TOWSON UNIVERSITY

Comprehensive Group Project

Jada Carter Elizabeth Cowger Victoria Linton Sheela Patel

Legal and Environmental Issues Typical claims include personal injury, contract claims, franchise related claims, dram shop claims, employment-related claims and claims from guests or employees alleging injury, illness or other food quality, health or operational concerns. Most of these are covered by insurance; however any claim not covered by or in excess of insurance coverage could negatively affect financial conditions (Buffalo Winld Wings, Inc., 2012). Buffalo Wild Wings is currently involved in numerous legal matters that occur in the ordinary course of business. However, according to management there will be no material negative effect on their consolidated financial position, results of operations, or cash flows (Buffalo Winld Wings, Inc., 2012). Summary of Significant Accounting Policies Buffalo Wild Wings significant accounting policies used to derive their consolidated financial statements are in accordance with US Generally Accepted Accounting Principles (GAAP). Buffalo Wild Wings believes that this information is critical in measuring their performance and accessing customer acceptance of their restaurants. They also take into account franchise information, which gives an understanding of their revenues. This is due to the fees and royalties received from opening of franchise locations and their sales (Buffalo Winld Wings, Inc., 2012). Buffalo Wild Wings uses some non-GAAP measurements for franchise information; however they do not use this information as a substitute for GAAP. Franchise sales and samestore sales information does not represent sales in accordance with U. S. Generally Accepted Accounting Principles (GAAP), [and] 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 (Buffalo Winld Wings, Inc., 2012). ECONOMIC AND INDUSTRY OUTLOOK Economic Outlook: According to the National Economic Report by Kevin R. Hopkins, the National Economic Outlook for the year 2012 shows promising conditions, while not in the most ideal state at the time. According to Hopkins, the current U.S economic recovery ranks tenth out of ten recoveries in the post-World War II era (Hopkins, 2012). Hopkins states, the U.S. gross domestic product (GDP) during the third quarter of 2012 grew even more strongly than at first expected. The Departments first reading for third-quarter growth, released on October 26, had come in at 2.0% and the second reading, released on November 30, had come in at 2.7%, both representing significant increases from the meager second-quarter growth rate of 1.3%. However, the second revision for the third quarter registered an even higher 3.1%, topping the 3.0% annual growth rate achieved during the fourth quarter of 2011 (Hopkins, 2012). Hopkins is sure that the fourth quarter GDP will be much lower than the third quarter due to the effects from Superstorm Sandy, as well as tax increases and government spending cuts, more

specifically that was to take place during the debt ceiling dispute in January and February of 2013 (Hopkins, 2012). Entrepreneurship and Investments Hopkins also states that that Entrepreneurship has been greatly affected by the economy. Hopkins states, Some 55% of small business owners and manufacturers would not have started their businesses in todays economy, according to a September 26 survey jointly commissioned by the National Association of Manufacturers (NAM) and the National Federation of Independent Business. In addition, 69% of respondents said that the Federal governments recent regulatory policies have hurt their businesses (Hopkins, 2012). Not only was Entrepreneurship greatly affected, but investments and investment plans as well. According to Hopkins, U.S. companies are scaling back investment plans at the fastest pace since the recent recession, signaling more trouble ahead for the still sluggish U.S. economic recovery, The Wall Street Journal reported on November 19. Half of the nations largest publicly traded corporate entities have announced plans to curtail capital expenditures either this year or next, a Journal survey determined (Hopkins, 2012). U.S Federal Reserve Economic Growth Forecast The U.S Fed has given their forecast of economic growth, and it has been lowered greatly. According to Hopkins, The U.S. Federal Reserve, on December 12, released new forecasts for economic growth in the coming years, but foresees only minimal short-term improvements. The Feds projection for GDP growth in 2013 is little changed from both its June and September forecasts, which was for a rate of from 2.2% to 2.8%, down from its April estimate of 2.7% to 3.1%. The Fed sees growth coming in at no higher than 3.5% in 2014 and no higher than 3.7% in 2015. In addition, a survey of 39 top economic forecasters by the Philadelphia Federal Reserve Bank, released on November 9, forecasts fourth-quarter growth at only 0.8%, down from 2.2% in Q3 (Hopkins, 2012). Small Economic Growth Expected The economy overall did not see much growth between the year 2012 and 2013. Hopkins states that, The widely watched National Association for Business Economics Outlook, a survey of 44 professional forecasters, declared in an October 15 report that economic growth in 2013 was expected to increase only 2.4% next year, approaching normalalthough unremarkable growth of just 3.0% only by the end of 2013 (Hopkins, 2012). Inflation Rates Inflation rates have increased over the past year as well. According to Hopkins, Elsewhere, on the positive side of the ledger, industrial production gained ground in November, the U.S. auto market continues to rebound, housing sales increased, the manufacturing sector

