Buffalo Wild Wings
BUFFALO WILD WINGS INC (Form: 10-K, Received: 02/25/2016 17:14:05)


 
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549 
 
  FORM 10-K
 
x       Annual Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 for the fiscal year ended December 27, 2015 .
or
       Transition Report Under Section 13 or 15(d) of the Securities Exchange Act of 1934 for the transition period from             to            .
Commission File Number: 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)
  Registrant’s telephone number (952) 593-9943  
 
 
Securities registered pursuant to Section 12(b) of the Act:
Title of each class
Name of each exchange on which registered
Common Stock, no par value
NASDAQ Global Market
  Securities registered pursuant to Section 12(g) of the Act: None
 
  
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act.
YES   x      NO      
 Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act.
YES        NO   x    
 Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the 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 a checkmark 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 if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K.   
 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. 
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 Exchange Act Rule 12b-2 of the Exchange Act).    YES    NO   x     
 The aggregate market value of the voting stock held by non-affiliates was $3.0 billion based on the closing sale price of the Company’s Common Stock as reported on the NASDAQ Global Market on June 28, 2015
The number of shares outstanding of the registrant’s common stock as of February 19, 2016 : 18,828,772 shares.
 
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the Proxy Statement for the 2016 Annual Meeting of Shareholders are incorporated by reference into Part III of this report.
 




 
 
Page
PART I
 
Item 1.
Business
Item 1A.
Risk Factors
Item 1B.
Unresolved Staff Comments
Item 2.
Properties
Item 3.
Legal Proceedings
Item 4.
Mining Safety Disclosures
 
 
PART II
 
Item 5.
Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities
Item 6.
Selected Financial Data
Item 7.
Management’s Discussion and Analysis of Financial Condition and Results of Operations
Item 7A.
Quantitative and Qualitative Disclosures About Market Risk
Item 8.
Consolidated Financial Statements and Supplementary Data
Item 9.
Changes in and Disagreements with Accountants on Accounting and Financial Disclosure
Item 9A.
Controls and Procedures
Item 9B.
Other Information
 
 
PART III
 
Item 10.
Directors, Executive Officers and Corporate Governance
Item 11.
Executive Compensation
Item 12.
Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters
Item 13.
Certain Relationships and Related Transactions, and Director Independence
Item 14.
Principal Accountant Fees and Services
 
 
PART IV
 
Item 15.
Exhibits and Financial Statement Schedules
 
 
Signatures

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PART I

ITEM 1. BUSINESS
 
General
 
References in this annual report on Form 10-K to “Buffalo Wild Wings”, “BWW”, “company”, “we”, “us”, and “our” refer to the business of Buffalo Wild Wings, Inc. and its wholly owned and majority owned subsidiaries. We operate Buffalo Wild Wings ® , R Taco™, and PizzaRev ® restaurants, as well as sell Buffalo Wild Wings and R Taco restaurant franchises. In exchange for the initial and continuing franchise fees received, we give franchisees the right to use the brand names. We operate as a single segment for reporting purposes.

We maintain an Internet website address at www.buffalowildwings.com . We make available free of charge through our website our annual report on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K, and all amendments to those reports as soon as they are reasonably available after these materials are electronically filed with or furnished to the Securities and Exchange Commission (“SEC”). These materials are also accessible on the SEC’s web site at www.sec.gov. The public may read and copy any materials we file with the SEC at the SEC’s Public Reference Room at 100 F Street, NE, Washington, DC 20549. The public may obtain information from the Public Reference Room by calling the SEC at 1-800-SEC-0330.
 
Buffalo Wild Wings is an established and growing owner, operator, and franchisor of restaurants featuring a variety of boldly-flavored, crave-able menu items including our Buffalo, New York-style chicken wings spun in any of our 16 signature sauces or 5 signature seasonings. Buffalo Wild Wings restaurants create a welcoming neighborhood atmosphere that includes an extensive multi-media system, a full bar and an open layout, which appeals to sports fans and families alike. We differentiate our restaurants by the social environment we create and the connection we make with our Team Members, guests and the local community. Our guests have the option of watching sporting events or other popular programs on our projection screens and approximately 60 additional televisions, competing in Buzztime® Trivia or playing video games. The open layout of our restaurants offers dining and bar areas that provide distinct seating choices for sports fans and families. Our flexible restaurants allow our guests to customize their Buffalo Wild Wings experience to meet their time demands, service preferences or the experience they are seeking of a workday lunch, a dine-in dinner, a take-out meal, an afternoon or evening enjoying a sporting event or a late-night craving. Buffalo Wild Wings restaurants are the place people want to be, where any excuse to get together is a good one.
 
Buffalo Wild Wings restaurants have widespread appeal and have won dozens of “Best Wings” and “Best Sports Bar” awards across the country. Our made-to-order menu items are enhanced by the bold flavor profile of our 16 signature sauces and 5 signature seasonings, ranging from Sweet BBQ to Blazin’ ® . Our restaurants offer 20 to 30 domestic and imported beers on tap, including craft brews, and a wide selection of bottled beers, wines, and liquor. Our award-winning food and memorable experience drive guest visits and loyalty.
 
We have established the Buffalo Wild Wings brand through coordinated marketing and operational execution that ensures brand recognition and quality and consistency throughout our concept. These efforts include marketing programs and irreverent advertising to support both our company-owned and franchised restaurants. We also prominently feature our trademark Buffalo insignias, yellow and black colors, sports memorabilia, dozens of televisions and projection screens, and exterior trade dress at our restaurants and as branding for our company materials. Our concept is further strengthened by our emphasis on operational excellence supported by operating guidelines and employee training in both company-owned and franchised restaurants.
 
The Buffalo Wild Wings brand was founded in 1982 at a location near The Ohio State University. Our original name was Buffalo Wild Wings & Weck ® and we became more popularly known as bw-3®. In 1991, we began our franchising program. In 2003, we completed an initial public offering and became a publicly-held company. Today, we are popular throughout the United States and Canada and widely recognized as Buffalo Wild Wings.

R Taco is a distinctive fast casual taco concept, inspired by fun and adventure. Our menu features a variety of tasty tacos at an affordable price, in a lively and welcoming environment. Each taco is hand-made fresh and fast in our open kitchen, using ingredients made from scratch. The result is authentic Mexican street-style tacos that are both traditional and inventive, each with a unique flavor and personality. Warm chips, house-made salsas, craft beers and no-frills margaritas round out the experience.


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PizzaRev is a fast casual pizza concept that empowers guests to craft their own custom personal pizza, using fresh ingredients and homemade pizza dough. Guests have the option of selecting their choice of crust, sauce and over 30 cheeses and fresh ingredients.
 
Our Concept and Business Strategy
 
We aspire to be a growth enterprise of restaurant brands, with more than 3,000 restaurants creating the ultimate guest experience worldwide. To escalate our strategy, we will:
 
Continue to strengthen the Buffalo Wild Wings ® brand domestically and internationally;
Identify, invest in and develop emerging restaurant concepts beyond Buffalo Wild Wings;
Continuously develop and deliver unique guest experiences;
Offer crave-able menu items with broad appeal;
Create an inviting neighborhood atmosphere;
Focus on operational excellence;
Open restaurants in new and existing domestic and international markets; and
Increase same-store sales, average unit volumes, and profitability.

Buffalo Wild Wings Growth Strategy   
 
We have established and continue to expand the necessary infrastructure and control systems to support our disciplined growth strategy with our core concept, supporting approximately 1,700 restaurants in the United States and Canada. Our current growth strategy is to continue to open both company-owned restaurants and franchised restaurants.
 
In most of our existing markets, we plan to continue to open new restaurants until a market is penetrated to a point that enables us to gain operational, cost, and other efficiencies. We intend to grow our franchise system through the development of new restaurants by existing and new franchisees. We may also grow our number of company-owned restaurants through the acquisition of franchised restaurants.

Along with planned unit growth, we are focused on innovating our Guest Experience for existing and new restaurants. This includes new technologies to make it easy for our guests to locate us, wait for a table, order from our menu and make their payment. We are also enhancing our Guest Experience by developing digital entertainment experiences inside and outside our restaurants to increase value and strengthen brand loyalty. As part of our focus on making our experience engaging we are building an enhanced service model to ensure our guests gain the full experience of our Brand while they’re in our restaurants, including the addition of Guest Experience Captains.

We will continue our international growth through development agreements with new and existing franchisees. As of December 27, 2015, we had ten restaurants open in Mexico, two restaurants open in the Philippines, one restaurant opened in Saudi Arabia and one restaurant opened in the United Arab Emirates. We had six signed franchise development agreements for restaurants in the Middle East, Mexico, Philippines, Panama and India. We intend to open 400 restaurants internationally in the next 10 to 12 years. A typical international franchise development agreement provides for payment of development fees and franchise fees in addition to subsequent royalty fees based on the gross sales of each restaurant. We expect development agreements for international locations to remain limited to organizations having significant experience as restaurant operators and proven financial ability to support and develop multi-unit and multi-brand operations. 
 
R Taco and PizzaRev Strategy
 
We will look beyond the growth of the Buffalo Wild Wings ® brand by exploring investments in emerging restaurant brands. We have a minority interest in Pie Squared Holdings, operator and franchisor of PizzaRev ® , a California-based fast-casual pizza restaurant. In addition to our minority investment, we also own and operate two PizzaRev restaurants in Minnesota. We also have a majority interest in Rusty Taco, Inc., operator and franchisor of R Taco , a Texas-based fast-casual street-style taco restaurant with both company-owned and franchised locations. We continue to evaluate additional emerging restaurant brands for possible investment. 


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The Buffalo Wild Wings ® Menu
 
Our Buffalo Wild Wings restaurants feature a variety of menu items including our Buffalo, New York-style chicken wings spun in one of our signature sauces from sweet to screamin’ hot: Sweet BBQ, Teriyaki, Bourbon Honey Mustard, Mild, Parmesan Garlic, Medium, Honey BBQ, Spicy Garlic, Asian Zing ® , Caribbean Jerk, Thai Curry , Hot BBQ, Hot, Mango Habanero , Wild ® and Blazin’ ® ; or signature seasonings: Buffalo, Desert Heat ® , Chipotle BBQ, Lemon Pepper and Salt & Vinegar. Our chicken wings can be ordered by the portion, ranging from Snack-sized to Large, with even larger orders available for parties. Our sauces and seasonings complement and distinguish our wings and other menu offerings to create a bold flavor profile for our guests. In addition to traditional and boneless chicken wings, our menu features a wide variety of food items including Sharables, specialty hamburgers and sandwiches, wraps, Buffalito ® soft tacos, and salads. We also provide a 12 & Under Menu for kids.
 
Our restaurants feature a full bar which offers an extensive selection of 20 to 30 domestic, imported, and craft beers on tap as well as bottled beers, wine and liquor. In order to continually improve our menu, our research and development department continuously tests and introduces new menu items. Our goal is to balance the established menu offerings that appeal to our loyal guests with new menu items that increase guest frequency and attract new guests. In addition, our food experience team created a “Sauce Lab” concept in 2014 that features one to two brand new sauces that are introduced during our engagement zone promotions for a limited time only.
 
Buffalo Wild Wings Atmosphere and Layout
 
Our restaurants are sports grill and bars that provide a high-energy atmosphere where friends gather for camaraderie and to celebrate competition, as well as allow our guests the flexibility to customize their dining experience. The inviting and energetic environment of our restaurants is created using furnishings that can be easily rearranged to accommodate parties of various sizes. Our restaurants also feature distinct dining and bar areas, and many of the restaurants have patio seating.
 
We strategically place approximately 60 high-definition flat-screen monitors and approximately 2 to 4 projection screens throughout the restaurant to allow for easy viewing. These televisions, combined with our sound system, Buzztime ® Trivia and assorted video games, provide a source of entertainment for our guests and reinforce the energetic nature of our concept. We tailor the content and volume of our video and audio programming to reflect our guests’ tastes. We believe the design of our restaurants enhances our guests’ experiences, drives repeat visits and solidifies the broad appeal of our concept.
 
All of our menu items are made-to-order and are available for take-out, which approximated 15% of restaurant sales for company-owned restaurants in 2015 . Many of our restaurants have separate parking spots for our take-out guests.

Current Restaurant Locations
 
As of December 27, 2015 , we owned and operated 596 company-owned restaurants, including 590 Buffalo Wild Wings ® , 4 R Taco TM , and 2 PizzaRev ® restaurants in the United States and Canada. We also franchised an additional 579 restaurants, including 573 Buffalo Wild Wings restaurants and 6 R Taco restaurants. In 2016 , we expect to open 45 to 50 company-owned Buffalo Wild Wings restaurants and we expect our franchisees will open 30 to 35 Buffalo Wild Wings restaurants in the United States and 12 to 15 Buffalo Wild Wings restaurants internationally.
 
Our company-owned Buffalo Wild Wings restaurants range in size from 3,900 to 11,200 square feet, with a typical size of approximately 6,200 square feet for restaurants that were opened or acquired in the last three years. We anticipate that future restaurants will range in size from 4,000 square feet to 6,500 square feet with an average cash investment per restaurant of approximately $2.3 million , excluding preopening expenses of approximately $271,000 . From time to time, we expect that our restaurants may be smaller or larger or cost more or less than our targeted range, depending on the particular circumstances of the selected site, market, or country. Also, from time to time, we expect to purchase the building for certain restaurants, in which case the cash investment would be significantly higher.
 
Our Buffalo Wild Wings restaurants are typically open on a daily basis from 11 a.m. to 2 a.m., although closing times vary depending on the day of the week and applicable regulations governing the sale of alcoholic beverages. Our franchise agreements require franchisees to operate their restaurants for a minimum of 12 hours a day.
 

