Buffalo Wild Wings, Inc. Announces Third Quarter Earnings per Share of $1.17 and Adjusted Earnings per Share of $1.36

Buffalo Wild Wings, Inc. (NASDAQ: BWLD) announced today financial results for the third quarter ended September 24, 2017.

Key metrics for the third quarter, versus the same period a year ago, were:

• Total revenue increased 0.5% to $496.7 million.
• Company-owned restaurant sales increased 0.5% to $473.0 million.
• Same-store sales decreased 2.3% at company-owned restaurants and 3.2% at franchise locations.
• Net earnings decreased 19.7% to $18.2 million from $22.7 million, and earnings per diluted share decreased 5.4% to $1.17 from $1.23.
• Adjusted net earnings decreased 10.7% to $21.2 million from $23.7 million, and adjusted earnings per diluted share increased 5.4% to $1.36 from $1.29.

Sally Smith, President and Chief Executive Officer, commented, "Our teams are executing on the cost initiatives of our fiscal fitness program and we exceeded our goal in the third quarter. These savings helped deliver adjusted income from operations above our expectations. The recent Tuesday promotion shift from traditional to boneless wings at company-owned restaurants will continue to improve cost of sales while traditional wing prices remain elevated. Combined with our cost savings initiatives and service excellence focus, we are optimistic these actions will deliver an improving bottom line."

Revenue

• Total revenue increased $2.5 million to $496.7 million in the third quarter, compared to $494.2 million in the third quarter of 2016. Revenue includes the recognition of $2.9 million of deferred revenue, as the company established an initial breakage estimate for the Blazin' Rewards loyalty program.
• Company-owned restaurant sales for the third quarter increased 0.5% over the same period in 2016 to $473.0 million, driven by 21 additional company-owned restaurants.
• Franchise royalties and fees increased 1.0% to $23.7 million for the quarter, versus $23.5 million in the third quarter of 2016, driven by 31 additional franchised restaurants.

Expenses

• Cost of sales for the third quarter was 30.8% of restaurant sales, compared to 28.9% in the quarter last year, driven by higher traditional chicken wing prices.
  • Traditional wings were $2.16 per pound in the third quarter, representing a $0.44 increase, or 25.6% above last year's third quarter average of $1.72. Traditional wings as a percent of cost of sales was 28.8% in the third quarter.
• Cost of labor for the third quarter was 31.4% of restaurant sales, 70 basis points lower than third quarter last year, driven primarily by 40 basis points of favorable hourly labor, 50 basis points from an out-of-period benefits adjustment, partially offset by wage inflation.
• Restaurant operating expenses as a percentage of restaurant sales were 15.2%, 40 basis points lower than third quarter of 2016, driven by favorable insurance and repair and maintenance expenses.
• Occupancy costs were 6.0% as a percentage of restaurant sales, 20 basis points higher compared to the same quarter last year based on sales deleveraging.
• Restaurant-level profit was $78.5 million, or 16.6%, of restaurant sales, compared to $82.8 million, or 17.6%, in the third quarter last year.
• Depreciation and amortization expense for the third quarter was $37.8 million, decreasing 1.5% from the prior year.
• General and administrative expenses were $31.1 million in the third quarter, decreasing 3.8% from the same period last year, due to decreased salaries and travel expenses.
  • Stock-based compensation was $2.4 million in the third quarter, compared to $0.3 million of expense in the prior year, which included a reversal of previously recognized expense.
• Total savings achieved from the company's fiscal fitness program in the third quarter were $9.2 million and $15.3 million year-to-date in 2017.
• Preopening expenses for the quarter totaled $0.9 million, versus $1.5 million in the third quarter last year, due to 4 openings this year versus 9 last year.
• Loss on asset disposal for the third quarter totaled $4.1 million, compared to last year of $1.4 million. The 2017 expense includes impairment of two restaurants totaling $2.2 million and the write-off of prepaid software licenses of approximately $1 million.
• Interest expense was $3.8 million in the third quarter, compared to $0.9 million in the prior year period.
• The effective tax rate during the quarter was 27.3%, compared to 30.4% in the prior year, due to the benefit of employee tax credits.