returned to growth, consumer spending and retail sales jumped, and both inflation and energy prices waned (Hopkins, 2012). Unemployment Rates While jobs are being maintained during 2012, Hopkins has observed an increase of unemployment to about 7.8% for the next year. Hopkins states, The U.S. unemployment rate climbed back up to 7.8% in December from an originally reported 7.7% in November (although the November rate itself was revised upward in January to 7.8% as well). The U-6 underemployment rate, which had declined from 14.7% in September to 14.4% in November, remained at that latter level in December (Hopkins, 2012). Womens unemployment rates have increased as well, from 7.0% to about 7.3%. Teen unemployment has increased to about 24.9% and young adults from 18-25 years of age have had an increase in unemployment to about 11.5%, which is about a third higher than the overall unemployment rate (Hopkins, 2012). College graduates are also struggling to find high level jobs. According to Hopkins, Even though 63% of Generation Y workersthose aged 18 to 29have a bachelors degree, the majority of jobs taken by recent graduates do not require one, according to a survey of 500,000 young workers by PayScale.com. Separately, a survey by Rutgers University reported that half of graduates in the past five years said that their jobs did not require a four-year degree and that only 20% said that their first job was on their career path (Hopkins, 2012).

Industry Outlook: Current Environment Industries react in different ways to the business cycle fluctuations of the U.S. economy (Berman and Pfleeger). Some industries are very vulnerable to economic swings, while others are relatively immune to them. For those industries that are characterized as cyclical, the degree and timing of these fluctuations vary widely. The industries that experience only modest gains during expansionary periods may also suffer only mildly during contractions, and those that recover fastest from recessions may also feel the impact of a downturn earlier and more strongly than other industries. While the operating environment will remain challenging, Americas 980,000 restaurants are expected to post record sales and continue to be a leading job creator in 2013, according to the National Restaurant Associations (NRA). According to restaurant.org, Total restaurant industry sales are expected to exceed $660 billion in 2013 a 3.8 percent increase over 2012, marking the fourth consecutive year of real sales growth for the industry. In addition, 2013 will be the 14th straight year in which restaurant industry employment will outpace overall employment. Restaurants will employ 13.1 million individuals next year as the nations second-largest private-sector employer, representing 10 percent of the total U.S. workforce (National Restaurant Association).

Industry Profile Restaurant companies are essentially retailers of prepared foods, and their operating performance is influenced by many of the same factors that affect traditional retail stores. Competition between restaurants is intense, since dining options abound. And, while there are certainly dominant players in this industry (especially among fast-food purveyors), no one company has the market cornered (Spencer). Type of Restaurants in the Industry Restaurants can be loosely broken down into two broad categories: fast food and casual sit-down establishments. The same general factors dictate the performance of each group, but sitdown restaurants tend to be more expensive, making them even more sensitive to consumer budgets and the health of the economy. Fast-food restaurants, being less dependent on macroeconomic conditions, are better defensive investment plays. In a recessionary environment, their convenience and value make them attractive options for diners seeking inexpensive meals or for those trading down from casual-dining establishments. Industry Trends Industry-wide sales and traffic trends in the restaurant industry haven't been very encouraging in 2013 according to a report from Blackbox Intelligence. In fact, traffic growth in September was a negative 1.9% for the entire industry. In addition, industry-wide same-store sales for the third quarter were down 0.2%, which represents a 0.6% sequential drop. As a result, it isn't surprising to find many restaurants reporting weak results. COMPARATIVE ANALYSIS OF FINANCIAL RATIOS TO INDUSTRY NORMS RMA Ratios All dollar amounts are in thousands. All information retrieved from Buffalo Wild Wings 10K unless noted.

