Buffalo Wild Wings (BWLD) Q4 2014 Results Earnings Call Transcript

Buffalo Wild Wings (BWLD) Q4 2014 Earnings Call February 5, 2015 5:00 PM ET

Executives

Heather Pribyl - Director

Sally J. Smith - Chief Executive Officer, President, Director and Member of Executive Committee

Mary J. Twinem - Chief Financial Officer, Executive Vice President and Treasurer

James M. Schmidt - Chief Operating Officer and Member of Compliance Committee

Analysts

Jeffrey D. Farmer - Wells Fargo Securities, LLC, Research Division

John S. Glass - Morgan Stanley, Research Division

Jeffrey Andrew Bernstein - Barclays Capital, Research Division

Alexander Slagle - Jefferies LLC, Research Division

Brian J. Bittner - Oppenheimer & Co. Inc., Research Division

David E. Tarantino - Robert W. Baird & Co. Incorporated, Research Division

Keith Siegner - UBS Investment Bank, Research Division

Will Slabaugh - Stephens Inc., Research Division

Gregory J. McKinley - Dougherty & Company LLC, Research Division

Peter Saleh - Telsey Advisory Group LLC

Diane Geissler - CLSA Limited, Research Division

Stephen Anderson - Miller Tabak + Co., LLC, Research Division

Mark E. Smith - Feltl and Company, Inc., Research Division

Andrew Strelzik - BMO Capital Markets Canada

Matthew James DiFrisco - The Buckingham Research Group Incorporated

Robert M. Derrington - Wunderlich Securities Inc., Research Division

Operator

Good afternoon, ladies and gentlemen. Welcome to the Buffalo Wild Wings Fourth Quarter 2014 Conference Call. [Operator Instructions] I would like to remind everyone that this conference call is being recorded. I will now turn the call over to Heather Pribyl, Director of Investor Relations for Buffalo Wild Wings. Please go ahead.

Heather Pribyl

Good afternoon, and thank you for joining us as we review our fourth quarter 2014 results and fiscal year-end. I'm Heather Pribyl, Director of Investor Relations for Buffalo Wild Wings. Joining me today is Sally Smith, President and Chief Executive Officer; and Mary Twinem, Executive Vice President and Chief Financial Officer.

By now everyone should have access to our fourth quarter earnings release. Copies are available on our investor website at ir.buffalowildwings.com.

Before we get started, I remind you that during the course of today's call, various remarks we make about future expectations, plans and prospects for the company constitute forward-looking statements. 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 sales and other growth factors at our company-owned and franchised locations; our ability to successfully operate in new markets, including non-U.S. markets; success of acquired restaurants; success of investments in new or emerging concepts; the cost of commodities; the success of our key initiatives and our advertising and marketing campaigns; our ability to control restaurant labor and other restaurant operating cost; economic conditions, including changes in consumer preferences or consumer discretionary spending; and other factors disclosed from time to time in our filings with the U.S. Securities and Exchange Commission.

On today's call, Sally will provide an overview of our performance for the fourth quarter and fiscal year. After that, Mary will provide further detail on the quarter and comment on trends to date in the first quarter. Finally, Sally will share some thoughts on our initiatives and outlook for 2015. We will then answer questions.

So with that, I'll turn things over to Sally.

Sally J. Smith

Thank you, Heather, and good afternoon, everyone. Buffalo Wild Wings had a great year. We grew our net earnings over 31% in 2014, achieving earnings per diluted share of $4.95. Our 2014 same-store sales increased 6.5% at company-owned restaurants and 5.6% at franchised locations. With wall-to-wall televisions and big screens, Buffalo Wild Wings remains the place to cheer on your favorite sports team. Our restaurants deliver memorable game-day experiences to guests no matter what the season.

In 2014, we continue to lay the foundation for our ongoing growth. Among the highlights are: opening 46 new company-owned Buffalo Wild Wings restaurants, with nearly all built in our Stadia design; launching Sauce Lab, allowing us to capture current flavor trends in our sauces. It gives guests a sense of urgency to come into B-Dubs and try a new sauce before it's gone; completing the staffing of all company-owned Buffalo Wild Wings restaurants with Guest Experience Captains. These team members engage our guests to deliver the ultimate social experience for sports fans; deploying tabletop tablets at over 70% of Buffalo Wild Wings with differentiated content like GameBreak, which is our fantasy competitive gaming platform; opening 5 franchise locations in Mexico. While still early, we're pleased with how the brand is being embraced internationally; and finally, continuing to build a portfolio of emerging restaurant brands with our investments in Rusty Taco and PizzaRev to support long-term sustained growth.

We're exceptionally pleased with our restaurant's performance in the fourth quarter and, in particular, with our same-store sales results of 5.9% at company-owned restaurants and 5.1% at franchised locations.

As previously communicated, we anticipated higher food and labor costs compared to the prior year. Food cost rose as the cost per pound for traditional chicken wings increased over the fourth quarter last year. Labor as a percentage of restaurant sales increased primarily due to expansion in states with higher wage rates and staffing of all company-owned restaurants with Guest Experience Captain. Captains are an essential part of the Guest Experience Business Model.