Earnings

• Income from operations was $28.4 million in the third quarter, or 5.7% of total revenue, compared to $32.8 million and 6.6% in the prior year. For the year to date period, income from operations was $71.6 million, or 4.7% of total revenue, compared to $114.9 million and 7.7% in the prior year.
• Adjusted income from operations was $32.5 million in the third quarter, or 6.6% of total revenue, versus $34.4 million and 7.0% in the same quarter of 2016. For the year to date period, adjusted income from operations was $88.5 million, or 5.8% of total revenue, versus $119.6 million and 8.0% in 2016.
• Net earnings decreased 19.7% to $18.2 million in the third quarter, versus $22.7 million in the third quarter of 2016. For the year to date period, net earnings decreased 38.7% to $48.5 million, versus $79.1 million in 2016.
• Earnings per diluted share were $1.17, compared to third quarter 2016 earnings per diluted share of a $1.23. Earnings per diluted share decreased 29.7% to $2.98 for the year to date period, compared to $4.24 in the same period last year.
• Adjusted earnings per diluted share were $1.36, compared to third quarter 2016 adjusted earnings per diluted share of $1.29. Adjusted earnings per diluted share for the year to date period decreased 21.5% to $3.47, compared to $4.42 in the same period last year.

Balance Sheet

• Cash totaled $30.7 million at the end of the third quarter.
• The revolving credit facility had an outstanding balance of $385 million as of the end of the quarter.

Cash Flow

• Cash flow from operations was $43.2 million for the quarter, a 33.1% decrease over the third quarter last year. For the year-to-date period, cash flow from operations was $141.9 million, a 33.7% decrease over 2016.
• Capital expenditures in the quarter were $25.0 million compared to $47.2 million in the prior year.
• Free cash flow in the third quarter was $18.2 million, compared to $17.3 million in the prior year. Free cash flow in the year to date period was $82.4 million, compared to $96.1 million in the same period of the prior year.

2017 Outlook

The company expects approximately the following new unit development in 2017:

• 14 company-owned Buffalo Wild Wings restaurants in the United States, with 5 in the fourth quarter
• 15 franchised Buffalo Wild Wings locations in the United States, with 3 in the fourth quarter
• 20 franchised Buffalo Wild Wing locations internationally, with 10 in the fourth quarter
• 2 company-owned and 10 franchised R Taco restaurants

The company expects the following in 2017:

• Same-store sales growth of approximately -1.5%
• Traditional chicken wing inflation of 10% to 11%
• Depreciation and amortization expense of $151 to $152 million
• General and administrative expense of $133 to $135 million, including stock-based compensation of $8 to $9 million
• Interest expense of approximately $14 million
• Earnings per diluted share of $4.30 to $4.60
• Adjusted earnings per diluted share of $4.85 to $5.15
• Capital expenditures of approximately $80 million

Buffalo Wild Wings will be hosting a conference call today, October 25, 2017 at 4:00 p.m. Central Daylight Time to discuss these results. There will be a simultaneous webcast conducted at our investor website IR.BuffaloWildWings.com.

A replay of the call will be available until November 1, 2017. To access this replay, please dial 1-412-317-6671 password 8206882.

About the Company

Buffalo Wild Wings, Inc., founded in 1982 and headquartered in Minneapolis, is a growing owner, operator and franchisor of Buffalo Wild Wings^® restaurants featuring a variety of boldly-flavored, made-to-order menu items including its namesake Buffalo, New York-style chicken wings. The Buffalo Wild Wings menu specializes in 21 mouth-watering signature sauces and seasonings with flavor sensations ranging from Sweet BBQ™ to Blazin’^®. Guests enjoy a welcoming neighborhood atmosphere that includes an extensive multi-media system for watching their favorite sporting events. Buffalo Wild Wings is the recipient of hundreds of "Best Wings" and "Best Sports Bar" awards from across the country. There are currently more than 1,240 Buffalo Wild Wings locations around the world.

