange Committees (SEC) on February 28th, 2011.

The filing was on time and there was no amendment filing for fiscal year 2010.

Buffalo Wild Wings adopts the SEC 10-K filing as its annual report. It does not provide a

separate annual report to its investors. Management Discussion and Analysis (MD & A) is

an important part of the company’s annual report. It offers investors an informed insight

on significant events, trends or uncertainties regarding a company’s operation, liquidity,

and capital resources. Buffalo Wild Wings’ MD & A section follows the general guideline

and provides the management view on company’s operational results and financial

positions.

Sarbanes-Oxley Act of 2002 requires the publicly held company to include the

certification statement to its annual report. Buffalo Wild Wings complied with this

requirement and included certification statement (exhibits 31.1 and 31.2) to its 10-K. It is

signed off by Sally J. Smith, CEO and President, Mary J. Twinem, EVP and CFO. They are

certifying that they have read the 10-K, that the 10-K is not misleading or containing

http://www.buffalowildwings.com/


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untruths, that the financial statements fairly present the financial condition and results of

operations, that they are responsible for establishing and maintaining disclosure

procedures and internal controls, and that they have disclosed any significant deficiencies

and any fraud.

The company filed one 8-K form (on October 19, 2011) with the SEC in the last three

months. The filing is to inform the general public and the SEC on it most recent press

release announcing its 3rd quarter financial results.

Compensation of Executive Officers

(Answers question#11 and 12)

Buffalo Wild Wings ‘compensation package for its executive officers includes three main

elements: 1) Base salary; 2) Annual cash incentive program; and 3) Equity incentive

program. Each compensation component is directly linked to the company’s overall

performance measured by specific targets and objectives set each year for company’s

revenue, unit growth, net income, same store sales and the three year cumulative net

income growth.

For 2010, Sally J. Smith, CEO of BWLD, received a total compensation of approximately

$1.8 million including $560,000 base salary, $328,104 cash incentive, and $1,008,000

worth of restricted stocks and stock options; Mary J. Twine, CFO of BW3, received a total

compensation of approximately $1 million including $360,000 base salary, $182,404 cash

incentive, and $540,000 worth of company’s restricted stocks and stock options.xii

Pay-for-performance is one of the key guiding principles adopted by BW3 for executive

compensation. Each year, the Compensation Committee recommends CEO’s compensation

based on the specific performance measurement on company’s key operational results. As

disclosed in its 2010 Proxy Statement, the company achieved 96.1% of its revenue target,

failed to achieve its same store sales target, achieved 105.7% of its net income target, and

was 7 short of its company-owned restaurant openings target. Based on these

performance results, the annual incentive program for executive officers was 65% of the

target amount. xiii Therefore, there is clear correlation between the company’s

performance and the compensation of CEO.

Independent Auditors

(Answers question#13, 14, and 15)

To ensure the financial statements of the publicly traded companies fairly representing the

financial position, the results of operations and cash flows and in conformity with GAAP,

Auditor’s Report prepared and issued by an independent auditing firm is an integral part of


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a company’s annual report. Based on the auditors’ examination on a company’s financial

statements and the internal control procedures, auditors will conclude their report with an

opinion.

KPMG LLP is the independent auditing firm for Buffalo Wild Wings. It has issued an

unqualified opinion on the company’s presentation of the financial statements and

concluded that the efficient internal control is in place over the financial reporting for the

fiscal year ending 2010. The company did not change its auditing firm from 2009.

Consolidated Statements of Earnings

(Answers question#17, 18, 19, 20 and 32)

Buffalo Wild Wings’ income statement provided operating data for the last three years

(2008 -2010) using a single step format. Its net income has grown 57% over the past three

years, from 2008’s $24,435,000 to 2010’s $38,400,000.xiv The company did not incur any

restructuring charges and did not report any extraordinary item nor discontinued

operations for the past three years.

BWLD adopts different revenue recognition method between the company owned

restaurants and its franchise operations. Sales from company owned restaurants are

recognized at the point of delivery of meals and services. Whereas, the franchise fee

revenue is not recognized until all material obligations and initial services have been

performed by the company. Royalties are accrued as earned and are calculated each period

based on the restaurant sales.