We achieved net earnings per share of $1.07 for the quarter, a slight decline from prior year as the result of the increased food and labor costs.

Mary will now provide additional details on the fourth quarter as well as the first quarter-to-date. Then I'll return to talk about the first quarter and full year 2015.

Mary J. Twinem

Thank you, Sally. Our revenue in the fourth quarter reached $408.9 million, increasing 19.7% over the same period last year. System-wide sales in our company-owned and franchised restaurants were $861.1 million for the quarter, an increase of 15% over the fourth quarter of 2013.

Company-owned restaurant sales for the fourth quarter increased to $384.4 million, a 20.2% increase over the same period in the prior year.

Same-store sales at company-owned Buffalo Wild Wings restaurants were 5.9% for the fourth quarter compared to 5.2% for the same period last year.

Menu price increases and adjustments taken during the past 12 months at company-owned restaurants were about 3.4%. We had 53 additional company-owned Buffalo Wild Wings restaurants in operation at the end of this quarter versus fourth quarter last year, a 12.2% unit increase. This increase includes the acquisition of 3 franchised restaurants in the third quarter of 2014, 10 franchised locations in the fourth quarter and the sale of one company-owned restaurant to a franchisee in the fourth quarter.

Average weekly sales increased by 6.7% in the fourth quarter, 80 basis points higher than the same-store sales percentage. The average weekly sales calculation benefited by 80 basis points from newly opened locations during the last 15 months and by 40 basis points for the closing of older lower volume locations during the last 12 months. There was a 40 basis point decline from locations acquired from franchisees during the last 12 months.

Our royalty and franchise fee revenue for the fourth quarter grew 13% to $24.5 million versus $21.7 million last year, with an additional 25 franchised Buffalo Wild Wings units in operation at the end of the fourth quarter versus a year ago.

Same-store sales at franchised Buffalo Wild Wings locations increased by 5.1% in the quarter compared to a 3.1% increase in fourth quarter last year.

Franchised average weekly sales volumes at Buffalo Wild Wings in the United States for the quarter increased by 4.5%, 60 basis points lower than the same-store sales percentage. The average weekly sales calculation declined by 190 basis points for franchised locations opened during the last 15 months. There was a 90 basis point benefit from the closing of older lower volume locations and a 40 basis point increase for franchised locations sold to the company in the last 12 months.

Although the restaurant operating cost section of our statement of earnings includes the activity of our company-owned emerging brand locations, these results are not yet material and the following comments on restaurant operating cost pertain to the performance of our Buffalo Wild Wings company-owned restaurants.

Cost of sales for the fourth quarter was 30.6% of restaurant sales compared to 29.8% in fourth quarter last year, an 80 basis point increase. Traditional wings were $1.90 per pound in the fourth quarter, $0.26 or 16% higher than last year's fourth quarter average of $1.64. Traditional wings and boneless wings were both 21% of restaurant sales compared to 20% in the same period last year.

Food and nonalcoholic beverage sales were 79% of restaurant sales in the fourth quarter, up from 77% last year.

Cost of labor for the fourth quarter was 31.1% of restaurant sales, 110 basis points higher than fourth quarter last year. As expected, hourly wages as a percentage of restaurant sales were higher than the prior year, primarily from expansion in states with higher wage rates and from the staffing of all of our company-owned restaurants with Guest Experience Captains.

In the fourth quarter, restaurant operating expenses as a percentage of restaurant sales were 15.1%, an increase of 30 basis points from the prior year, resulting primarily from higher repair and maintenance expense for acquired franchised units.

Occupancy costs were 5.4% as a percentage of restaurant sales compared to 5.7% last year, leveraging on same-store sales growth.

In summary, restaurant level cash flow, which is calculated before depreciation, amortization and preopening expenses, was $68.1 million or 17.7% of restaurant sales. This compares to restaurant level cash flow of $63.2 million or 19.8% in the fourth quarter last year. This 200 basis point decrease in cash flow as a percentage of restaurant sales is primarily a result of the higher cost of sales and labor.

Depreciation and amortization for the fourth quarter was 6.6% of total revenue, 10 basis points higher than the prior year.

General and administrative expenses were $31.9 million in the fourth quarter or 7.8% of total revenue compared to $26.6 million or 7.8% in the prior year. Excluding stock-based compensation of $4 million in the fourth quarter and $4.2 million in the prior year, G&A expenses for the fourth quarter would have totaled $27.9 million or 6.8% of total revenue compared to 6.6% last year.

G&A expenses were higher than our initial estimate for the quarter, resulting from higher bonus accruals, IT projects and expenses related to the acquisition of franchised locations.

Preopening expenses for the quarter totaled $5.2 million versus $5 million in the fourth quarter last year. The $5.2 million includes $269,000 of preopening expenses for future openings that are under construction. And in the fourth quarter last year, we incurred $855,000 related to future openings.

Preopening cost for the 22 company-owned Buffalo Wild Wings averaged $284,000 during the quarter compared to $290,000 for the 19 company-owned restaurants opened in the fourth quarter last year.

A loss on asset disposals for the fourth quarter totaled $458,000 compared to last year of $1.6 million. The loss on asset disposals include the impairment of 2 company-owned restaurants and the gain on sale from 1 company-owned restaurant.

