XFRA:BWW Buffalo Wild Wings Inc Quarterly Report 10-Q Filing - 6/24/2012

Effective Date 6/24/2012

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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
 

 
FORM 10-Q
 

 
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
 
For the quarterly period ended June 24, 2012
 
Commission File No. 000-24743
 

 
BUFFALO WILD WINGS, INC.
(Exact name of registrant as specified in its charter)
 

 
Minnesota
No. 31-1455915
(State or Other Jurisdiction of
Incorporation or Organization)
(IRS Employer
Identification No.)
 
5500 Wayzata Boulevard, Suite 1600, Minneapolis, MN 55416
(Address of Principal Executive Offices) (Zip Code)
 
(952) 593-9943
(Registrant’s Telephone Number, Including Area Code)
 

 
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.    YES  x    NO  ¨
 
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).    YES  x    NO  ¨
 
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer”, “accelerated filer”, and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check one):
Large accelerated filer  x    Accelerated filer  ¨    Non-accelerated filer  ¨    Smaller reporting company  ¨
 
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).     YES  ¨    NO  x    
 
The number of shares outstanding of the registrant’s common stock as of July 27, 2012:  18,587,202 shares.
 


 
 

 
 
TABLE OF CONTENTS
 
   
Page
PART I – FINANCIAL INFORMATION
 
     
Item 1.
Financial Statements
3
     
Item 2.
Management’s Discussion and Analysis of Financial Condition and Results of Operations
10
     
Item 3.
Quantitative and Qualitative Disclosures About Market Risk
18
     
Item 4.
Controls and Procedures
18
   
PART II – OTHER INFORMATION
 
     
Item 1.
Legal Proceedings
19
     
Item 6.
Exhibits
19
   
Signatures
20
   
Exhibit Index
21
 
 
2

 
 
PART I. FINANCIAL INFORMATION
 
ITEM 1. FINANCIAL STATEMENTS
 
BUFFALO WILD WINGS, INC. AND SUBSIDIARIES
 
CONSOLIDATED BALANCE SHEETS
 
(Dollar amounts in thousands)
 
(unaudited)
 
   
June 24,
2012
   
December 25,
2011
 
Assets
           
Current assets:
           
Cash and cash equivalents
  $ 23,247       20,530  
Marketable securities
    52,985       39,956  
Accounts receivable – net of allowance of $25
    14,390       12,165  
Inventory
    6,022       6,311  
Prepaid expenses
    2,617       3,707  
Refundable income taxes
    1,600       7,561  
Deferred income taxes
    6,963       6,323  
Restricted assets
    30,751       42,692  
Total current assets
    138,575       139,245  
                 
Property and equipment, net
    321,440       310,170  
Other assets
    27,903       28,174  
Goodwill
    17,777       17,770  
Total assets
  $ 505,695       495,359  
                 
Liabilities and Stockholders’ Equity
               
Current liabilities:
               
Unearned franchise fees
  $ 1,807       1,852  
Accounts payable
    28,299       30,089  
Accrued compensation and benefits
    23,151       30,499  
Accrued expenses
    8,750       7,580  
System-wide payables
    30,861       44,250  
Total current liabilities
    92,868       114,270  
                 
Long-term liabilities:
               
Other liabilities
    1,631       1,544  
Deferred income taxes
    36,907       38,512  
Deferred lease credits, net of current portion
    23,868       23,047  
Total liabilities
    155,274       177,373  
Commitments and contingencies (note 9)
               
Stockholders’ equity:
               
Undesignated stock, 1,000,000 shares authorized; none issued
           
Common stock, no par value. Authorized 44,000,000 shares; issued and outstanding 18,587,152 and 18,377,920, respectively
    116,215       113,509  
Retained earnings
    234,679       204,772  
Accumulated other comprehensive loss
    (473 )     (295 )
Total stockholders’ equity
    350,421       317,986  
Total liabilities and stockholders’ equity
  $ 505,695       495,359  
 
See accompanying notes to consolidated financial statements.
 
 
3

 
 
BUFFALO WILD WINGS, INC. AND SUBSIDIARIES
 
CONSOLIDATED STATEMENTS OF EARNINGS
 
(Amounts in thousands except per share data)
 
(unaudited)
 
   
Three months ended
   
Six months ended
 
   
June 24,
2012
   
June 26,
2011
   
June 24,
2012
   
June 26,
2011
 
Revenue:
                       
Restaurant sales
  $ 220,550       167,896       452,866       333,423  
Franchise royalties and fees
    18,173       16,205       36,979       32,828  
Total revenue
    238,723       184,101       489,845       366,251  
Costs and expenses:
                               
Restaurant operating costs:
                               
Cost of sales
    69,799       45,735       141,950       91,999  
Labor
    66,638       51,309       134,906       100,187  
Operating
    32,349       25,048       65,146       49,597  
Occupancy
    13,091       10,659       25,891       20,886  
Depreciation and amortization
    16,090       11,931       31,621       22,953  
General and administrative
    20,976       18,766       40,400       35,058  
Preopening
    1,536       4,116       4,127       6,503  
Loss on asset disposals and store closures
    597       492       1,334       903  
Total costs and expenses
    221,076       168,056       445,375       328,086  
Income from operations
    17,647       16,045       44,470       38,165  
Investment income (loss)
    (115 )     (152 )     295       204  
Earnings before income taxes
    17,532       15,893       44,765       38,369  
Income tax expense
    5,870       5,220       14,858       12,835  
Net earnings
  $ 11,662       10,673       29,907       25,534  
Earnings per common share – basic
  $ 0.63       0.58       1.61       1.39  
Earnings per common share – diluted
    0.62       0.58       1.60       1.39  
Weighted average shares outstanding – basic
    18,575       18,330       18,565       18,318  
Weighted average shares outstanding – diluted
    18,660       18,401       18,650       18,389  
 
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
 
Net earnings
  $ 11,662       10,673       29,907       25,534  
Other comprehensive income
                               
Foreign currency translation adjustments
    (313 )     8       (178 )      
Other comprehensive income, net of tax
    (313 )     8       (178 )      
Comprehensive income
    11,349       10,681       29,729       25,534  
 
See accompanying notes to consolidated financial statements.