Liquidity Ratios: Current Ratio Total Current Assets 2012 Total Current Liabilities = $140,843 $125,536 = 0.89

Total Current Assets 2011 Total Current Liabilities =

$139,245 = $114,270 1.22

Total Current Assets Industry Average 2012 Total Current Liabilities = 0.70

Total Current Assets Industry Average 2011 Total Current Liabilities = 0.70

The Current Ratios are simply a measure of how rapidly a company is capable of paying off short-term debt. The current ratios above compare Buffalo Wild Wings current ratios to the industry averages of 2011 and 2012. In 2011, Buffalo Wild Wings has a ratio of 1.22 and the industry average is at 0.70. The comparison of Buffalo Wild Wings current ratio to the industry ratio looks very good for this year. A ratio below 1 will show that the company would more than likely be unable to pay off their debt in a short period of time. A ratio of a 1.22 shows a higher chance of the debt being paid off. For 2012, Buffalo Wild Wings ratio of 0.89 in comparison to the 0.70 industry average also shows a more attractive ratio, showing a higher ability to pay off short-term debt.

Quick Ratios Cash & Equivalents + Trade Receivables 2012 Total Current Liabilities = $140,843 $21,340 = 0.15

Cash & Equivalents + Trade Receivables 2011 Total Current Liabilities =

$3,195 = $6,263 0.40

Cash & Equivalents + Trade Receivables Industry Average 2012 Total Current Liabilities = 0.40

Cash & Equivalents + Trade Receivables Industry Average 2011 Total Current Liabilities = 0.60

Quick Ratios are best used to determine the short-term liquidity of a company. Similar to the Current Ratio, this ratio will show a companys ability to pay off short-term obligations, but with the companys most liquid assets. For the years 2011 and 2012, a comparison was made between Buffalo Wild Wings and the Industry Average. Note that the Quick Ratios are much lower than the Current Ratios, due to the fact that inventories are excluded from the current assets of the company. Comparing the 2011 industry average and Buffalo Wild Wings average, you will see a lower average of 0.40 in Buffalo Wild Wings in comparison to the 0.60 Industry Average, which shows that the Quick Ratio is not as strong. In 2012, Buffalo Wild Wings Quick Ratio is also much lower, at 0.15 for the ratio, in comparison to a 0.40 Quick Ratio Industry Average for 2012. Again, Buffalo Wild Wings falls short of the industry average.

Sales/Receivables Net Sales 2012 Trade Receivables = $20,203 $1,040,530 = 51.50

Net Sales 2011 Trade Receivables =

$784,478 = $12,165 64.49

Net Sales Industry Average 2012 Trade Receivables = NA

Net Sales Industry Average 2011 Trade Receivables = NA

The Sales/Receivable average is used to observe how effectively a company can extend credit and collect debts. While there was no Industry Average available to compare to the Sales/Receivable average for Buffalo Wild Wings, you can see that for the years 2011 and 2012, the company shows a fairly high ratio. A higher Sales/Receivable ratio shows that there is a higher maintenance of Accounts Receivable, that the company is very successful at collecting their receivables or that they are operating on a cash basis only. While there is a slight decrease from 2011 to 2012, this shows that maintenance of the companys receivables may not be as successful.

Days Receivables 365 2012 Sales/Receivables Ratio = 51.50373707 365 = 7.09

365 2011 Sales/Receivables Ratio =

365 = 5.66 64.4864776

365 Industry Average 2012 Sales/Receivables Ratio = NA

365 Industry Average 2011 Sales/Receivables Ratio = NA

The purpose of the Days Receivables ratio is to show the average collection period of debts and receivables. While no industry average is available for comparison, the years 2011 and 2012 are presented for Buffalo Wild Wings and shows an increase in the average. For the year 2011, the average is 5.66 and for 2012, the company shows a 7.09 average. The difference in ratios shows that from 2011 to 2012, it will take approximately 1.43 more days to collect debt and receivables.