FASB ASC 220 requires that a company keeps a running total for net income and other

comprehensive income. Buffalo Wild Wings complied with this requirement by reporting

both of the net earnings and the total comprehensive income in the Statement of

Stockholders’ Equity.

Consolidated Balance Sheets

(Answers question#17,23,24,25,26,27,28,29,30,31,33,34 and 35)

Buffalo Wild Wings’ balance sheets present a snapshot of the company’s financial positions

for the past two years (2009 and 2010). Current assets were reported at $134,204,000 for

the fiscal year 2010 which makes up 35.28% of the total assets. Marketable securities is

the current asset with the largest balance of$56 million. Accounts receivable amounted at

$9,033,000 at the end of 2010 and represented 6.7% of current assets. Buffalo Wild Wings

estimated $25,000 bad debts (about 2.3% of accounts receivable) that was expensed

during the year. xv


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Buffalo Wild Wings’ noncurrent assets consist of property, plant, and equipment,

goodwill and other assets. The net book value of the property, plant and equipment is

$224,970,000. The company reviews property and equipment along with other long-lived

assets for impairment on the quarterly basis. For 2010, there was no operating assets

impairment but a $2 million loss on “Asset Disposals and Impairment” was reported on the

income statement. As it is disclosed in note 12 page 57, the $2 million loss was caused by

store closing and miscellaneous assets write off. $11,246,000 of goodwill is reported for

both 2010 and 2009.xvi There is no other intangible asset reported on the company’s

balance sheet.

The company did not disclose any subsequent event, contingent liabilities or prior period

adjustments as result of accounting error in its most recent 10-K filing.

Consolidated Statements of Cash Flows


Buffalo Wild Wings adopted indirect method to report its cash flow from operating

activities. In 2010, the business generated positive cash flow of $89 million from its

operating activities. Buffalo Wild Wings’ strong cash generating capabilities enables the

firm to not only fund its day to day operations but also to finance the business expansion

without heavy borrowing. In addition to reinvest the fund back into the business, the

company takes advantages of its cash surplus and invests heavily into the marketable

securities. For fiscal year 2010, the major source of cash outflows is the purchasing of

marketable securities at $99,165,000 and the major source of cash inflows is the proceeds

of marketable securities at $87,338,000. xvii

Company Stock performance

(Answers question#36, 37, 38, 39, 40 and 41)

Buffalo Wild Wings became a publicly traded company in 2003. Its stock is traded on

NasdaqGS with the ticker symbol, BWLD. As it is illustrated in the company’s 10-K, the

cumulative return for the past five years on investing in the company’s stock outperforms

the return of the Nasdaq Composite and the S&P 600 Restaurants by 53% and 62%

respectively. The closing stock price was $40.27 on 12/31/2009, $43.85 on 12/31/2010

and $66.22 on 10/31/2011.xviii In the last two years, the lowest closing price of the stock

was $35.25 on 7/6/2010 and the highest closing price of the stock was $69.31 on

7/19/2011. xix The overall trend in the stock price in the last year has been upward with a

few sharp drops that were received in a short period of time. Buffalo Wind Wings is a

growth company and has never declared or paid cash dividends on its common stock.


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Industry Outlook


Given the current uncertainty in the domestic and international economic and political

climates, the observers for the food service industry have different views on the industry

outlook. According to the National Restaurant Association, the industry outlook is good.

They are expecting record sales for year 2011 and positive growth for the first time in the

next three years. xx Most industry observer predicts that 2012 will mark another year for

the food service industry to find a path towards real growth. The performance will vary

widely depending on geographic location and the market segment.xxi

Buffalo Wild wings is not an industry leader in most measures, mainly due to its size.

But the institutional investors have been purchasing large amount of BWLD shares over the

last 6 months based on its strong balance sheet and earnings quality. The company is one

of the Top 10 fastest-growing restaurant chains in the country and it is well positioned to

continue with its business expansion both domestically and internationally.