We reported an investment loss of $189,000 for the quarter compared to investment income of $30,000 in 2013.

Our effective tax rate during the fourth quarter was 27.1% compared to 29.8% in the prior year. We recorded a benefit for the workers opportunity tax credit in the fourth quarter. For the year, our effective tax rate was 30.5%.

In summary, our net earnings in the fourth quarter of 2014 were $20.3 million, producing earnings per diluted share of $1.07 compared to $1.10 in the prior year. For the full year 2014, our net earnings grew 31.5% to $94.1 million, producing net earnings per diluted share of $4.95.

On our balance sheet on December 28, 2014, our cash, cash equivalents and marketable securities totaled $112.9 million compared to $65.1 million at the end of 2013. We ended the quarter with $853 million in total assets and $574 million in total equity.

Cash flow from operations was $74.2 million for the quarter. We spent $42.2 million for capital expenditures in the fourth quarter of 2014, excluding franchise acquisitions.

Now I will highlight trends and provide some comments on the first quarter of 2015. For the first 5 weeks of the first quarter, Buffalo Wild Wings same-store sales are trending at 11.9% at company-owned restaurants and 11.1% at our franchised locations as compared to same-store sales trends for the first 5 weeks in the first quarter last year of 4.8% at company-owned restaurants and 2.1% at franchised locations.

For the full first quarter of 2014, our same-store sales were 6.6% at company-owned restaurants and 5% at franchised locations.

Menu price increases and adjustments taken in the last 12 months will be 4.3% for the first quarter. Earlier this week, we acquired 6 franchised locations. We expect to open 4 company-owned Buffalo Wild Wings restaurants in the first quarter, with 1 already opened. As a reference point, in the first quarter of 2014, we opened 9 new company-owned locations.

We also expect that our franchisees in the United States and Philippines will open 15 restaurants during the first quarter, with 4 already open.

Our cost for traditional chicken wings for the first 2 months of the first quarter are averaging about $1.90 per pound. This compares to last year's average cost for the first quarter of $1.36. In an effort to decrease the range of volatility in our cost of sales from traditional chicken wings, we have entered into modified pricing agreements for about 2/3 of our traditional chicken wings supply. These agreements will be in place by April and effectively narrow the range of cost per pound that we will pay when traditional wings are at historically high and low market prices.

The other 1/3 of our traditional wings supply continues to be purchased based on the average of the prior month's market price, plus the market for processing and distribution. Effective in April of 2015, we also secured slightly lower pricing for our boneless wings, which will provide a very small improvement in our cost of sales.

We anticipate higher labor costs in the first quarter as a percentage of restaurant sales compared to the prior year, as we completed the staffing of all of our company-owned restaurants with Guest Experience Captains, incur higherly hourly wage rates and anticipate some inefficiencies in labor from newly acquired and opened restaurants. We estimate that labor cost would -- could be 50 basis points higher than last year's first quarter of 30.5%.

In the first quarter, we anticipate that G&A expenses, exclusive of stock-based compensation expense, will be $28 million to $29 million. First quarter stock-based compensation expense is estimated to be $3 million, a decrease of $600,000 compared to first quarter last year.

Stock-based compensation expense for the year is estimated to be approximately $16 million to $17 million and will vary depending on the level of net earnings achieved for 2015 as well as for estimates of net earnings in future years.

We estimate our effective tax rate in 2015 will be about 33%. We remain confident in our 18% net earnings growth goal for 2015.

For 2015, we estimate that our capital expenditures, exclusive of franchised acquisitions and emerging brand investments, will be $177 million. We anticipate generating cash from operations in excess of our planned capital spending, and we'll be strategic in franchise acquisitions, emerging brand investments and return to shareholders as options to deploy excess cash to maximize shareholder value.

Please review the Risk sections outlined in our SEC filings, including our 10-K for fiscal 2014, which will be filed this month as well as our Safe Harbor statement for factors affecting our forward-looking statements.

Now Sally will share some color on 2015.

Sally J. Smith

Thank you, Mary. 2015 is off to an excellent start with strong same-store sales results of 11.9% at company-owned restaurants and 11.1% at franchised locations for the first 5 weeks. Sales were particularly strong during the college bowl game, including the Buffalo Wild Wings Citrus Bowl and the national championship game. Sunday's Super Bowl between the New England Patriots and the Seattle Seahawks was an exciting game to watch, and hungry fans consumed more than 11 million wings from B-Dubs. Now that the Lombardi trophy is in Boston, Buffalo Wild Wings is gearing up for the excitement and intense competition that leads up to the NCAA college basketball tournaments. As the Official Hangout of NCAA March Madness, we've got a great game plan to execute. We signed with a new creative agency, and their first media campaign will air nationally during the tournament with a unique commercial for each round.

Our menu panel that launches February 9 includes food and beverages inspired by the tournament's 4 regions. For example, from the East region will feature Sam Adams, Boston Lager with a New York-style pastrami sandwich on a pretzel bun.