 
4

 

BUFFALO WILD WINGS, INC. AND SUBSIDIARIES
 
CONSOLIDATED STATEMENTS OF CASH FLOWS
 
(Dollar amounts in thousands)
 
(unaudited)
 
   
Six months ended
 
   
June 24,
2012
   
June 26,
2011
 
Cash flows from operating activities:
           
Net earnings
  $ 29,907       25,534  
Adjustments to reconcile net earnings to cash provided by operations:
               
Depreciation
    30,267       22,574  
Amortization
    1,354       379  
Loss on asset disposals and store closures
    1,143       904  
Deferred lease credits
    1,618       1,568  
Deferred income taxes
    (2,245 )     4,795  
Stock-based compensation
    3,919       5,952  
Excess tax benefit from stock issuance
    (289 )     (211 )
Change in operating assets and liabilities:
               
Trading securities
    (534 )     (246 )
Accounts receivable
    (4,484 )     (2,643 )
Inventory
    281       (186 )
Prepaid expenses
    1,090       1,077  
Other assets
    (1,084 )     (1,534 )
Unearned franchise fees
    (45 )     (60 )
Accounts payable
    (177 )     4,072  
Income taxes
    6,250       5,743  
Accrued expenses
    (234 )     2,525  
Net cash provided by operating activities
    66,737       70,243  
Cash flows for investing activities:
               
Acquisition of property and equipment
    (44,438 )     (55,159 )
Purchase of marketable securities
    (52,493 )     (54,790 )
Proceeds from marketable securities
    39,998       63,597  
Net cash used in investing activities
    (56,933 )     (46,352 )
Cash flows for financing activities:
               
Issuance of common stock
    1,117       867  
Excess tax benefit from stock issuance
    289       211  
Tax payments for restricted stock units
    (8,447 )     (2,481 )
Net cash used in financing activities
    (7,041 )     (1,403 )
Effect of exchange rate changes on cash and cash equivalents
    (46 )     39  
Net increase in cash and cash equivalents
    2,717       22,527  
Cash and cash equivalents at beginning of period
    20,530       15,309  
Cash and cash equivalents at end of period
  $ 23,247       37,836  
 
See accompanying notes to consolidated financial statements.

 
5

 

BUFFALO WILD WINGS, INC. AND SUBSIDIARIES
 
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
 
FOR THE THREE MONTHS AND SIX MONTHS ENDED JUNE 24, 2012 AND JUNE 26, 2011
(Dollar amounts in thousands except share and per share data)
 
(1)       Basis of Financial Statement Presentation
 
The consolidated financial statements as of June 24, 2012 and December 25, 2011, and for the three-month and six-month periods ended June 24, 2012 and June 26, 2011 have been prepared by Buffalo Wild Wings, Inc. pursuant to the rules and regulations of the Securities and Exchange Commission (SEC). The financial information as of June 24, 2012 and December 25, 2011 and for the three-month and six-month periods ended June 24, 2012 and June 26, 2011 is unaudited, but, in the opinion of management, reflects all adjustments and accruals necessary for a fair presentation of the financial position, results of operations, and cash flows for the interim periods.
 
References in the remainder of this document to “company,” “we,” “us” and “our” refer to the business of Buffalo Wild Wings, Inc. and our subsidiaries.

The financial information as of December 25, 2011 is derived from our audited consolidated financial statements and notes thereto for the fiscal year ended December 25, 2011, which is included in Item 8 in the Fiscal 2011 Annual Report on Form 10-K and should be read in conjunction with such financial statements.
 
The results of operations for the three-month and six-month periods ended June 24, 2012 are not necessarily indicative of the results of operations that may be achieved for the entire year ending December 30, 2012.
 
(2)       Summary of Significant Accounting Policies
 
(a)       Inventories
 
Inventories are stated at the lower of cost or market. Cost is determined by the first-in, first-out (FIFO) method. Cash flows related to inventory sales are classified in net cash provided by operating activities in the Consolidated Statements of Cash Flows.
 
We purchase products from a number of suppliers and believe there are alternative suppliers. We have minimum purchase commitments from some of our vendors, but the terms of the contracts and nature of the products are such that our purchase requirements do not create a market risk. The primary food product used by our restaurants and our franchised restaurants is chicken wings. Chicken wings are purchased by us at market prices. For the three-month periods ended June 24, 2012 and June 26, 2011, chicken wings were 27.1% and 16.4%, respectively, of restaurant cost of sales. For the six-month periods ended June 24, 2012 and June 26, 2011, chicken wings were 26.4% and 17.8%, respectively, of restaurant cost of sales.
 
(b)       New Accounting Pronouncements
 
We reviewed all significant newly-issued accounting pronouncements and concluded that they either are not applicable to our operations or that no material effect is expected on our consolidated financial statements as a result of future adoption.

(3)      Fair Value Measurements

 
The guidance for fair value measurements establishes the authoritative definition of fair value, sets out a framework for measuring fair value, and outlines the required disclosures regarding fair value measurements. Fair value is the price that would be received to sell an asset or paid to transfer a liability (an exit price) in the principal or most advantageous market for the asset or liability in an orderly transaction between market participants at the measurement date. We use a three-tier fair value hierarchy based upon observable and non-observable inputs as follows:

 
Level 1 – Observable inputs such as quoted prices in active markets;
 
Level 2 – Inputs, other than the quoted prices in active markets, that are observable either directly or indirectly; and
 
Level 3 – Unobservable inputs in which there is little or no market data, which require the reporting entity to develop its own assumptions.
 
 
6

 
 
The following table summarizes the financial instruments measured at fair value in our consolidated balance sheet as of June 24, 2012:

 
Fair Value Measurements
 
 
Level 1
 
Level 2
 
Level 3
 
Total
 
Assets
               
Cash Equivalents
$ 14,950             14,950  
Marketable Securities
  5,838     30,584         36,422  
 
The following table summarizes the financial instruments measured at fair value in our consolidated balance sheet as of December 25, 2011:

 
Fair Value Measurements
 
 
Level 1
 
Level 2
 
Level 3
 
Total
 
Assets
               
Cash Equivalents
$ 10,103     1,500         11,603  
Marketable Securities
  5,304             5,304  

We classified a portion of our marketable securities as available-for-sale and trading securities which were reported at fair market value, using the “market approach” valuation technique. The “market approach” valuation method uses prices and other relevant information observable in market transactions involving identical or comparable assets to determine fair market value. Our cash equivalents include commercial paper and money market funds which are valued using a Level 1 approach. Our trading securities are valued using a Level 1 approach. Our available-for-sale marketable securities are valued using a Level 2 approach using observable direct and indirect inputs for municipal bonds.

There were no transfers between Level 1 and Level 2 of the fair value hierarchy during the six-month periods ended June 24, 2012 or June 26, 2011.

(4)       Marketable Securities

Marketable securities consisted of the following:
 
   
As of
 
   
June 24,
2012
   
December 25,
2011
 
Held-to-maturity
           
Municipal securities
  $ 16,563       34,652  
Available-for-sale
               
Municipal securities
    30,584        
Trading
               
Mutual funds
    5,838       5,304  
Total
  $ 52,985       39,956  

All held-to-maturity debt securities mature within one year and had aggregate fair values of $16,561 and $34,640 as of June 24, 2012 and December 25, 2011, respectively. Trading securities represent investments held for future needs of our non-qualified deferred compensation plan.
 