Cost of Sales/ Inventory

Cost of Sales 2012 Inventory =

$303,653 = 38.83 $7,820

Cost of Sales 2011 Inventory =

$203,291 = 32.21 $6,311

Cost of Sales Industry Average 2012 Inventory = 36.40

Cost of Sales Industry Average 2011 Inventory = 36.80

The Cost of Sales/Inventory Ratio is used to show the amount of time that the companys inventory is sold and replaced during the course of a year. A lower ratio shows very low sales or an excessive amount of inventory. The higher ratios show higher sales and a lack of inventory. In comparison to the industry average in 2011, Buffalo Wild Wings has a ratio of 32.21 compared to the industry average of 36.80. The company underperformed the industry, which shows that the sales of the company for the year 2011 was lower than the industrys sales. In 2012, Buffalo Wild Wings had an average of 38.83 in comparison to the industry average of 36.80, which showed better sales from Buffalo Wild Wings as well as a better performance than the industry.

Days Inventory 365 2012 Cost of Sales/Inventory Ratio = 38.83030691 365 = 9.40

365 2011 Cost of Sales/Inventory Ratio =

365 = 11.33 32.21216923

365 Industry Average 2012 Cost of Sales/Inventory Ratio

$365 = 10.03 $36

365 Industry Average 2011 Cost of Sales/Inventory Ratio

$365 = $37 9.92

The purpose of the Days Inventory ratio is to show how quickly a companys inventory can be converted into sales. Obviously, a smaller ratio is more attractive looking, as it shows a fast conversion from inventory to sales. In comparison of Buffalo Wild Wings to the Industry Average, in 2011, the industry average of 9.92 beats Buffalo Wild Wings 11.33 ratio. However, in 2012, Buffalo Wild Wings outperforms the industry average of 10.03 with a ratio of 9.40.

Cost of Sales/Payables Cost of Sales 2012 Trade Payables = $36,418 $303,653 = 8.34

Cost of Sales 2011 Trade Payables =

$203,291 = $30,089 6.76

Cost of Sales Industry Average 2012 Trade Payables = 22.40

Cost of Sales Industry Average 2011 Trade Payables = 21.10

The Cost of Sales/Payables ratio is used to measure the average payable period. The lower the number, the more attractive the company ratio will look, due to the fact that it shows a faster payoff period. As you can see, Buffalo Wild Wings outperforms the industry average in both 2011 and 2012. In 2011, Buffalo Wild Wings has an average of 6.76 days in comparison to the industry averages 21.10 days to payoff. In 2012, Buffalo Wild Wings has a ratio of 8.34 days in comparison to the 22.40 industry average. Days Payables 365 2012 Cost of Sales/Payables Ratio = 8.337992202 365 = 43.78

365 2011 Cost of Sales/Payables Ratio =

365 = 54.02 6.756322909

365 Industry Average 2012 Cost of Sales/Payables Ratio

$365 = 16.29 $22

365 Industry Average 2011 Cost of Sales/Payables Ratio

$365 = 17.38 $21

The purpose of the Days Payable ratio is to measure the amount of days it will take a company to pay off its suppliers. After comparison of the industry average with Buffalo Wild Wings in 2011 and 2012, the ratios are outperformed by the industry average. The industry shows a faster payoff period than Buffalo Wild Wings. Sales/Working Capital Net Sales 2012 Net Working Capital = $(15,307) $1,040,530 = -67.98

Net Sales 2011 Net Working Capital =

$784,478 = $24,975 31.41

Net Sales Industry Average 2012 Net Working Capital = -45.20

Net Sales Industry Average 2011 Net Working Capital = -49.60

The Sales/Working Capital Ratio is used to measure a companys effectiveness in converting working capital to sales. The higher the ratio the better, due to the fact that this shows a large accumulation of sales compared to the money used in support of the sales. In the year 2011, Buffalo Wild Wings shows an over performance of 31.41 to the industry average of -49.60. The industry averages negative ratio shows that there is more money being funded toward sales than sales being accumulated. In 2012, Buffalo Wild Wings shows a ratio of -67.98 in comparison to the industry averages ratio of -45.20. Both performed badly in the year 2012, but the industry performed significantly better, though both companies funded more of their sales than made sales.