In addition to regional favorites, Sauce Lab will feature Buttery Maple, a sweet and savory sauce. To foster the spirit of healthy competition among our guests, GameBreak will feature 4 mini games for the NCAA tournament in addition to a Traditional Bracket Challenge. And don't sweat it if your bracket is busted after the first round. GameBreak will have a Bracket Re-pick 'Ems for the Sweet 16 and Final Four.

In 2015, to increase lunch sales, we'll launch a nationwide lunch program in April that highlights what guests want from a lunch occasion: variety, value and speed. We conducted several tests and believe our pick to approach will help drive traffic during lunch, while optimizing the speed in the kitchen to ensure guest satisfaction.

Our guest experience technology continues to be installed at more locations. Tabletop tablets are installed in over 70% of all Buffalo Wild Wings restaurants. We will test tablet menu ordering in 2 of our major markets shortly, with the goal of fully implementing in company-owned restaurants in 2015. Server handheld tests are also going well, and we anticipate implementation after updated technology is available from our point-of-sale provider in late 2015.

Our 2015 unit development plan remains the same as discussed in our October earnings call. We expect to open approximately 50 new company-owned restaurants in the United States, and our franchise partners will open an additional 40 locations this year.

International franchisees expect to open 8 to 10 Buffalo Wild Wings. We plan to open a total of 5 company-owned Rusty Taco and PizzaRev locations, and both brands will continue their expansion through franchising. We also anticipate completing 50 remodels at company-owned Buffalo Wild Wings, and our franchisees will complete 40 remodels.

2015 will be an exciting year for Buffalo Wild Wings. We have great plans for food and beverage, new advertising, exciting interactive game-facing technology and coast-to-coast restaurant development. We're building the foundation for long-term sustained earnings growth, and we remain confident in our 18% net earnings growth goal for 2015.

We thank our team members, our franchisees and our vendor partners for their passion and their continued dedication to our success. I will now turn it back to Heather.

Heather Pribyl

Thank you, Sally. We will now move to the question-and-answer session of our fourth quarter earnings call. We will end the call promptly at the top of the hour. [Operator Instructions] Jim Schmidt, Chief Operating Officer for Buffalo Wild Wings, will join us for Q&A today. Operator, please open the call for questions.

Question-and-Answer Session

Operator

[Operator Instructions] And we'll go first to Jeff Farmer with Wells Fargo.

Jeffrey D. Farmer - Wells Fargo Securities, LLC, Research Division

Just right off the bat here, what will your new contract strategy mean for your wing prices in '15? And over the longer term, I realize that's a hard question to answer, but could you just give us a little bit more detail on how this is going to work and what it could potentially mean to prices in the near and longer term?

Mary J. Twinem

We will continue to have volatility in our cost of sales percentage. What the modified pricing agreement allows is that it will narrow the range. So when the market gets to historic highs or lows, we'll have a narrow range of what we're paying compared to that. So it's really to mitigate the impact of being out of what we consider a normal range for wings.

Jeffrey D. Farmer - Wells Fargo Securities, LLC, Research Division

Okay. Then I'll leave that there. But just one more on the same-store sales, and you touched on it. Just in reference to those 11-plus percent same-store sales numbers to the first 5 weeks of the quarter, again obvious question, but any type of calendar shift shorter-term driver in play? Any benefit you potentially won't see as you move through the balance of the quarter?

Sally J. Smith

Let's see. I'm trying to take a look at any calendar...

Mary J. Twinem

There were -- there was an additional of 1 college football bowl game in the first 5 weeks, as well as 1 additional UFC compared to the first 5 weeks of the year. And then...

James M. Schmidt

And then in February, we're going -- we won't give the average share [ph].

Mary J. Twinem

Correct.

Sally J. Smith

Correct.

Operator

Our next question comes from John Glass with Morgan Stanley.

John S. Glass - Morgan Stanley, Research Division

I'm just trying to frame out how we should think about store margins for overall for 2015? So maybe you can -- I know that wings are probably the biggest unknown factor, but do you expect this new pricing protocol to have a real influence in the back half to mitigate any price wings? And particularly does it add to cost if wings are not in those extremes? And also, can you just sequence through on labor, where minimum wages begin to lap most significantly? I believe it's in the back half where Guest Captains begin to lap. But that seems to be more of a continuum, but maybe if there's a dropoff point where it's less burdensome.

Mary J. Twinem

As we look at the cost of sales as we go through the year, we do believe that wing prices on the market are going to moderate. We're higher than prior year right now. We do believe that wing prices will go down from here and that our cost of sales range will return into that 29% to 30% range. From a labor standpoint, we also will improve as we go through the year. We think there are efficiencies that we can gain, and we would look for, on an annual basis, leveraging overall. From a G&A standpoint, we have added capabilities for guest innovation, technology, food and beverage in 2014, and we do believe that we will leverage on these investments as we grow throughout 2015.

John S. Glass - Morgan Stanley, Research Division

Is the contract meant to keep COGS between 29% and 30%? Is that how we should look at it?

Mary J. Twinem

It wouldn't necessarily. We do believe the market itself is going to keep the contract -- or is going to keep the prices between 29% and 30% as we go through the year, but we could be above 30%.

Operator

Next we'll go to Jeffrey Bernstein with Barclays.

