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 March 27, 2016
 
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   o
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   o
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   o     Non-accelerated filer   o     Smaller reporting company   o
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).     YES   o    NO   x    
The number of shares outstanding of the registrant’s common stock as of April 27, 2016 : 18,826,449 shares.
 



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

2



PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS

BUFFALO WILD WINGS, INC. AND SUBSIDIARIES
  CONSOLIDATED BALANCE SHEETS
(Dollar amounts in thousands)
(unaudited)
 
March 27,
2016
 
December 27,
2015
Assets
 
 
 
Current assets:
 
 
 
Cash and cash equivalents
$
11,693

 
11,220

Marketable securities
9,147

 
9,043

Accounts receivable, net of allowance of $25
33,873

 
34,087

Inventory
14,583

 
15,351

Prepaid expenses
5,509

 
6,386

Refundable income taxes
—

 
21,591

Restricted assets
22,880

 
100,073

Total current assets
97,685

 
197,751

 
 
 
 
Property and equipment, net
593,670

 
604,712

Reacquired franchise rights, net
128,175

 
129,282

Other assets
36,122

 
26,536

Goodwill
115,823

 
114,101

Total assets
$
971,475

 
1,072,382

 
 
 
 
Liabilities and Stockholders’ Equity
 
 
 
Current liabilities:
 
 
 
Unearned franchise fees
$
1,963

 
2,144

Accounts payable
40,762

 
44,760

Accrued compensation and benefits
31,943

 
55,578

Accrued expenses
19,675

 
21,678

Income tax payable
1,189

 
—

Current portion of long-term debt and capital lease obligations
4,787

 
2,147

Current portion of deferred lease credits
76

 
59

System-wide payables
81,220

 
137,257

Total current liabilities
181,615

 
263,623

 
 
 
 
Long-term liabilities:
 
 
 
Other liabilities
16,168

 
16,473

Deferred income taxes
24,585

 
23,726

Long-term debt and capital lease obligations, net of current portion
42,423

 
70,954

Deferred lease credits
42,636

 
41,869

Total liabilities
307,427

 
416,645

 
 
 
 
Commitments and contingencies (note 10)


 


Stockholders’ equity:
 
 
 
Undesignated stock, 1,000,000 shares authorized, none issued
—

 
—

Common stock, no par value. Authorized 44,000,000 shares; issued and outstanding 18,750,276 and 18,917,776, respectively
159,265

 
160,353

Retained earnings
508,332

 
499,085

Accumulated other comprehensive loss
(3,847
)
 
(4,094
)
Total stockholders’ equity
663,750

 
655,344

Noncontrolling interests
298

 
393

Total equity
664,048

 
655,737

Total liabilities and equity
$
971,475

 
1,072,382

 
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
 
March 27,
2016
 
March 29,
2015
Revenue:
 
 
 
Restaurant sales
$
483,911

 
414,972

Franchise royalties and fees
24,346

 
25,614

Total revenue
508,257

 
440,586

Costs and expenses:
 
 
 
Restaurant operating costs:
 
 
 
Cost of sales
143,823

 
125,677

Labor
149,129

 
130,394

Operating
69,680

 
58,551

Occupancy
26,723

 
21,990

Depreciation and amortization
37,549

 
28,069

General and administrative
31,665

 
30,522

Preopening
1,863

 
1,270

Loss on asset disposals
1,222

 
605

Total costs and expenses
461,654

 
397,078

Income from operations
46,603

 
43,508

Interest and other income (expense)
27

 
(75
)
Earnings before income taxes
46,630

 
43,433

Income tax expense
13,952

 
14,448

Net earnings including noncontrolling interests
32,678

 
28,985

Net loss attributable to noncontrolling interests
(95
)
 
(78
)
Net earnings attributable to Buffalo Wild Wings
$
32,773

 
29,063

Earnings per common share – basic
$
1.73

 
1.53

Earnings per common share – diluted
$
1.73

 
1.52

Weighted average shares outstanding – basic
18,922

 
18,993

Weighted average shares outstanding – diluted
18,957

 
19,074

 
 
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
 
Net earnings including noncontrolling interests
$
32,678

 
28,985

Other comprehensive loss:
 
 
 
Foreign currency translation adjustments, net of tax
247

 
(895
)
Other comprehensive income (loss), net of tax
247

 
(895
)
Comprehensive income including noncontrolling interests
32,925

 
28,090

Comprehensive loss attributable to noncontrolling interests
(95
)
 
(78
)
Comprehensive income attributable to Buffalo Wild Wings
$
33,020

 
28,168

 
See accompanying notes to consolidated financial statements.

4



BUFFALO WILD WINGS, INC. AND SUBSIDIARIES
  CONSOLIDATED STATEMENTS OF CASH FLOWS
(Dollar amounts in thousands)
(unaudited)
 
Three months ended
 
March 27,
2016
 
March 29,
2015
Cash flows from operating activities:
 
 
 
Net earnings including noncontrolling interests
$
32,678

 
28,985

Adjustments to reconcile net earnings to net cash provided by operations:
 
 
 
Depreciation
34,552

 
26,851

Amortization
2,997

 
1,218

Loss on asset disposals
1,222

 
605

Deferred lease credits
2,067

 
1,159

Deferred income taxes
858

 
(5,508
)
Stock-based compensation
1,404

 
2,745

Excess tax benefit from stock issuance
(33
)
 
(66
)
Change in fair value of contingent consideration
(1,106
)
 
—

Loss on investments in affiliates
158

 
—

Change in operating assets and liabilities, net of effect of acquisitions:
 
 
 
Trading securities
(104
)
 
(328
)
Accounts receivable
(1,297
)
 
(2,053
)
Inventory
806

 
471

Prepaid expenses
889

 
(5,619
)
Other assets
(428
)
 
154

Unearned franchise fees
(181
)
 
362

Accounts payable
(706
)
 
(1,037
)
Income taxes
22,813

 
17,796

Accrued expenses
(19,488
)
 
(18,374
)
Net cash provided by operating activities
77,101

 
47,361

Cash flows from investing activities:
 
 
 
Acquisition of property and equipment
(34,094
)
 
(25,788
)
Acquisition of businesses
(3,860
)
 
