| BUFFALO WILD WINGS INC Item 1A Risk Factors 9 ITEM 1A RISK FACTORS The foregoing discussion and the discussion contained in Item 7 of this Form 10-K contain various "e forward-looking statements "e 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 "e anticipate, "e "e believe, "e "e estimate, "e "e expect, "e "e intend, "e "e may, "e "e could, "e "e possible, "e "e plan, "e "e project, "e "e will, "e "e forecast "e and similar words or expressions |
| Our forward-looking statements generally relate to our growth strategy, financial results, sales efforts, store openings and related expense, and cash requirements |
| Although 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 |
| FLUCTUATIONS IN CHICKEN WING PRICES COULD REDUCE OUR OPERATING INCOME The primary food product used by our company-owned and franchised restaurants is fresh chicken wings |
| We purchase fresh chicken wings based on current market prices that are subject to fluctuations |
| A material increase in fresh chicken wings costs may adversely affect our operating results |
| Fresh chicken wing prices in 2005 averaged 14prca lower than 2004 as the average price per pound dropped from dlra1dtta39 in 2004 to dlra1dtta20 in 2005 |
| If there is a significant rise in the price of fresh 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, fresh chicken wings accounted for approximately 31prca, 34prca, and 27prca of our cost of sales in 2003, 2004, and 2005, respectively, with an annual average price per pound of dlra1dtta06, dlra1dtta39, and dlra1dtta20, respectively |
| A 10prca increase in the fresh chicken wing costs for 2005 would have increased restaurant cost of sales by approximately dlra1dtta6 million |
| If the avian flu were to affect our supply of chicken wings, our operations may be negatively impacted, as prices may rise due to limited supply |
| Additional information related to chicken wing prices is included in Item 7 under "e Results of Operations "e |
| IF WE ARE UNABLE TO SUCCESSFULLY OPEN NEW RESTAURANTS, OUR REVENUE GROWTH RATE AND PROFITS MAY BE REDUCED 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 or failures 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 or that new restaurants opened by either of us will be operated profitably |
| 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 |
| Further, any restaurants that we or our franchisees open may not achieve operating results similar to those of our existing restaurants |
| Our ability to expand successfully will depend on a number of factors, many of which are beyond our control |
| These factors include: 9 o Locating suitable restaurant sites in new and existing markets; o Negotiating acceptable lease or purchase terms for new restaurants; o Recruiting, training and retaining qualified home office, field and restaurant personnel and management; o Attracting and retaining qualified franchisees; o Cost effective and timely planning, design and build-out of restaurants; o Obtaining building materials and hiring satisfactory construction contractors; o Obtaining and maintaining required local, state and federal governmental approvals and permits related to the construction of the sites and the sale of food and alcoholic beverages; o Creating guest awareness of our restaurants in new markets; o Competition in our markets; and o General economic conditions |
| We may make errors in selecting these criteria or applying these criteria to a particular site, or we or our franchisees may not be able to find sufficient new restaurant sites that satisfy these criteria to support 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 |
| Our inability to obtain suitable restaurant sites at reasonable costs may reduce our growth rate |
| OUR RESTAURANTS MAY NOT ACHIEVE MARKET ACCEPTANCE IN THE NEW GEOGRAPHIC REGIONS WE ENTER Our expansion plans depend on opening restaurants in new markets where we or our franchisees have little or no operating experience |
| 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 the Buffalo Wild Wings brand |
| Sales at restaurants opening in new markets may take longer to reach average annual restaurant sales, if at all, thereby affecting the profitability of these restaurants |
| We may not be successful in operating our restaurants in new markets on a profitable basis |
| 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 |
| IMPLEMENTING OUR EXPANSION STRATEGY MAY STRAIN OUR RESOURCES Our expansion strategy may strain our management, financial and other resources |
| We must attract and retain talented operating personnel to maintain the quality and service levels at our existing and future restaurants |
| We must also continue to enhance our operational, financial and management systems |
| We may not be able to effectively manage these or other aspects of our expansion |
| If we fail to do so, our business, financial condition, operating results and cash flows could suffer |
| WE ARE DEPENDENT ON FRANCHISEES AND THEIR SUCCESS Currently, approximately 67prca of our restaurants are franchised |
| Franchising royalties and fees represented approximately 11prca of our revenues during fiscal 2003, 2004, and 2005 |
| Our performance depends upon i) our ability to attract and retain qualified franchisees, ii) the franchisees &apos ability to execute our concept and capitalize upon our brand recognition and marketing, and iii) franchisees &apos ability to timely develop restaurants |