 
7

 
 
(5)       Property and Equipment
 
Property and equipment consisted of the following:
 
   
June 24,
2012
   
December 25,
2011
 
Construction in process
  $ 20,738     $ 20,078  
Buildings
    43,972       37,956  
Furniture, fixtures, and equipment
    187,337       175,718  
Leasehold improvements
    262,375       245,506  
Property and equipment, gross
    514,422       479,258  
Less accumulated depreciation
    (192,982 )     (169,088 )
Property and equipment, net
  $ 321,440     $ 310,170  

(6)           Stockholders’ Equity
 
(a)       Stock Options
 
We have 5.4 million shares of common stock reserved for issuance under our Equity Incentive Plan (Plan) for our employees, officers, and directors. The option price for shares issued under the Plan is to be not less than the fair market value on the date of grant with respect to incentive and nonqualified stock options. Incentive stock options become exercisable in four equal installments from the date of the grant and have a contractual life of seven to ten years. Nonqualified stock options issued pursuant to the Plan have varying vesting periods from immediately to four years and have a contractual life of seven to ten years. Incentive stock options may be granted under this Plan until March 12, 2022. We issue new shares of common stock upon exercise of stock options. Option activity is summarized for the six months ended June 24, 2012 as follows:
 
   
Number
of shares
   
Weighted
average
exercise price
   
Average remaining contractual Life (years)
   
Aggregate intrinsic value
 
Outstanding, December 25, 2011
    182,629     $ 34.06       4.0     $ 6,242  
                                 
Granted
    27,691       94.42                  
Exercised
    (14,927 )     19.92                  
Cancelled
    (1,764 )     35.08                  
Outstanding, June 24, 2012
    193,629     $ 43.77       4.0     $ 7,918  
Exercisable, June 24, 2012
    112,284       29.70       3.1       5,989  
 
The aggregate intrinsic value in the table above is before applicable income taxes, based on our closing stock price of $83.04 as of the last business day of the quarter ended June 24, 2012, which would have been received by the optionees had all options been exercised on that date. As of June 24, 2012, total unrecognized stock-based compensation expense related to nonvested stock options was approximately $1,730, which is expected to be recognized over a weighted average period of approximately 2.6 years. During the six-month periods ended June 24, 2012 and June 26, 2011, the total intrinsic value of stock options exercised was $982 and $1,161, respectively. During the six-month periods ended June 24, 2012 and June 26, 2011, the weighted average grant date fair value of options granted was $43.97 and $26.07. No shares vested during the six-month periods ended June 24, 2012 or June 26, 2011.

The Plan has 1,553,779 shares available for grant as of June 24, 2012.
 
(b)       Restricted Stock Units
 
Restricted stock units are granted annually under the Plan at the discretion of the Board of Directors. Restricted stock units are subject to three-year cliff vesting and a cumulative three-year earnings target. The number of units which vest at the end of the three-year period is based on performance against the target. These restricted stock units are subject to forfeiture if they have not vested at the end of the three-year period. Stock-based compensation is recognized for the number of units expected to vest at the end of the period and is expensed over the three-year period.
 
 
8

 
 
For each grant, restricted stock units meeting the three-year performance criteria will vest as of the end of our fiscal year. The distribution of vested restricted stock units as common stock typically occurs in March of the following year. The common stock is issued to participants net of the number of shares needed for the required minimum employee withholding taxes. We issue new shares of common stock upon the disbursement of restricted stock units. Restricted stock units are contingently issuable shares, and the activity for the first six months of fiscal 2012 is as follows:
 
   
Number
of shares
   
Weighted
average
grant date
fair value
 
Outstanding, December 25, 2011
    360,280     $ 45.95  
                 
Granted
    136,744       93.28  
Vested
    (4,865 )     86.33  
Cancelled
    (14,083 )     50.81  
Outstanding, June 24, 2012
    478,076     $ 58.93  

As of June 24, 2012, the total stock-based compensation expense related to nonvested awards not yet recognized was $12,388, which is expected to be recognized over a weighted average period of 1.9 years. The weighted average grant date fair value of restricted stock units granted during the six-month periods ended June 24, 2012 and June 26, 2011 was $93.28 and $53.77, respectively. During the six-month periods ended June 24, 2012 and June 26, 2011, we recognized $3,260 and $5,369, respectively, of stock-based compensation expense related to restricted stock units.
 
(c)           Employee Stock Purchase Plan
 
We have reserved 600,000 shares of common stock for issuance under our Employee Stock Purchase Plan (ESPP). The ESPP is available to substantially all employees subject to employment eligibility requirements. Participants may purchase our common stock at 85% of the beginning or ending closing price, whichever is lower, for each six-month period ending in May and November. During the first six months of 2012 and 2011, we issued 14,505 and 16,292 shares of common stock, respectively, under the ESPP. As of June 24, 2012, we have 260,157 shares available for future issuance under the ESPP.

(7)       Earnings Per Share
 
The following is a reconciliation of basic and fully diluted earnings per common share for the three-month and six-month periods ended June 24, 2012 and June 26, 2011:
 
 
   
Three months ended June 24, 2012
 
   
Earnings
(numerator)
   
Shares
(denominator)
   
Per-share
amount
 
Net earnings
  $ 11,662              
Earnings per common share
    11,662       18,574,924     $ 0.63  
Effect of dilutive securities – stock options
          85,542          
Earnings per common share – assuming dilution
  $ 11,662       18,660,466       0.62  

   
Three months ended June 26, 2011
 
   
Earnings
(numerator)
   
Shares
(denominator)
   
Per-share
amount
 
Net earnings
  $ 10,673              
Earnings per common share
    10,673       18,330,333     $ 0.58  
Effect of dilutive securities – stock options
          71,144          
Earnings per common share – assuming dilution
  $ 10,673       18,401,477       0.58  
 
 
9

 
 
   
Six months ended June 24, 2012
 
   
Earnings
(numerator)
   
Shares
(denominator)
   
Per-share
amount
 
Net earnings
  $ 29,907              
Earnings per common share
    29,907       18,565,131     $ 1.61  
Effect of dilutive securities – stock options
          84,696          
Earnings per common share – assuming dilution
  $ 29,907       18,649,827       1.60  

   
Six months ended June 26, 2011
 
   
Earnings
(numerator)
   
Shares
(denominator)
   
Per-share
amount
 
Net earnings
  $ 25,534              
Earnings per common share
    25,534       18,318,342     $ 1.39  
Effect of dilutive securities – stock options
          70,822          
Earnings per common share – assuming dilution
  $ 25,534       18,389,164       1.39  

The following is a summary of those securities outstanding at the end of the respective periods, which have been excluded from the fully diluted calculations because the effect on net earnings per common share would have been antidilutive or were performance-granted shares for which the performance criteria had not yet been met:

   
Three months ended
   
Six months ended
 
   
June 24,
2012
   
June 26,
2011
   
June 24,
2012
   
June 26,
2011
 
Stock options
    27,691       11,768       13,845       19,506  
Restricted stock units
    478,076       657,701       478,076       657,701  

(8)       Supplemental Disclosures of Cash Flow Information
 
   
Six months ended
 
   
June 24,
2012
   
June 26,
2011
 
Cash paid during the period for:
           
Income taxes
  $ 10,951       2,334  
Noncash financing and investing transactions:
               
Property and equipment not yet paid for
    1,604       2,978  
 
(9)       Contingencies
 
We are involved in various legal actions arising in the ordinary course of business. In the opinion of management, the ultimate disposition of these matters will not have a material adverse effect on our consolidated financial position, results of operations, or cash flows.

ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
 
The following discussion and analysis of our financial condition and results of operations should be read in conjunction with our consolidated financial statements and related notes included in Item 1 of Part 1 of this Quarterly Report and the audited consolidated financial statements and related notes and Management’s Discussion and Analysis of Financial Condition and Results of Operations contained in our Annual Report on Form 10-K for the fiscal year ended December 25, 2011. This discussion and analysis contains certain statements that are not historical facts, including, among others, those relating to our anticipated financial performance for 2012, cash requirements, and our expected store openings and preopening costs. Such statements are forward-looking and speak only as of the date on which they are made. Actual results are subject to various risks and uncertainties including, but not limited to, those discussed in this Form 10-Q under Item 2 of Part I as well as in Item 1A of Part I of the fiscal 2011 Form 10-K. Information included in this discussion and analysis includes commentary on company-owned and franchised restaurant units, restaurant sales, same-store sales, and average weekly sales volumes. Management believes such sales information is an important measure of our performance, and is useful in assessing consumer acceptance of the Buffalo Wild Wings® Grill & Bar concept and the overall health of the concept. Franchise information also provides an understanding of our revenues because franchise royalties and fees are based on the opening of franchised units and their sales. However, franchise sales and same-store sales information does not represent sales in accordance with U. S. generally accepted accounting principles (GAAP), should not be considered in isolation or as a substitute for other measures of performance prepared in accordance with GAAP and may not be comparable to financial information as defined or used by other companies.
 
 
10

 
 
Critical Accounting Estimates
 
Our most critical accounting estimates, which are those that require significant judgment, include: valuation of long-lived assets and store closing reserves, goodwill, vendor allowances, self-insurance liabilities, and stock-based compensation. An in-depth description of these can be found in our Annual Report on Form 10-K for the fiscal year ended December 25, 2011. There have been no changes to those policies during this period.
 
Overview
 
As of June 24, 2012, we owned and operated 330 company-owned and franchised an additional 505 Buffalo Wild Wings® Grill & Bar restaurants in North America. We believe that we will grow the Buffalo Wild Wings brand to about 1,500 locations in North America, continuing the strategy of developing both company-owned and franchised restaurants.
 
We believe we will have 55 to 60 company-owned and 45 to 50 franchised restaurant openings in 2012. With commodity challenges ahead and assuming sales remain strong, we should achieve annual net earnings growth of between 15% and 20%. Our growth and success depend on several factors and trends. First, we will continue our focus on trends in company-owned and franchised same-store sales as an indicator of the continued acceptance of our concept by consumers. We also review the overall trend in average weekly sales as an indicator of our ability to increase the sales volume and, therefore, cash flow per location. We remain committed to high quality operations and guest hospitality.
 
Our revenue is generated by:

 
Sales at our company-owned restaurants, which represented 92% of total revenue in the second quarter of 2012. Food and nonalcoholic beverages accounted for 78% of restaurant sales. The remaining 22% of restaurant sales was from alcoholic beverages. The menu items with the highest sales volume are traditional and boneless wings at 20% and 19%, respectively, of total restaurant sales.
 
 
Royalties and franchise fees received from our franchisees.

A second factor is our success in developing restaurants in new markets. There are inherent risks in opening new restaurants, especially in new markets, including the lack of experience, logistical support, and brand awareness. These factors may result in lower than anticipated sales and cash flow for restaurants in new markets along with higher preopening costs. We believe our focus on new restaurant opening procedures, along with our expanding North American presence, will help to mitigate the overall risk associated with opening restaurants in new markets.
 
Third, we continue to monitor and react to changes in our cost of goods sold. The cost of goods sold is difficult to predict, as it has ranged from 27.2% to 31.6% of restaurant sales per quarter in our 2011 fiscal year and year-to-date in 2012, mostly due to price and yield fluctuations in chicken wings. We work to counteract the volatility of chicken wing prices with the introduction of new menu items, marketing promotions, focused efforts on food costs and waste, and menu price increases. We will continue to monitor the cost of chicken wings, as it can significantly change our cost of sales and cash flow from company-owned restaurants. We continue to explore purchasing strategies to lessen the severity of cost increases and fluctuations, and are reviewing menu additions and other strategies that may decrease the percentage that chicken wings represent in terms of total restaurant sales. We are currently purchasing chicken wings at market prices.
 
We generate cash from the operation of company-owned restaurants and from franchise royalties and fees. We highlight the specific costs associated with the on-going operation of our company-owned restaurants in the consolidated statement of earnings under “Restaurant operating costs.” Nearly all of our depreciation expense relates to assets used by our company-owned restaurants. Preopening costs are those costs associated with opening new company-owned restaurants and will vary quarterly based on the number of new locations opening and under construction. Loss on asset disposals and store closures expense is related to company-owned restaurants and includes the costs associated with closures of locations and normal asset retirements. Certain other expenses, such as general and administrative, relate to both company-owned restaurant and franchising operations.
 
 
11

 
 
We operate on a 52 or 53-week fiscal year ending on the last Sunday in December. Both of the first quarters of 2012 and 2011 consisted of thirteen weeks. We have a 53-week fiscal year in 2012, with the fourth quarter having 14 weeks.
 
Quarterly Results of Operations
 
Our operating results for the periods indicated are expressed below as a percentage of total revenue, except for the components of restaurant operating costs, which are expressed as a percentage of restaurant sales. The information for each three-month and six-month period is unaudited, and we have prepared it on the same basis as the audited financial statements. In the opinion of management, all necessary adjustments, consisting only of normal recurring adjustments, have been included to present fairly the unaudited quarterly results.
 
Quarterly and annual operating results may fluctuate significantly as a result of a variety of factors, including increases or decreases in same-store sales, changes in commodity prices, the timing and number of new restaurant openings and related expenses, asset impairment charges, store closing charges, general economic conditions, stock-based compensation, and seasonal fluctuations. As a result, our quarterly results of operations are not necessarily indicative of the results that may be achieved for any future period.
 