(13,894
)
Purchase of marketable securities
—

 
(12,297
)
Proceeds from marketable securities
—

 
11,155

Net cash used in investing activities
(37,954
)
 
(40,824
)
Cash flows from financing activities:
 
 
 
Proceeds from line of credit
108,633

 
—

Repayments of line of credit
(135,514
)
 
—

Borrowings from restricted funds
22,622

 
—

Repurchases of common stock
(25,000
)
 
—

Other financing activities
(500
)
 
—

Issuance of common stock
434

 
231

Excess tax benefit from stock issuance
33

 
66

Tax payments for restricted stock units
(9,172
)
 
(7,627
)
Net cash used in financing activities
(38,464
)
 
(7,330
)
Effect of exchange rate changes on cash and cash equivalents
(210
)
 
65

Net increase (decrease) in cash and cash equivalents
473

 
(728
)
Cash and cash equivalents at beginning of period
11,220

 
93,329

Cash and cash equivalents at end of period
$
11,693

 
92,601

See accompanying notes to consolidated financial statements.

5



BUFFALO WILD WINGS, INC. AND SUBSIDIARIES
  NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
 
FOR THE THREE MONTHS ENDED MARCH 27, 2016 AND MARCH 29, 2015
(Dollar amounts in thousands except share and per share data)
(unaudited)
(1)
Basis of Financial Statement Presentation
The consolidated financial statements as of March 27, 2016 and December 27, 2015 , and for the three -month periods ended March 27, 2016 and March 29, 2015 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 March 27, 2016 and for the three -month periods ended March 27, 2016 and March 29, 2015 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 “the Company,” “we,” “us” and “our” refer to the business of Buffalo Wild Wings, Inc. and its wholly and majority owned subsidiaries. We operate Buffalo Wild Wings ® , R Taco TM , and PizzaRev ® restaurants as well as sell Buffalo Wild Wings and R Taco restaurant franchises. In exchange for initial and continuing franchise fees, we give franchisees the right to use the brand names. We operate as a single segment for reporting purposes.
The financial information as of December 27, 2015 is derived from our audited consolidated financial statements and notes thereto for the fiscal year ended December 27, 2015 , which are included in Item 8 in the fiscal 2015 Annual Report on Form 10-K, and should be read in conjunction with such financial statements.
The results of operations for the three -month period ended March 27, 2016 are not necessarily indicative of the results of operations that may be achieved for the entire year ending December 25, 2016 .
Certain amounts as of December 27, 2015 have been reclassified to conform to the current year presentation. The Company reclassified amounts previously presented separately on the Consolidated Balance Sheets as amounts due to restricted funds into our system-wide payables, to which they were related. The change in classification does not affect previously reported cash flows from operations or from financing activities in the Consolidated Statement of Cash Flows, or the previously reported Consolidated Statement of Operations for any period.
(2)
Summary of Significant Accounting Policies
(a)
Inventories
Inventories are stated at the lower of cost and net realizable value (see Recently Adopted Accounting Standards for our early adoption of the guidance issued in 2015 for inventory measurement). Cost is determined by the first-in, first-out method.
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. One of the primary food products used by our restaurants and our franchised restaurants is traditional chicken wings. The price we pay for traditional chicken wings is determined based on the average of the previous month’s wing market plus mark-up for processing and distribution. If the monthly average exceeds an upper threshold or falls below a lower threshold set in the contract, we split the impact with our suppliers. For the three-month periods ended March 27, 2016 and March 29, 2015 , chicken wings were 25.9% and 26.5% , respectively, of restaurant cost of sales.
(b)
Recently Issued Accounting Standards
In May 2014, the Financial Accounting Standards Board (FASB) issued Accounting Standards Update (ASU) 2014-09 “Revenue with Contracts from Customers.” ASU 2014-09 supersedes the current revenue recognition guidance, including industry-specific guidance. The guidance introduces a five-step model to achieve its core principal of the entity recognizing revenue to depict the transfer of goods or services to customers at an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services. The requirements will be effective for interim and annual periods beginning after December 15, 2017. Early adoption is permitted for interim and annual periods beginning after December 15, 2016. We are currently evaluating the impact of the updated requirements on our consolidated financial statements.
In February 2016, the FASB issued ASU 2016-02, “Leases.” ASU 2016-02 requires for lease arrangements spanning more than 12 months, an entity to recognize an asset and liability. The updated guidance is effective

6



for interim and annual periods beginning after December 15, 2018, and early adoption is permitted. We believe the adoption of ASU 2016-02 will materially impact our consolidated financial statements.
In March 2016, the FASB issued ASU 2016-04, “Liabilities - Extinguishments of Liabilities: Recognition of Breakage for Certain Prepaid Stored-Value Products.” ASU 2016-04 provides specific guidance for the derecognition of prepaid stored-value product liabilities. The updated guidance is effective for interim and annual periods beginning after December 15, 2017, and early adoption is permitted. We do not believe it will materially impact our consolidated financial statements.
In March 2016, the FASB issued ASU 2016-08, “Revenue from Contracts with Customers: Principal versus Agent Considerations (Reporting Revenue Gross versus Net).” ASU 2016-08 provides specific guidance to determine whether an entity is providing a specified good or service itself or is arranging for the good or service to be provided by another party. The guidance is effective for interim and annual periods beginning after December 15, 2017. Early adoption is permitted for interim and annual periods beginning after December 15, 2016. We are currently evaluating the impact of the updated requirements on our consolidated financial statements.
In March 2016, the FASB issued ASU 2016-09, “Compensation-Stock Compensation: Improvement to Employee Share-Based Payment Accounting.” ASU 2016-09 provides guidance intended to simplify accounting for share-based payment transactions, including the income tax consequences, classification of awards as either equity or liabilities, and classification on the statement of cash flows. The guidance is effective for interim and annual periods beginning after December 15, 2016. Early adoption is permitted for any entity in any interim or annual period. We are currently evaluating the impact of the updated guidance on our consolidated financial statements.
We reviewed all other significant newly-issued accounting pronouncements and concluded they are not applicable to our operations.
(c)
Recently Adopted Accounting Standards
We adopted each of the following four standards as of December 28, 2015, which did not have a material impact on our consolidated financial statements.
In February 2015, the FASB issued ASU 2015-02, “Consolidation: Amendments to the Consolidation Analysis.” ASU 2015-02 modifies the analysis that must be performed to determine whether a reporting entity should consolidate certain types of legal entities. The updated guidance was effective for interim and annual periods beginning after December 15, 2015.
In April 2015, the FASB issued ASU 2015-05, “Intangibles - Goodwill and Other - Internal-Use Software: Customer's Accounting for Fees Paid in a Cloud Computing Arrangement.” ASU 2015-05 provides guidance related to a customer's accounting for fees paid in a cloud computing arrangement. The updated guidance was effective for interim and annual periods beginning after December 15, 2015. We adopted this guidance prospectively. Fees that meet the criteria of a software license are capitalized and included in other assets on our consolidated balance sheets. Amortization expense is recognized over the term of the arrangement and is included in depreciation and amortization expense on our consolidated statements of earnings.
In July 2015, the FASB issued ASU 2015-11, “Inventory: Simplifying the Measurement of Inventory.” ASU 2015-11 changed the subsequent measurement of inventory from lower of cost or market to lower of cost and net realizable value. The guidance requires prospective application for the reporting periods beginning after December 15, 2016 and permits adoption in an earlier period. The Company elected early adoption of this guidance as of December 28, 2015.
In September 2015, the FASB issued ASU 2015-16, “Business Combinations: Simplifying the Accounting for Measurement-Period Adjustments.” ASU 2015-16 removes the requirement to retrospectively account for adjustments to preliminary amounts recognized in a business combination. The guidance requires the cumulative impact of a measurement period adjustment (including the impact on prior periods) be recognized in the reporting period in which the adjustment is identified. The prior period impact of the adjustment should be either presented separately on the face of the income statement or disclosed in the notes. The guidance was effective for interim and annual reporting periods beginning after December 15, 2015.