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Site Selection and Development
 
Our Buffalo Wild Wings ® site selection process is integral to the successful execution of our growth strategy. We have processes for identifying, analyzing and assigning undeveloped markets for both company-owned and franchise development. Once a market is assigned, we use a trade area and site selection evaluation process to assist in identifying suitable trade areas within that market and suitable sites within identified trade areas. Criteria examined to determine appropriate trade areas include the presence of a casual dining corridor, projected growth within the trade area, the locations of key big box retailers, key demographics and population density, drive time and trade area analysis and other quantitative and qualitative measures. Once a suitable trade area is identified, we examine site-specific details including visibility, signage, access, ability to get trade dress, and parking. We employ an opportunistic approach to real estate by developing end caps, freestanding units, and conversions in both urban, suburban, exurban and standalone smaller markets with strong trade areas. Final approval by at least two members of our Real Estate Committee is required for each company-owned site.
 
Marketing and Advertising
 
Since 1982, Buffalo Wild Wings ® has created a unique brand experience with a loyal fan base, award-winning wings and sauces, a variety of beers and an exciting social atmosphere. This unique experience, centered around sports, sets us apart from our competition. Our marketing programs are designed to build awareness of our brand with sports fans, encouraging them to visit and ultimately develop a personal connection to Buffalo Wild Wings. These programs are developed to drive first-time guest sales, same-store sales and average check increase, and support strong restaurant openings.
 
Marketing Campaigns. Each marketing campaign has a theme that reflects guest lifestyles and behaviors. These lifestyles and behaviors are the cornerstone for creating key brand touch-points within each campaign that include media, promotions, partnerships, and food and beverage experiences that will encourage social interactions and bring each theme to life. For example, we promote our NCAA sponsorship at Buffalo Wild Wings, which provided our guests with an opportunity to participate in a Bracket Challenge, a tournament bracket game which allows our guests to pick the winners of all tournament games. In addition, our local restaurant marketing efforts are designed to enhance community connections. Examples of this are our Home Team Advantage and Eat Wings, Raise Funds programs that connect our restaurants to local sports teams and community groups.
 
Advertising. Our media strategy builds continuity throughout the year while still supporting our peak periods. Our primary media vehicles include national television in relevant programming to drive awareness and consideration, national and local radio to drive consideration and trial and digital and search to drive all three. 
 
Franchise Involvement. System-wide campaigns and promotions are developed and implemented with input from the Marketing Subcommittee, a subset of the Buffalo Wild Wings Franchise Advisory Council (FAC). The FAC is a volunteer group consisting of 12 franchisees, six of which are elected by their peers and six of which are jointly appointed by existing FAC members and us. The FAC's Marketing Subcommittee is comprised of two franchisee members of the FAC and two to four additional franchisee members that are asked to serve on the committee at our request. The Marketing Subcommittee meets regularly to review marketing strategies, provide input on advertising messages and vendor co-op programs, and discuss marketing objectives.

Operations
 
Our leadership team strives for operational excellence by recruiting, developing and supporting our highly qualified management teams and Team Members while implementing operational standards and best practices within our Buffalo Wild Wings restaurants.
 
Restaurant Management. Our management structure consists of a General Manager, an Operational General Manager and up to three other managers, as well as a Shift Lead, depending on the sales volume of the restaurant. We utilize Regional Managers to oversee our General Managers in our company-owned locations, ensuring that they receive the training and support necessary to effectively operate their restaurants. Currently, we have 89 Regional Managers who oversee 3 to 8 restaurants each. As we expand geographically, we expect to add additional Regional Managers. Similarly, our franchised restaurants receive operational guidance from our 16 Franchise Consultants, who oversee 24 to 45 restaurants each. We have three Divisional Vice Presidents who have responsibility for all company-owned operations and 13 Directors of Operations who provide leadership to the Regional Managers. We also have a Vice President of Franchise Operations who has responsibility for all franchised restaurant operations and three Franchise Directors of Operations who provide leadership to the Franchise Consultants.
 

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Guest Experience Business Model. Our Guest Experience Business Model is a comprehensive approach to restaurant operations, which includes Guest Experience Captains, a refined management structure with clearly defined roles, and the introduction of new Guest technology including unique tabletop tablets and the development of a proprietary television network. Redefining the management and Team Member structure allows our restaurants to separate the work in a way that supports the business model.  Team Members and Managers have more specific areas of responsibility, including essential operational work and Guest Experience work, such as Guest engagement and community connection.
 
Kitchen Operations. An important aspect of our concept is the efficient design, layout and execution of our kitchen operations. Due to the relatively simple preparation of our menu items, the kitchen consists of fryers, grill and food prep stations that are arranged assembly-line style for maximum productivity. Given our menu and kitchen design, we are able to staff our kitchen with hourly Team Members who require only basic training before reaching full productivity. Additionally, we do not require the added expense of an on-site chef. The ease and simplicity of our kitchen operations allows us to achieve our goal of preparing quality food with minimal wait times.
 
Training. We provide thorough training for our management and hourly Team Members to prepare them for their role in delivering a positive and engaging Buffalo Wild Wings ® experience for our guests.
 
Our managers are trained using a hands-on education process during a six-week period at one of our Certified Training Restaurants. During this training period, our manager trainees work in and learn about key aspects of the business – from our culture to our core focus areas: Team, Guest, Quality Operations and Sales and Profits. This includes experience in both hourly and management functions.
 
After successful completion of the manager training program, the new managers work with their General Managers to build a tailored program to meet their training and development needs, specific to their assigned area of responsibility. A library of targeted modules covering both technical and managerial skills serves as the vehicle for this phase of learning. The program, which is progressive in nature, is also built around our core focus areas.  
 
Later in their careers, our General Managers and high-potential Operational General Managers attend a management skills class where they take a deeper look into bringing all of the core elements for success together to create the ultimate experience for our guests.
 
Our hourly Team Members complete a comprehensive position certification process, which includes 16 to 20 hours of hands-on training. Team Members must also successfully pass position validations, which include menu certifications, responsible alcohol service training, chemical safety training, and training in the safe handling of food as appropriate for their position.
 
Hourly restaurant Team Members who have demonstrated outstanding performance are provided opportunities for career advancement. Those with a high level of knowledge in one or more positions within the restaurant are encouraged to apply for the Wing Certified Trainer (WCT) program. The WCT candidate completes a training plan, which includes developing and evaluating his/her ability to train and influence the performance of Team Members. Our objective is to have two WCTs in every hourly position in each restaurant. Team Members who have performed successfully as Wing Certified Trainers in four or more station areas can apply to become All-Star Trainers. Our WCTs have the opportunity to travel around the country to assist with training at new restaurant openings. 
 
Further, Team Members with management potential can participate in the Shift Lead program, which is a developmental program that provides hourly Team Members the opportunity to build and demonstrate leadership capabilities while providing the restaurants with leaders who are trained to support management. The Shift Leader program helps us to identify talent and build bench strength throughout the organization – through the selection and training of those who have demonstrated the initiative, desire, behaviors and competencies necessary for success in restaurant management or other positions of leadership.

Career Opportunities. Through our training programs, we are able to motivate and retain our field operations team by providing them with opportunities for increased responsibilities and advancement. In addition, we offer performance-based incentives tied to sales, profitability and qualitative measures such as guest and team-related metrics. We strive for a balance of internal promotion and external hiring. This provides us with the ability to retain and grow our Team Members and to infuse our organization with talented individuals from outside of Buffalo Wild Wings.
 
Recruiting. We actively recruit and select individuals who demonstrate enthusiasm and dedication and who share our passion for high quality guest service delivered through teamwork and commitment. To attract high caliber managers, we have

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developed a competitive compensation plan that includes a base salary and an attractive benefits package, including participation in a management incentive plan that rewards managers for achieving restaurant performance objectives.
 
Food Preparation and Quality Control
 
We strive to maintain high quality standards. Our systems are designed to protect our food supply throughout the supply chain. We provide detailed specifications to suppliers for our food ingredients, products and supplies. We have dedicated resources focused on maintaining food safety and quality specifications.

Our operational teams have multiple processes in the restaurants to ensure that food safety and quality standards are met throughout the preparation process. In addition, we contract third party auditors to monitor food safety and sanitation standards. Our restaurant managers are certified in a comprehensive food safety and sanitation course, ServSafe®, which was developed by the National Restaurant Association Educational Foundation.
 
Sourcing and Supply
    
We take a centralized approach to purchasing and supply chain management. Our supply chain team serves all Buffalo Wild Wings ® company-owned and franchised locations in the U.S. and Canada. Additionally, the supply chain team works with international franchisees to ensure proprietary goods and services are available in all international locations.

The supply chain team is responsible for all major food, paper, equipment, and operating supply purchases as well as company-owned restaurant utility contracts, marketing/print materials, and a percentage of restaurant services. We also have dedicated distribution and logistics Team Members dedicated to optimizing freight costs.

We have national distribution programs in the U.S. and Canada that include food, beverage, and packaging goods. This program is with two custom distribution companies (one in the U.S. and one in Canada). The companies provide only products approved for our system through a limited number of warehouses. The customized nature of our distribution network allows our supply chain team to more effectively control the volumes and costs associated with items required by our restaurants.

To maximize purchasing efficiencies and obtain optimum pricing for ingredients, products, and supplies, our supply chain team negotiates prices by leveraging our scope and scale to create purchasing power and efficiencies. Our supply chain team works with suppliers to ensure that sufficient levels of inventory are available to ensure continuous supply to our restaurants. In addition, we are consistently evaluating our supply chain to develop contingency plans for all critical items.

Chicken wings are an important component of cost of sales at our Buffalo Wild Wings restaurants. We work to counteract the effect of the volatility of chicken wing prices, which can affect 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 identify and implement purchasing strategies in order to mitigate the impact of cost increases and market fluctuations. The price we pay on chicken wings changes monthly and is determined based on the average of the previous month’s wing market plus a 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.

Restaurant Franchise Operations
 
Our Buffalo Wild Wings ® concept has a strong group of franchisees, many of whom have substantial prior restaurant operations experience. Our franchisees execute a separate franchise agreement for each restaurant opened, typically providing for a 20-year initial term, with an opportunity to enter into a renewal franchise agreement subject to certain conditions. The initial franchise fee for a single restaurant is $40,000.
 
Franchisees typically pay us a royalty fee of 5.0% of their restaurant sales. We also assess franchisees an advertising fee in the amount of 3.5% of their restaurant sales. Since June 1, 2015, franchisees have been required to contribute 2.75% to 3.15% to our National Advertising Fund (NAF) and the remaining 0.35% to 0.75% was required to be spent directly by the franchisee or through marketing co-ops in the applicable local market. Our current form of franchise agreement permits us to increase the royalty fee and to increase the required contribution to the NAF by 0.5% per year so long as the NAF contribution does not exceed 4% of restaurant sales during the initial term of the franchise agreement. The royalty fee is not expected to increase in 2016.
 

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All of our franchise agreements require that each franchised restaurant operate in accordance with our defined operating procedures, adhere to the menu established by us, meet applicable quality, service, health and cleanliness standards and comply with all applicable laws. We ensure these high standards are being followed through a variety of means including mystery shoppers and announced and unannounced quality assurance inspections by our franchise consultants. We may terminate the franchise rights of any franchisee who does not comply with our standards and requirements. We believe that maintaining superior food quality, an inviting and energetic atmosphere and excellent guest service are critical to the reputation and success of our concept; therefore, we consistently enforce the contractual requirements of our franchise agreements.

The area development agreement establishes the number of restaurants that must be developed in a defined geographic area and the deadlines by which these restaurants must open. For area development agreements covering three to seven restaurants, restaurants are often required to open in approximately 12-month intervals. For larger development agreements, the interval is typically shorter. The area development agreement can be terminated by us if, among other reasons, the area developer fails to open restaurants on schedule.
 
We work hard to maintain positive and productive relationships with our franchisees. We have formed and maintain the FAC, which, as described previously, is an advisory council made up of twelve franchisees that engage with BWW on matters of system-wide importance; six of these FAC members are elected by their peers, and the remaining six are appointed jointly by existing FAC members and us. The FAC meets several times per year in person, and more frequently via conference calls, with our senior leaders. We also have other councils of franchisees with whom we consult periodically on specific matters.
 
Information Technology
 
We utilize a standard point-of-sale system in all of our company-owned and franchised Buffalo Wild Wings ® restaurants, which is integrated to our central offices through a secure, high-speed connection. Visibility to sales, cost of sales, labor and other operating metrics is provided to company-owned restaurant management through web-based decision support and analysis tools. Franchisees are required to report sales on a daily basis through an on-line reporting network and submit their restaurant-level financial statements on a quarterly and annual basis. Our international franchised restaurants also utilize this point-of-sale system, allowing their sales information to be automatically obtained by our central office systems on a daily basis. Our online ordering system allows guests to place orders online or through our mobile app. Orders taken online are sent directly to the point-of-sales system and routed to the kitchen management system based on item cook times and time of customer order pickup. The online ordering system is available for all company-owned locations and substantially all franchised locations.
 
Competition
 
The restaurant industry is intensely competitive. We compete on the basis of the taste, quality and price of food offered, guest service, ambience, location, and overall guest experience. We believe that our attractive price-value relationship, the atmosphere of our restaurants, our sports viewing experience, our focus on our guest and the quality and distinctive flavor of our food enable us to differentiate ourselves from our competitors. We believe we compete primarily with local and regional sports bars and national casual dining and quick casual establishments, and to a lesser extent with quick service restaurants such as wing-based take-out concepts. Many of our direct and indirect competitors are well-established national, regional or local chains and some have greater financial and marketing resources than we do. We also compete with other restaurant and retail establishments for site locations and restaurant Team Members.
 