   
Three months ended
   
Six months ended
 
   
June 24,
2012
   
June 26,
2011
   
June 24,
2012
   
June 26,
2011
 
Revenue:
                       
Restaurant sales
    92.4 %     91.2 %     92.5 %     91.0 %
Franchising royalties and fees
    7.6       8.8       7.5       9.0  
Total revenue
    100.0       100.0       100.0       100.0  
Costs and expenses:
                               
Restaurant operating costs:
                               
Cost of sales
    31.6       27.2       31.3       27.6  
Labor
    30.2       30.6       29.8       30.0  
Operating
    14.7       14.9       14.4       14.9  
Occupancy
    5.9       6.3       5.7       6.3  
Depreciation and amortization
    6.7       6.5       6.5       6.3  
General and administrative
    8.8       10.2       8.2       9.6  
Preopening
    0.6       2.2       0.8       1.8  
Loss on asset disposals and store closures
    0.3       0.3       0.3       0.2  
Total costs and expenses
    92.6       91.3       90.9       89.6  
Income from operations
    7.4       8.7       9.1       10.4  
Investment income (loss)
    0.0       (0.1 )     0.1       0.1  
Earnings before income taxes
    7.3       8.6       9.1       10.5  
Income tax expense
    2.5       2.8       3.0       3.5  
Net earnings
    4.9       5.8       6.1       7.0  
 
The number of company-owned and franchised restaurants open are as follows:
 
   
As of
 
   
June 24,
2012
   
June 26,
2011
 
Company-owned restaurants
    330       277  
Franchised restaurants
    505       492  
 
 
12

 
 
The restaurant sales for company-owned and franchised restaurants are as follows (amounts in thousands):
 
   
Three months ended
   
Six months ended
 
   
June 24,
2012
   
June 26,
2011
   
June 24,
2012
   
June 26,
2011
 
Company-owned restaurant sales
  $ 220,550     $ 167,896     $ 452,866     $ 333,423  
Franchised restaurant sales
    359,296       321,667       731,630       649,749  
 
Increases in comparable same-store sales are as follows (based on restaurants operating at least fifteen months):
 
   
Three months ended
   
Six months ended
 
   
June 24,
2012
   
June 26,
2011
   
June 24,
2012
   
June 26,
2011
 
Company-owned same-store sales
    5.3 %     5.9 %     7.3 %     4.9 %
Franchised same-store sales
    5.5       2.7       6.4       2.1  
 
The average prices paid per pound for chicken wings are as follows:
 
   
Three months ended
   
Six months ended
 
   
June 24,
2012
   
June 26,
2011
   
June 24,
2012
   
June 26,
2011
 
Average price per pound
  $ 1.90       1.02       1.91       1.12  
 
Results of Operations for the Three Months Ended June 24, 2012 and June 26, 2011
 
Restaurant sales increased by $52.7 million, or 31.4%, to $220.6 million in 2012 from $167.9 million in 2011. The increase in restaurant sales was due to a $44.7 million increase associated with 14 new company-owned restaurants that opened in 2012 and 77 company-owned restaurants that opened or were acquired before 2012 that did not meet the criteria for same-store sales for all or part of the three-month period, and $8.0 million related to a 5.3% increase in same-store sales.
 
Franchise royalties and fees increased by $2.0 million, or 12.1%, to $18.2 million in 2012 from $16.2 million in 2011. The increase was primarily due to royalties related to additional sales due to 13 more franchised restaurants in operation at the end of the period compared to prior year, and an increase in same-store sales at franchised restaurants of 5.5% in the second quarter 2012.
 
Cost of sales increased by $24.1 million, or 52.6%, to $69.8 million in 2012 from $45.7 million in 2011 due primarily to more restaurants being operated in 2012. Cost of sales as a percentage of restaurant sales increased to 31.6% in 2012 from 27.2% in 2011. Cost of sales as a percentage of restaurant sales increased primarily due to higher chicken wing prices and a lower wing-per-pound yield. For the second quarter of 2012, the cost of chicken wings averaged $1.90 per pound which was an 86.3% increase over the same period in 2011.
 
Labor expenses increased by $15.3 million, or 29.9%, to $66.6 million in 2012 from $51.3 million in 2011 due primarily to more restaurants being operated in 2012. Labor expenses as a percentage of restaurant sales decreased to 30.2% in 2012 from 30.6% in 2011. Cost of labor as a percentage of restaurant sales decreased primarily due to lower hourly labor costs partially offset by higher health insurance costs.
 
Operating expenses increased by $7.3 million, or 29.1%, to $32.3 million in 2012 from $25.0 million in 2011 due primarily to more restaurants being operated in 2012. Operating expenses as a percentage of restaurant sales decreased to 14.7% in 2012 from 14.9% in 2011. The decrease in operating expenses as a percentage of restaurant sales is primarily due to lower natural gas utility costs and debit card fees.
 
Occupancy expenses increased by $2.4 million, or 22.8%, to $13.1 million in 2012 from $10.7 million in 2011 due primarily to more restaurants being operated in 2012. Occupancy expenses as a percentage of restaurant sales decreased to 5.9% in 2012 from 6.3% in 2011 due primarily to leveraging rent cost with higher sales and a shift toward more company-owned buildings.
 
Depreciation and amortization increased by $4.2 million, or 34.9%, to $16.1 million in 2012 from $11.9 million in 2011. The increase was primarily due to the additional depreciation related to the 53 additional restaurants compared to second quarter of 2011 and incremental amortization related to the acquisition of franchised restaurants.
 
 
13

 
 
General and administrative expenses increased by $2.2 million, or 11.8%, to $21.0 million in 2012 from $18.8 million in 2011 primarily due to additional headcount. General and administrative expenses as a percentage of total revenue decreased to 8.8% in 2012 from 10.2% in 2011. Exclusive of stock-based compensation, our general and administrative expenses as a percentage of revenue decreased to 7.7% in 2012 from 8.3% in 2011 due primarily to leveraging expenses against higher sales and lower travel-related expenses.
 
Preopening costs decreased by $2.6 million, to $1.5 million in 2012 from $4.1 million in 2011. In 2012, we incurred costs of $598,000 for four new company-owned restaurants opened in the second quarter of 2012 and costs of $951,000 for restaurants that will open in the third quarter of 2012 or later. In 2011, we incurred costs of $3.2 million for 17 new company-owned restaurants opened in the second quarter of 2011 and costs of $950,000 for restaurants that opened in the third quarter of 2011 or later.
 
Loss on asset disposals and store closures increased by $105,000 to $597,000 in 2012 from $492,000 in 2011. In 2012, the loss was related to the write-off of equipment related to the rollout of new point-of-sale and back-office systems of $276,000 and the write-off of miscellaneous equipment. In 2011, the loss was related to the write-off of miscellaneous equipment and disposals due to remodels.
 