7



(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.
The following table summarizes the financial instruments measured at fair value in our consolidated balance sheet as of March 27, 2016 :
 
Fair Value Measurements
 
Level 1
 
Level 2
 
Level 3
 
Total
Assets
 
 
 
 
 
 
 
Marketable Securities
$
9,147

 
—

 
—

 
9,147

Liabilities
 
 
 
 
 
 
 
Contingent Consideration
$
—

 
—

 
445

 
445

Deferred Compensation
8,979

 
—

 
—

 
8,979

The following table summarizes the financial instruments measured at fair value in our consolidated balance sheet as of December 27, 2015 :
 
Fair Value Measurements
 
Level 1
 
Level 2
 
Level 3
 
Total
Assets
 
 
 
 
 
 
 
Marketable Securities
$
9,043

 
—

 
—

 
9,043

Liabilities
 
 
 
 
 
 
 
Contingent Consideration
—

 
—

 
1,551

 
1,551

Deferred Compensation
8,958

 
—

 
—

 
8,958

Our marketable securities were classified as trading securities. Our trading securities and deferred compensation liability comprise investments held for future needs of our non-qualified deferred compensation plan and 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 and is a Level 1 approach. Our contingent consideration liabilities represent amounts owed in association with our fiscal year 2015 acquisitions. These liabilities were valued using a Level 3 approach that utilizes an option pricing model and the projected future performance of certain restaurants we acquired. The future performance of these acquired restaurants will ultimately determine the settlement amount of these liabilities. Estimates of fair value are inherently uncertain and represent only management's reasonable expectation regarding future developments. These estimates and the judgments and assumptions upon which the estimates are based will, in all likelihood, differ in some respects from actual future results.









8



The following table summarizes the activity within Level 3 instruments during the three-month period ended March 27, 2016 :
Contingent Consideration Liabilities
 
Level 3 balance at December 27, 2015
$
(1,551
)
Mark to market adjustment
1,106

Level 3 balance at March 27, 2016
$
(445
)
There was no significant activity within Level 3 instruments during the three-month period ended March 29, 2015 .
There were no significant transfers between the levels of the fair value hierarchy during the three -month periods ended March 27, 2016 and March 29, 2015 .
(4)
Marketable Securities
Marketable securities consisted of the following:
 
March 27,
2016

December 27,
2015
Trading
 
 
 
Mutual funds
$
9,147

 
9,043

Total
$
9,147

 
9,043

There were no purchases or sales of available-for-sale securities during the three -month period ended March 27, 2016 . There were purchases totaling $12,297 and sales totaling $11,155 of available-for-sale securities during the three -month period ended March 29, 2015 .
(5)
Property and Equipment
Property and equipment consisted of the following:
 
March 27,
2016
 
December 27,
2015
Construction in process
$
22,193

 
18,662

Buildings
94,304

 
92,603

Capital leases and buildings under deemed landlord financing
24,928

 
25,105

Furniture, fixtures, and equipment
361,158

 
369,344

Leasehold improvements
566,312

 
553,736

Property and equipment, gross
1,068,895

 
1,059,450

Less accumulated depreciation
(475,225
)
 
(454,738
)
Property and equipment, net
$
593,670

 
604,712

(6)
Long-Term Debt and Capital Lease Obligations
Our long-term debt and capital lease obligations consisted of the following:
 
Average interest rate for the three months ended March 27, 2016
 
Maturity
 
March 27, 2016
 
December 27, 2015
Revolving credit facility
1.3%
 
July 2018
 
$
7,648

 
34,530

Capital lease and deemed landlord financing obligations
7.7%
 
Various through November 2030
 
39,562

 
38,571

Total debt and capital lease obligations
 
 
 
 
47,210

 
73,101

Less current maturities
 
 
 
 
(4,787
)
 
(2,147
)
Total long-term debt and capital lease obligations
 
 
 
 
$
42,423

 
70,954


9



We have a $200,000 unsecured revolving credit facility. Interest is charged at LIBOR plus an applicable margin based on our consolidated total leverage ratio. We also pay a commitment fee on the average unused portion of the facility at a rate per annum based on our consolidated total leverage ratio.
The revolving credit facility contains covenants that require us to maintain certain financial ratios, including consolidated coverage, consolidated total leverage and minimum EBITDA. The revolving credit facility also has other customary affirmative and negative covenants, including covenants that restrict the right of the Company and its subsidiaries to merge, to lease, sell or otherwise dispose of assets, to make investments and to grant liens on their assets. As of March 27, 2016 , we were in compliance with all of these covenants.
(7)
Stockholder’s Equity
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 Plan had 910,099 shares available for grant as of March 27, 2016 .
(a)
Stock Options
The exercise price for stock options 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. Stock options vest in four equal annual installments and have a contractual life of seven years. Incentive stock options may be granted under this Plan until March 12, 2022. We issue new shares of common stock upon the exercise of stock options. Option activity is summarized for the three months ended March 27, 2016 as follows:
 