| We may not be able to recruit franchisees who have the business abilities or financial resources necessary to open restaurants on schedule, or who will conduct operations in a manner consistent with our concept and standards |
| Also, our franchisees may not be able to operate restaurants in a profitable manner |
| 10 FRANCHISEES MAY TAKE ACTIONS THAT COULD HARM OUR BUSINESS Franchisees are independent contractors and are not our employees |
| We provide training and support to franchisees, but 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 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 |
| In addition, we may also face potential claims and liabilities due to the acts of our franchisees based on agency or vicarious liability theories |
| 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 |
| Expensive litigation with our franchisees or government agencies may adversely affect both our profits and our important relations with our franchisees |
| 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 quick casual establishments, and quick service wing-based take-out concepts |
| Many of our direct and indirect competitors are well-established national, regional or local chains with a greater market presence than us |
| Further, some competitors have substantially greater financial, marketing and other resources than us |
| In addition, independent owners of local or regional establishments may enter the wing-based 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 |
| A REDUCTION IN VENDOR ALLOWANCES CURRENTLY RECEIVED COULD AFFECT OUR COSTS OF GOODS SOLD During fiscal 2003, 2004, and 2005, vendor allowances were recorded as a reduction in inventoriable costs and cost of sales was reduced by dlra2dtta3 million, dlra3dtta9 million, and dlra4dtta0 million, respectively |
| If the amount of vendor rebates is reduced, inventoriable costs may increase, as may the cost of sales |
| 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(R) and other popular sporting events, and thus are subject to fluctuations based on the dates for such events |
| Historically, sales in most of our restaurants have been higher during fall and winter months based on the relative popularity of national, regional and local sporting and other events |
| Further, our quarterly operating results may fluctuate significantly because of other factors, including: o Increases or decreases in same-store sales; o Fluctuations in food costs, particularly fresh chicken wings; o The timing of new restaurant openings, which may impact margins due to the related preopening costs and initially higher restaurant level operating expense ratios; o Labor availability and costs for hourly and management personnel; o Changes in competitive factors; o Disruption in supplies; o General economic conditions and consumer confidence; 11 o Claims experience for self-insurance programs; o Increases or decreases in labor or other variable expenses; o The impact from natural disasters; o Fluctuations in interest rates; and o The timing and amount of asset impairment loss and restaurant closing charges |
| 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 |
| In the future, operating results may fall below the expectations of securities analysts and investors |
| In that event, the price of our common stock would likely decrease |
| WE MAY NOT BE ABLE TO ATTRACT AND RETAIN QUALIFIED PERSONNEL TO OPERATE AND MANAGE OUR RESTAURANTS Our success and the success of our individual restaurants depends on our ability to attract, motivate and retain a sufficient number of qualified restaurant employees, including restaurant managers, kitchen staff and wait staff |
| The inability to recruit and retain these individuals may delay the planned openings of new restaurants or result in high employee turnover in existing 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 |
| Further, the loss of any of our executive officers could adversely impact us |
| 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 |
| The failure to obtain and maintain these licenses, permits and approvals, including food and liquor 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 |
| 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, unemployment tax rates, workers &apos compensation rates, citizenship requirements 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, 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, and increased employee litigation including claims relating to the Fair Labor Standards Act |
| 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 to provide service to, or make reasonable accommodations for disabled persons |
| WE ARE SUSCEPTIBLE TO ADVERSE TRENDS AND ECONOMIC CONDITIONS IN OHIO As of December 25, 2005, 81, or approximately 22prca, of our company-owned and franchised restaurants were located in Ohio |
| As a result, we are susceptible to adverse trends and economic conditions in that state |
| In addition, given our geographic concentration in the Midwest, negative publicity regarding any of our restaurants could have a material effect on our business and operations throughout the region, as could other regional occurrences such as local strikes, new or revised laws or regulations, or disruptions in the supply of food products |
| CHANGES IN CONSUMER PREFERENCES OR DISCRETIONARY CONSUMER SPENDING COULD HARM OUR PERFORMANCE Our success depends, in part, upon the continued popularity of Buffalo, New York-style chicken wings, our other menu items, sports bars and casual dining restaurant styles |
| We also depend on trends toward consumers eating away from home more often |