Jeffrey Andrew Bernstein - Barclays Capital, Research Division

Just 2 questions as well. First, on the very strong comp quarter-to-date. I'm just wondering if you can share any insight. It would seem like that's probably ahead of your internal expectation, but just looking to confirm that and whether that -- I know it's early in the year, but I would presume that, that gives you increasing confidence in that 18% earnings for the full year. Obviously too soon to be touching that full year guidance, but just trying to get a sense for how the start of the year has played out versus your expectation. And then I have one follow-up.

Sally J. Smith

Sure. It is definitely too early to make any comments about full year guidance. I think our script did a pretty good job of saying we're comfortable with 18%. And there's a lot of ways you can get there. Certainly, strong sales to begin with are certainly helpful. We saw very strong results of sales during the college bowl games, both the championship game and on New Year's day. And so we're -- it's always great to start off the year with strong same-store sales. We are going up against higher sales as we kind of continue on through the rest of the first quarter, but it -- we're off to a great start.

Jeffrey Andrew Bernstein - Barclays Capital, Research Division

Got it. And then just a follow-up. Just wondering whether you're -- can get any feedback to date on the tablet menu ordering. I know you've had it in tests. Just wondering what we should expect as you now, it sounds like, roll it out by the end of this year. Kind of whether it's speed of service color or average check or anything along those lines, that would be helpful.

James M. Schmidt

We're still early in the test with the tablets. Obviously, I think tablets do provide you with an opportunity to drive incremental sales through suggestive selling. They can also be a source of revenue through premium gaming that we'll be charging for. And they do, I think, tablets combined with the ability to order and pay ultimately provide you with some opportunity towards some labor efficiencies. And we are factoring that in when we look at saying we think we can leverage on labor for the year and find some of it.

Operator

We'll next go to Alex Slagle with Jefferies.

Alexander Slagle - Jefferies LLC, Research Division

I might have missed this, but just want to follow up on the cost of goods discussion if you gave any outlook or range for what you expected in the first quarter.

Mary J. Twinem

We stated that we thought while wing prices for the first 2 months are $1.90, and based on that, we do believe we would be over 30% on our cost of sales with the higher wing prices.

Alexander Slagle - Jefferies LLC, Research Division

Okay. And then with the franchise acquisitions late '14, early '15, is there any pressure on the D&A line that starts to delever a little bit after those?

Mary J. Twinem

Just a little bit. We will have some additional amortization in 2015 for the reacquired franchise rights related to that. It's pretty minimal. It seems to me it's about 10 basis points year-over-year.

Operator

Next question comes from Brian Bittner with Oppenheimer & Co.

Brian J. Bittner - Oppenheimer & Co. Inc., Research Division

Question here on just free cash flow. You know your operating cash flow is going to continue to grow and CapEx is going to decelerate. You're actually going to start really generating some good free cash flow starting in 2015 and beyond. And just love to hear any thoughts you have on what you are thinking about doing with that cash, possibly initiating a buyback plan, and also how you think about the balance sheet as that cash flow really starts to grow.

Mary J. Twinem

You're correct, Brian. We do believe we're going to generate sufficient cash to fund all of our growth plans in the U.S. and Canada, international, emerging brands as they exist today. We have used cash in the past to fund acquisition of franchised locations. We think there is going to be additional opportunities in 2015 as well. And if we have excess cash and we don't need it for our growth strategies, we will consider returning it to -- capital to the shareholders in some way that we think most maximizes value.

Brian J. Bittner - Oppenheimer & Co. Inc., Research Division

Okay. And I also wanted to follow up on the sales. The sales acceleration that you're seeing, you definitely talk a lot about the strength during the ballgames and the Super Bowl. But are those events really what's driving the acceleration? I mean, are you seeing a more normalized trend similar to 4Q outside of those events? I mean, are those events really driving that big of a comp lift for the overall 5 weeks?

James M. Schmidt

I mean, they certainly were a contributing factor, but we also, we took a menu price increase at the end of November. And I'm happy to report that we were able to support that increase. We haven't seen any pushback from that increase. So I think that certainly helped drive our sales. And we're -- I think we're executing very well on our restaurants right now and really providing our guests with a great experience. So I think it's a combination of factors that lead us up to that same-store sales number.

Operator

Our next question comes from David Tarantino with Robert W. Baird.

David E. Tarantino - Robert W. Baird & Co. Incorporated, Research Division

Mary, just a clarification on the wing cost contract that you've entered. Would you be willing to share what the cap and the floor is on that contract?

Mary J. Twinem

We would not.

David E. Tarantino - Robert W. Baird & Co. Incorporated, Research Division

It's worth a shot. So I guess one of my questions -- other questions about the Guest Experience Captain. And now that you have it rolled out, I guess, what have your learnings been so far in terms of executing that position? And do you think there's been a measurable increase in the same-store sales resulting from that extra position in the units?