Number
of shares
 
Weighted
average
exercise price
 
Average remaining contractual life
(years)
 
Aggregate intrinsic value
Outstanding, December 27, 2015
131,248

 
$
113.12

 
4.0
 
$
7,051

Exercised
(6,392
)
 
67.85

 
 
 
 
Cancelled
(3,821
)
 
152.93

 
 
 
 
Outstanding, March 27, 2016
121,035

 
$
114.26

 
3.8
 
$
4,788

Exercisable, March 27, 2016
81,276

 
95.60

 
3.2
 
4,311

The aggregate intrinsic value in the table above is before applicable income taxes, based on our closing stock price of $144.84 as of the last business day of the three -month period ended March 27, 2016 , which would have been received by the optionees had all options been exercised and sold on that date. As of March 27, 2016 , total unrecognized stock-based compensation expense related to nonvested stock options was approximately $1,600 , which is expected to be recognized over a weighted average period of approximately 2.2 years . During the three -month periods ended March 27, 2016 and March 29, 2015 , the total intrinsic value of stock options exercised was $533 and $288 , respectively. No shares were granted or vested during the three -month periods ended March 27, 2016 or March 29, 2015 .
(b)
Restricted Stock Units
Restricted stock units are granted annually under the Plan at the discretion of the Compensation Committee of our Board of Directors.
We grant restricted stock units subject to three -year cliff vesting and a cumulative three -year earnings target. The number of units that 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 beginning on the grant date through the end of the performance period.
For each grant, restricted stock units meeting the performance criteria will vest as of the end of the third fiscal year in the performance period, subject to a Plan-specified maximum number of shares that may be issued to any individual in any year in settlement of restricted stock units. 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 three months ended March 27, 2016 was as follows:

10



 
Number
of shares
 
Weighted
average
grant date
fair value
Outstanding, December 27, 2015
190,120

 
$
161.06

Cancelled
(6,772
)
 
166.88

Outstanding, March 27, 2016
183,348

 
$
160.85

As of March 27, 2016 , the total stock-based compensation expense related to nonvested awards not yet recognized was $7,181 , which is expected to be recognized over a weighted average period of 1.3 years. No shares were granted or vested during the three -month periods ended March 27, 2016 and March 29, 2015 . During the three -month periods ended March 27, 2016 and March 29, 2015 , we recognized $1,111 and $2,317 , 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 three -month periods ended March 27, 2016 , and March 29, 2015 , we issued no shares of common stock under the ESPP. As of March 27, 2016 , we had 185,758 shares available for future issuance under the ESPP.
(8)
Earnings Per Common Share
The following is a reconciliation of basic and fully diluted earnings per common share for the three -month periods ended March 27, 2016 and March 29, 2015 :
 
Three Months Ended March 27, 2016
 
Earnings
(numerator)  
 
Shares
(denominator)  
 
Per-share
amount  
Net earnings attributable to Buffalo Wild Wings
$
32,773

 
 
 
 
Earnings per common share
32,773

 
18,922,040

 
$
1.73

Effect of dilutive securities – stock options
—

 
35,044

 
 

Earnings per common share – assuming dilution
$
32,773


18,957,084

 
$
1.73

 
Three Months Ended March 29, 2015
 
Earnings
(numerator)  
 
Shares
(denominator)  
 
Per-share
amount  
Net earnings attributable to Buffalo Wild Wings
$
29,063

 
 
 
 
Earnings per common share
29,063

 
18,992,965

 
$
1.53

Effect of dilutive securities – stock options
—

 
81,363

 
 

Earnings per common share – assuming dilution
$
29,063

 
19,074,328

 
$
1.52

 
 
 
 
 
 
 
 
 
 
 
 
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  
 
March 27,
2016
 
March 29,
2015
Stock options
49,094

 
6,691

Restricted stock units
183,348

 
242,471



11



(9)
Supplemental Disclosures of Cash Flow Information
 
Three months ended
 
March 27,
2016
 
March 29,
2015
Cash paid (received) during the period for:
 
 
 
Income taxes
$
(9,786
)
 
2,096

Interest
867

 
—

Noncash financing and investing transactions:
 
 
 
Decrease in property and equipment not yet paid for
(3,326
)
 
(2,311
)
Increase in deemed owner assets and obligations
1,490

 
—

Increase in property and equipment and liabilities from hosted software arrangements
1,151

 
—

(10) Contingencies
We have a limited guarantee of the borrowings of Pie Squared Pizza, LLC, a subsidiary of Pie Squared Holdings, LLC, in the amount of $575 .
On June 2, 2015, two of our former employees (the “plaintiffs”) filed a collective action under the Fair Labor Standards Act (“FLSA”) and putative class action under New York state law against us in the United States District Court for the Western District of New York. The claim alleges that we have a policy or procedure requiring employees who receive compensation in part through tip credits to perform work that is ineligible for tip credit compensation at a tip credit rate in violation of the FLSA and New York state law. We intend to vigorously defend this lawsuit. We believe a loss is reasonably possible, but we are currently unable to reasonably estimate the amount of loss.
In addition to the litigation described above, we are involved in various other legal matters arising in the ordinary course of business. In the opinion of management, the ultimate disposition of these other 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 27, 2015 . This discussion and analysis contains certain statements that are not historical facts, including, among others, those relating to our anticipated financial performance for 2016 , 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 Management's Discussion and Analysis of Financial Condition and Results of Operations as well as in Item 1A of Part I of the fiscal 2015 Annual Report on 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, Inc. concepts and the overall health of the concepts. 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, franchised restaurant 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.
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, business combinations, lessee involvement in construction, 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 27, 2015 . There have been no changes to those policies during this period.
We are currently monitoring several restaurants in regards to the valuation of long-lived assets. Based on our current estimates of the future operating results of these restaurants, we believe that the assets at these restaurants are not impaired. As we