Proprietary Rights
 
We own the rights to the “Buffalo Wild Wings ® ” and “Rusty Taco ® ” service marks and to certain other service marks and trademarks used in our system in the U.S., Canada, and other countries where we have restaurants or anticipate opening restaurants in the future, and we are in the process of registering the “R Taco ® service mark. We also own certain rights to the “PizzaRev” trademark. We protect our sauce recipes as trade secrets by, among other things, requiring a confidentiality agreement with our sauce supplier and executive officers. It is possible that competitors could develop recipes and procedures that duplicate or closely resemble our recipes and procedures. We believe that our trademarks, service marks and other proprietary rights have significant value and are important to our brand-building efforts and the marketing of our restaurant concept. We vigorously protect our proprietary rights. We cannot predict, however, whether steps taken by us to protect our proprietary rights will be adequate to prevent misappropriation of these rights or the use by others of restaurant features based upon, or otherwise similar to, our concept. It may be difficult for us to prevent others from copying elements of our concept and any litigation to enforce our rights will likely be costly and may not be successful. Although we believe that we have sufficient rights to all of our trademarks and service marks, we may face claims of infringement that could interfere with our ability to

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market our restaurants and promote our brand. Any such litigation may be costly and divert resources from our business. Moreover, if we are unable to successfully defend against such claims, we may be prevented from using our trademarks or service marks in the future and may be liable for damages.
 
Government Regulation
 
The restaurant industry is subject to numerous federal, state and local governmental regulations, including those relating to the preparation and sale of food and alcoholic beverages, sanitation, public health, fire codes, zoning, and building requirements. Each restaurant requires appropriate licenses from regulatory authorities allowing it to sell liquor, beer and wine, and each restaurant requires food service licenses from local health authorities. Our licenses to sell alcoholic beverages must be renewed annually and may be suspended or revoked at any time for cause, including violation by us or our employees of any law or regulation pertaining to alcoholic beverage control, such as those regulating the minimum age of employees or patrons who may serve or be served alcoholic beverages, the serving of alcoholic beverages to visibly intoxicated patrons, advertising, wholesale purchasing and inventory control. In order to reduce this risk, restaurant employees are trained in standardized operating procedures designed to assure compliance with all applicable codes and regulations. We are also subject to governmental regulations, such as the Foreign Corrupt Practices Act, that impact the way we do business with our international franchisees and vendors, and, as we expand into international markets, we may be subject to various foreign regulations. We have implemented policies, procedures and training to ensure compliance with these regulations.

We and our franchisees are also subject to laws governing our relationship with employees. Our failure or the failure of our franchisees to comply with international, federal, state and local employment laws and regulations may subject us to losses and harm our brands. The laws and regulations govern such matters as wage and hour requirements; workers’ compensation insurance; unemployment and other taxes; working and safety conditions; and citizenship and immigration status. Significant additional government-imposed regulations under the Fair Labor Standards Act and similar laws related to increases in minimum wages, overtime pay, paid leaves of absence, and mandated health benefits, may also impact the performance of company-owned and franchised operations. In addition, employee claims based on, among other things, discrimination, harassment, wrongful termination, wage and hour requirements and payments to employees who receive gratuities, may divert financial and management resources and adversely affect operations. The losses that may be incurred as a result of any violation of such governmental regulations by the company or our franchisees are difficult to quantify.
 
We are also subject to licensing and regulation by state and local departments relating to the service of alcoholic beverages, health, sanitation, and fire and safety standards. Compliance with these laws and regulations may lead to increased costs and operational complexity and may increase our exposure to governmental investigations or litigation. We may also be subject in certain states to “dramshop” statutes, which generally allow a person injured by an intoxicated person to recover damages from an establishment that wrongfully served alcoholic beverages to the intoxicated person. In addition, we are subject to various state and federal laws relating to the offer and sale of franchises and the franchisor-franchisee relationship. In general, these laws and regulations impose specific disclosure and registration requirements prior to the sale and marketing of franchises and regulate certain aspects of the relationship between franchisor and franchisee.
 
Because of gaming operations in our Nevada Buffalo Wild Wings facilities, the ownership and operation of those facilities are subject to the Nevada Gaming Control Act and the regulations promulgated thereunder, as well as various local regulations related to gaming. Our gaming operations are also subject to the licensing and regulatory control of the Nevada Gaming Commission, the Nevada State Gaming Control Board and various county and city licensing agencies. These gaming laws, regulations, and supervisory procedures are based upon declarations of public policy that are concerned with, among other things:
 
the prevention of unsavory or unsuitable persons from having a direct or indirect involvement with gaming at any time or in any capacity;
the establishment and maintenance of responsible accounting practices;
the maintenance of effective controls over the financial practices of licensees, including the establishment of minimum procedures for internal fiscal affairs and the safeguarding of assets and revenues;
providing reliable record keeping and requiring the filing of periodic reports with the gaming authorities;
the prevention of cheating and fraudulent practices; and
providing a source of state and local revenues through taxation and licensing fees.


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Any change in such laws, regulations, and procedures could have an adverse effect on the gaming operations in our Nevada facilities. Additional information regarding regulation related to gaming in our Nevada facilities can be found in Exhibit 99.1 to this Form 10-K. 
 
Team Members
 
As of December 27, 2015 , we employed approximately 44,500 Team Members. We had approximately 6,100 full-time and 37,900 part-time Team Members working in our company-owned restaurants and 500 Team Members based out of our home office or in field management positions. Our Team Members are not covered by any collective bargaining agreement, and we have never experienced an organized work stoppage or strike. We believe that our working conditions and compensation packages are competitive and consider our relations with our Team Members to be good.
 
Executive Officers
 
The following sets forth certain information about our executive officers:
 
Sally J. Smith, 58, has served as our Chief Executive Officer and President since July 1996 and as a director since August 1996. She served as our Chief Financial Officer from 1994 to 1996. Prior to joining Buffalo Wild Wings, she was the Chief Financial Officer of Dahlberg, Inc., the manufacturer and franchisor of Miracle-Ear hearing aids, from 1983 to 1994. Ms. Smith began her career with KPMG LLP, an international accounting and auditing firm. Ms. Smith holds an inactive CPA license. She serves on the boards of the National Restaurant Association, Alerus Financial Corporation, Allina Health Systems, and Hormel Foods, Inc.

Mary J. Twinem, 55, has served as our Executive Vice President, Chief Financial Officer and Treasurer since July 1996. and as the Corporate Controller from January 1995 to July 1996. Prior to joining Buffalo Wild Wings, Ms. Twinem served as the Director of Finance/Corporate Controller of Dahlberg, Inc. from 1989 to 1994. Ms. Twinem began her career in public accounting with an emphasis in tax, has an accounting degree from the University of Wisconsin-Platteville and is a CPA, inactive. Ms. Twinem will be retiring on February 29, 2016.
 
Kathleen M. Benning, 53, has served as our Executive Vice President, Chief Strategy Officer and New Business Development since January 2014. She served as our Executive Vice President, Global Brand and Business Development since October 2011. She served as Executive Vice President, Global Marketing and Brand Development from January 2010 until October 2011. She joined us in March 1997 as Vice President of Marketing and served as Senior Vice President, Marketing and Brand Development from January 2002 until December 2009. From 1992 to 1997, Ms. Benning was employed by Nemer, Fieger & Associates, an advertising agency, where she was a partner from 1994 to 1997.
 
James M. Schmidt, 56, has served as our Chief Operating Officer since January 2011. He served as our Executive Vice President since December 2006 and as General Counsel from April 2002 to January 2011. He served as either Vice President or Senior Vice President from April 2002 until December 2006. Mr. Schmidt also served as our Secretary from September 2002 until January 2011, and he served as a director on our Board from 1994 to September 2003. From 1997 to 2002, Mr. Schmidt was an attorney with the law firm of Robbins, Kelly, Patterson & Tucker.
 
Judith A. Shoulak, 56, has served as our EVP, President, North America Buffalo Wild Wings since January 2014. She served as Executive Vice President, North American Operations from October 2011 to January 2014, as Executive Vice President, Global Operations and Human Resources from January 2010 until October 2011, as our Senior Vice President, Operations, from March 2004 to December 2009, Senior Vice President, Human Resources from January 2003 to February 2004 and Vice President of Human Resources from October 2001 to January 2003. From 1993 to 2001, Ms. Shoulak served as Vice President of Field Human Resources of OfficeMax Incorporated.
 
Lee R. Patterson, 41, has served as our Senior Vice President, Guest Marketing Experience since January 2014. He served as Senior Vice President, Guest Experience and Innovation from October 2011 to December 2013, Senior Vice President, Information Technology from January 2011 until October 2011 and as our Vice President, Information Technology from January 2008 until January 2011. Mr. Patterson was with Applebee’s International, Inc. from May 2003 to January 2008, serving most recently as Director of Restaurant Systems.
 
Andrew D. Block, 47, has served as our Senior Vice President, Talent Management since January 2012. He served as Vice President, Talent Management from April 2010 until January 2012. Mr. Block served as Director of Human Resources at C. H. Robinson Worldwide from December 2002 to April 2011. From March 1996 to December 2002 Mr. Block was with

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Wells Fargo Home Mortgage as Director of Human Resources. Earlier in his career Mr. Block worked in the Human Resources field for Ecolab and a subsidiary of Sony Corporation of America.
 
Emily C. Decker, 36, has served as our Senior Vice President, General Counsel and Secretary since April 2014. She served as our Vice President, General Counsel and Secretary from January 2011 to April 2014 and as our Franchise Attorney from August 2007 until January 2011. From September 2004 to July 2007, Ms. Decker was an Associate at Briggs and Morgan, P.A., which provides legal services to us from time to time.
 
ITEM 1A. RISK FACTORS
 
This Form 10-K, including the discussions contained in Items 1 and 7, contains 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” 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 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 risk factors that follow. 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.
 
Multi-unit restaurant businesses such as ours can be adversely affected by publicity resulting from complaints or litigation or general publicity regarding poor food quality, food-borne illness, personal injury, food tampering, team member relations, adverse health effects of consumption of various food products or high-calorie foods (including obesity), or other concerns. Negative publicity from traditional or digital media, or from on-line social network postings may also result from actual or alleged incidents or events taking place in our restaurants. Regardless of whether the allegations or complaints are valid, unfavorable publicity relating to a number of our restaurants, or only to a single restaurant, could adversely affect public perception of the entire brand. Adverse publicity and its effect on overall consumer perceptions of food safety, or our failure to respond effectively to adverse publicity, could have a material adverse effect on our business.

Fluctuations in chicken wing prices could impact our operating income.
 
Chicken wings are a primary food product used by our Buffalo Wild Wings® restaurants. 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. During 2013, we began selling our wings by portion, providing our guests a more consistent amount of chicken in their orders, and decreasing the impact of yield fluctuations on our cost of sales. We also explore purchasing strategies to reduce the severity of cost increases and fluctuations. The price we pay for 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 the upper threshold or falls below the lower threshold set in the contract, we split the impact with our suppliers, reducing our risk related to wing price fluctuations. If a satisfactory long-term pricing agreement for chicken wings were to arise, we would consider locking in prices to reduce our price volatility. Chicken wing prices in 2015 averaged 18.1% higher than 2014 as the average price per pound increased to $1.83 in 2015 from $1.55 in 2014 . If there is a significant rise in the price of chicken wings, and we are unable to successfully adjust menu prices or menu mix or otherwise make operational adjustments to account for the higher wing prices, our operating results could be adversely affected. For example, chicken wings accounted for approximately 25% , 23% , and 25% of our cost of sales in 2015 , 2014 , and 2013 , respectively, with an annual average price per pound of $1.83 , $1.55 , and $1.76 , respectively. A 10% increase in the chicken wing costs for 2015 would have increased cost of sales by approximately $12.9 million . Additional information related to chicken wing prices is included in Item 7 under “Results of Operations.”  
 

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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.
 
We require that all proposed restaurant sites, whether for company-owned or franchised restaurants, meet our site selection criteria. We may make errors in selecting these criteria or applying these criteria to a particular site, or there may be an insignificant number of new restaurant sites meeting these criteria that would enable us to achieve our planned expansion in future periods. We face significant competition from other restaurant companies and retailers for sites that meet our criteria and the supply of sites may be limited in some markets. Further, we may be precluded from acquiring an otherwise suitable site due to an exclusivity restriction held by another tenant. As a result of these factors, our costs to obtain and lease sites may increase, or we may not be able to obtain certain sites due to unacceptable costs. Our inability to obtain suitable restaurant sites at reasonable costs may reduce our growth.

To successfully expand our business, we must open new Buffalo Wild Wings® restaurants on schedule and in a profitable manner. In the past, we and our franchisees have experienced delays in restaurant openings and we may experience similar delays in the future. Delays in opening new restaurants could hurt our ability to meet our growth objectives, which may affect our results of operations, the expectations of securities analysts and shareholders and thus our stock price. We cannot guarantee that we or our franchisees will be able to achieve our expansion goals. Further, any restaurants that we, or our franchisees, open may not achieve operating results similar or better than our existing restaurants. If we are unable to generate positive cash flow from a new restaurant, we may be required to recognize an impairment loss with respect to the assets for that restaurant. Our ability to expand successfully will depend on a number of factors, many of which are beyond our control. These factors include:
Negotiating acceptable lease or purchase terms for new restaurants;
Our ability to obtain necessary credit with our landlords;
Cost effective and timely planning, design and build-out of restaurants;
Creating guest awareness of our restaurants in new markets;
Competition in new and existing markets;
General economic conditions.

A security failure in our information technology systems could expose us to potential liability and loss of revenues.
 