Investment loss was essentially flat at $115,000 in 2012 and $152,000 in 2011. The loss was related to investments held for our deferred compensation plan. Cash and marketable securities balances at the end of the second quarter totaled $76.2 million in 2012 compared to $86.1 million at the end of the second quarter of 2011.
 
Provision for income taxes increased $650,000 to $5.9 million in 2012 from $5.2 million in 2011. The effective tax rate as a percentage of income before taxes increased to 33.5% in 2012 from 32.8% in 2011. For 2012, we believe our effective annual tax rate will be about 33.0% to 33.5%.
 
Results of Operations for the Six Months Ended June 24, 2012 and June 26, 2011
 
Restaurant sales increased by $119.4 million, or 35.8%, to $452.9 million in 2012 from $333.4 million in 2011. The increase in restaurant sales was due to a $97.8 million increase associated with 14 new company-owned restaurants that opened in 2012 and 98 company-owned restaurants that opened or were acquired before 2012 that did not meet the criteria for same-store sales for all or part of the six-month period, and $21.6 million related to a 7.3% increase in same-store sales.
 
Franchise royalties and fees increased by $4.2 million, or 12.6%, to $37.0 million in 2012 from $32.8 million in 2011. The increase was primarily due to royalties related to additional sales due to 13 more franchised restaurants in operation at the end of the period compared to prior year, and an increase in same-store sales at franchised restaurants of 6.4% in the first six months of 2012.
 
Cost of sales increased by $50.0 million, or 54.3%, to $142.0 million in 2012 from $92.0 million in 2011 due primarily to more restaurants being operated in 2012. Cost of sales as a percentage of restaurant sales increased to 31.3% in 2012 from 27.6% in 2011. Cost of sales as a percentage of restaurant sales increased primarily due to higher chicken wing prices and a lower wing per pound yield. For the first six months of 2012, the cost of chicken wings averaged $1.91 per pound which was a 70.5% increase over the same period in 2011.
 
Labor expenses increased by $34.7 million, or 34.7%, to $134.9 million in 2012 from $100.2 million in 2011 due primarily to more restaurants being operated in 2012. Labor expenses as a percentage of restaurant sales decreased to 29.8% in 2012 from 30.0% in 2011. Cost of labor as a percentage of restaurant sales decreased primarily due to leveraging of management salaries against higher sales and lower hourly labor costs partially offset by higher health insurance costs.
 
Operating expenses increased by $15.5 million, or 31.4%, to $65.1 million in 2012 from $49.6 million in 2011 due primarily to more restaurants being operated in 2012. Operating expenses as a percentage of restaurant sales decreased to 14.4% in 2012 from 14.9% in 2011. The decrease in operating expenses as a percentage of restaurant sales is primarily due to lower natural gas utility cost and debit card fees.

Occupancy expenses increased by $5.0 million, or 24.0%, to $25.9 million in 2012 from $20.9 million in 2011 due primarily to more restaurants being operated in 2012. Occupancy expenses as a percentage of restaurant sales decreased to 5.7% in 2012 from 6.3% in 2011 due primarily to leveraging rent cost with higher sales and a shift toward more company-owned buildings.
 
Depreciation and amortization increased by $8.7 million, or 37.8%, to $31.6 million in 2012 from $23.0 million in 2011. The increase was primarily due to the additional depreciation related to the 53 additional restaurants compared to second quarter of 2011 and incremental amortization related to the acquisition of franchised restaurants.
 
 
14

 
 
General and administrative expenses increased by $5.3 million, or 15.2%, to $40.4 million in 2012 from $35.1 million in 2011 primarily due to additional headcount. General and administrative expenses as a percentage of total revenue decreased to 8.2% in 2012 from 9.6% in 2011. Exclusive of stock-based compensation, our general and administrative expenses as a percentage of revenue decreased to 7.4% in 2012 from 7.9% in 2011 due primarily to leveraging of salary and incentive compensation expenses against higher sales.
 
Preopening costs decreased by $2.4 million, to $4.1 million in 2012 from $6.5 million in 2011. In 2012, we incurred costs of $3.0 million for 14 new company-owned restaurants opened in the first six months of 2012 and costs of $1.2 million for restaurants that will open in the second half of 2012. In 2011, we incurred costs of $5.4 million for 22 new company-owned restaurants opened in the first six months of 2011 and costs of $1.0 million for restaurants that opened in the third quarter of 2011 or later. Preopening costs per restaurant averaged $279,000 and $263,000 in the first six months of 2012 and 2011, respectively. The higher per restaurant costs are due to additional costs related to expansion into new markets both domestically and internationally.
 
Loss on asset disposals and store closures increased by $431,000, to $1.3 million in 2012 from $903,000 in 2011. In 2012, the loss was related to store closing costs related to three store closures of $347,000, write-offs related to the rollout of new point-of-sale and back-office systems of $276,000, and the write-off of miscellaneous equipment. In 2011, the loss was related to store closing costs related to five store closures of $72,000 and the write-off of miscellaneous equipment.
 
Investment income increased by $91,000 to $295,000 in 2012 from $204,000 in 2011. The increase in the gain was primarily related to investments held for our deferred compensation plan. Cash and marketable securities balances at the end of the second quarter totaled $76.2 million in 2012 compared to $86.1 million at the end of the second quarter of 2011.
 
Provision for income taxes increased $2.0 million to $14.9 million in 2012 from $12.8 million in 2011. The effective tax rate as a percentage of income before taxes decreased to 33.2% in 2012 from 33.5% in 2011.
 
Liquidity and Capital Resources
 
Our primary liquidity and capital requirements have been for constructing, remodeling and maintaining our new and existing company-owned restaurants; working capital; acquisitions; and other general business needs. We fund these expenses, except for acquisitions, primarily with cash from operations. Depending on the size of the transaction, acquisitions would generally be funded from cash and marketable securities balances. The cash and marketable securities balance at June 24, 2012 was $76.2 million. We invest our cash balances in debt securities with the focus on protection of principal, adequate liquidity, and return on investment based on risk. As of June 24, 2012, nearly all excess cash was invested in high quality municipal securities.
 
For the six months ended June 24, 2012, net cash provided by operating activities was $66.7 million. Net cash provided by operating activities consisted primarily of net earnings adjusted for non-cash expenses, and a decrease in refundable income taxes, partially offset by an increase in accounts receivable. The decrease in refundable income taxes was due to timing of tax payments. The increase in accounts receivable was due to higher credit card sales at the end of the quarter.
 