12



periodically refine our estimated future operating results, changes in our estimates and assumptions may cause us to realize impairment charges in the future. We believe that any future impairment charges related to the assets at these restaurants, in the aggregate, would not be material to our financial statements.
Overview
As of March 27, 2016 , we owned and operated 603 company-owned restaurants, including 596 Buffalo Wild Wings ® , 5 R Taco TM , and 2 PizzaRev ® restaurants in the United States and Canada. We also franchised an additional 587 restaurants, including 580 Buffalo Wild Wings restaurants and 7 R Taco restaurants. We are building for long-term future earnings growth by investing in Buffalo Wild Wings, franchising, and new and emerging brands. These investments will help us to achieve our vision of being a company of 3,000 total restaurants worldwide.
In 2016, we expect to open approximately 40 company-owned Buffalo Wild Wings restaurants, and we expect our franchisees to open 30 to 35 Buffalo Wild Wings restaurants in the United States and 12 to 15 Buffalo Wild Wings restaurants internationally. Our net earnings per share growth goal is 13% to 18% for 2016. Our growth and success depend on several factors and trends. First, we will continue to 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 experience.
Our revenue is generated by:
•
Sales at our company-owned restaurants, which represented 95% of total revenue in the first quarter of 2016 . Food and nonalcoholic beverages accounted for 80% of restaurant sales. Alcoholic beverages accounted for 19% of restaurant sales. Other items accounted for the remaining 1% of restaurant sales. The menu items with the highest sales volumes in the first quarter of 2016 are traditional and boneless wings, representing 21% and 22% of restaurant sales, respectively.
•
Royalties and franchise fees received from our franchisees.
A second factor is our success in developing restaurants, including international locations. There are inherent risks in opening new restaurants, especially in new markets or countries, 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 domestic and international 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 sales. The cost of sales is difficult to predict, as it has ranged from 29.3% to 30.3% of restaurant sales per quarter in our 2015 fiscal year and 2016 first quarter, mostly due to the price fluctuations in chicken wings. We are focused on minimizing the impact of rising costs per wing. Our efforts include selling wings by portion, new purchasing strategies, menu price increases, and reduced food waste, as well as marketing promotions, menu additions, and menu changes that affect the percentage that chicken wings represent of total restaurant sales. 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. Current-month chicken wing prices are determined based on the average of the previous month’s wing market plus mark-up for processing and distribution. If the monthly average exceeds an upper threshold or falls below a lower threshold set in the contract, we split the impact with our suppliers, reducing our risk related to wing price fluctuations. We continually evaluate alternative pricing models in order to mitigate price volatility.
We generate cash from the operation of company-owned restaurants and from franchise royalties and fees. We highlight the specific costs associated with the ongoing operation of our company-owned restaurants in the consolidated statement of earnings under “Restaurant operating costs.” Our depreciation and amortization expense consists primarily of depreciation related to assets used by our company-owned restaurants and amortization of reacquired franchise rights. 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 is related to company-owned restaurants and includes the costs associated with remodels, closures of locations, and normal asset retirements. General and administrative expenses are related to home office and field support provided to both company-owned restaurant and franchising operations.
We operate on a 52- or 53-week fiscal year ending on the last Sunday in December. Both of the first quarters of 2016 and 2015 consisted of 13 weeks.




13



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 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 fairly present 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
 
March 27,
2016
 
March 29,
2015
Revenue:
 
 
 
Restaurant sales
95.2
 %
 
94.2

Franchise royalties and fees
4.8

 
5.8

Total revenue
100.0

 
100.0

Costs and expenses:
 
 
 
Restaurant operating costs:
 
 
 
Cost of sales
29.7

 
30.3

Labor
30.8

 
31.4

Operating
14.4

 
14.1

Occupancy
5.5

 
5.3

Depreciation and amortization
7.4

 
6.4

General and administrative
6.2

 
6.9

Preopening
0.4

 
0.3

Loss on asset disposals
0.2

 
0.1

Total costs and expenses
90.8

 
90.1

Income from operations
9.2

 
9.9

Interest and other income (expense)
0.0

 
(0.0
)
Earnings before income taxes
9.2

 
9.9

Income tax expense
2.7

 
3.3

Net earnings including noncontrolling interests
6.4

 
6.6

Net loss attributable to noncontrolling interests
(0.0
)
 
(0.0
)
Net earnings attributable to Buffalo Wild Wings
6.4
 %
 
6.6










14



The number of company-owned and franchised restaurants open are as follows:
 
Three Months Ended
 
March 27, 2016
 
March 29, 2015
 
Corporate
 
Franchise
 
Total
 
Corporate
 
Franchise
 
Total
Buffalo Wild Wings
 
 
 
 
 
 
 
 
 
 
 
Beginning of period
590
 
573
 
1,163
 
487
 
584
 
1,071
Opened
6
 
8
 
14
 
3
 
11
 
14
Acquired
1
 
(1)
 
—
 
6
 
(6)
 
—
Closed/Relocated
(1)
 
—
 
(1)
 
—
 
(2)
 
(2)
End of period
596
 
580
 
1,176
 
496
 
587
 
1,083
R Taco
 
 
 
 
 
 
 
 
 
 
 
Beginning of period
4
 
6
 
10
 
2
 
7
 
9
Opened
1
 
1
 
2
 
—
 
—
 
—
Acquired
—
 
—
 
—
 
1
 
(1)
 
—
Closed/Relocated
—
 
—
 
—
 
—
 
—
 
—
End of period
5
 
7
 
12
 
3
 
6
 
9
PizzaRev
 
 
 
 
 
 
 
 
 
 
 
Beginning of period
2
 
n/a
 
2
 
2
 
n/a
 
2
Opened
—
 
n/a
 
—
 
—
 
n/a
 
—
Acquired
—
 
n/a
 
—
 
—
 
n/a
 
—
Closed/Relocated
—
 
n/a
 
—
 
—
 
n/a
 
—
End of period
2
 
n/a
 
2
 
2
 
n/a
 
2
Consolidated
 
 
 
 
 
 
 
 
 
 
 
End of the period
603
 
587
 
1,190
 
501
 
593
 
1,094
The restaurant sales for company-owned and franchised restaurants are as follows (amounts in thousands):
 