We accept credit and debit card payments in our restaurants. A number of retailers have experienced actual or potential security breaches in which credit and debit card information may have been stolen, including a number of highly publicized incidents with well-known retailers. The intentional, inadvertent or negligent release or disclosure of data by our company or our service providers could result in theft, loss, fraudulent or unlawful use of customer data, some or all of which could harm our reputation and result in remedial and other costs, fines or lawsuits.

We are required to maintain the highest level of Payment Card Industry (“PCI”) Data Security Standard compliance at our company-owned restaurants and corporate offices due to the number of credit card transactions processed in our company-owned restaurants. Failure to maintain our PCI compliance could result in fines or even prohibit our use of payment cards in our company-owned restaurants. Our franchisees are separate businesses, and therefore are subject to PCI compliance requirements separate and apart from our company-owned restaurants. However, any failure by our franchisees to maintain their required level of PCI compliance could harm our reputation or result in loss of future royalties.

Shortages or interruptions in the availability and delivery of food and other supplies may increase costs or reduce revenues.
 
Possible shortages or interruptions in the supply of food items and other supplies to our restaurants caused by inclement weather, terrorist attacks, natural disasters such as floods, drought and hurricanes, global warming, pandemics, the inability of our vendors to obtain credit in a tightened credit market, or other distribution dependencies, food safety warnings or advisories or the prospect of such pronouncements, or other conditions beyond our control could adversely affect the availability, quality and cost of items we buy and the operations of our restaurants. Our inability to effectively manage supply chain risk could increase our costs and limit the availability of products critical to our restaurant operations.




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Wage and hour litigation could negatively impact our performance.

Increased wage and hour litigation, including claims relating to the Fair Labor Standards Act, analogous state laws, or other state wage and hour laws could result in significant attorney fee and settlement costs. The potential settlement of, or awards of damages for, such claims also could materially impact our financial performance as could operational adjustments implemented to mitigate future exposure.

Changes in employment laws or regulation could harm our performance.
 
Various federal and state labor laws govern our relationship with our employees and affect operating costs. These laws include minimum wage requirements, overtime pay, paid time off, work scheduling, healthcare reform and the implementation of the Patient Protection and Affordable Care Act, unemployment tax rates, workers’ compensation rates, citizenship requirements, union membership, and sales taxes. A number of factors could adversely affect our operating results, including additional government-imposed increases in minimum wages, overtime pay, paid leaves of absence and mandated health benefits, mandated training for employees, increased tax reporting and tax payment requirements for employees who receive tips, a reduction in the number of states that allow tips to be credited toward minimum wage requirements, changing regulations from the National Labor Relations Board or other agencies.
 
The Americans with Disabilities Act is a federal law that prohibits discrimination on the basis of disability in public accommodations and employment. Although our restaurants are designed to be accessible to the disabled, we could be required to make modifications to our restaurants or to our guest-facing technologies including our website to provide service to, or make reasonable accommodations for disabled persons.
 
Investments in new or emerging brands may not be successful.
 
We have a minority investment in Pie Squared Holdings, operator and franchisor of PizzaRev, a fast-casual pizza restaurant, and a majority investment in Rusty Taco Inc., operator and franchishor of R Taco, a fast-casual restaurant specializing in street-style tacos, and intend to invest in these and additional emerging restaurant brands in the future as additional vehicles of growth. If an emerging brand does not succeed, we risk losing all or a substantial portion of our investment in that brand. In addition, our overall long-term growth may be affected by the level of success achieved by any of these restaurant concepts.
  
Our restaurants may not achieve market acceptance in the new domestic and international geographic regions we enter.
 
Our expansion plans depend on opening restaurants in new domestic and international markets where we or our franchisees have little or no operating experience. We may not be successful in operating our restaurants in new markets on a profitable basis. The success of these new restaurants will be affected by the different competitive conditions, consumer tastes, and discretionary spending patterns of the new markets as well as our ability to generate market awareness of our brands. Sales at restaurants opening in new markets may take longer to reach profitable levels, if at all.
 
New restaurants added to our existing markets may take sales from existing restaurants.
 
We and our franchisees intend to open new restaurants in our existing markets, which may reduce sales performance and guest visits for existing restaurants in those markets. In addition, new restaurants added in existing markets may not achieve sales and operating performance at the same level as established restaurants in the market.
  
Failure of our internal control over financial reporting could harm our business and financial results.
 
Our management is responsible for establishing and maintaining effective internal control over financial reporting. Internal control over financial reporting is a process to provide reasonable assurance regarding the reliability of financial reporting for external purposes in accordance with accounting principles generally accepted in the United States. Because of its inherent limitations, internal control over financial reporting is not intended to provide absolute assurance that we would prevent or detect a misstatement of our financial statements or fraud. Any failure to maintain an effective system of internal control over financial reporting could limit our ability to report our financial results accurately and timely or to detect and prevent fraud. A significant financial reporting failure or material weakness in internal control over financial reporting could cause a loss of investor confidence and decline in the market price of our stock.



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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.

In connection with the preparation of our consolidated financial statements as of and for the fiscal year ended December 27, 2015, our management conducted an assessment of the effectiveness of our internal control over financial reporting. In connection with that assessment, we identified material weaknesses in our internal control over financial reporting. Exchange Act Rule 12b-2 and Rule 1-02(b) of Regulation S-X define a material weakness as a deficiency, or combination of deficiencies, in internal control over financial reporting, such that there is a reasonable possibility that a material misstatement of our annual or interim consolidated financial statements will not be prevented or detected and corrected on a timely basis. The identified material weaknesses are further described in Part II, Item 9A of this report.

Our remediation efforts regarding these material weaknesses are also described in Part II, Item 9A of this report. While we are confident that that our remediation plan will fully remediate the identified material weaknesses, it is possible that our remedial measures may not be sufficient or may take longer than anticipated. If our remedial measures are insufficient to address the material weaknesses, our consolidated financial statements may contain material misstatements and we could be required to restate our financial results. Even after the identified material weaknesses have been remediated, investors may lose confidence in our reported financial information and the market price of our common shares may decline.

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.
 
Our landlords may be unable to obtain financing or remain in good standing under their existing financing arrangements, resulting in failures to pay required construction contributions or satisfy other lease covenants to us. In addition other tenants at retail centers in which we or our franchisees are located or have executed leases may fail to open or may cease operations. If our landlords fail to satisfy required co-tenancies, such failures may result in us or our franchisees terminating leases or delaying openings in these locations. Also, decreases in total tenant occupancy in retail centers in which we are located may affect guest traffic at our restaurants. All of these factors could have a material adverse impact on our operations.

An impairment in the carrying value of our goodwill or other intangible assets could adversely affect our financial condition and consolidated results of operations.

Goodwill represents the excess of cost over the fair value of identified net assets of businesses acquired. We review goodwill for impairment annually, or whenever circumstances change in a way which could indicate that impairment may have occurred. Goodwill is tested at the reporting unit level. We identify potential goodwill impairments by comparing the fair value of the reporting unit to its carrying amount, which includes goodwill and other intangible assets. The fair value of the reporting unit is calculated using a market approach. If the carrying amount of the reporting unit exceeds the fair value, this is an indication that impairment may exist. We would calculate the amount of the impairment by comparing the fair value of the assets and liabilities to the fair value of the reporting unit. The fair value of the reporting unit in excess of the value of the assets and liabilities is the implied fair value of the goodwill. If this amount is less than the carrying amount of goodwill, impairment is recognized for the difference. A significant amount of judgment is involved in determining if an indication of impairment exists. Factors may include, among others: a significant decline in our expected future cash flows; a sustained, significant decline in our stock price and market capitalization; a significant adverse change in legal factors or in the business climate; unanticipated competition; the testing for recoverability of a significant asset group within a reporting unit; and slower growth rates. Any adverse change in these factors would have a significant impact on the recoverability of these assets and negatively affect our financial condition and consolidated results of operations.
 
We evaluate the useful lives of our intangible assets to determine if they are definite- or indefinite-lived. Reaching a determination on useful life requires significant judgments and assumptions regarding the future effects of obsolescence, demand, competition, other economic factors (such as the stability of the industry, legislative action that results in an uncertain or changing regulatory environment, and expected changes in distribution channels), and the expected lives of other related groups of assets.
 
We cannot accurately predict the amount and timing of any impairment of goodwill and other intangible assets. Should the value of these assets become impaired, there could be an adverse effect on 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.

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Our revenues and expenses can be impacted significantly by the location, number, and timing of the opening of new restaurants and the closing, relocating, and remodeling of existing restaurants. We incur substantial pre-opening expenses each time we open a new restaurant and incur other expenses when we close, relocate, or remodel existing restaurants. These expenses are generally higher when we open restaurants in new markets, but the costs of opening, closing, relocating or remodeling any of our restaurants may be higher than anticipated. An increase in such expenses could have an adverse effect on our results of operations.

We may be dependent on franchisees and their success.
 
Currently, approximately 49% of our restaurants are franchised. Franchising royalties and fees represented approximately 5.4% , 6.1% , and 6.4% of our revenues during fiscal 2015 , 2014 , and 2013 , respectively. Our performance depends upon (i) our ability to attract and retain qualified franchisees, (ii) the franchisees' ability to timely develop restaurants, and (iii) the franchisees’ ability to execute our concept and capitalize upon our brand recognition and marketing. Additionally, the quality of franchised restaurant operations may be diminished if franchisees do not operate restaurants in a manner consistent with our standards and requirements, or if they do not hire and train qualified managers and other restaurant personnel. If franchisees do not adequately operate or manage their restaurants, our image and reputation, and the image and reputation of other franchisees, may suffer materially and system-wide sales could significantly decline.
 
We could face liability from or as a result of our franchisees.
 
Various state and federal laws govern our relationship with our franchisees and our potential sale of a franchise. If we fail to comply with these laws, we could be liable for damages to franchisees and fines or other penalties. A franchisee or government agency may bring legal action against us based on the franchisee/franchisor relationship. Also, under the franchise business model, we may face claims and liabilities based on vicarious liability, joint-employer liability, or other theories or liabilities. All such legal actions not only could result in changes to laws, making it more difficult to appropriately support our franchisees and, consequently, impacting our performance, but, also, such legal actions could result in expensive litigation with our franchisees or government agencies that could adversely affect both our profits and our important relations with our franchisees. In addition, other regulatory or legal developments may result in changes to laws or the franchisor/franchisee relationship that could negatively impact the franchise business model and, accordingly, our profits.

We may be unable to compete effectively in the restaurant industry.
 
The restaurant industry is intensely competitive. We believe we compete primarily with regional and local sports bars, casual dining and fast casual establishments, and to a lesser extent, quick service wing-based take-out concepts and quick service restaurants. In addition, independent owners of local or regional establishments may enter the wing-based or sports bar restaurant business without significant barriers to entry and such establishments may provide price competition for our restaurants. Competition in the casual dining, quick casual and quick service segments of the restaurant industry is expected to remain intense with respect to price, service, location, concept and the type and quality of food. We also face intense competition for real estate sites, qualified management personnel, and hourly restaurant staff.
 
Our success depends substantially on the value of our brands and our reputation for offering guests an unparalleled guest experience.
 
We believe we have built a strong reputation for the quality and breadth of our menu items as part of the total experience that guests enjoy in our restaurants. We believe we must protect and grow the value of our brands to continue to be successful in the future. Any incident that erodes consumer trust in or affinity for our brands could significantly reduce their value. If consumers perceive or experience a reduction in food quality, service, or ambiance, or in any way believe we failed to deliver a consistently positive experience, our brand value could suffer.
 
Our inability to successfully and sufficiently raise menu prices could result in a decline in profitability.
 
We utilize menu price increases to help offset cost increases, including increased cost for commodities, minimum wages, employee benefits, insurance arrangements, construction, utilities, and other key operating costs.  If our selection and amount of menu price increases are not accepted by consumers and reduce guest traffic, or are insufficient to counter increased costs, our financial results could be harmed.
 

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Our quarterly operating results may fluctuate due to the timing of special events and other factors, including the recognition of impairment losses.
 
Our quarterly operating results depend, in part, on special events, such as the Super Bowl® and other sporting events viewed by our guests in our Buffalo Wild Wings restaurants such as the NFL, MLB, NBA, NHL, and NCAA. Interruptions in the viewing of these professional and collegiate sporting league events due to strikes, lockouts, or labor disputes may impact our results. Additionally, our results are subject to fluctuations based on the dates of sporting events and their availability for viewing through broadcast, satellite and cable networks. Historically, sales in most of our restaurants have been higher during fall and winter months based on the relative popularity and extent of national, regional and local sporting and other events. Further, our quarterly operating results may fluctuate significantly because of other factors, including:

Fluctuations in food costs, particularly chicken wings;
The timing of new restaurant openings, which may impact margins due to the related preopening costs and initially higher restaurant level operating expense ratios;
Potential distraction or unusual expenses associated with our expansion into international markets;
Our ability to operate effectively in new markets domestically and internationally in which we or our franchisees have limited operating experience;
Labor availability and costs for hourly and management personnel;
Changes in competitive factors;
Disruption in supplies;
General economic conditions, consumer confidence, and fluctuations in discretionary spending;
Claims experience for self-insurance programs;
Increases or decreases in labor or other variable expenses;
The impact of inclement weather, natural disasters, and other calamities;
Fluctuations in interest rates;
The timing and amount of asset impairment loss and restaurant closing charges; and
Tax expenses and other non-operating costs.
 
As a result of the factors discussed above, our quarterly and annual operating results may fluctuate significantly. Accordingly, results for any one quarter are not necessarily indicative of results to be expected for any other quarter or for any year. These fluctuations may cause future operating results to fall below the expectations of securities analysts and shareholders. In that event, the price of our common stock could decrease.
 