Financial Ratio Comparison


Financial ratio analysis is critical in assisting investors and creditors to assess a company’s

profitability, liquidity, and long-term solvency. It also allows the analysts to compare the

company’s operating results with that of the industry and its competitors. The following

chart presented Buffalo Wild Wings’ key financial ratios for year 2010 and 2009 and its

comparison to the ratios of Brinker International Restaurants:

Ratio BW3-2010 BW3-2009 Brinker Intl-2010 Brinker Intl-2009

Current ratio 1.7 1.5 1.1 0.9

Quick ratio 1.1 1.0 0.9 0.5

Debt/asset ratio 0.33 0.32 0.61 0.67

Return on S/H equity

0.17 0.16 0.15 0.13

Return on assets 0.10 0.10 0.05 0.05

P/E ratio 21.2 23.69 n/a n/a

EPS 2.11 1.70 n/a n/a


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A/R turnover 67.89 56.72 n/a n/a

Inventory Turnover

116.2 119.4 75.9 84.7

Book Value per Share

14.1 11.65 n/a n/a

Common Sized Financial Statements


To further assist the analysis on Buffalo Wild Wings’ financial performance, we have

prepared the common sized balance sheet and the income statement for the last two years

which will allow easy analysis between companies or between time periods of a company.

Balance Sheet

Balance Sheet as of: Dec-31-2010 Dec-31-2009

USD USD

Assets

Cash 4.0% 3.1%

Short-Term Investments 14.9% 14.1%

Cash & Short-Term Investments 19.0% 17.2%

Trade Receivables 0.3% 0.7%

Income Tax Refund 1.7% 0.6%

Other Receivables 2.1% 2.4%

Total Receivables 4.0% 3.7%

Total Inventories 1.1% 1.2%

Prepaid Expenses 0.9% 1.0%

Other Current Assets 10.3% 8.8%

Other Current Assets, Total 11.2% 9.8%

Total Current Assets 35.3% 31.9%

Gross Property, Plant & Equipment 94.2% 96.4%

Accumulated Depreciation & Amort. (35.1%) (35.1%)

Net Property, Plant & Equipment 59.1% 61.4%


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Total Intangible Assets 4.6% 5.8%

Other Assets, Total 1.0% 1.0%

Total Assets 100.0% 100.0%

Liabilities

Accounts Payable 4.6% 4.3%

Accrued Expenses 6.6% 8.4%

Other Current Liabilities 9.6% 8.8%

Other Current Liabilities, Total 16.2% 17.2%

Total Current Liabilities 20.8% 21.6%

Deferred Taxes & Investment Tax Credit 6.5% 4.8%

Other Liabilities 5.2% 5.7%

Total Liabilities 32.5% 32.1%

Common Stock 26.9% 30.4%

Retained Earnings 40.6% 37.5%

Total Common Equity 67.5% 67.9%

Total Equity 67.5% 67.9%

Total Liabilities and Equity 100.0% 100.0%

Income Statement

For the Fiscal Period Ending 12 months

Dec-31-2010 12 months

Dec-31-2009

USD USD

Total Revenue 100.0% 100.0%

Cost of Goods Sold 73.9% 74.8%

Gross Profit 26.1% 25.2%

Selling General & Admin. Exp. 10.5% 11.0%

Depreciation and Amortization 6.4% 6.1%


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Operating Income 9.2% 8.2%

Other Non-Operating Inc. (Exp.) 0.1% 0.2%

Pretax Income 9.3% 8.4%

Income Taxes 3.0% 2.7%

Net Income 6.3% 5.7%

The Importance of Financial Statements


The financial statements and related footnotes help external users to assess a company’s

profitability, earning’s quality, financial flexibility and ultimately the investment potential.

The income statement and its related notes provide the critical information on a

business’s profit-generating activities. Potential investors and analysts can predict a

company’s future profitability and assess the earning’s quality by utilizing information

provided on the income statement and the information disclosed in the related notes. After

studying BLWD’s income statement and its related notes, the project group was able to

assess Buffalo Wild Wings revenue recognition method and its earnings quality by

separating any earnings in transitory nature from permanent earnings.

The statement of cash flows reports information about the cash receipts and cash

disbursement of an enterprise that occurred during a period. It summarizes the operating,

investing and financing activities that occurred during the reporting period. In assessing

Buffalo Wild Wings’ financial flexibility and profitability, we utilized the following

information from the cash flow statement-- positive cash flows provided by the operating

activities and major cash inflows and outflows in 2010.