Three months ended
 
March 27,
2016
 
March 29,
2015
Company-owned restaurant sales
$
483,911

 
414,972

Franchised restaurant sales
482,838

 
508,455

Increases (decreases) in comparable same-store sales for Buffalo Wild Wings restaurants are as follows (based on restaurants operating at least fifteen months):
 
Three months ended
 
March 27,
2016
 
March 29,
2015
Company-owned same-store sales
(1.7
)%
 
7.0
Franchised same-store sales
(2.4
)
 
6.0
The average prices paid per pound for chicken wings for company-owned Buffalo Wild Wings restaurants are as follows:
 
Three months ended
 
March 27,
2016
 
March 29,
2015
Average price per pound
$
1.97

 
1.92




15



Results of Operations for the Three Months Ended March 27, 2016 and March 29, 2015
Restaurant sales increased by $68.9 million , or 16.6% , to $483.9 million in 2016 from $415.0 million in 2015 . The increase in restaurant sales was due to a $76.2 million increase associated with eight company-owned restaurants that opened or were acquired in 2016 and the company-owned restaurants that opened or were acquired before 2016 that did not meet the criteria for same-store sales for all or part of the three-month period, partially offset by a $7.2 million decrease related to a 1.7% decrease in same-store sales at Buffalo Wild Wings restaurants.
Franchise royalties and fees decreased by $1.3 million , or 5.0% , to $24.3 million in 2016 from $25.6 million in 2015 . The decrease was due to less franchised restaurants in operation in 2016, primarily due to acquisitions of franchised restaurants that we completed in 2015 and a 2.4% decrease in same-store sales for the franchised Buffalo Wild Wings restaurants in operation at the end of the period compared to the same period in 2015 .
Cost of sales increased by $18.1 million , or 14.4% , to $143.8 million in 2016 from $125.7 million in 2015 due primarily to more company-owned restaurants being operated in 2016 . Cost of sales as a percentage of restaurant sales decreased to 29.7% in 2016 from 30.3% in 2015 , primarily due to a decrease in the costs of traditional chicken wings as a percentage of sales. The decrease in the costs of chicken wing as a percentage of sales was driven by menu price increases taken on chicken wings, which were greater than the increase in the cost per pound for chicken wings during the same period. During the first quarter of 2016 , the average cost per pound for traditional chicken wings was $1.97 , a 2.6% increase over the same period in 2015 .
Labor expenses increased by $18.7 million , or 14.4% , to $149.1 million in 2016 from $130.4 million in 2015 due primarily to more restaurants being operated in 2016 . Labor expenses as a percentage of restaurant sales decreased to 30.8% in 2016 from 31.4% in 2015 . Cost of labor as a percentage of restaurant sales decreased primarily due to lower bonus expenses.
Operating expenses increased by $11.1 million , or 19.0% , to $69.7 million in 2016 from $58.6 million in 2015 due primarily to more restaurants being operated in 2016 . Operating expenses as a percentage of restaurant sales increased to 14.4% in 2016 from 14.1% in 2015 . The increase in operating expenses as a percentage of restaurant sales was primarily due to deleveraging repair and maintenance and supplies expenses consistent with the same-store-sales decrease, as well as increased credit card processing fees.
Occupancy expenses increased by $4.7 million , or 21.5% , to $26.7 million in 2016 from $22.0 million in 2015 due primarily to more restaurants being operated in 2016 . Occupancy expenses as a percentage of restaurant sales increased to 5.5% in 2016 from 5.3% in 2015 primarily due to deleveraging on the same-store-sales decrease.
Depreciation and amortization increased by $9.5 million , or 33.8% , to $37.5 million in 2016 from $28.1 million in 2015 . The increase was primarily due to the additional depreciation related to the 102 additional company-owned restaurants compared to the same period in 2015 . Depreciation and amortization as a percentage of total revenue increased to 7.4% in 2016 from 6.4% in 2015 . The increase was due to amortization of reacquired franchise rights and depreciation related to capital leases acquired as part of the acquisitions we completed in 2015.
General and administrative expenses increased by $1.1 million , or 3.7% , to $31.7 million in 2016 from $30.5 million in 2015 primarily due to additional headcount. General and administrative expenses as a percentage of total revenue decreased to 6.2% in 2016 from 6.9% in 2015 primarily due to a decrease in stock-based compensation. Excluding stock-based compensation of $1.4 million in the first quarter and $2.7 million in the prior year, general and administrative expenses for the first quarter would have totaled $30.3 million or 6.0% of total revenue, compared to 6.3% last year. The decrease was primarily due to lower bonus expense, partially offset by increased professional fees and repair and maintenance costs.
Preopening costs increased by $0.6 million to $1.9 million in 2016 from $1.3 million in 2015 . In 2016 , we incurred costs of $1.3 million for seven new company-owned restaurants opened in the first quarter of 2016 and costs of $0.6 million for restaurants that will open in the second quarter of 2016 or later. In 2015 , we incurred costs of $0.8 million for three new company-owned restaurants opened in the first quarter of 2015 and costs of $0.5 million for restaurants that opened in the second quarter of 2015 or later. Preopening costs per new company-owned Buffalo Wild Wings restaurant averaged $288,000 in the first quarter of 2016 . Preopening costs per new company-owned Buffalo Wild Wings restaurant averaged $329,000 in the first quarter of 2015 .
Loss on asset disposals increased by $0.6 million to $1.2 million in 2016 from $0.6 million in 2015 . The expense in 2016 represented disposals due to remodels, and the write-off of miscellaneous equipment. The expense in 2015 represented the write-off of miscellaneous equipment and disposals due to remodels.
Other income increased to $27,000 in 2016 from other expenses of $75,000 in 2015 . Other income in 2016 consisted primarily of a gain related to an increase in the valuation of our contingent consideration of $1.1 million , partially offset by interest expense of $0.9 million. Other expense in 2015 was primarily related to a loss on our minority investment in Pie Squared Holdings.