To stay up-to-date on all the latest events and offers for sports fans and wing lovers, like Buffalo Wild Wings on Facebook, follow @BWWings on Twitter and visit www.buffalowildwings.com.

Forward-looking Statements

Various remarks we make about future expectations, plans, and prospects for the company constitute forward-looking statements for purposes of the Safe Harbor provisions under the Private Securities Litigation Reform Act of 1995. These statements relate to our future financial and restaurant performance measures and growth goals, including but not limited to those relating to our fourth quarter trends, projected unit and net earnings growth rates, projected capital expenditures and expected adjustments to the same. All statements other than statements of historical fact are statements that could be deemed forward-looking statements and are based upon the current beliefs and expectations of our management. We have attempted to identify forward-looking statements by terminology, including "anticipates,” "believes,” "can,” "continue,” "could,” "estimates,” "expects,” "goal,” "intends,” "may,” "plans,” "potential,” "predicts,” "should,” "scheduled,” or "will” or the negative of these terms or other comparable terminology. Actual results may vary materially from those contained in forward-looking statements based on a number of factors, including, but not limited to, our ability to achieve and manage our planned expansion, the ability of our franchisees to open and manage new restaurants, market acceptance in the new geographic regions we enter (particularly international locations), success of acquired restaurants, success of investments in new or emerging concepts, unforeseen obstacles in developing nontraditional sites or non-U.S. locations, our ability to obtain and maintain licenses and permits necessary to operate our existing and new restaurants, our franchisees’ adherence to our system standards, the cost of commodities such as traditional chicken wings, supply chain consistency, the success of our key initiatives and our advertising and marketing campaigns, our ability to control restaurant labor and other restaurant operating costs, the continued service of key management personnel, our ability to protect our name and logo and other proprietary information, economic conditions (including changes in consumer preferences or consumer discretionary spending), the impact of federal, state or local government regulations relating to our employees, the sale of food and alcoholic beverages, the effect of competition in the restaurant industry, and other factors disclosed from time to time in our filings with the U.S. Securities and Exchange Commission, including the factors described under "Risk Factors” in Part I, Item 1A of our Annual Report on Form 10-K for the fiscal year ended December 25, 2016, as updated in subsequent reports filed with the SEC. Investors should take such risks into account when making investment decisions. Shareholders and other readers are cautioned not to place undue reliance on these forward-looking statements, which speak only as of the date on which they are made. We undertake no obligation to update any forward-looking statements.

The following table expresses results of operations as a percentage of total revenue for the periods presented, except for restaurant operating costs which are expressed as a percentage of restaurant sales:

Restaurant-Level Profit and Restaurant-Level Margin

Restaurant-level profit and restaurant-level margin are neither required by, nor presented in accordance with U.S. GAAP and are non-GAAP financial measures. Restaurant-level profit is defined restaurant sales less restaurant operating costs (cost of sales, labor, operating, and occupancy expense). Restaurant-level margin is defined as restaurant-level profit as a percentage of restaurant sales. Restaurant-level profit and restaurant-level margin have limitations as analytical tools, and should not be evaluated in isolation or as substitutes for analysis of results as reported under U.S. GAAP. Management believes the restaurant-level profit and restaurant-level margin are important tools for investors because they are widely-used metrics within the restaurant industry to evaluate restaurant-level productivity, efficiency and performance. Management uses restaurant-level profit and restaurant-level margin as key performance indicators to evaluate the profitability of company-owned restaurants.

A reconciliation of restaurant sales to restaurant-level margin is provided below:

EBITDA

Earnings before interest, taxes, and depreciation and amortization (EBITDA) is not required by, nor presented in accordance with U.S. GAAP and is a non-GAAP financial measure. The Company defines EBITDA as net earnings including non-controlling interests plus interest expense, income tax expense, and depreciation and amortization. EBITDA has limitations as an analytical tool, and should not be evaluated in isolation or as a substitute for analysis of results as reported under U.S. GAAP. Management utilizes this metric as a basis for evaluating our ongoing operations, and believes investors' understanding of our performance is enhanced by including this non-GAAP financial measure as a reasonable basis for evaluating our ongoing results of operations, without the effects of interest, taxes, and depreciation and amortization.