The balance sheet summarizes a company’s financial position on a particular date. It

describes a company’s resources available for generating future cash flows. Balance sheet

has significant value in helping investors to evaluate a business’s financial flexibility. In

assessing Buffalo Wild Wings’ financial flexibility, the project group reviewed the

company’s balance sheet in the past two years to determine its capital structure, the ability

to pay its current obligations, its debt to equity ratio, and its easiness to assess extra

funding or financing.

Lastly, the statement of stockholder’s equity reveals the company’s market capitalization,

its accumulated earnings and other comprehensive income items. The project team utilizes


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the data presented in Buffalo Wind Wings ‘stockholder’s equity to further evaluate the

company’s capital structure , the rate of return to shareholders and its investment potential.

Profitability

Profitability is one of the key measures to evaluate a business’s operational efficiency and

to predict a business’s future cash –generating ability. Various profitability ratios attempt

to measure a company’s ability to earn an adequate return on sales or resources devoted to

operations. In this section, we will look closely at Buffalo Wild Wings’ key activity ratios

and profitability ratios to assess its asset utilization efficiency and its ability to withstand

volatility in expenses and revenues.

Buffalo Wild Wings’ gross profit margin is 27.3 percent, which is above the industry

average of 20 percent.xxii The ratio measures the relative profitability of firm’s sales after

the cost of sales has been deducted, therefore showing how effectively BWL’s management

is dealing with pricing and the control of its main inventory chicken wings. Management

has benefitted from cheaper wing prices, which are running well below that of the prior

year at $1.14 per pound versus $1.49 per pound a year ago.xxiii

The favorable food prices will help boost the company’s revenue. BWLD’s 3-year average

revenue growth rate of 23% far exceeds the industry average of -2.6%. Furthermore,

management made small price increases 2.4% and 1.9% in Q1 and Q2, respectively to the

menu to offset increases in other input costs (non-chicken wings) and protect margins. xxiv

The net profit margin measures how profitable a company’s sales are after all expenses,

including taxes and interest have been subtracted. BWLD’s net profit margin is 6.5%,

which is below the industry average of 10.2 percent and is interpreted to mean that the

company is earning 3.7 percent less on each dollar of sales than the average firm in the

industry. xxv This percentage indicates that BWLD may have difficulty controlling costs of

new store openings and the additional management’s stock-based compensation, which

has led to the rise in G&A expenses.xxvi

BWLD return on stockholder’s equity ratio is 17.20, which is below the industry average

of 27.6 percent. xxvii The lower ROE is partly caused by the company’s conservative

approach on utilizing financial leverage. BWLD’s debt to equity ratio is 0.48 which is

significantly lower than the industry average of 3.0. xxviii The firm’s lower profit margins

result in profitability ratios inferior to the industry.

The company is fairly efficient in utilizing operating assets to generate revenue. Its asset

turnover ratio of 1.78, and accounts receivable turnover ratio of 66.17 all outperforms the

ratio of its competitor, Brinker Intl, at 1.5, and 60.4 respectively.xxix


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Financial Flexibility

Financial flexibility is an enterprise’s ability to alter cash flows in order to take advantage

of unexpected investment opportunities and needs. As a general rule, the higher the

percentage of a company’s liabilities, the more difficult it will be for the business to access

additional funds in meeting obligations or taking advantage of investment opportunities. In

this section, we will take a closer look at Buffalo Wild Wings’ key liquidity and financing

ratios to assess its ability to access additional funding if it is ever needed.

Buffalo Wild Wings has no major long-term debt and $72m in cash and marketable

securities on the balance sheet as of Q 4, 2010. The company is in a strong financial

position in terms of its liquidity. Potential bondholders and creditors are interested in the

firm’s debt ratio. This group prefers low debt ratio because it offers protection on their

investment in the event of a major financial problem. Management’s preference appears to

be to preserve cash for future capital investments and working capital.