For the six months ended June 26, 2011, net cash provided by operating activities was $70.2 million. Net cash provided by operating activities consisted primarily of net earnings adjusted for non-cash expenses, and an increase in accounts payable and accrued expenses, a decrease in refundable income taxes, partially offset by an increase in accounts receivable. The increase in accounts payable was primarily due to an increase in amounts due related to restaurants under construction at the end of the quarter, as well as an increase in the number of restaurants. The increase in accrued expenses was primarily due to higher cash incentive costs. The decrease in refundable income taxes was due to timing of tax payments. The increase in accounts receivable was due to higher credit card sales at the end of the quarter.
 
For the six months ended June 24, 2012 and June 26, 2011, net cash used in investing activities was $56.9 million and $46.4 million, respectively. Investing activities included acquisitions of property and equipment related to the additional company-owned restaurants and restaurants under construction in both periods. During the first six months of 2012 and 2011, we opened 14 and 23 restaurants, respectively. In 2012, we expect capital expenditures to be approximately $150.0 million for an estimated 60 new or relocated company-owned restaurants, technology improvements on our restaurant and corporate systems, and capital expenditures at existing restaurants. In 2012, we purchased $52.5 million of marketable securities and received proceeds of $40.0 million as these investments matured or were sold. In 2011, we purchased $54.8 million of marketable securities and received proceeds of $63.6 million as these investments matured or were sold.
 
For the six months ended June 24, 2012 and June 26, 2011, net cash used in financing activities was $7.0 million and $1.4 million, respectively. Net cash used in financing activities for 2012 resulted primarily from tax payments for restricted stock units of $8.4 million, offset by proceeds from the exercise of stock options of $1.1 million and the excess tax benefit from stock issuance of $289,000. Net cash used in financing activities for 2011 resulted primarily from tax payments for restricted stock units of $2.5 million, offset by proceeds from the exercise of stock options of $867,000 and the excess tax benefit from stock issuance of $211,000. No additional funding from the issuance of common stock (other than from the exercise of options and purchase of stock under the employee stock purchase plan) is anticipated for the remainder of 2012.
 
 
15

 
 
Our liquidity is impacted by minimum cash payment commitments resulting from operating lease obligations for our restaurants and our corporate offices. Lease terms are generally 10 to 15 years with renewal options and generally require us to pay a proportionate share of real estate taxes, insurance, common area maintenance, and other operating costs. Some restaurant leases provide for contingent rental payments based on sales thresholds. We own the buildings in which 53 of our restaurants operate and therefore have a limited ability to enter into sale-leaseback transactions as a potential source of cash.
 
The following table presents a summary of our contractual operating lease obligations and commitments as of June 24, 2012:
 
         
Payments Due By Period (in thousands)
 
   
Total
   
Less than
One year
   
1-3 years
   
3-5 years
   
After 5
years
 
Operating lease obligations
  $ 378,520       41,570       80,694       73,837       182,419  
Lease commitments for restaurants under development
    100,184       5,005       13,612       13,621       67,946  
Total
  $ 478,704       46,575       94,306       87,458       250,365  
 
We believe the cash flows from our operating activities and our balance of cash and marketable securities will be sufficient to fund our operations and building commitments and meet our obligations for the foreseeable future. Our future cash outflows related to income tax uncertainties amounted to $801,000 as of June 24, 2012. These amounts are excluded from the contractual obligations table due to the high degree of uncertainty regarding the timing of these liabilities.

Off-Balance Sheet Arrangements

As of June 24, 2012, we had no off-balance sheet arrangements or transactions.

Risk Factors/Forward-Looking Statements
 
The foregoing discussion and other statements in this report contain various “forward-looking statements” within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended. Forward-looking statements are based on current expectations or beliefs concerning future events. Such statements can be identified by the use of terminology such as “anticipate,” “believe,” “estimate,” “expect,” “intend,” “may,” “could,” “possible,” “plan,” “project,” “will,” “forecast” or similar words or expressions. Our forward-looking statements generally relate to our growth strategy, financial results, sales efforts, franchise expectations, restaurant openings and related expense, and cash requirements. Although we believe there is a reasonable basis for the forward-looking statements, our actual results could be materially different. While it is not possible to foresee all of the factors that may cause actual results to differ from our forward-looking statements, such factors include, among others, the following (some of which are discussed in greater detail in the risk factor section of our Annual Report on Form 10-K for the fiscal year ended December 25, 2011). Investors are cautioned that all forward-looking statements involve risks and uncertainties and speak only as of the date on which they are made, and we do not undertake any obligation to update any forward-looking statement.
 
 
·
Price and yield fluctuations related to chicken wings could impact our operating income.
 
 
·
If we are unable to successfully open new restaurants, our revenue growth rate and profits may be reduced.
 
 
·
We must identify and obtain a sufficient number of suitable new restaurant sites for us to sustain our growth.
 
 
·
Shortages or interruptions in the availability and delivery of food and other supplies may increase costs or reduce revenues.
 
 
·
We may experience higher-than-anticipated costs associated with the opening of new restaurants or with the closing, relocating, and remodeling of existing restaurants, which may adversely affect our results of operations.
 
 
·
Our restaurants may not achieve market acceptance in the new domestic and international geographic regions we enter.
 
 
·
New restaurants added to our existing markets may take sales from existing restaurants.
 
 
16

 
 
 
·
Failure of our internal controls over financial reporting could harm our business and financial results.
 
 
·
Economic conditions could have a material adverse impact on our landlords or other tenants in retail centers in which we or our franchisees are located, which in turn could negatively affect our financial results.
 
 
·
An impairment in the carrying value of our goodwill or other intangible assets could adversely affect our financial condition and consolidated results of operations.
 
 
·
We are dependent on franchisees and their success.
 
 
·
Franchisees may take actions that could harm our business.
 
 
·
We could face liability from our franchisees.
 
 
·
We may be unable to compete effectively in the restaurant industry.
 
 
·
Our success depends substantially on the value of our brand and our reputation for offering guests an unparalleled guest experience.
 
 
·
Our inability to successfully and sufficiently raise menu prices could result in a decline in profitability.
 
 
·
A reduction in vendor allowances currently received could affect our costs of goods sold.
 
 
·
Our quarterly operating results may fluctuate due to the timing of special events and other factors, including the recognition of impairment losses.
 
 
·
We may not be able to attract and retain qualified team members and key executives to operate and manage our restaurants.
 
 
·
We may not be able to obtain and maintain licenses and permits necessary to operate our restaurants.
 
 
·
Unfavorable publicity could harm our business.
 
 
·
The sale of alcoholic beverages at our restaurants subjects us to additional regulations and potential liability.
 
 
·
Changes in employment laws or regulations could harm our performance.
 
 
·
Changes in consumer preferences or discretionary consumer spending could harm our performance.
 
 
·
A regional or global health pandemic could severely affect our business.
 
 
·
The acquisition of existing restaurants from our franchisees or other acquisitions may have unanticipated consequences that could harm our business and our financial condition.
 