We may not be able to attract and retain qualified Team Members and key executives to operate and manage our business.

Our success and the success of our individual restaurants and business depends on our ability to attract, motivate, develop and retain a sufficient number of qualified key executives and restaurant employees, including restaurant managers, and hourly Team Members. The inability to recruit, develop and retain these individuals may delay the planned openings of new restaurants or result in high employee turnover in existing restaurants, thus increasing the cost to efficiently operate our restaurants. This could inhibit our expansion plans and business performance and, to the extent that a labor shortage may force us to pay higher wages, harm our profitability. The loss of any of our key executive officers could jeopardize our ability to meet our financial targets.
 

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We may not be able to obtain and maintain licenses and permits necessary to operate our restaurants.
 
The restaurant industry is subject to various federal, state, and local government regulations, including those relating to the sale of food and alcoholic beverages. In addition, we are subject to gaming regulations with respect to our gaming operations within our nine company-owned restaurants in Las Vegas. The failure to obtain and maintain these licenses, permits and approvals, including food, liquor and gaming licenses, could adversely affect our operating results. Difficulties or failure to obtain the required licenses and approvals could delay or result in our decision to cancel the opening of new restaurants. Local authorities may revoke, suspend, or deny renewal of our food and liquor licenses if they determine that our conduct violates applicable regulations.
 
The sale of alcoholic beverages at our restaurants subjects us to additional regulations and potential liability.
 
Because our restaurants sell alcoholic beverages, we are required to comply with the alcohol licensing requirements of the federal government, states and municipalities where our restaurants are located. Alcoholic beverage control regulations require applications to state authorities and, in certain locations, county and municipal authorities for a license and permit to sell alcoholic beverages on the premises and to provide service for extended hours and on Sundays. Typically, the licenses are renewed annually and may be revoked or suspended for cause at any time. Alcoholic beverage control regulations relate to numerous aspects of the daily operations of the restaurants, including minimum age of guests and employees, hours of operation, advertising, wholesale purchasing, inventory control and handling, storage and dispensing of alcoholic beverages. If we fail to comply with federal, state or local regulations, our licenses may be revoked and we may be forced to terminate the sale of alcoholic beverages at one or more of our restaurants. Further, growing movements to change laws relating to alcohol may result in a decline in alcohol consumption at our restaurants or increase the number of dram shop claims made against us, either of which may negatively impact operations or result in the loss of liquor licenses.
 
In certain jurisdictions we are subject to “dram shop” statutes, which generally allow a person injured by an intoxicated person the right to recover damages from an establishment that wrongfully served alcoholic beverages to the intoxicated person. Some dram shop litigation against restaurant companies has resulted in significant judgments, including punitive damages.
 
Changes in consumer preferences or discretionary consumer spending could harm our performance.

The success of Buffalo Wild Wings depends, in part, upon the continued popularity of our Buffalo, New York-style chicken wings, our boneless wings, other food and beverage items, and appeal of sports bars and casual dining restaurants. We also depend on trends toward consumers eating away from home. Shifts in these consumer preferences could negatively affect our future profitability. Such shifts could be based on health concerns related to the cholesterol, carbohydrate, fat, calorie, or salt content of certain food items, including items featured on our menu. Negative publicity over the health aspects of such food items may adversely affect consumer demand for our menu items and could result in a decrease in guest traffic to our restaurants, which could materially harm our business. In addition, we will be required to disclose calorie counts for all food and certain beverage items on our menus, due to federal regulations, and this may have an effect on consumers’ eating habits. In addition, our success depends to a significant extent on numerous factors affecting discretionary consumer spending, including economic conditions, disposable consumer income and consumer confidence. A decline in consumer spending or in economic conditions could reduce guest traffic or impose practical limits on pricing, either of which could harm our business, financial condition, operating results or cash flow.
 
A regional or global health pandemic could severely affect our business.
 
A health pandemic is a disease outbreak that spreads rapidly and widely by infection and affects many individuals in an area or population at the same time. If a regional or global health pandemic were to occur, depending upon its duration and severity, our business could be severely affected. We have positioned our brand as a place where people can gather together. Customers might avoid public gathering places in the event of a health pandemic, and local, regional or national governments might limit or ban public gatherings to halt or delay the spread of disease. A regional or global health pandemic might also adversely impact our business by disrupting or delaying production and delivery of materials and products in our supply chain and by causing staffing shortages in our restaurants. The impact of a health pandemic might be disproportionately greater than on other companies that depend less on the gathering of people together for the sale or use of their products and services.

The acquisition of existing restaurants from our franchisees or other acquisitions may have unanticipated consequences that could harm our business and our financial condition.
 

18



We may selectively acquire existing restaurants from our franchisees or other restaurants. To do so, we would need to identify suitable acquisition candidates, negotiate acceptable acquisition terms and obtain appropriate financing. Any acquisition that we pursue, whether or not successfully completed, may involve risks, including:

Material adverse effects on our operating results, particularly in the fiscal quarters immediately following the acquisition as the acquired restaurants are integrated into our operations;
Risks associated with entering into markets or conducting operations where we have no or limited prior experience;
Problems maintaining key personnel;
Potential impairment of tangible and intangible assets and goodwill acquired in the acquisition;
Potential unknown liabilities;
Difficulties of integration; and
Disruption of our ongoing business, including diversion of management’s attention from other business concerns.

Future acquisitions of existing restaurants from our franchisees or other acquisitions, which may be accomplished through a cash purchase transaction, the issuance of our equity securities or a combination of both, could result in potentially dilutive issuances of our equity securities, the incurrence of debt and contingent liabilities and impairment charges related to goodwill and other intangible assets, any of which could harm our business and financial condition.
 
There is volatility in our stock price.
 
The market for our stock has, from time to time, experienced extreme price and volume fluctuations. Factors such as announcements of variations in our quarterly financial results and fluctuations in same-store sales could cause the market price of our stock to fluctuate significantly. In addition, the stock market in general, and the market prices for restaurant companies in particular, have experienced volatility that often has been unrelated to the operating performance of such companies. These broad market and industry fluctuations may adversely affect the price of our stock, regardless of our operating performance. Additionally, volatility or a lack of positive performance in our stock price may adversely affect our ability to retain key employees, many of whom have been granted equity compensation.
 
The market price of our stock can be influenced by shareholders' expectations about the ability of our business to grow and to achieve certain profitability targets. If our financial performance in a particular quarter does not meet the expectations of our shareholders, it may adversely affect their views concerning our growth potential and future financial performance. In addition, if the securities analysts who regularly follow our stock lower their ratings of our stock, the market price of our stock is likely to drop significantly.
 
We may be subject to increased labor and insurance costs or our current insurance may not provide adequate levels of coverage.
 
Our restaurant operations are subject to federal and state laws governing such matters as minimum wages, working conditions, overtime, and tip credits. As federal and state minimum wage rates increase, we may need to increase not only the wages of our minimum wage employees, but also the wages paid to employees at wage rates that are above minimum wage. Labor shortages, increased employee turnover, and health care mandates could also increase our labor costs. This, in turn, could lead us to increase prices which could impact our sales. Conversely, if competitive pressures or other factors prevent us from offsetting increased labor costs by increases in prices, our profitability may decline. In addition, the current premiums that we pay for our insurance (including workers' compensation, general liability, property, health, and directors' and officers' liability) may increase at any time, thereby further increasing our costs. The dollar amount of claims that we actually experience under our workers' compensation and general liability insurance, for which we carry high per-claim deductibles, may also increase at any time, thereby further increasing our costs. Also, the decreased availability of property and liability insurance has the potential to negatively impact the cost of premiums and the magnitude of uninsured losses.

We currently maintain insurance customary for businesses of our size and type. However, there are types of losses we may incur that cannot be insured against or that we believe are not economically reasonable to insure, such as losses due to natural disasters. Such damages could have a material adverse effect on our business and results of operations.  In addition,

19



legal settlements or awards of damages may exhaust our coverage for certain policy years or impact our ability to obtain appropriate levels of coverage for future years. We may have claims, including those associated with alleged wage and hour violations, for which we are not able to obtain insurance coverage, for which obtainable coverage may be inadequate or or for which the cost of coverage would be cost prohibitive.
 
We are dependent on information technology and any material failure of that technology could impair our ability to efficiently operate our business.
 
We rely on information systems across our operations, including, for example, point-of-sale processing in our restaurants, management of our supply chain, collection of cash and credit and debit card payments, payment of obligations, and various other processes and procedures. Our ability to efficiently manage our business depends significantly on the reliability and capacity of these systems. The failure of these systems to operate effectively, disputes with our technology vendors, problems with maintenance, upgrading or transitioning to replacement systems, or a breach in security of these systems could cause delays in customer service, reduce efficiency in our operations, require significant investment to remediate the issue, or cause negative publicity that could damage our brand. Significant capital investments might be required to remediate any problems.

Our in-restaurant guest-facing technologies may not drive restaurant traffic as anticipated; furthermore, difficulties in developing the technology--or in integrating it with our other systems--may delay a technology roll out or result in its cancellation.
 
If we are unable to maintain our rights to use key technologies of third parties, our business may be harmed.
 
We rely on certain technology licensed from third parties, and may be required to license additional technology in the future for use in managing our Internet sites and providing related services to users and customers. These third-party technology licenses may not continue to be available to us on acceptable commercial terms or at all. The inability to enter into and maintain any of these technology licenses could significantly harm our business, financial condition and operating results.
 
We may not be able to protect our trademarks, service marks or trade secrets.
 
We place considerable value on our trademarks, service marks and trade secrets. We actively enforce and defend our marks and if violations are identified, take appropriate action to preserve and protect our goodwill in our marks. We attempt to protect our sauce recipes as trade secrets by, among other things, requiring confidentiality agreements with our sauce suppliers and executive officers. However, we cannot be sure that we will be able to successfully enforce our rights under our marks or prevent competitors from misappropriating our sauce recipes. We can also not be sure that: (i) our marks are valuable, (ii) using our marks does not, or will not, violate others’ marks, (iii) the registrations of our marks would be upheld if challenged, or (iv) we would not be prevented from using our marks in areas of the country, or in other countries, where others might have already established rights to them. Any of these uncertainties could have an adverse effect on us and our expansion strategy.
 
ITEM 1B. UNRESOLVED STAFF COMMENTS
 
None.

20



ITEM 2. PROPERTIES
 
We are headquartered in Minneapolis, Minnesota. Our home office has approximately 73,000 square feet of office space. We occupy this facility under a lease that terminates on November 30, 2020, with no options to renew. As of December 27, 2015 , we owned and operated 596 company-owned restaurants. We either lease the land and building for our sites or utilize ground leases. The majority of our existing leases are for 10 or 15-year terms, generally including options to extend the terms. We typically lease our restaurant facilities under “triple net” leases that require us to pay minimum rent, real estate taxes, maintenance costs and insurance premiums and, in some instances, percentage rent based on sales in excess of specified amounts. Most of our leases include “exclusive use” provisions prohibiting our landlords from leasing space to other restaurants that fall within certain specified criteria. Under our franchise agreements, we have certain rights to gain control of a restaurant site in the event of default under the lease or franchise agreement. The following table sets forth the countries, states and provinces in which our restaurants are located and the number of restaurants in each state or province as of December 27, 2015 :
 
 
Number of Restaurants Open
 
Buffalo Wild Wings
 
PizzaRev
 
R Taco
 
 
 
Company-owned
 
Franchised
 
Company-owned
 
Company-owned
 
Franchised
 
Total
United States:
 
 
 
 
 
 
 
 
 
 
 
Alabama
3

 
12

 

 

 

 
15

Alaska

 
1

 

 

 

 
1

Arizona
15

 
6

 

 

 

 
21

Arkansas

 
11

 

 

 

 
11

California
45

 
33

 

 

 

 
78

Colorado
20

 
2

 

 
1

 

 
23

Connecticut
1

 
10

 

 

 

 
11

District of Columbia
1

 

 

 

 

 
1

Delaware

 
6

 

 

 

 
6

Florida
28

 
23

 

 

 

 
51

Georgia
19

 
1

 

 

 

 
20

Hawaii
3

 

 

 

 

 
3

Idaho
6

 
1

 

 

 

 
7

Illinois
22

 
47

 

 

 

 
69

Indiana
7

 
46

 

 

 

 
53

Iowa
17

 
1

 

 

 

 
18

Kansas
13

 

 

 

 

 
13

Kentucky
16

 
5

 

 

 

 
21

Louisiana

 
16

 

 

 

 
16

Maine

 
3

 

 

 

 
3

Maryland
2

 
16

 

 

 

 
18

Massachusetts
4

 
5

 

 

 

 
9

Michigan

 
58

 

 

 

 
58

Minnesota
24

 
5

 
2

 

 
3

 
34

Mississippi
2

 
9

 

 

 

 
11

Missouri
7

 
24

 

 

 

 
31

Montana

 
7

 

 

 

 
7

Nebraska
7

 
3

 

 

 

 
10

Nevada
12

 
1

 

 

 

 
13

New Hampshire

 
4

 

 

 

 
4

New Jersey
5

 
10

 

 

 

 
15

New Mexico
12

 

 

 

 

 
12

New York
18

 
19

 

 

 

 
37

North Carolina
22

 
8

 

 

 

 
30

North Dakota

 
7

 

 

 

 
7

Ohio
32

 
60

 

 

 

 
92

Oklahoma

 
18

 

 

 

 
18

Oregon

 
11

 

 

 

 
11

Pennsylvania
26

 
1

 

 

 

 
27

Rhode Island
2





 

 

 
2

South Carolina
10

 
4

 

 

 

 
14

South Dakota

 
5

 

 

 

 
5

Tennessee
25

 

 

 

 

 
25

Texas
72

 
23

 

 
3

 
3

 
101

Utah
10

 

 

 

 

 
10

Vermont

 
1

 

 

 

 
1

Virginia
20

 
22

 

 

 

 
42

Washington
13

 
3

 

 

 

 
16

West Virginia

 
11

 

 

 

 
11

Wisconsin
32

 

 

 

 

 
32

Wyoming
3

 

 

 

 

 
3

Canada:
 
 
 
 
 
 
 
 
 
 
 
Alberta
2

 

 

 

 

 
2

Ontario
12

 

 

 

 

 
12

Mexico:

 
10

 

 

 

 
10

Kingdom of Saudi Arabia:

 
1

 

 

 

 
1

Philippines:

 
2

 

 

 

 
2

United Arab Emirates:

 
1

 

 

 

 
1

Total
590

 
573

 
2

 
4

 
6

 
1,175

 
ITEM 3. LEGAL PROCEEDINGS

In addition to the legal proceedings described in Note 16 to the consolidated financial statements included in Item 8 of this Form 10-K, we are occasionally 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, wage and hour and other 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, many 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 4. MINING SAFETY DISCLOSURES
 
Not applicable.