The current ratio is 1.7 and quick ratio is 1.1 and the industry averages are 1.16 and 1.04,

respectively. The current ratio means that in order to satisfy the claims for short-term

creditors exclusively from current assets, the company must convert each dollar of current

assets into at least $0.58 of cash ($1.00/1.7) versus the industry average of $0.86. The

quick ratio for BWLD means that its cash and other current assets are equal to 110 percent

of the current liabilities. BWLD’s high current and quick ratio enhances the firm’s ability to

satisfy any short-term obligation.

Due to BWLD’s strong operating results and high reserves in cash and marketable

securities, BWLD carries a lower-than- industry average debt to equity ratio of 0.48 (vs.

3.0). This low debt to equity ratio provides a measure of safety to creditors in the event of

insolvency as well as significantly reduces the company’s borrowing costs and interest

expenses. BWLD’s debt to equity ratio of 0.48 and industry average of 3.0 indicates that

competitors use more borrowed funds to finance their activities than BWLD. The

company’s current capital structure has a greater liquidity in case of financial distress or if

earnings decrease in the near future.

Earnings Quality

Earnings quality is an important aspect of the investing world. It is a tool in determining

the future performance of the company. It is easy to jump on a stock that reports high

earnings, but doing so in many instances can result in losing money. Investors are

attracted to high earnings and often forget or do not know that they should investigate the

earnings. By investigating reported earnings, an investor can avoid falling in to the trap of

the “hot” stock that might not continue to be so hot. This is where earnings quality comes


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in to the picture. According to Ben McClure of Bay of Thermi Limited, earnings quality

should be analyzed in three ways; are the earnings repeatable, controllable, and bankable. xxx

Repeatable earnings are quite simply any earnings that can be reproduced in future

periods. This means that items that are one time in nature, like a sale of assets, would not

increase earnings quality. Items that do increase earnings quality are increases in sales and

reductions in costs. For Buffalo Wild Wings, earnings are repeatable. There are no items

that appear on the income statement that are one time in nature. Loss on asset disposals

and impairment, a line item on the income statement that would generally be none

recurring, is quite common in the restaurant industry. It is the charges incurred for closing

locations. Also, looking at the five year income statement summary, there are not any items

that are not repeatable. A large part of the company’s revenue growth is from an increase

in locations. While this could be alarming to a company with much more locations, it is not

so alarming for Buffalo Wild Wings. This is because the company is not close to market

saturation. So, overall the earnings for buffalo Wild Wings are repeatable.

Controllable earnings are earnings that companies can positively or negatively affect.

The most common types of uncontrollable earnings are foreign currency exchange gains

and losses, inflation, and the cost of commodities. This becomes alarming for the company

because of the price of chicken wings. Buffalo Wild Wings serves bone in and boneless

chicken wings with 16 different sauce choices. While there are other items on the menu,

wings are the big seller. According to the management discussion and analysis, the

company had a decrease in costs of sales as a percentage of restaurant sales of 29% due to

the lower cost of chicken wings. Chicken wings cost the company approximately $1.58 a

pound during the year, which is a 7% decrease from the prior year. Helping to offset the

impact of this uncontrollable windfall is an increase in the cost of boneless chicken wings of

18.8%. Apart from these two items, the remainder of the company’s expenses seem to be

increasing within line of the increase in company owned locations. Total costs and

expenses as a percentage of net earnings had actually dropped by 1% from the prior year,

where revenue seems to be fairly constant. While it appears that revenue is controllable,

the cost of wings, a major part of the company’s business, is a concern for controllability.

Bankable earnings are those earnings which have increased in cash. Most sales are

recording as sales and increase receivables, which carry inherent risks. Company adjusts

their receivables for an allowance for doubtful accounts that does not show in revenues

immediately. Buffalo Wild Wings has increases its revenue while contributing mainly to

cash. This is partly due to the industry. While most companies make private credit

arrangements for buyers, restaurants only accept cash or credit card for the majority of

their transactions. This greatly reduces the amount of receivables that a normal company


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would have. Also, where the company does make its own credit arrangements, franchisees,

the receivables for that specific group have decreased by just under 50% compared to prior

year end. While the revenue for franchisees have grown on the income statement over the

past three years. Overall, Buffalo Wild Wings earnings are highly bankable.