 
·
There is volatility in our stock price.
 
 
·
We may be subject to increased labor and insurance costs.
 
 
·
Our current insurance may not provide adequate levels of coverage against claims.
 
 
·
We are dependent on information technology and any material failure of that technology could impair our ability to efficiently operate our business.
 
 
·
If we are unable to maintain our rights to use key technologies of third parties, our business may be harmed.
 
 
·
We may not be able to protect our trademarks, service marks or trade secrets.
 
 
17

 
 
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
 
We are exposed to international market risk related to our cash and cash equivalents and marketable securities. We invest our excess cash in highly liquid short-term investments with maturities of less than one year. These investments are not held for trading or other speculative purposes. We invest with a strategy focused on principal preservation. Changes in interest rates affect the investment income we earn on our cash and cash equivalents and marketable securities and, therefore, impact our cash flows and results of operations. We also have trading securities, which are held to generate returns that seek to offset changes in liabilities related to the equity market risk of our deferred compensation arrangements.
 
Financial Instruments
 
Financial instruments that potentially subject us to concentrations of credit risk consist principally of municipal securities. We do not believe there is a significant risk of non-performance by these municipalities because of our investment policy restrictions as to acceptable investment vehicles.
 
Inflation
 
The primary inflationary factors affecting our operations are food, labor, and restaurant operating costs. Substantial increases in these costs in any country that we operate in could impact operating results to the extent that such increases cannot be passed along through higher menu prices. A large number of our restaurant personnel are paid at rates based on the applicable federal and state minimum wages, and increases in the minimum wage rates and tip-credit wage rates could directly affect our labor costs. Many of our leases require us to pay taxes, maintenance, repairs, insurance, and utilities, all of which are generally subject to inflationary increases.
 
Commodity Price Risk
 
Many of the food products purchased by us are affected by weather, production, availability, and other factors outside our control. We believe that almost all of our food and supplies are available from several sources, which helps to control food product risks. We negotiate directly with independent suppliers for our supply of food and paper products. Domestically, we use members of UniPro Food Services, Inc., a national cooperative of independent food distributors, to distribute these products from the suppliers to our restaurants. We have minimum purchase requirements with some of our vendors, but the terms of the contracts and nature of the products are such that our purchase requirements do not create a market risk. The primary food product used by company-owned and franchised restaurants is chicken wings. We work to counteract the effect of the volatility of chicken wing prices, which can significantly change our cost of sales and cash flow, with the introduction of new menu items, effective marketing promotions, focused efforts on food costs and waste, and menu price increases. We also explore purchasing strategies to reduce the severity of cost increases and fluctuations. We currently purchase our chicken wings at market prices. Chicken wings accounted for approximately 27.1% and 16.4% of our cost of sales in the second quarters of 2012 and 2011, respectively, with a quarterly average price per pound of $1.90 and $1.02, respectively.
 
ITEM 4. CONTROLS AND PROCEDURES
 
Evaluation of Disclosure Controls and Procedures

As of the end of the period covered by this report, we conducted an evaluation, under the supervision and with the participation of our chief executive officer and chief financial officer, of our disclosure controls and procedures as defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934. Based on that evaluation, the chief executive officer and chief financial officer concluded that our disclosure controls and procedures were effective as of the date of such evaluation to provide reasonable assurance that information required to be disclosed by the Company in the reports that it files or submits under the Exchange Act is recorded, processed, summarized and reported within the time periods specified by the SEC’s rules and forms.

Changes in Internal Control over Financial Reporting

There were no changes in our internal controls over financial reporting during our most recently completed fiscal quarter that have materially affected, or are reasonably likely to materially affect, our internal controls over financial reporting.
 
 
18

 
 
PART II – OTHER INFORMATION
 
ITEM 1. LEGAL PROCEEDINGS
 
Occasionally, we are a defendant in litigation arising in the ordinary course of our business, including claims arising from personal injuries, contract claims, franchise-related claims, dram shop claims, employment-related claims and claims from guests or employees alleging injury, illness or other food quality, health or operational concerns. To date, none of these types of litigation, most of which are typically covered by insurance, has had a material effect on us. We have insured and continue to insure against most of these types of claims. A judgment on any claim not covered by or in excess of our insurance coverage could adversely affect our financial condition or results of operations.

 ITEM 6. EXHIBITS
 
See Exhibit Index following the signature page of this report.
 
 
19

 
 
SIGNATURES
 
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
 
Date: August 2, 2012
BUFFALO WILD WINGS, INC.
 
       
 
By:
/s/ Sally J. Smith
 
   
Sally J. Smith, President and Chief Executive Officer
(principal executive officer)
 
       
 
By:
/s/ Mary J. Twinem
 
   
Mary J. Twinem, Executive Vice President, Chief
Financial Officer and Treasurer (principal financial and
accounting officer)
 
 
 
20

 

EXHIBIT INDEX
 
BUFFALO WILD WINGS, INC.
FORM 10-Q FOR QUARTER ENDED JUNE 24, 2012
 
Exhibit
Number
 
Description
3.1
   
Restated Articles of Incorporation, as amended (Incorporated by reference to Exhibit 3.1 to our Form 10-Q for the fiscal quarter ended June 29, 2008).
       
3.2
   
Amended and Restated Bylaws, as amended (Incorporated by reference to Exhibit 3.1 to our current report on Form 8-K filed May 27, 2009).
       
 10.1     Buffalo Wild Wings, Inc. 2012 Equity Incentive Plan (Incorporated by reference to Appendix B to our Definitive Proxy Statement on Schedule 14A filed March 22, 2012)
       
31.1
   
Certification of Chief Executive Officer Pursuant to Section 302 of the Sarbanes-Oxley Act
       
31.2
   
Certification of Chief Financial Officer Pursuant to Section 302 of the Sarbanes-Oxley Act
       
32.1
   
Certification of Chief Executive Officer Pursuant to Section 906 of the Sarbanes-Oxley Act
       
32.2
   
Certification of Chief Financial Officer Pursuant to Section 906 of the Sarbanes-Oxley Act
       
101.INS
*  
XBRL Instance Document
       
101.SCH
*  
XBRL Taxonomy Extension Schema Document
       
101.CAL
*  
XBRL Taxonomy Extension Calculation Linkbase Document
       
101.LAB
*  
XBRL Taxonomy Extension Label Linkbase Document
       
101.PRE
*  
XBRL Taxonomy Extension Presentation Linkbase Document
       
101.DEF
*  
XBRL Taxonomy Extension Definition Linkbase Document
 
  *
In accordance with Regulation S-T, the XBRL-related information in Exhibit 101 to this Quarterly Report on
Form 10-Q shall be deemed to be “furnished” and not “filed.”
 
21

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