A reconciliation of net earnings including noncontrolling interests to EBITDA is provided below:

Adjusted Net Earnings and Adjusted Earnings per Diluted Share (Adjusted EPS)

Adjusted net earnings and adjusted earnings per diluted share are not required by, nor presented in accordance with U.S. GAAP and are non-GAAP financial measures. The Company defines adjusted earnings diluted per share as adjusted net earnings attributable to Buffalo Wild Wings divided by our weighted diluted average shares outstanding. Adjusted net earnings attributable to Buffalo Wild Wings is calculated as earnings before income taxes plus loss on asset disposals and impairment (excluding store closing reserve costs), proxy costs for contested election, advisory and consulting fees, restructuring costs, acquisition costs, and divestiture costs less gain on sale of investment in affiliate. This amount is then adjusted for an estimated income tax expense and net earnings (loss) attributable to noncontrolling interests. Adjusted net earnings and adjusted earnings per diluted share have limitations as analytical tools, and should not be evaluated in isolation or as a substitute for analysis of results as reported under U.S. GAAP. Management utilizes these metrics as a basis for evaluating our ongoing operations, and believes investors' understanding of our performance is enhanced by including these non-GAAP financial measures as a reasonable basis for evaluating our ongoing results of operations, without the effects of certain non-recurring or non-cash items. Excluding loss on asset disposals and impairment, all adjustments to earnings before income taxes are considered non-recurring.

Adjusted Income from Operations

Adjusted income from operations is not required by, nor presented in accordance with U.S. GAAP and is a non-GAAP financial measure. The Company defines adjusted income from operations as income from operations plus loss on asset disposals and impairment (excluding store closing reserve costs), proxy costs for contested election, advisory and consulting fees, restructuring costs, acquisition costs, and divestiture costs. Adjusted income from operations has limitations as an analytical tool, and should not be evaluated in isolation or as a substitute for analysis of results as reported under U.S. GAAP. Management utilizes this metric for incentive compensation and as a basis evaluating our ongoing operations, and believes investors' understanding of our performance is enhanced by including this non-GAAP financial measure as a reasonable basis for evaluating our ongoing results of operations, without the effects of certain non-recurring or non-cash items. Excluding loss on asset disposals and impairment, all adjustments to income from operations are considered non-recurring.

Free Cash Flow

Free cash flow is not required by, nor presented in accordance with U.S. GAAP and is a non-GAAP financial measure. The Company defines free cash flow as net cash provided operating activities minus acquisition of property and equipment. Free cash flow has limitations as an analytical tool, and should not be evaluated in isolation or as a substitute for analysis of results as reported under U.S. GAAP. Management utilizes this metric, and also believes investors' understanding of our performance is enhanced by including this non-GAAP financial measure, as a basis for evaluating our cash flow available after capital expenditures.

Adjusted Earnings per Diluted Share Forecast

Adjusted earnings per diluted share is not required by, nor presented in accordance with U.S. GAAP and is a non-GAAP financial measure. The Company defines adjusted earnings per diluted share as diluted earnings per share on a U.S. GAAP basis, plus diluted earnings per share impacts of loss on tangible and intangible asset disposals and impairment, costs related to the advisory fees and preparation of proxy materials in a contested election for the board of directors, and costs related to consulting services pertaining to the identification of best practices and improving efficiencies. Adjusted earnings per diluted share has limitations as an analytical tool, and should not be evaluated in isolation or as a substitute for analysis of results as reported under U.S. GAAP. Management utilizes this metric to forecast and evaluate our ongoing operations, and believes investors' understanding of our performance is enhanced by including this non-GAAP financial measure as a reasonable basis for forecasting and evaluating our ongoing results of operations, without the effects of certain non-recurring or non-cash items. Excluding loss on asset disposals and impairment, all adjustments to earnings before income taxes are considered non-recurring.

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