When looking at the three factors to determine earnings quality, it is clear that Buffalo

Wild Wings has strong earnings quality. Their earnings are repeatable since no of their

revenues or expenses are non-recurring in nature. Their earnings are controllable, with

the exception of the chicken wings pricing. This is the only item that keeps Buffalo Wild

Wings from having the strongest of earnings quality. The one thing that mitigates the extra

earnings from the bone in chicken wing pricing is the extra costs for the boneless chicken

wings. As far as bankable earnings, Buffalo Wild Wings benefits from being in an industry

where the majority of their revenues come from cash and third party credit cards. But,

where they make the own credit arrangements is franchisees and the revenues they receive

from that group are extremely bankable as evidenced by their balance sheet and income

statement.

Investment Potential

We believe BWLD has a brand differentiation in the very crowded bar & grill segment, yet

the company may struggle to keep valuation relative to high-growth peers. The balance

sheet remains very conservative, with operating cash flow sufficient for new unit growth.

Unfortunately, management has no current plans for share repurchase or dividend

payments, which may impact stock performance in the long-run.

BWLD EPS growth underperformed high growth peers in 2009 and 2010 by 14% & 23%,

respectively.xxxi The peer group consists of companies like Chipotle Mexican Grill, Inc.

(CMG), Panera Bread (PNRA), and BJ’s restaurants, which had 39% and 48% EPS growth

respectively for the same time period. BWLD Q3 2011 earnings per share are $2.11, the

current share price is $66.22, so the P/E ratio is 31.38 times, which is above the long term

growth range of 15-20%. xxxii On the other hand, the company outperforms the industry

average in most of the ratio categories for profitability, financial flexibility, and earnings

quality.

Overall, we feel BWLD is a worthy stock investment. If you are a shareholder of the

company, “hold’ might be a wise decision. For potential investors, we remain neutral to the

company as we see little upside to shares at this time because of the weak economy and

strong competition from other brands in the bar and grill segment. Finally, the share prices

are close to their historic high of$ 69.31, which reflects much of the company’s actual and

impending success.


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Social Responsibility

Buffalo Wild Wings has limited involvement in social responsibility. Its principles of

corporate governance provide a glimpse of company’s values and management’s believes

on these issues. The company pledges to conduct business at all times in compliance with

appropriate environmental laws and regulations. It is BWLD policy to operate its facilities

in a manner, which does its best to protect the public and the environment.xxxiii

The company relies on the character and values of its team. The leadership values

include recruiting quality, knowledgeable, honest people with leadership skills and a

passion for doing their best. BWLD values their guests, co-workers and communities and

strive to treat them with respect.

Buffalo Wild Wings Restaurants across the country participate in community events by

supporting and donating local charities. BWLD donated 10 percent of their pre-tax food

sales for tornado relief in north Minneapolis. xxxiv The company also supports Ronald

McDonald House Charities of Memphis’ where local celebrities work as waiters, while

helping to raise funds for the local children and families.xxxv

Conclusion

Buffalo Wild Wings Grill and Bar Inc's impressive past financial performance coupled with

its conservative management, low debt, moderate to fast growth rate, and high valuation

multiples represents a limited potential to create value to potential investors, which makes

for our neutral recommendation at this point of time. Buffalo Wild Wings competes in the

US bar and grill segment. We believe the broader restaurant industry is overstored

implying future category growth to be limited for BWLD. This presents a challenge for a

company such as Buffalo Wild Wings, which appears to have planned significant new store

growth domestically.

i “ Buffalo Wild Wings”, http://en.wikipedia.org/wiki/Buffalo_Wild_Wings, (11/2011) ii “ Form 10-K-Buffalo Wild Wings Inc.-BWLD” 2010-12-26

iii “ Form 10-K Buffalo Wild Wings Inc.-BWLD” 2010-12-26

iv “ About Us”, http://www.buffalowildwings.com/, (11-2011)

v “ Buffalo Wild Wings to buy 15 restaurants”, http://www.cnbc.com/id/45329907, (11/16/2011)