Coverage Ratios: EBIT/Interest Earnings Before Interest & Tax 2012 Annual Interest Expense = $$83,368 = N/A

Earnings Before Interest & Tax 2011 Annual Interest Expense =

$72,902 = $N/A

Earnings Before Interest & Tax Industry Average 2012 Annual Interest Expense = 2.30

Earnings Before Interest & Tax Industry Average 2011 Annual Interest Expense = 2.50

EBIT/Interest ratios are used to measure how quickly a company can pay off its outstanding debt. While there were no ratios available from Buffalo Wild Wings to compare to the industry average, the industry shows a small increase in ratio between 2011 and 2012, but still a quick payoff on debt. Net Profit+ Depreciation, Depletion, Amortization/ Current Portion of Long-term Debt

2012

Net Profit + Depreciation, Depletion, Amortization $124,73 = = N/A Expenses 7 Current Portion of Long-Term Debt $0*

2011

Net Profit + Depreciation, Depletion, Amortization $100,33 = = N/A Expenses 9 Current Portion of Long-Term Debt $0*

Industry Average 2012

Net Profit + Depreciation, Depletion, Amortization Expenses Current Portion of Long-Term Debt

= 1.8

Industry Average 2011

Net Profit + Depreciation, Depletion, Amortization Expenses Current Portion of Long-Term Debt

= 2.2

* Numbers retrieved from Yahoo Finance

Net Profit+ Depreciation, Depletion, Amortization/ Current Portion of Long-term Debt ratios are used to examine a companys long term debt. While there were no ratios available that were measured from Buffalo Wild Wings, the industry average shows a decrease in ratio from 2011 to 2012. Due to the smaller ratio size in 2012, this shows a smaller long term debt for the industry.

Leverage Ratios:
Formula Fixed/Worth Ratio Net Fixed Assets/ Tangible Net Worth 2012 Number 386570/313637 =1.23 2011 Number 310170/279188 =1.11 RMA(2011) .40 RMA(2012) 4.3

Debt/Worth Ratio

Total Liabilities/Tangible Net Worth

207715/313637 =.66

177373/279188 =.64

5.7

6.3

The purpose of Fixed/Worth Ratios is to measure the vulnerability of the company to the business climate. Anything above a 0.75 is said to measure a high vulnerability of the companys performance in the business climate. In 2011 and 2012, Buffalo Wild Wings ratios were well over a 0.75, showing high vulnerability. In comparison to the RMA in 2011 and 2012, the RMA was less vulnerable in 2011, with a ratio of 0.40 than in 2012 with a ratio of 4.3. The Debt/Worth Ratio shows how much debt the company carries with its net worth. A higher debt/worth ratio shows that most of their finances are from lenders. The lower the ratio shows that the companys worth are financed by investors or the companys retained earnings. In 2011 and 2012, Buffalo Wild Wings has a very low ratio of .66 and .64, which most likely means that their net worth is financed by either their investors or retained earnings, which outperformed the RMAs ratios of 5.7 and 6.3 in 2011 and 2012. The RMAs higher average could indicate a higher use of lenders with their companies.

Operating Ratios:
Formula % Profits Before Taxes/Net Worth % Profits Before Taxes/Total Assets Sales/Net Fixed Assets Profit Before Taxes/Tangible N.Worth x 100 2012 Number 83368/313637*100 =26.58% 2011 Number 72902/279188*100 =26.11% RMA(2011) 37.2 RMA(2012) 34.1