16



Provision for income taxes decreased $0.5 million to $14.0 million in 2016 from $14.4 million in 2015 . The effective tax rate as a percentage of income before taxes decreased to 29.9% in 2016 from 33.3% in 2015 primarily due to employment credits. We estimate our effective tax rate in 2016 will be about 30.5% based on federal and state tax rates and credits currently in effect.
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; improving technology; share repurchases; and other general business needs. We fund these expenses, except for acquisitions of businesses and investments in affiliates, primarily with cash from operations. Depending on the size of the transaction, acquisition of businesses or investments in affiliates would generally be funded from our cash balances or additional borrowing under our revolving credit facility.
Our cash balance at March 27, 2016 was $11.7 million . As of March 27, 2016 , we had $192.4 million available under our revolving credit facility.
For the three months ended March 27, 2016 , net cash provided by operating activities was $77.1 million . Net cash provided by operating activities consisted primarily of net earnings adjusted for non-cash expenses and a decrease in income taxes receivable, partially offset by a decrease in accrued expenses. The decrease in income taxes receivable was primarily due to the receipt of an expedited refund for a portion of the year-end receivable balance, and an increase in income taxes payable during the first three months of 2016 due to the timing of estimated tax payments. The decrease in accrued expenses was primarily due to the timing of bonus and payroll payments.
For the three months ended March 29, 2015 , net cash provided by operating activities was $47.4 million . Net cash provided by operating activities consisted primarily of net earnings adjusted for non-cash expenses and an increase in income taxes payable, partially offset by a decrease in accrued expenses. The increase in income taxes payable was primarily due to the timing of tax payments. The decrease in accrued expenses was primarily due to the timing of bonus and payroll payments.
For the three months ended March 27, 2016 and March 29, 2015 , net cash used in investing activities was $38.0 million and $40.8 million , respectively. Investing activities included purchases of property and equipment related to the additional company-owned restaurants and restaurants under construction in both periods as well as the acquisition of 1 franchised restaurant in 2016 and 6 franchised restaurants in 2015. During the first three months of 2016 and 2015 , we opened or purchased 8 and 10 restaurants, respectively. In 2016 , exclusive of acquisitions, we expect capital expenditures of approximately $111.7 million for the cost of approximately 40 new or relocated company-owned Buffalo Wild Wings restaurants, $18.3 million for technology improvements on our restaurant and corporate systems, and $64.1 million for capital expenditures at our existing restaurants. In the first three months of 2015 , we purchased $12.3 million of marketable securities and received proceeds of $11.2 million for sales of marketable securities.
For the three months ended March 27, 2016 and March 29, 2015 , net cash used in financing activities was $38.5 million and $7.3 million , respectively. Net cash used in financing activities for 2016 was primarily due to repayments of our line of credit of $135.5 million and repurchases of our common stock of $25.0 million , partially offset by proceeds from our line of credit of $108.6 million and short-term borrowings from our national advertising and gift card funds of $22.6 million . Additional cash used in financing activities was due to tax payments for restricted stock units of $9.2 million , partially offset by proceeds from the issuance of common stock of $0.4 million . Net cash used in financing activities for 2015 resulted from tax payments for restricted stock units of $7.6 million , partially offset by proceeds the issuance of common stock of $0.2 million and the excess tax benefit from stock issuance of $0.1 million . 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 2016 .
Our liquidity is impacted by minimum cash payment commitments resulting from lease obligations for our restaurants and our corporate office. Initial 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.








17



The following table presents a summary of our contractual obligations and commitments as of March 27, 2016 :
 
 
 
Payments Due By Period (in thousands)
 
Total
 
Less than
One year
 
1-3 years
 
3-5 years
 
After 5
years
Operating lease obligations
$
725,243

 
81,980

 
156,149

 
131,983

 
355,131

Capital lease obligations
48,694

 
4,823

 
9,802

 
9,823

 
24,246

Deemed landlord financing obligations
6,519

 
634

 
1,292

 
1,319

 
3,274

Commitments for restaurants under development
56,388

 
2,171

 
7,813

 
7,849

 
38,555

Revolving credit facility
7,648

 
—

 
7,648

 
—

 
—

Other commitments
10,000

 
2,000

 
4,000

 
4,000

 


Total
$
854,492

 
91,608

 
186,704

 
154,974

 
421,206

We believe the cash flows from our operating activities will be sufficient to fund our operations and building commitments and meet our obligations for the foreseeable future. Depending on the size of the transaction, acquisitions or investments and share repurchases would generally be funded from cash balances or using our revolving credit facility. Our future cash outflows related to income tax uncertainties amounted to $1,391 as of March 27, 2016 . 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 March 27, 2016 , 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 (“the Exchange Act”). 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” and 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 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 risk factors that follow (all of which are discussed in greater detail in Item 1A of Part I of our Annual Report on Form 10-K for the fiscal year ended December 27, 2015 ). 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.
•
Unfavorable publicity could harm our business.
•
Fluctuations in chicken wing prices could impact our operating income.
•
If we are unable to identify and obtain suitable new restaurant sites and successfully open new restaurants, our revenue growth rate and profits may be reduced.
•
A security failure in our information technology systems could expose us to potential liability and loss of revenues.
•
Shortages or interruptions in the availability and delivery of food and other supplies may increase costs or reduce revenues.
•
Wage and hour litigation could negatively impact our performance
•
Changes in employment laws or regulations could harm our performance.
•
Investments in new or emerging brands may not be successful.

18



•
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.
•
Failure of our internal control over financial reporting could harm our business and financial results.
•
If the material weaknesses we have identified in our internal control over financial reporting persist or if we fail to establish and maintain effective internal control over financial reporting, our ability to accurately report our financial results could be adversely affected.
•
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 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.
•
We may be dependent on franchisees and their success.
•
We could face liability from or as a result of our franchisees.
•
We may be unable to compete effectively in the restaurant industry.
•
Our success depends substantially on the value of our brands and our reputation for offering guests a compelling guest experience.
•
Our inability to successfully and sufficiently raise menu prices could result in a decline in profitability.
•
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 business.
•
We may not be able to obtain and maintain licenses and permits necessary to operate our restaurants.
•
The sale of alcoholic beverages at our restaurants subjects us to additional regulations and potential liability.
•
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 or current insurance may not provide adequate levels of coverage.
•
We are dependent on information technology and any material failure of that technology could impair our ability to efficiently operate our business.