vi “ Form 10-K- Buffalo Wild Wings Inc. –BWLD” 2010-12-26

http://en.wikipedia.org/wiki/Buffalo_Wild_Wings

http://www.buffalowildwings.com/

http://www.cnbc.com/id/45329907


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vii

“ Form 10-K- Buffalo Wild Wings Inc.-BWLD” 2010-12-26 viii

“ Board of Directors” , http://ir.buffalowildwings.com/directors.cfm, (11/2011) ix “ Management”, http://ir.buffalowildwings.com/management.cfm, (11/2011)

x “ Board of Directors”, http://ir.buffalowildwings.com/directors.cfm, (11/2011)

xi “ Proxy Materials”, http://ir.buffalowildwings.com/proxy.cfm, (11/2011)

xii “ 2011 Proxy Statement”, http://ir.buffalowildwings.com/proxy.cfm, (11/2011)

xiii “ 2011 Proxy Statement” , http://ir.buffalowildwings.com/proxy.cfm, (11/2011)

xiv “Form 10-K-Buffalo Wild Wings. Inc. –BWLD” 2010-12-26

xv “Form 10-K Buffalo Wild Wings. Inc – BWLD” 2010-12-26

xvi “ Form 10-K Buffalo Wild Wings. Inc – BWLD” 2010-12-26

xvii “Form 10-K Buffalo Wild Wings. Inc – BWLD” 2010-12-26

xviii “Historical Prices” , http://finance.yahoo.com/q/hp?s=BWLD, (11/2011)

xix Historical Prices” , http://finance.yahoo.com/q/hp?s=BWLD, (11/2011)

xx “Trends and Forecasts”, http://restaurant.org/research/forecast/, (11/2011)

xxi Joseph M. Carbonara, “A look head to 2012”, http://www.fesmag.com/index.php/news/foodservice-

perspectives/item/5799-a-look-ahead-to-2012, (09/01/2011) xxii

Bernstein, Jeffrey A. Buffalo Wild Wings Inc. Equity Research, New York: Barclays Capital, 2011. xxiii

Lyon, Conrad. Event: Sales Rocket as Does G&A; Reducing Estimates; Increasing Price Target. Research Update,

Los Angeles: B. Riley & Co., LLC, 2011. xxiv

Bernstein, Jeffrey A. Buffalo Wild Wings Inc. Equity Research, New York: Barclays Capital, 2011. xxv "Morningstar." Key Stats BWLD. 2011. http://quote.morningstar.com/stock/s.aspx?t=bwld (accessed November

18, 2011). xxvi

Lyon, Conrad. Event: Sales Rocket as Does G&A; Reducing Estimates; Increasing Price Target. Research Update,

Los Angeles: B. Riley & Co., LLC, 2011. xxvii

"Morningstar." Key Stats BWLD. 2011. http://quote.morningstar.com/stock/s.aspx?t=bwld (accessed

November 18, 2011). xxviii "Morningstar." Key Stats BWLD. 2011. http://quote.morningstar.com/stock/s.aspx?t=bwld (accessed

November 18, 2011). xxix

“Form 10-K-Buffalo Wild Wings. Inc. –BWLD” 2010-12-26 xxx McClure, Ben. "Earnings: Quality Means Everything." Investopedia.com - Your Source For Investing Education. 12

Jan. 2010. Web. 20 Nov. 2011. <http://www.investopedia.com/articles/02/103002.asp>. xxxi

Bernstein, Jeffrey A. Buffalo Wild Wings Inc. Equity Research, New York: Barclays Capital, 2011. xxxii Lyon, Conrad. Event: Sales Rocket as Does G&A; Reducing Estimates; Increasing Price Target. Research Update,

Los Angeles: B. Riley & Co., LLC, 2011. xxxiii

Buffalo Wild Wings. "Investor Relations." Buffalo Wild Wings. 2011.

http://ir.buffalowildwings.com/governance.cfm (accessed November 18, 2011). xxxiv Carlyle, Erin. "City Pages Blog." Hot Dish. May 31, 2011.

http://blogs.citypages.com/food/2011/05/buffalo_wild_wi_6.php (accessed November 15, 2011). xxxv Trotter, Jeramia. "Celebrity waiters working at Buffalo Wild Wings." Bartlett. January 6, 2011.

http://bartlett.wmctv.com/content/celebrity-waiters-working-buffalo-wild-wings (accessed November 17,