21



PART II
 
ITEM 5. MARKET FOR REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES
 
Market Information
 
Our Common Stock trades on the NASDAQ Global Market under the symbol “BWLD”. The following table sets forth the high and low sale prices of our Common Stock.
 
 
2015
 
2014
 
High
 
Low
 
High
 
Low
First Quarter
$
195.83

 
173.83

 
$
159.81

 
123.05

Second Quarter
186.66

 
149.00

 
166.40

 
130.69

Third Quarter
205.83

 
155.72

 
167.64

 
132.90

Fourth Quarter
198.48

 
147.69

 
183.73

 
122.15

 
Holders
 
As of February 6, 2016 , there were approximately 111 record holders of our Common Stock, excluding shareholders whose stock is held either in nominee name and/or street name brokerage accounts. Based on information which we have obtained from our transfer agent, there are approximately 50,000  holders of our Common Stock whose stock is held either in nominee name and/or street name brokerage accounts.
 
Dividends
 
We have never declared or paid cash dividends on our Common Stock. It is our policy to preserve cash for development and other working capital needs and, therefore, do not currently have plans to pay any cash dividends. Our future dividend policy will be determined by our Board of Directors and will depend on various factors, including our results of operations, financial condition, anticipated cash needs and plans for expansion. Our revolving credit facility contains customary covenants that could, among other things, limit or prohibit the payment of dividends under certain circumstances.

Issuer Purchases of Equity Securities
 
The table below provides information with respect to our purchase of shares of Buffalo Wild Wings common stock during the three months ended December 27, 2015 :

Period
Total Number of Shares Purchased
Average Price Paid per Share
Total Number of Shares Purchased as Part of Publicly Announced Plans
Approximate Dollar Value of Shares That May Yet Be Purchased Under the Plans (a)
September 28, 2015, through October 25, 2015
October 26, 2015, through November 22, 2015
November 23, 2015, through December 27, 2015
155,623
$160.64
155,623
$175,000,146
Total
155,623
$160.64
155,623
$175,000,146

(a) On November 23, 2015, we announced that our Board of Directors approved a share repurchase program authorizing the repurchase of up to $200 million of our outstanding common stock from time to time on the open market or in privately negotiated transactions.




22



Stock Performance Chart
 
The following graph compares the yearly percentage change in the cumulative total shareholder return on our Common Stock for the five-year period ended December 27, 2015 with the cumulative total return on the Nasdaq Composite and the S&P 600 Restaurants Index. The comparison assumes $100 was invested in Buffalo Wild Wings Common Stock on December 26, 2010 , and in each of the foregoing indices on December 26, 2010 and assumes reinvestment of dividends.

 
12/26/2010

 
12/25/2011

 
12/30/2012

 
12/29/2013

 
12/28/2014

 
12/27/2015
Buffalo Wild Wings, Inc.
$
100.00

 
151.75

 
159.97

 
324.84

 
407.12

 
360.86

NASDAQ Composite
100.00

 
100.53

 
116.92

 
166.19

 
188.78

 
199.95

S&P 600 Restaurants Index
100.00

 
97.32

 
121.50

 
182.66

 
233.14

 
224.29


The preceding stock performance chart is furnished and not filed with the Securities and Exchange Commission. Notwithstanding anything to the contrary set forth in any of our previous filings made under the Securities Act of 1933 or the Securities Exchange Act of 1934 that incorporate future filings made by us under those statutes, the above stock performance chart is not to be incorporated by reference in any prior filings, nor shall it be incorporated by reference into any future filings made by us under those statutes.

23



ITEM 6. SELECTED FINANCIAL DATA
 
The following summary information should be read in conjunction with the Consolidated Financial Statements and related notes thereto set forth in Item 8 of this Form 10-K. 
 
Fiscal Years Ended (1)
 
Dec 27,
2015
 
Dec 28,
2014
 
Dec 29,
2013
 
Dec 30,
2012
 
Dec 25,
2011
 
(in thousands, except per share data)
Consolidated Statements of Earnings Data:
 
 
 
 
 
 
 
 
 
Revenue:
 
 
 
 
 
 
 
 
 
Restaurant sales
$
1,715,000

 
1,422,990

 
1,185,351

 
963,963

 
717,395

Franchise royalties and fees
97,722

 
93,233

 
81,368

 
76,567

 
67,083

Total revenue
1,812,722

 
1,516,223

 
1,266,719

 
1,040,530

 
784,478

Costs and expenses:
 
 
 
 
 
 
 
 
 
Restaurant operating costs:
 
 
 
 
 
 
 
 
 
Cost of sales
507,812

 
413,890

 
363,755

 
303,653

 
203,291

Labor
542,847

 
444,232

 
360,302

 
289,167

 
215,649

Operating
250,755

 
209,583

 
174,338

 
141,417

 
109,654

Occupancy
94,569

 
78,931

 
68,394

 
54,147

 
44,005

Depreciation and amortization
127,503

 
98,454

 
84,978

 
67,462

 
49,913

General and administrative
129,133

 
118,038

 
96,182

 
84,149

 
72,689

Preopening
14,154

 
13,544

 
14,647

 
14,630

 
14,564

Loss on asset disposals and impairment
7,462

 
3,827

 
3,262

 
3,291

 
1,929

Total costs and expenses
1,674,235

 
1,380,499

 
1,165,858

 
957,916

 
711,694

Income from operations
138,487

 
135,724

 
100,861

 
82,614

 
72,784

Interest and other income (expense)
(2,346
)
 
(317
)
 
674

 
754

 
118

Earnings before income taxes
136,141

 
135,407

 
101,535

 
83,368

 
72,902

Income tax expense
41,265

 
41,352

 
29,981

 
26,093

 
22,476

Net earnings including non-controlling interests
94,876

 
94,055

 
71,554

 
57,275

 
50,426

Net loss attributable to noncontrolling interests
(193
)
 
(39
)
 

 

 

Net earnings attributable to Buffalo Wild Wings
$
95,069

 
94,094

 
71,554

 
57,275

 
50,426

 
 
 
 
 
 
 
 
 
 
Earnings per common share – basic
$
5.00

 
4.98

 
3.81

 
3.08

 
2.75

Earnings per common share – diluted
$
4.97

 
4.95

 
3.79

 
3.06

 
2.73

Weighted average shares outstanding – basic
19,013

 
18,908

 
18,770

 
18,582

 
18,337

Weighted average shares outstanding – diluted
19,131

 
19,002

 
18,872

 
18,705

 
18,483

 
 
 
 
 
 
 
 
 
 
Consolidated Statements of Cash Flow Data:
 
 
 
 
 
 
 
 
 
Net cash provided by operating activities
$
237,260

 
217,866

 
179,360

 
145,188

 
148,260

Net cash used in investing activities
(365,191
)
 
(179,029
)
 
(145,741
)
 
(142,753
)
 
(146,682
)
Net cash provided by (used in) financing activities
45,499

 
(1,942
)
 
3,039

 
(1,588
)
 
3,690

 
As Of (1)
 
Dec 27,
2015
 
Dec 28,
2014
 
Dec 29,
2013
 
Dec 30,
2012
 
Dec 25,
2011
 
(in thousands)
Consolidated Balance Sheets Data:
 
 
 
 
 
 
 
 
 
Total current assets
$
197,751

 
263,929

 
182,756

 
125,536

 
139,245

Total assets
1,072,382

 
853,466

 
705,728

 
591,087

 
495,359

Total current liabilities
263,623

 
195,485

 
166,474

 
140,843

 
114,270

Total liabilities
416,645

 
279,167

 
239,920

 
207,715

 
177,373

Retained earnings
499,085

 
427,695

 
333,601

 
262,047

 
204,772

Total equity
655,737

 
574,299

 
465,808

 
383,372

 
317,986

 
(1)
We utilize a 52- or 53-week accounting period that ends on the last Sunday in December. The fiscal year ended December 25, 2011 was comprised of 52 weeks. The fiscal year ended December 30, 2012 was a 53-week year. Each of the fiscal years in the three years ended December 27, 2015 were comprised of 52 weeks. Our next 53-week year will be the fiscal year ended December 31, 2017.


24



ITEM 7. 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. This discussion and analysis contains certain statements that are not historical facts, including, among others, those relating to our anticipated financial performance for fiscal 2016 , future 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 Item 1A of this 10-K under “Risk Factors.” 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® 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, 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.
 
Overview
 
As of December 27, 2015 , we owned and operated 596 company-owned restaurants, including 590 Buffalo Wild Wings ® , 4 R Taco TM , and 2 PizzaRev ® restaurants in the United States and Canada. We also franchised an additional 579 restaurants, including 573 Buffalo Wild Wings restaurants and 6 R Taco restaurants. We are building for long-term future earnings growth by investing in Buffalo Wild Wings in the United States and Canada, international franchising, R Taco, and PizzaRev. These investments will help us to achieve our vision of being a company of 3,000 restaurants worldwide.
 
In 2016 , we expect to open 45 to 50 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. We have set an annual net earnings per share growth goal of 20% to 25% for 2016. 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 experience.
 
Our revenue is generated by:

Sales at our company-owned restaurants, which represented 95% of total revenue in 2015 . Food and non-alcoholic beverages accounted for 80% of restaurant sales. The remaining 20% of restaurant sales was from alcoholic beverages. The menu items with the highest sales volumes are traditional and boneless wings, each at 21% of total restaurant sales.

Royalties and franchise fees received from our franchisees.

A second factor is our success in developing restaurants. 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 our 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 ranged from 28.2% to 30.6% of restaurant sales per quarter in 2015 and 2014 , mostly due to the price fluctuation 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. The price we pay for chicken wings is determined based on the average of the previous month’s wing market plus mark-up for processing and distribution. The chart below illustrates the fluctuation in chicken wing prices from quarter to quarter in the last

25



five years.
We generate cash from the operation of our 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.” 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 annually based on the number of new locations opening and under construction. Loss on asset disposals and impairment expense is related to company-owned restaurants and includes the costs associated with normal asset retirements, asset impairment charges, and closures of locations. General and administrative expenses are related to home office and field support provided to both company-owned restaurants and franchising operations.
 
We utilize a 52- or 53-week accounting period that ends on the last Sunday in December. The fiscal year ended December 25, 2011 was comprised of 52 weeks. The fiscal year ended December 30, 2012 was a 53-week year. Each of the fiscal years in the three years ended December 27, 2015 were comprised of 52 weeks. Our next 53-week year will occur in 2017.
 
Critical Accounting Estimates
 
Our significant accounting policies are described in Note 1 to the Consolidated Financial Statements, which were prepared in accordance with U.S. GAAP. Critical accounting policies are those that we believe are both important to the portrayal of our financial condition and results and require our most difficult, subjective or complex judgments, often as a result of the need to make estimates about the effect of matters that are inherently uncertain.
 
We believe that the following discussion represents our most critical accounting policies and estimates used in the preparation of our consolidated financial statements. In addition to these critical accounting estimates, there are other items used in the preparation of the consolidated financial statements that require estimation, but are not deemed critical. Changes in estimates used in these and other items could have a material impact on our consolidated financial statements.
 

26



Business Combinations

We have accounted for the five acquisitions completed in 2015 and the three acquisitions completed in 2014 as business combinations. We allocate the purchase price to tangible and intangible assets acquired and liabilities assumed, based on their estimated fair values. The excess of the purchase price, if any, over the aggregate fair value of assets acquired and liabilities assumed is allocated to goodwill. We estimated the fair values of certain tangible property, assets and liabilities related to capital leases, and certain identifiable intangible assets, including favorable and unfavorable operating leases and reacquired franchise rights, with the use of an independent valuation firm. The adjustments, if any, arising out of the finalization of the allocation of the purchase could result in material changes to our consolidated financial statements.

Valuation of Long-Lived Assets and Store Closing Reserves
 
We review long-lived assets quarterly to determine if triggering events have occurred which would require a test to determine if the carrying amount of these assets may not be recoverable based on estimated future cash flows. Assets are reviewed at the lowest level for which cash flows can be identified, which is at the individual restaurant level. In the absence of extraordinary circumstances, restaurants are included in the impairment analysis after they have been open for 15 months. We evaluate the recoverability of a restaurant’s long-lived assets, including buildings, intangibles, leasehold improvements, furniture, fixtures, and equipment over the remaining life of the primary asset in the asset group, after considering the potential impact of planned operational improvements, marketing programs, and anticipated changes in the trade area. In determining future cash flows, significant estimates are made by us with respect to future operating results of each restaurant over the remaining life of the primary asset in the asset group. If assets are determined to be impaired, the impairment charge is measured by calculating the amount by which the asset carrying amount exceeds its fair value based on our estimate of discounted future cash flows. The determination of asset fair value is also subject to significant judgment. During 2015 , 2014 , and 2013 , we recorded restaurant impairments of $1.5 million , $1.7 million , and $1.1 million , respectively. 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 periodically refine our estimated future operating results, changes in our estimates and assumptions may cause us to realize impairment charges in the future. We do not believe that these charges would be material.