James M. Schmidt

Well, I think it's always important to remember that our view is the Guest Experience Captains are one component of an integrated Guest Experience Business Model. So we really don't isolate and focus on what just is that one component returning to us. We look at everything we're doing that comes together to create that guest experience. That said, I think year-over-year, we've seen a reduction in our guest experience cost. Additional labors would become more efficient with it. We certainly think it is contributing to the strong same-store sales that we're reporting. Year-over-year, we've seen a 70 basis point increase in our guest loyalty index for system-wide. And again, we think the model, which the Captains are a part of, is contributing to all of that success.

Operator

We'll next go to Keith Siegner with UBS.

Keith Siegner - UBS Investment Bank, Research Division

A question on the marketing. Given that we don't have the Olympics this year, we don't have the World Cup, can you put in perspective, first, what was the marketing spend in 4Q and for 2013? How do you see that moving into -- or trending into 2015 as we again don't have those 2 big events? Is it a higher percentage of sales? Is it not? Do you run more promotions? Just help us think through like those moving pieces, please.

James M. Schmidt

Well, our marketing is a consistent percentage of our sales. I mean, we have an ad fund and we have a consistent percentage that has contributed to our ad fund based on our system-wide sales. So that fund grows year-after-year just based on our sales increase. What varies during the year sometimes, how we allocate those dollars, buying what portion of the year, what promotions. That's really where the variability occurs in our marketing plan on a year-to-year basis.

Keith Siegner - UBS Investment Bank, Research Division

If I may, if I can just ask one quick one to you. It sounds like, just to pull all this together, the acquisition had a drag on a couple of different line items, as you outlined. Can you just pull that together for us? What was the total drag from the repair and maintenance and other somewhat nonrecurring items in 4Q? And how much do we expect to continue into 1Q with the additional acquisitions?

Mary J. Twinem

On the operating expense line, the 10 basis points, that can mostly be attributed to the acquisition piece. We haven't broken it out specifically. It did have some impact in our G&A expenses as well as -- and then there is some of the hourly labor in fourth quarter that was higher at those locations.

Operator

Our next question comes from Will Slabaugh with Stephens.

Will Slabaugh - Stephens Inc., Research Division

Wanted to ask you about mobile and about technology. You talked about the tablets, and I know you aren't willing to share too much yet given that you're not fully rolled out there, but wondering how soon we could think about that being integrated or think about mobile being another piece of that technology bucket. And if you're thinking about loyalty, thinking about mobile pay, thinking about some sort of additional app you could launch, something like that, that could be another sort of boost to loyalty and to same-store sales.

James M. Schmidt

Yes, we certainly are taking a look at mobile and pay with your own device. I think we're looking at various solutions. I don't think we'll have anything on that though till later in the year. But that is definitely part of our overall technology strategy.

Operator

Our next question comes from Greg McKinley with Dougherty & Company.

Gregory J. McKinley - Dougherty & Company LLC, Research Division

I wonder if you could talk a little bit about your outlook for alcohol mix trends. So those have been down a little bit here in recent quarters. Is that part of your business performing strong and just being mixed down with food being stronger? Or any comments or color there would be helpful. And then could you tell us what wings were as a percentage of COGS for the quarter, please?

Mary J. Twinem

I'll take the wings as a percentage of COGS first. It was 26.4%.

James M. Schmidt

And I'll take the beer. No, we're -- we have no concerns with that slight dip in alcohol percentage. I mean we've had strong takeout sales, which obviously affects the mix. And then historically, we've seen as volumes grow that the -- it's not that we sell less beer, that just the mix tends to shift a little bit with higher -- overall higher volumes. So we don't have any concerns. We think we still have a very vibrant atmosphere in our restaurants on game days, and particularly our Stadia restaurant and new design with the centralized bar is being very well received by our customers. So we have no concerns about the mix shift.

Operator

Our next question comes from Peter Saleh with Telsey Advisory Group.

Peter Saleh - Telsey Advisory Group LLC

I appreciate the commentary on the wings and the new contract, but could you just talk a little bit about the rest of the basket and what you expect the overall inflation to be in the remainder of the basket?

Mary J. Twinem

Yes. We do expect to have increases in a few of our commodities, like beef and pork, but they're a very, very small part of our overall commodity basket. And then we have declines. We talked about the small decline in price for boneless wings also like in cheese and sauces, we're seeing decline. So overall, when you exclude traditional wings, we do believe that our overall commodity basket will be down compared to 2014.

Peter Saleh - Telsey Advisory Group LLC

Okay. And just real quick on the technology implementation. At what point or -- will it be this year will you have 100% of the restaurants with all the tablets installed?

James M. Schmidt

I would say we're projecting right now probably the company will be by April and then the franchise system will be complete before year-end.

Operator

Our next question comes from Diane Geissler with CLSA.

Diane Geissler - CLSA Limited, Research Division

You had mentioned in your prepared remarks that you were remodeling a certain number of stores, company-owned, I think 50 into the Stadia design and 40 on the franchise side. Can you just tell me what is the average cost of remodel? And then to the extent that you have data on the Stadia designs that were opened in 2014, what your estimate is in terms of how the AUVs would look in a remodeled unit versus an unremodeled unit or the previous design format?