19



•
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.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
We are exposed to market risk related to our cash balances held in foreign countries. Changes in interest rates affect the investment income we earn on our cash balances 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.
Interest Rates
We are exposed to interest rate risk on the outstanding borrowings on our revolving credit facility. As of March 27, 2016 , we had an outstanding balance of $7.6 million under the facility. As of March 27, 2016 , we deem our interest rate risk to be immaterial.
Inflation
The primary inflationary factors affecting our operations are food, labor, restaurant operating and building 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 and supply risks. We negotiate directly with independent suppliers for our supply of food and other products. Domestically, we have a distribution contract with McLane Company, Inc. that covers food, paper, and non-food products. 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. One of the primary food products used by company-owned and franchised Buffalo Wild Wings 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. Chicken wings accounted for approximately 25.9% and 26.5% of our cost of sales in the first quarters of 2016 and 2015 , respectively, with a quarterly average price per pound of $1.97 and $1.92 , respectively. If the monthly average wing price exceeds an upper threshold or falls below a lower threshold set in the contract, we split the impact with our suppliers, reducing our risk related to wing price fluctuations.
ITEM 4. CONTROLS AND PROCEDURES
Evaluation of Disclosure Controls and Procedures
As of March 27, 2016, management conducted an evaluation, with the participation of our Chief Executive Officer and our principal financial officer, of our disclosure controls and procedures as defined in Rule 13a-15(e) under the Securities Exchange Act of 1934, as amended (the “Exchange Act”). As a result of the material weaknesses in internal control over financial reporting identified and described in Item 9A of our Annual Report on Form 10-K for the fiscal year ended December 27, 2015, our disclosure controls and procedures were not effective as of March 27, 2016.
Notwithstanding the identified material weaknesses, management has concluded that the consolidated financial statements included in this Annual Report on Form 10-Q fairly represent in all material respects our financial condition, results of operations and cash flows at and for the periods presented in accordance with U.S. GAAP.
Remediation Plan for Material Weaknesses in Internal Control over Financial Reporting
The Company is in the process of improving its policies and procedures relating to the recognition and measurement of new and modified lease transactions originated by the Company or acquired through business combinations. Management plans to enhance its internal controls by a) adding controls to ensure proper review of new and modified leases and the application of relevant accounting standards; b) strengthening the review and approval of manual journal entries; and c) adding resources to the conduct of risk assessment procedures and implementing necessary revisions to internal control over financial reporting, responsive to changes in the business.

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The material weaknesses will not be considered remediated until the applicable remedial controls operate for a sufficient period of time and management has concluded, through testing, that these controls are operating effectively. We believe this remediation will occur in fiscal 2016 and will strengthen our internal control over financial reporting and will prevent a reoccurrence of the material weaknesses described in Item 9A of our Annual Report on Form 10-K for the fiscal year ended December 27, 2015.
Changes in Internal Control over Financial Reporting
Other than the actions taken under “Remediation Plan for Material Weaknesses in Internal Control over Financial Reporting” discussed above, there were no changes in our internal control over financial reporting (as defined in Rule 13a-15(f) under the Exchange Act) during our most recently completed fiscal quarter that have materially affected or are reasonably likely to materially affect our internal control over financial reporting.

PART II – OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
In addition to the legal proceedings described in Note 10 to the consolidated financial statements included in Item 1 of Quarterly Report on Form 10-Q, we are occasionally a defendant in litigation arising in the ordinary course of our business, including claims arising from personal injuries, contract claims, wage and hour 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 many 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 2. ISSUER PURCHASES OF EQUITY SECURITIES
This table below provides information with respect to our purchases of shares of Buffalo Wild Wings common stock during the three months ended March 27, 2016 :

Period
Total Number of Shares Purchased
Average Price Paid per Share
Total Number of Shares Purchased as Part of Publicly Announced Plan (a)
Approximate Dollar Value of Shares That May Yet Be Purchased Under the Plan
December 28, 2015, through January 24, 2016
—

—

—

—

January 25, 2016, through February 21, 2016
173,892

$
143.77

173,892

$
150,000,243

February 22, 2016, through March 27, 2016 (b)
57,614

159.20

—

—

Total
231,506

$
302.97

173,892

$
150,000,243


(a)  
Shares were repurchased pursuant to a repurchase program announced on November 23, 2015. The program initially included $200 million in authorized repurchases and has no expiration date.  
(b)  
All such shares were surrendered to the Company to satisfy tax withholding obligations in connection with the vesting of restricted stock issued to employees.  

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

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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:
May 2, 2016
BUFFALO WILD WINGS, INC.
 
 
 
 
 
 
By:
/s/ Sally J. Smith 
 
 
 
Sally J. Smith, President and Chief Executive Officer
(principal executive officer)
 
 
 
 
 
 
By:
/s/ Jeffrey B. Sorum 
 
 
 
Jeffrey B. Sorum, Senior Vice President, Chief
Accounting Officer (interim principal financial officer)

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EXHIBIT INDEX
BUFFALO WILD WINGS, INC.
FORM 10-Q FOR QUARTER ENDED MARCH 27, 2016
Exhibit
Number
 
Description
3.1
 
Restated Articles of Incorporation, as amended (Incorporated by reference to Exhibit 3.1 to our quarterly report on Form 10-Q for the fiscal quarter ended June 29, 2008, file no. 000-24743).
 
 
 
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, file no. 000-24743).
 
 
 
10.1
 
Form of Notice of Incentive Stock Option Award under the 2012 Equity Incentive Plan
 
 
 
10.2
 
Form of Notice of Non-Qualified Stock Option Award under the 2012 Equity Incentive Plan
 
 
 
10.3
 
Form of Notice of Restricted Stock Unit Award under the 2012 Equity Incentive Plan
 
 
 
10.4
 
Form of Notice of Performance-Based Restricted Stock Unit Award under the 2012 Equity Incentive Plan
 
 
 
31.1
 
Certification of Chief Executive Officer Pursuant to Section 302 of the Sarbanes-Oxley Act.
 
 
 
31.2
 
Certification of Principal 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 Principal Financial Officer Pursuant to Section 906 of the Sarbanes-Oxley Act.
 
 
 
101
 
The following financial statements from the Company’s 10-Q for the fiscal quarter ended March 27, 2016, formatted in XBRL: (i) Consolidated Balance Sheet, (ii) Consolidated Statement of Earnings, (iii) Consolidated Statement of Comprehensive Income, (iv) Consolidated Statement of Cash Flows, and (v) Notes to Consolidated Financial Statements.

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