In addition to the valuation of long-lived assets, we also record a store closing reserve when a restaurant is abandoned due to closure or relocation. The store closing reserve is subject to significant judgment as accruals are made for lease obligations on abandoned leased facilities. Many factors, including the local business environment, other available lease sites, the willingness of lessors to negotiate lease buyouts, and the ability to sublease our sites are considered in making the accruals. We estimate future lease obligations based on these factors and evaluate quarterly the adequacy of the estimated reserve based on current market conditions. During 2015 , 2014 , and 2013 , we recorded expenses of $503,000 , $315,000 , and $38,000 , respectively, for restaurants that closed.
 
Stock-Based Compensation
 
We account for stock-based compensation for options in accordance with the fair value recognition provisions, under which we use the Black-Scholes-Merton pricing model, which requires the input of subjective assumptions. These assumptions include the expected life of the options, expected volatility over the expected term, the risk-free interest rate.
 
Compensation expense for restricted stock units is recognized for the expected number of shares vesting at the end of each annual period. Restricted stock units granted in 2015 , 2014 , and 2013 are subject to three-year cliff vesting and a cumulative three-year earnings target. The number of units that vest is based on performance against the target. Stock-based compensation is recognized for the expected number of shares vesting at the end of the three-year period and is expensed over that period. For these restricted stock unit grants, significant assumptions are made to estimate the expected net earnings levels for future years and the expected forfeitures.

Lessee Involvement in Construction

In certain leases, due to our involvement in the construction of leased assets, we are considered the deemed accounting owner of a construction project. In addition, we recognize a deemed landlord financing obligation for construction costs incurred by our landlords. Once construction is complete, we complete an assessment to determine if we are deemed to have continuing involvement in the construction project. In certain leases, due to unreimbursed construction costs, we are deemed to have continuing involvement and are precluded from de-recognizing the asset and associated financing obligation. In these cases, we continue to account for the landlord's asset as if we are the legal owner.


27




Results of Operations
 
Our operating results for 2015 , 2014 , and 2013 , 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.
 
 
Fiscal Years Ended
 
December 27, 2015
 
December 28, 2014
 
December 29, 2013
Revenue:
 
 
 
 
 
Restaurant sales
94.6
 %
 
93.9
 %
 
93.6
%
Franchise royalties and fees
5.4

 
6.1

 
6.4

Total revenue
100.0

 
100.0

 
100.0

Costs and expenses:
 
 
 
 
 
Restaurant operating costs:
 
 
 
 
 
Cost of sales
29.6

 
29.1

 
30.7

Labor
31.7

 
31.2

 
30.4

Operating
14.6

 
14.7

 
14.7

Occupancy
5.5

 
5.5

 
5.8

Depreciation and amortization
7.0

 
6.5

 
6.7

General and administrative
7.1

 
7.8

 
7.6

Preopening
0.8

 
0.9

 
1.2

Loss on asset disposals and impairment
0.4

 
0.3

 
0.3

Total costs and expenses
92.4

 
91.0

 
92.0

Income from operations
7.6

 
9.0

 
8.0

Interest and other income (expense)
(0.1
)
 

 
0.1

Earnings before income taxes
7.5

 
8.9

 
8.0

Income tax expense
2.3

 
2.7

 
2.4

Net earnings including noncontrolling interests
5.2

 
6.2

 
5.6

Net income (loss) attributable to noncontrolling interests

 

 

Net earnings attributable to Buffalo Wild Wings
5.2
 %
 
6.2
 %
 
5.6
%


28



The number of company-owned and franchised restaurants open are as follows:
 
 
As of
 
Dec 27,
2015
 
Dec 28,
2014
 
Dec 29,
2013
Company-owned restaurants
596

 
491

 
434

Franchised restaurants
579

 
591

 
559

  
The restaurant sales for company-owned and franchised restaurants are as follows (amounts in thousands):
 
 
Fiscal Years Ended
 
Dec 27,
2015
 
Dec 28,
2014
 
Dec 29,
2013
Company-owned restaurant sales
$
1,715,000

 
1,422,990

 
1,185,351

Franchised restaurant sales
1,928,195

 
1,858,116

 
1,619,526

 
Increases in comparable same-store sales at Buffalo Wild Wings locations in the United States and Canada are as follows (based on restaurants operating at least fifteen months):
 
 
Fiscal Years Ended
 
Dec 27,
2015
 
Dec 28,
2014
 
Dec 29,
2013
Company-owned same-store sales
4.2
%
 
6.5
%
 
3.9
%
Franchised same-store sales
2.5
%
 
5.6
%
 
3.3
%
 
The annual average prices paid per pound for chicken wings for company-owned Buffalo Wild Wings restaurants are as follows:
 
 
Fiscal Years Ended
 
Dec 27,
2015
 
Dec 28,
2014
 
Dec 29,
2013
Average price per pound
$
1.83

 
1.55

 
1.76

 

The following comparisons of 2015 to 2014 and 2014 to 2013 includes results of operations of Buffalo Wild Wings ® , R Taco™ and PizzaRev ® restaurants. Any impact from R Taco and PizzaRev is immaterial unless separately noted. There were no R Taco and PizzaRev restaurants in fiscal year 2013.

Fiscal Year 2015 Compared to Fiscal Year 2014
 
Restaurant sales increased by $292.0 million , or 20.5% , to $1.7 billion in 2015 from $1.4 billion in 2014 . The increase in restaurant sales was due to a $240.9 million increase associated with 107 company-owned restaurants that opened or were acquired in 2015 and the company-owned restaurants that opened or were acquired before 2015 and did not meet the criteria for same-store sales for all, or part, of the year. A same-store sales increase of 4.2% accounted for $51.1 million of the increase in restaurant sales.
 
Franchise royalties and fees increased by $4.5 million , or 4.8% , to $97.7 million in 2015 from $93.2 million in 2014 . The increase was primarily due to royalties related to additional sales at the franchised Buffalo Wild Wings restaurants that opened in 2015 and an increase in same-store sales for franchised restaurants of 2.5% in 2015 , partially offset by the decrease in number of franchised restaurants. The decrease in the number of franchised restaurants is primarily due to the company's acquisitions of franchised restaurants.
 
Cost of sales increased by $93.9 million , or 22.7% , to $507.8 million in 2015 from $413.9 million in 2014 , due primarily to more restaurants being operated in 2015 . Cost of sales as a percentage of restaurant sales increased to 29.6% during 2015

29



from 29.1% in 2014 , primarily due to higher chicken wing prices. In 2015 , chicken wings averaged $1.83 per pound, which was an 18.1% increase compared to 2014 .
 
Labor expenses increased by $98.6 million , or 22.2% , to $542.8 million in 2015 from $444.2 million in 2014 due primarily to more restaurants being operated in 2015 . Labor expenses as a percentage of restaurant sales increased to 31.7% in 2015 compared to 31.2% in 2014 . Cost of labor as a percentage of restaurant sales increased primarily due to our addition of Guest Experience Captains during the last year and increases in wage rates and benefit costs.
 
Operating expenses increased by $41.2 million , or 19.6% , to $250.8 million in 2015 from $209.6 million in 2014 due primarily to more restaurants being operated in 2015 . Operating expenses as a percentage of restaurant sales decreased to 14.6% in 2015 from 14.7% in 2014 . Advertising and marketing expense decreased as a percentage of restaurant sales, which was partially offset by an increase in repair and maintenance expense.

Occupancy expenses increased by $15.6 million , or 19.8% , to $94.6 million in 2015 from $78.9 million in 2014 due primarily to more restaurants being operated in 2015 . Occupancy expenses as a percentage of restaurant sales remained consistent at 5.5% in 2015 and 2014 .
 
Depreciation and amortization increased by $29.0 million , or 29.5% , to $127.5 million in 2015 from $98.5 million in 2014 . The increase was primarily due to the additional depreciation related to the 105 additional company-owned restaurants compared to 2014 . Depreciation and amortization expense as a percentage of total revenue increased to 7.0% in 2015 from 6.5% in 2014 due to an increase in amortization of reacquired franchise rights and higher depreciation related to capital leases.
 
General and administrative expenses increased by $11.1 million , or 9.4% , to $129.1 million in 2015 from $118.0 million in 2014 primarily due to additional headcount. General and administrative expenses as a percentage of total revenue decreased to 7.1% in 2015 from 7.8% in 2014 . Exclusive of stock-based compensation, our general and administrative expenses decreased to 6.4% of total revenue in 2015 from 6.8% in 2014 . This decrease was primarily due to a decrease in incentive compensation expense as a percentage of revenue.
 
Preopening costs increased by $0.6 million to $14.2 million in 2015 from $13.5 million in 2014 . In 2015 , we incurred costs of $13.6 million for 52 new company-owned restaurants and costs of $600,000 for restaurants that will open in 2016 . In 2014 , we incurred costs of $13.1 million for 48 new company-owned restaurants and costs of $300,000 for restaurants that opened in 2015 . Average preopening cost per new company-owned Buffalo Wild Wings restaurant in 2015 and 2014 was $271,000 and $299,000 , respectively.
 
Loss on asset disposals and impairment increased by $3.6 million to $7.5 million in 2015 from $3.8 million in 2014 . The expense in 2015 represented the impairment of three underperforming restaurants of $1.5 million , closure costs for two closed or relocated restaurants of $503,000 , the write-off of acquired PizzaRev franchise licenses of $596,000 , and the write-off of miscellaneous equipment and disposals due to remodels. The expense in 2014 represented the impairment of the assets of three underperforming restaurants of $1.7 million, closure costs for five closed or relocated restaurants of $315,000, and the write-off of miscellaneous equipment and disposals due to remodels partially offset by the gain on sale of one restaurant of $800,000.
 
Interest and other expenses increased by $2.0 million to $2.3 million in 2015 from $0.3 million in 2014 . The increase was primarily due to increased interest expense on our line of credit and interest expense related to capital leases and deemed landlord financing obligations. Cash and marketable securities balances at the end of the year were $20.3 million in 2015 compared to $112.9 million in 2014 .
 
Provision for income taxes decreased $0.1 million to $41.3 million in 2015 from $41.4 million in 2014 . The effective tax rate as a percentage of income before taxes decreased to 30.3% in 2015 from 30.5% in 2014 . The rate decrease was primarily due to higher employment-related Federal tax credits. We estimate our effective tax rate in 2016 will be about 31% based on current tax law.
 
Fiscal Year 2014 Compared to Fiscal Year 2013
 
Restaurant sales increased by $237.6 million, or 20.0%, to $1.4 billion in 2014 from $1.2 billion in 2013. The increase in restaurant sales was due to a $167.3 million increase associated with 63 company-owned restaurants that opened or were acquired in 2014 and the company-owned restaurants that opened or were acquired before 2014 and did not meet the criteria for same-store sales for all, or part, of the year. A same-store sales increase of 6.5% accounted for $70.3 million of the increase in restaurant sales.
 

30



Franchise royalties and fees increased by $11.9 million, or 14.6%, to $93.2 million in 2014 from $81.4 million in 2013. The increase was primarily due to royalties related to additional sales at 25 more franchised Buffalo Wild Wings restaurants in operation at the end of the year compared to the prior year, and an increase in same-store sales for franchised restaurants of 5.6% in 2014.
 
Cost of sales increased by $50.1 million, or 13.8%, to $413.9 million in 2014 from $363.8 million in 2013, due primarily to more restaurants being operated in 2014. Cost of sales as a percentage of restaurant sales decreased to 29.1% in 2014 from 30.7% in 2013. Cost of sales as a percentage of restaurant sales decreased primarily due to lower chicken wing prices and the rollout of Wings by Portion. In 2014, chicken wings averaged $1.55 per pound, which was a 11.9% decrease compared to 2013.
 
Labor expenses increased by $83.9 million, or 23.3%, to $444.2 million in 2014 from $360.3 million in 2013 due primarily to more restaurants being operated in 2014. Labor expenses as a percentage of restaurant sales increased to 31.2% in 2014 compared to 30.4% in 2013. Cost of labor as a percentage of restaurant sales increased primarily due to higher hourly labor costs related to the implementation of our Guest Experience Business Model, minimum wage increases in Minnesota and California, and higher bonus expense.
 
Operating expenses increased by $35.2 million, or 20.2%, to $209.6 million in 2014 from $174.3 million in 2013 due primarily to more restaurants being operated in 2014. Operating expenses as a percentage of restaurant sales remained consistent at 14.7% in 2014 and 2013. Repair and maintenance cost increases were partially offset by fewer pay-per-view event purchases.

Occupancy expenses increased by $10.5 million, or 15.4%, to $78.9 million in 2014 from $68.4 million in 2013 due primarily to more restaurants being operated in 2014. Occupancy expenses as a percentage of restaurant sales decreased to 5.5% in 2014 from 5.8% in 2013 primarily due to leveraging rent costs with the same-store sales increase.
 
Depreciation and amortization increased by $13.5 million, or 15.9%, to $98.5 million in 2014 from $85.0 million in 2013. The increase was primarily due to the additional depreciation related to the 57 additional Buffalo Wild Wings and Emerging Brands company-owned restaurants compared to 2013. Depreciation and amortization expense as a percentage of total revenue decreased to 6.5% in 2014 from 6.7% in 2013 due primarily to leveraging costs with the same-store sales increase.
 