James M. Schmidt

Okay. Yes, the remodels vary based upon the level of remodel. We have different tiers. And the cost varies between about $300,000 to $600,000. As far as sales, I think we -- for new restaurants opening, we obviously saw some very strong sales for our new restaurants last year, and we certainly attribute that part to the Stadia model. With Stadia remodels, we do see same-store sales that outpace the general same-store sales. So we see -- we do see a lift when we do a Stadia remodel.

Diane Geissler - CLSA Limited, Research Division

Okay. So just if I wanted to look at your total portfolio, sort of the old design versus the Stadia, can you tell me how long you think it will take to remodel whatever piece of the portfolio you think needs to go to Stadia? Is that like a 4-year deal? 3-year deal?

Sally J. Smith

It's -- the -- yes, it's -- we take a look at remodels on about halfway through the lease term, whether it's company or franchise. Some are more moderate remodels at the -- in 2015, we think that we'll have about, what, 41% of our company locations will be Stadia versus about 19% at the end of this year -- at the end of 2014. So significant improvement. I don't have the exact numbers per franchise, but we think about 30%. About 30 locations for franchise will be of Stadia by the end of this year, and remodeled.

James M. Schmidt

Correct, in 2015.

Sally J. Smith

In 2015.

Operator

Our next question comes from Steve Anderson with Miller Tabak.

Stephen Anderson - Miller Tabak + Co., LLC, Research Division

The reason I'm calling is I wanted to see if you've spoken to suppliers why you're seeing the broad divergence between your bone in wing prices and your boneless wing prices. So certainly with corn feed prices being at 5-year lows, would you not expect wing prices to head lower from this 30-plus percent range and -- as percentage total cost [indiscernible] to go below 30%?

Mary J. Twinem

Well, the wing prices had gone up through the end of fourth quarter. We do believe they are going to moderate as we go through this year as production increases across the United States.

Sally J. Smith

And boneless wings are a breast product. And certainly the chickens, they're grown for the breast product, and as supply increases, our suppliers are able to keep pricing relatively flat. And as our volume increases, we certainly can take advantage of some economies of scale with regard to the boneless wings. Traditional wings are fresh wings. They differ significantly from boneless wings.

Operator

Next, we'll go to Mark Smith with Feltl.

Mark E. Smith - Feltl and Company, Inc., Research Division

You took price in November. Can you talk about your next opportunity to save price and how much you feel maybe is available in 2015?

Mary J. Twinem

We have a menu refresh tentatively scheduled for October. We haven't made any decision as it relates to menu pricing on that. I will walk through by quarter then what our existing pricing is in effect. In first quarter, it's 4.3%; in second quarter, it will go down to 3.6%; third quarter, 3.4%; and then by fourth quarter, 1.8%, if we don't do any additional pricing with that menu refresh.

Mark E. Smith - Feltl and Company, Inc., Research Division

Perfect. And then can you talk about the opt-in on Guest Experience Captains in the franchise system? What you're seeing today?

James M. Schmidt

I couldn't -- could you repeat that, please?

Sally J. Smith

Opt-ins.

James M. Schmidt

Well, it's -- we're beginning to roll it on the franchise side, we'll be rolling it throughout this year. We are pacing ourselves and making sure we learn from each franchisee, who we work with, to initiate it. I would anticipate it will take us a couple of years to convert the entire franchise system to the model.

Operator

We'll next go to Andrew Strelzik with BMO Capital Markets.

Andrew Strelzik - BMO Capital Markets Canada

You made a comment about wings going down sequentially from these levels, but I think that would follow the pretty normal seasonal pattern. I'm wondering [indiscernible], if you look historically when production -- chicken production is up meaningfully the way it is and likely will be in '15, you usually see a pretty meaningful year-over-year decline in wing prices. So I'm wondering if you'd expect lower year-over-year wing prices in '15. And if you're not willing to explicitly say the fact, is there anything either on the supply or demand side that would make this year different and not hold to that historical perspective?

Mary J. Twinem

We do think that they're going to moderate from where we are now, and by the end of the year, fourth quarter of 2015 will be under where we saw fourth quarter 2014 to be. But the pacing on how that happens, we'll have to watch the market to know.

Andrew Strelzik - BMO Capital Markets Canada

Okay. And then I'm just wondering why you would enter into the wing contract now. Obviously, the outlook is you're coming off of pretty inflationary wing prices, and the outlook is better going forward. So I'm wondering why you would do -- choose to do that now.

Mary J. Twinem

Well, we -- I mean, we have modeled in a declining market into our approach on picking the ranges. And again, to remind people, there still will be volatility in our cost of sales. It's really to avoid the extreme highs. And in order to do that, you do give up some of the extreme lows. We don't believe this year is going to be either one of those. And so if wing prices or the market acts as we project, our pricing on wings will be very similar to what it is today from a calculation standpoint.

Operator

We'll next go to Matthew DiFrisco with Buckingham Research Group.

Matthew James DiFrisco - The Buckingham Research Group Incorporated

I'm trying to reconcile the labor guidance. so 50 basis points of deleverage, with the quarter-to-date 5-week trend at 11% same-store sales. I'm just curious, in what type of same-store sales range are you using where 50 basis points you would still get deleverage? I would think most would think an 11% comp you would get leverage even with the incremental allowance from Guest Captains. And also I had a follow-up on the wings. I just wanted to fully clarify here, not to beat a dead horse or a bird, with respect to the contract, the catalyst to get lower wing prices is the actual underlying market has to come back from where it is today. It's not necessarily the contract that you entered in that gets increasingly favorable on wing prices in the out quarters, correct?