Profit Before Taxes/Total Assets X 100

83368/591087*100 =14.10%

72902/495359*100 =14.72%

7.6

5.9

Net Sales/ Net Fixed Assets

1040530/386570 =2.69

784478/310170 =2.53

6.8

6.8

Sales/Total Assets

Net Sales/Total Assets

1040530/591087 =1.76

784478/495359 =1.58

3.2

3.3

The purpose of the %Profits Before Taxes/Net Worth Ratio is to show the owners equity rate of return in a company. The closer the ratio is to 17.75, the better. According to the data presented above, Buffalo Wild Wings is showing a much better owners equity rate of return (26.58 and 26.11) than RMAs (37.2 and 34.1) for 2011 and 2012. The %Profits Before Taxes/Total Assets Ratio is used to measure how much profit a companys assets will generate. As you can see, Buffalo Wild Wings has a much higher ratio in comparison to RMAs 2011 and 2012 ratios (14.10% and 14.72%), which shows a higher generation of profit. The Sales/Net Fixed Assets displays a companys ability to generate sales from net fixed assets. Buffalo Wild Wings shows a smaller ratio in comparison to RMA in 2011 and 2012, which means that more sales were generated from net fixed assets from RMA than Buffalo Wild Wings. The last ratio listed is the Sales/Total Assets, which is used to measure a companys ability to generate sales using their total assets to do so. Buffalo Wild Wings has a much lower ratio than the RMA ratios for 2011 and 2012, which shows that the ability of Buffalo Wild Wings to convert total assets to sales is much smaller.

Expense to Sales Ratios:

Formula Depreciation, Depletion, Amortization/Sales Officer,Director,Owner Compensation/Sales DDA Expenses/Net Sales x 100 ODDOC/NetSales x 100 2012 Number 2011 Number RMA(2011) RMA(2012) 2.6

67462/1040530 49913/784478 2.5 =6.48% NA =6.36% NA 4.2

3.8

The Expense to Sales Ratios are used to measure specific operating expenses, which are an excellent way to represent rising or declining costs or sales. The first ratio, Depreciation, Depletion, Amortization/Sales, is a way to represent the Net Sales acquired with DDA expenses. As you can see, more expenses were acquired with Buffalo Wild Wings in 2011 and 2012 in comparison to the RMA. The other ratio listed, Officer, Director, Owner Compensation/Sales gives a great representation of how the sales are acquired through officer, director and owner compensation. While 2011 and 2012 ratios were not available for Buffalo Wild Wings, RMA has decreased in its ratio from 2011 to 2012.

Price to Earnings Ratios:

Formula P/E Ratio Market Value per Share/ Earnings per Share (EPS) 2012 P/E 86.64*/3.08 2011 P/E 66.43*/2.75

=28.13

=24.16

* Numbers retrieved from Yahoo Finance The last ratio used to measure the performance of Buffalo Wild Wings is the Price to Earnings Ratio or P/E Ratio. This ratio is used to represent how much an investor would be willing to pay per dollar of earnings. From 2011 to 2012, Buffalo Wild Wings shows slight growth in P/E Ratio, which means that in 2012, the investors would be willing to pay more for the companys earnings than in 2011.

References

Berman, J., & Pfleeger, J. Which industries are sensitive to business cycles? Monthly Labor Review .

Buffalo Winld Wings, Inc. (2012). Form 10k: Annual Report. Minneapolis. Hopkins, K. R. (2012). National Economic Report. KeyValueData. Yahoo Finance. (2011-2012, June 29). Buffalo Wild Wings. Retrieved Nov 25, 2013, from Yahoo Finance: http://finance.yahoo.com/q;_ylt=AmYV_LrFmDrlxSM2eK..i_7xVax_;_ylu=X3oDMTFh cjVpMjN1BHBvcwMxMgRzZWMDeWZpU3ltYm9sTG9va3VwUmVzdWx0cwRzbGs DYndsZA--?s=BWLD National Restaurant Association - Restaurant Industry Will Grow, Outpace National Job Growth in 2013 Despite Sustained Challenges. National Restaurant Association. N.p., 11 Dec. 2012. Web. 23 Nov. 2013. <http://www.restaurant.org/Pressroom/Press-Releases/NRA2013-Forecast-News-Release>. Yahoo Finance. (2011-2012, June 29). Buffalo Wild Wings. Retrieved Nov 25, 2013, from Yahoo Finance: http://finance.yahoo.com/q;_ylt=AmYV_LrFmDrlxSM2eK..i_7xVax_;_ylu=X3oDMTFh cjVpMjN1BHBvcwMxMgRzZWMDeWZpU3ltYm9sTG9va3VwUmVzdWx0cwRzbGs DYndsZA--?s=BWLD Spencer, Matthew E. "Research Hub." Industry Analysis: Restaurant. N.p., n.d. Web. 23 Nov. 2013. <http://www.valueline.com/Stocks/Industry_Report.aspx?id=7256>.