General and administrative expenses increased by $21.9 million, or 22.7%, to $118.0 million in 2014 from $96.2 million in 2013 primarily due to additional headcount and higher stock-based compensation expense. General and administrative expenses as a percentage of total revenue increased to 7.8% in 2014 from 7.6% in 2013. Exclusive of stock-based compensation, our general and administrative expenses increased to 6.8% of total revenue in 2014 from 6.7% in 2013. This increase was primarily due to higher technology project expenses and travel related costs.
 
Preopening costs decreased by $1.1 million to $13.5 million in 2014 from $14.6 million in 2013. In 2014, we incurred costs of $13.1 million for 48 new company-owned Buffalo Wild Wings and Emerging Brands restaurants and costs of $300,000 for restaurants that will open in 2015. In 2013, we incurred costs of $13.7 million for 52 new company-owned restaurants and costs of $943,000 for restaurants that opened in 2014. Average preopening cost per new company-owned Buffalo Wild Wings restaurant in 2014 and 2013 was $299,000 and $290,000, respectively.
 
Loss on asset disposals and impairment increased by $565,000 to $3.8 million in 2014 from $3.3 million in 2013. The expense in 2014 represented the impairment of three underperforming restaurants of $1.7 million, closure costs for five closed or relocated restaurants of $315,000, and the write-off of miscellaneous equipment and disposals due to remodels partially offset by the gain on sale of one restaurant of $800,000. The expense in 2013 represented the impairment of the assets of two restaurants of $1.1 million and the write-off of miscellaneous equipment and disposals due to remodels.
 
Interest income and other income (expense) decreased by $991,000 to an expense of $317,000 in 2014 from income of $674,000 in 2013. Our investments were in short-term municipal securities and our deferred compensation investments were primarily in mutual funds. The decrease in investment income was primarily due to lower gains on investments held for our deferred compensation plan and a loss on our minority investment in Pie Squared Holdings. Cash and marketable securities balances at the end of the year were $112.9 million in 2014 compared to $65.1 million in 2013.
 
Provision for income taxes increased $11.4 million to $41.4 million in 2014 from $30.0 million in 2013. The effective tax rate as a percentage of income before taxes increased to 30.5% in 2014 from 29.5% in 2013. The rate increase was primarily due to the favorable impact of the American Taxpayer Relief Act of 2012, which was enacted in 2013, on the tax rate in 2013.

  

31






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, acquisitions of businesses or investments in affiliates would generally be funded from cash and marketable securities balances or using our line of credit. Our cash and marketable securities balance at December 27, 2015 was $20.3 million . Our marketable securities balance consists of mutual funds held for our deferred compensation plan.
 
During fiscal 2015 , 2014 , and 2013 , net cash provided by operating activities was $237.3 million , $217.9 million , and $179.4 million , respectively. Net cash provided by operating activities in 2015 consisted primarily of net earnings adjusted for non-cash expenses and an increase in accrued expenses partially offset by an increase in refundable income taxes. The increase in accrued expenses was primarily due to higher withholdings on restricted stock units and higher wages payable. The increase in refundable income taxes was due to the enactment of the Protecting Americans from Tax Hikes (PATH) Act of 2015.

Net cash provided by operating activities in 2014 consisted primarily of net earnings adjusted for non-cash expenses and an increase in accrued expenses and accounts payable. The increase in accrued expenses was primarily due to higher payroll-related costs including higher incentive compensation and wages. The increase in accounts payable was primarily due to timing of payments.
 
Net cash provided by operating activities in 2013 consisted primarily of net earnings adjusted for non-cash expenses and an increase in accrued expenses and income taxes. The increase in accrued expenses was primarily due to higher payroll-related costs including higher incentive compensation and wages. The increase in income taxes was primarily due to timing of payments.
 
Net cash used in investing activities for 2015 , 2014 , and 2013 , was $365.2 million , $179.0 million , and $145.7 million , respectively. Investing activities for 2015 included $172.5 million for acquisitions of property and equipment related to the additional company-owned restaurants and restaurants under construction and $203.6 million for the acquisitions of businesses. Investing activities for 2014 included $137.5 million for acquisitions of property and equipment related to the additional company-owned restaurants and restaurants under construction and $30.6 million for the acquisitions of businesses and investments in affiliates. Investing activities for 2013 included $138.7 million for acquisitions of property and equipment related to the additional company-owned restaurants and restaurants under construction and $10.3 million for the acquisition of businesses and investments in affiliates. In 2015 , 2014 , and 2013 , we opened or purchased 107 , 57, and 55 restaurants, respectively. In 2016 , we expect capital expenditures of approximately $200 million , which does not include franchise acquisitions or emerging brand investments. In 2015 , we purchased $12.3 million of marketable securities and received proceeds of $23.3 million as investments in marketable securities matured or were sold. In 2014 , we purchased $23.0 million of marketable securities and received proceeds of $12.0 million as investments in marketable securities matured or were sold. In 2013 , we received proceeds of $3.3 million as investments in marketable securities matured or were sold.
 
Net cash provided by (used in) financing activities for 2015 , 2014 , and 2013 , was $45.5 million , $(1.9) million , and $3.0 million , respectively. Net cash provided by financing activities for 2015 resulted primarily from net proceeds from our line of credit of $34.5 million , and short-term borrowings from our national advertising and gift card funds of $36.2 million , partially offset by repurchases of our common stock of $25.0 million . Net cash used in financing activities for 2014 resulted primarily from tax payments for restricted stock units of $7.5 million partially offset by the issuance of common stock for options exercised and employee stock purchases of $3.0 million and excess tax benefits from stock issuances of $2.5 million . Net cash provided by financing activities for 2013 resulted primarily from the issuance of common stock for options exercised and employee stock purchases of $2.5 million and excess tax benefits from stock issuances of $5.5 million partially offset by tax payments for restricted stock units of $4.9 million . No additional funding from the issuance of common stock (other than from the exercise of options and employee stock purchases) is anticipated in 2016 . We anticipate repurchasing $100 million of common stock in 2016.
 
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

32



leases provide for contingent rental payments based on sales thresholds. We own the buildings in which 24% of our company-owned restaurants operate.
 
The following table presents a summary of our contractual operating lease obligations, capital lease obligations, financing obligations and commitments as of December 27, 2015 :
 
 
 
 
Payments Due By Period
(in thousands)
 
Total
 
Less than
one year
 
1-3 years
 
3-5 years
 
After 5
years
Operating lease obligations
$
726,064

 
81,269

 
155,251

 
131,453

 
358,091

Capital lease obligations
50,363

 
4,779

 
9,665

 
9,939

 
25,980

Deemed landlord financing obligations
8,547

 
747

 
1,516

 
1,549

 
4,735

Commitments for restaurants under development
42,563

 
1,926

 
5,804

 
5,842

 
28,991

Total
$
827,537

 
88,721

 
172,236

 
148,783

 
417,797


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 in the foreseeable future. We have a $200 million unsecured revolving credit facility to allow us to remain nimble for future acquisitions of businesses, investments in affiliates, and share repurchases. There is a commitment fee on the average unused portion of the facility at a rate per annum between 0.125% and 0.200%, which is dependent on our consolidated total leverage ratio. Our future cash outflows related to income tax uncertainties amounted to $1.1 million as of December 27, 2015 . These amounts were 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 December 27, 2015 and December 28, 2014 , we had no off-balance sheet arrangements or transactions other than contractual lease obligations.

Recent Accounting Pronouncements
 
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 updated guidance is effective for interim and annual periods beginning after December 15, 2017 and early adoption is permitted only for interim and annual periods beginning after December 15, 2016. We are currently evaluating the impact of the updated guidance 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 is effective for interim and annual periods beginning after December 15, 2015, and early adoption is permitted. We are currently evaluating the impact of the updated guidance on our consolidated financial statements.
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 is effective for interim and annual periods beginning after December 15, 2015, and early adoption is permitted. We do not believe the adoption of ASU 2015-05 will have a significant impact on our consolidated financial statements.
In November 2015, the FASB issued ASU 2015-17, “Income Taxes: Balance Sheet Classification of Deferred Taxes.” ASU 2015-17 requires that deferred income tax liabilities and assets be classified as non-current in a statement of financial position. The Company elected early adoption of this guidance for the fiscal year ended December 27, 2015, on a prospective basis. The adoption of this ASU allows the Company to simplify its presentation of deferred income tax liabilities and assets. Prior periods were not retrospectively adjusted.

33



In February 2016, the FASB issued ASU 2016-02, “Leases.” ASU 2016-02 requires that lease arrangements longer than 12 months result in an entity recognizing an asset and liability. The updated guidance is effective for interim and annual periods beginning after December 15, 2018, and early adoption is permitted. We have not evaluated the impact of the updated guidance on our consolidated financial statements.
We reviewed all other 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.

Impact of Inflation
 
In the last three years we have not operated in a period of high general inflation; however, the cost of commodities, labor, certain utilities and building costs have generally increased or experienced price volatility. Our restaurant operations are subject to federal and state minimum wage laws and other laws governing such matters as working conditions, overtime and tip credits. Significant numbers of our food service personnel are paid at rates related to the federal and/or state minimum wage and, accordingly, increases in the minimum wage have increased our labor costs in the last three years. In addition, costs associated with our operating leases, such as taxes, maintenance, repairs and insurance, are often subject to upward pressure. To the extent permitted by competition, we have mitigated increased costs by increasing menu prices and may continue to do so if deemed necessary in future years.
 
Quarterly Results of Operations
 
The following table sets forth, by quarter, the unaudited quarterly results of operations for the two most recent years, as well as the same data expressed as a percentage of our total revenue for the periods presented. Restaurant operating costs are expressed as a percentage of restaurant sales. The information for each quarter is unaudited and we have prepared it on the same basis as the audited financial statements appearing elsewhere in this document. In the opinion of management, all necessary adjustments, consisting only of normal recurring adjustments, have been included to present fairly the unaudited quarterly results. All amounts, except per share amounts, are expressed in thousands.
 
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 preopening expenses, asset impairment charges, store closing charges, general economic conditions, and stock-based compensation. As a result, our results of operations are not necessarily indicative of the results that may be achieved for any future period.

34



Results of Quarterly Operations (unaudited) (amounts in thousands except per share data)
 
 
Mar 30,
2014
 
Jun 29,
2014
 
Sep 28,
2014
 
Dec 28,
2014
 
Mar 29,
2015
 
Jun 28,
2015
 
Sep 27,
2015
 
Dec 27,
2015
Revenue:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Restaurant sales
344,945

 
343,141

 
350,524

 
384,380

 
414,972

 
401,860

 
431,763

 
466,405

Franchise royalties and fees
22,910

 
22,853

 
22,934

 
24,536

 
25,614

 
24,527

 
23,763

 
23,818

Total revenue
367,855

 
365,994

 
373,458

 
408,916

 
440,586

 
426,387

 
455,526

 
490,223

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Costs and expenses:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Restaurant operating costs:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Cost of sales
97,487

 
96,837

 
101,886

 
117,680

 
125,677

 
117,843

 
126,878

 
137,414

Labor
105,334

 
107,432

 
111,897

 
119,569

 
130,394

 
129,294

 
138,897

 
144,262

Operating
49,038

 
50,017

 
52,364

 
58,164

 
58,551

 
56,822

 
63,343

 
72,039

Occupancy
18,969

 
19,283

 
19,796

 
20,883

 
21,990

 
22,354

 
24,210

 
26,015

Depreciation and amortization
22,832

 
23,746

 
24,776

 
27,100

 
28,069

 
29,208

 
33,610

 
36,616

General and administrative
28,156

 
30,223

 
27,784

 
31,875

 
30,522

 
33,701

 
33,714

 
31,196

Preopening
2,578

 
2,197

 
3,594

 
5,175

 
1,270

 
3,204

 
4,777

 
4,903

Loss on asset disposals and impairment
787

 
1,211

 
1,371

 
458

 
605

 
2,306

 
1,269

 
3,282

Total costs and expenses
325,181

 
330,946

 
343,468

 
380,904

 
397,078

 
394,732

 
426,698

 
455,727

Income from operations
42,674

 
35,048

 
29,990

 
28,012

 
43,508

 
31,655

 
28,828

 
34,496

Interest and other income (expense)
(127
)
 
235

 
(236
)
 
(189
)
 
(75
)
 
41

 
(1,400
)
 
(912
)
Earnings before income taxes
42,547

 
35,283

 
29,754

 
27,823

 
43,433

 
31,696

 
27,428

 
33,584

Income tax expense
14,231

 
11,580

 
8,001

 
7,540

 
14,448

 
10,264

 
8,261

 
8,292

Net earnings including noncontrolling interests
28,316

 
23,703

 
21,753

 
20,283

 
28,985

 
21,432

 
19,167

 
25,292

Net income (loss) attributable to noncontrolling interests

 

 

 
(39
)
 
(78
)
 
(67
)
 
(69
)
 
21

Net earnings attributable to Buffalo Wild Wings
28,316

 
23,703

 
21,753

 
20,322

 
29,063

 
21,499

 
19,236

 
25,271

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Earnings per common share – basic
1.50

 
1.25

 
1.15

 
1.07

 
1.53

 
1.13

 
1.01

 
1.33

Earnings per common share – diluted
1.49

 
1.25

 
1.14

 
1.07

 
1.52

 
1.12

 
1.00

 
1.32

Weighted average shares outstanding – basic
18,873

 
18,904

 
18,923

 
18,931

 
18,993

 
19,003

 
19,022

 
19,036

Weighted average shares outstanding – diluted
18,953

 
18,981

 
19,021

 
19,051

 
19,074

 
19,113

 
19,167

 
19,173




35



Results of Quarterly Operations (unaudited)