Mary J. Twinem

Correct.

James M. Schmidt

I think on the labor estimate, we're looking at, as we entered -- finished up the year, you've got minimum wage increases. We're a little uncertain about exactly what our health care costs are going to be as we enter the year. You're still seeing, I think, some labor costs -- we just finished the GDC roles, so there's -- rollouts, so there's still some inefficiencies related to that. And then also we just completed the acquisition of the restaurants 1 month or 2 ago in Orlando. And so we typically see some inefficiencies. So I think what you're seeing there is us looking at those various factors and trying to be realistic about how quickly we can gain efficiency as we enter 2015.

Matthew James DiFrisco - The Buckingham Research Group Incorporated

On then on the wings?

Mary J. Twinem

On the wings, if I understood your comment, it was -- would we see an immediate decrease in what we're paying in April because of the contract? And the answer to that would be, no, it would really depend on what the market was. But if the market is moderating like we believe it will, the pricing that our wings would be calculated on is very similar to what it is today.

Matthew James DiFrisco - The Buckingham Research Group Incorporated

I guess on your initial response with the labor, are you then assuming you would have 50 basis points of deleverage even if in a perfect world you stay in double-digit same-store sales in the first quarter?

Sally J. Smith

It's hard to tell. I'd love stay in double-digit same-store sales, but our same-store sales will be increasing as we go through the first quarter. We do have some calendar shifting happening. And again, we've got some significant minimum wage increases that will happen, that we're still, besides Minnesota and California, that are happening in the first half of the year. Jim talked a little bit about the guest experience, just completing that rollout in the fourth quarter and having a little bit of -- still experiencing some higher labor cost. The acquisitions of the Orlando group later in the fourth quarter, and we just acquired, I believe...

James M. Schmidt

New York LI.

Sally J. Smith

New York, 6 more locations on Long Island area in New York, and that will have some labor conversion, along with our normal openings. So it's hard to say. I don't want to say we're not expecting 11% comps, but we are going up over higher comps as the quarter continues.

Operator

Our next question comes from Robert Derrington with Wunderlich Securities.

Robert M. Derrington - Wunderlich Securities Inc., Research Division

Sally, you had talked in the past about the relationship with Pepsi and the possibility of ultimately seeing some of the recipes and some of the things that Pepsi has been involved would ultimately help your business. Could you give us any kind of an update on what we might see in 2015 from that?

Sally J. Smith

Sure. We continue to work with Pepsi. I think 2014 was a year to kind of get to know each other and get the product rolled into our system. I just returned from spending some time with Pepsi last week. And hot on their list or on ours as well is both beverage and food innovation. And I'm hoping that throughout 2015, we'll continue to work with them and be able to report something.

Robert M. Derrington - Wunderlich Securities Inc., Research Division

Okay. But nothing that you can share at this point?

Sally J. Smith

No, nothing at this point.

Robert M. Derrington - Wunderlich Securities Inc., Research Division

Okay. All right, that's fine. And then the second question. You also talked about previously the company really kind of going out of its way during the World Cup of 2014 to try and make sure that guests had a really good experience. And ultimately, you thought it would add some tailwind to traffic trends. Do you think in fact that's what's helping the business? And secondarily, what's your plan for 2015's World Cup, the Women's World Cup for FIFA, and your view?

Sally J. Smith

Okay. It doesn't hurt. I mean certainly, what we were able to do during the World Cup of 2014 was, we felt, introduce new people. Buffalo Wild Wings is a place to celebrate their game. And so I -- as a combination of things, I think as we went into the fourth quarter, we were operating and executing very well as we had during the World Cup, and I'm hoping that given the strong comps and into the first quarter, perhaps they selected to watch their bowl game for the first time at Buffalo Wild Wings. So it doesn't hurt. Certainly, we're cognizant of the fact that in the second quarter, we'll have the World Cup to go up against, and we've got some interesting things that we're working on. And again, we'll have more details on that in our probably end of our first quarter conference call as we highlight what's happening in the second quarter. But we're aware of it. We're working with vendor partners on what we can do to make that time frame very special and drive traffic in the stores.

Operator

Your last question comes from Greg McKinley with Dougherty & Company.

Gregory J. McKinley - Dougherty & Company LLC, Research Division

My question was answered.

Operator

As there are no more questions in the queue, we'll turn it back over to Sally for additional closing remarks.

Sally J. Smith

Great. Well, thank you, everyone, for calling in and for your thoughtful questions surrounding our fourth quarter and 2014 earnings call. We'll be back with -- to you at the end of April with our first quarter conference call. And my thanks to the teams out there, our vendors, our franchisees and our home office and restaurant teams for the great job that they did in completing 2014 and as we move into 2015. Thank you.

Operator

Thank you for your participation. This does conclude today's call.

Source : https://seekingalpha.com/article/2891156-buffalo-wild-wings-bwld-q4-2014-results-earnings-call-transcript

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