| Shifts in these consumer preferences could negatively affect our future profitability |
| Such shifts could be based on health concerns related to the cholesterol, carbohydrate or fat 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 |
| A decrease in guest traffic could materially harm our business |
| Smoking bans imposed by state or local laws could also adversely impact our restaurants &apos performance |
| 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 |
| 12 CHANGES IN PUBLIC HEALTH CONCERNS MAY IMPACT OUR PERFORMANCE Changes in public health concerns may affect consumer preferences for our products |
| For example, if incidents of the avian flu occur in the United States, consumer preferences for poultry products may be negatively impacted, resulting in a decline in demand for our products |
| Similarly, public health concerns over smoking have seen a rise in smoking bans |
| Such smoking bans may adversely affect our operations to the extent that such bans are imposed in specific locations, rather than state-wide, or that exceptions to the ban are given to bars or other establishments, giving patrons the ability to choose nearby locations that have no such ban |
| Further, growing movements to lower blood alcohol levels may result in a decline in alcohol consumption at our stores or increase the number of dram shop claims made against us, either of which may negatively impact operations |
| A DECLINE IN VISITORS TO ANY OF THE BUSINESS DISTRICTS NEAR THE LOCATIONS OF OUR RESTAURANTS COULD NEGATIVELY AFFECT OUR RESTAURANT SALES Some of our restaurants are located near high activity areas such as retail centers, big box shopping centers and entertainment centers |
| We depend on high visitor rates at these businesses to attract guests to our restaurants |
| If visitors to these centers decline due to economic conditions, road construction, changes in consumer preferences or shopping patterns, changes in discretionary consumer spending or otherwise, our restaurant sales could decline significantly and adversely affect our results of operations |
| THE ACQUISITION OF EXISTING RESTAURANTS FROM OUR FRANCHISEES MAY HAVE UNANTICIPATED CONSEQUENCES THAT COULD HARM OUR BUSINESS AND OUR FINANCIAL CONDITION We may seek to selectively acquire existing restaurants from our franchisees |
| 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: o 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; o risks associated with entering into markets or conducting operations where we have no or limited prior experience; and o the diversion of managementapstas attention from other business concerns |
| Future acquisitions of existing restaurants from our franchisees, 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 |
| IMPROPER FOOD HANDLING MAY AFFECT OUR BUSINESS ADVERSELY There are health risks associated with eating contaminated or improperly handled or prepared food items |
| Negative publicity over illness caused by improper handling or preparation of food items could harm our future revenue and profitability |
| While we currently maintain insurance for these types of incidents, we cannot guarantee our insurance is sufficient to cover all adverse outcomes |
| COMPLAINTS OR LITIGATION MAY HURT US Occasionally, our guests file complaints or lawsuits against us alleging that we are responsible for an illness or injury they suffered at or after a visit to our restaurants |
| We are also subject to a variety of other claims arising in the ordinary course of business, including personal injury claims, contract claims, employment-related claims, claims by franchisees, and claims arising from an incident at a franchised restaurant |
| The restaurant industry has also been subject to a growing number of claims that the menus and actions of restaurant chains have led to the obesity of certain of their guests |
| In addition, we are subject to "e dram shop "e statutes |
| These statutes generally allow a person injured by an intoxicated person to recover damages from an establishment that wrongfully served alcoholic beverages to the intoxicated person |
| Recent litigation against restaurant chains has resulted in significant judgments and settlements under dram shop statutes |
| Regardless of whether any claims against us are valid or whether we are liable, claims may be expensive to defend and may divert time and money away from our operations and hurt our performance |
| A judgment significantly in excess of our insurance coverage or for which we do not have insurance coverage could materially adversely affect our financial condition or results of operations |
| Further, adverse publicity resulting from these allegations may materially adversely affect us and our restaurants |
| 13 OUR CURRENT INSURANCE MAY NOT PROVIDE ADEQUATE LEVELS OF COVERAGE AGAINST CLAIMS 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 |
| NATURAL DISASTERS AND OTHER EVENTS COULD HARM OUR PERFORMANCE A natural disaster, such as a hurricane, a serious, widespread disease, such as an avian flu pandemic, or other events, such as a serious terrorist attack, could have a material adverse effect on our business and results of operations |
| 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 intend to actively enforce and defend our marks and if violations are identified, to 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 &apos 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 where others might have already established rights to them |
| Any of these uncertainties could have an adverse effect on us and our expansion strategy |