20

http://ir.buffalowildwings.com/directors.cfm

http://ir.buffalowildwings.com/management.cfm

http://ir.buffalowildwings.com/directors.cfm

http://ir.buffalowildwings.com/proxy.cfm



http://finance.yahoo.com/q/hp?s=BWLD

http://finance.yahoo.com/q/hp?s=BWLD

http://restaurant.org/research/forecast/

http://www.fesmag.com/index.php/news/foodservice-perspectives/item/5799-a-look-ahead-to-2012

http://www.fesmag.com/index.php/news/foodservice-perspectives/item/5799-a-look-ahead-to-2012


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Appendix A

Buffalo Wild Wings on growth

Sports-focused casual-dining chain is growing aggressively, foresees 1,400 U.S. units

October 4, 2011 | By Mark Brandau Read more: http://nrn.com/article/qa-jim-schmidt-buffalo-wild-wings-chief-operating-officer#ixzz1fFlxLcPJ

Buffalo Wild Wings opened its 500th franchised location in the United States last month — a growth milestone for the sports-centric casual-dining chain — and has no plans to slow down, said chief operating officer Jim Schmidt.

The unit, which opened in South Miami, Fla., is one of nearly 800 total restaurants in Buffalo Wild Wings’ portfolio. The Minneapolis-based brand foresees 1,400 U.S. locations, Schmidt said, and this year’s plans call for 13-percent year-over-year unit growth, including 55 company-owned locations and 60 franchised restaurants.

The chain also operates three company-owned restaurants in Ontario, Canada — its first foray into the international marketplace.

Schmidt, who was named COO in February and has been with the company since 2002, spoke with Nation’s Restaurant News about the role franchising plays in the chain’s growth plans, and the challenges it faces.

How challenging is securing growth capital for Buffalo Wild Wings’ franchisees? Is the lending environment more hospitable to multi-unit franchisees?

Most of our franchisees are multi-unit developers, so we don’t have too many small or one-off franchisees. Most of our franchisees, while they’ve experienced some lending challenges, continue to get the financing necessary to grow. We don’t do anything special to assist them in that, though there are some relationships we’ve established with lenders, so they’re obtaining their growth capital through their own resources. I think that speaks to the strength of those operators and of the brand.

The chain has identified California, Seattle and Philadelphia as potential markets to build out with company-owned stores. How do you determine which markets make sense for corporate or franchise units.

That strategy has evolved over time, but it’s something we constantly look at. Some of it is logistics, some of it is that certain markets play to franchisees’ local knowledge and give them an advantage over a company-owned store. We have some franchisees doing a great job operating in smaller towns by becoming a part of their communities. And sometimes it’s geographic. We try not to have too many mixed markets with both company-owned and franchisee locations. Your first restaurant outside the United States opened in May near Toronto. What have you learned so far from this foray into international growth, and where else is Buffalo Wild Wings looking to expand in the near term?

We’ve learned a lot. Even though it’s Canada and there are a lot of similarities, everything is different, from the supply chain to employment laws to just how people conduct business. The learning curve is pretty steep, and things take a little longer to get done. You can get used to having a finely oiled machine in the United States, and then it’s tougher to meet timelines and deadlines internationally.

We are also exploring possibilities in the United Kingdom and the Middle East in the near term, and we’ll continue to look at other areas all over the globe.

Record-low chicken wing prices and the resolution of the National Football League lockout have worked out in your favor recently. But how do you plan for new franchise growth with commodity prices rising and the potential cancellation of the National Basketball Association season?

http://nrn.com/mark-brandau-0

http://nrn.com/article/qa-jim-schmidt-buffalo-wild-wings-chief-operating-officer#ixzz1fFlxLcPJ

http://www.nrn.com/article/nfl-ends-lockout-restaurants-relieved


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Chicken wings have always been based on market price for us. We were at record highs a few years ago and were profitable and growing. It’s something we know will be bearable, and we’ve learned over the years to manage through it. It doesn’t impact growth decisions one way or another, that volatility.

As for the NBA, we are looking at contingencies [if the season is canceled], but pro basketball is not as significant a driver of sales as NFL football is, so I think we’ll be OK.

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