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Favorite Investment Book:The Most Important Thing: Uncommon Sense for the Thoughtful Investor by Howard Marks

Favorite Quote/Author: “It’s not what you look at that matters, it’s what you see.” —Thoreau

Most Attractive Area of the Market Right Now:Small cap special situations

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for approximately 1.5x EBITDA along with a cash balance equal to roughly 85% of the market cap and $800MM in NOL’s.

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Personal Investing Style:Value oriented with a preference for growth at a reasonable price and special situations

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Joshua Thomas Midsummer Capital, LLC

Age: 37 Title: Co-Managing Partner, Portfolio Manager Location: New York, NY

Education (Undergrad/Grad/Certifications): Bachelor of Arts in Economics, Vanderbilt University

Previous Employers/Positions: Sanford Bernstein (Equity Research), ABN Amro and Merrill Lynch (Investment Banking)

Bio: Mr. Joshua Thomas is a Co-Managing Partner of Midsummer Capital and the Portfolio Man-ager of Midsummer Small Cap. He has over thirteen years of financial markets experience, including principal investing, capital raising for both public and private companies, and fundamental analysis. During his time at Midsummer, he has served on the board of directors of several portfolio companies, structured and negotiated complex securities, and led both operational and financial restructurings. Mr. Thomas has primary responsibility for risk management and trading as well as the sourcing, evaluation and monitoring of new investment opportunities. Prior to joining Midsummer in July 2004, Mr. Thomas held various positions in investment banking and equity analysis at Merrill Lynch, ABN Amro and Sanford Bernstein. During his tenure in investment banking, he marketed and executed a variety of transactions, includ-ing private placements, venture financings, and mergers and acquisitions. In equity research at Sanford Bernstein, Mr. Thomas covered broadline retailers and helped to initiate coverage on the department store sector. Mr. Thomas holds a Bachelor of Arts degree in Economics from Vanderbilt University.

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Fund Disclaimer: Please see section 8 of appendix.

Fund Description:Midsummer Capital, LLC is a New York based investment manager specializing in U.S. listed small and micro-cap equities. Midsummer has managed several successful funds/strategies in the small cap space since inception in 2002. The firm employs a fundamental, value-oriented investment philosophy, leveraging a deep knowledge base of small cap equities accumulated over 11 years. Midsummer Small Cap offers a unique strategy for accessing the small cap equity markets, combining a long/short approach to equities with a long term warrant book. The long/short strategy pursues an opportunistic, bottom up, value oriented approach with an emphasis on special situations and event driven returns. The warrant book provides an attractive, differentiated, and asymmetric return profile in high growth sectors. We believe that focusing exclusively on misunderstood, complex, or neglected small and micro cap securities provides a structural advantage. Midsummer’s culture emphasizes capital preservation and maintaining a “margin of safety”, with a focus on evaluating downside and risk as much as return.

Battle of the Buy-Side - Short Buffalo Wild Wings (BWLD)

733 Third Avenue, 19th Floor

New York, NY 10017

212.624.5030

2

This write-up was prepared by an employee of Midsummer Capital, LLC (“MSC”), to be used solely in

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information that the author and MSC believe to be correct but they have not verified that information

and assume no liability if such information is incorrect. Neither MSC nor the author has any duty to

correct or update the information contained herein. MSC’s clients [and certain MSC employees]

currently have a significant position in the security mentioned herein. MSC may buy, sell or sell short

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This document contains forward-looking statements based on the author’s expectations and projections.

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Such statements are not guarantees of future performance and are subject to certain risks,

uncertainties and assumptions that are difficult to predict. Therefore, actual returns could differ

materially and adversely from those expressed or implied in any forward-looking statements as a result

of various factors

DISCLAIMER

3

INVESTMENT THESIS: SHORT BWLD

GROWTH MODEL IS BROKEN: INFLECTION POINT IN CONCEPT’S LIFECYCLE DUE TO MARKET SATURATION

• Store base is set to transition from consistent double-digit unit growth to decelerating, single-digit unit growth (i.e., “Middle

Age”)

• As the concept reaches Middle Age, it will be unable to support historical rates of company EPS growth of +20%

• The Street believes, even if the core concept decelerates, lost growth can be replaced through the incubation of new concepts

• Due to aggressive and impetuous capital allocation decisions, we believe prior rates of EPS growth cannot be replicated going

forward

THE PRICE OF PAST GROWTH : MORTGAGING THE FUTURE

• BWLD stores generate mediocre returns on capital; in order to manufacture high rates of EPS growth, management

consistently reinvested >200% of earnings into growth CapEx

• Accelerated reinvestment was made possible by maintenance CapEx levels (per store) that were considerably below depreciation,

given the youth of the store base

• In essence, the company mortgaged its existing asset/store base to fund elevated levels of growth CapEx, creating an off-balance

sheet liability

• The last meaningful re-model cycle was in 2008 and we believe older stores will require fresh capital injections, lest traffic and

same-store-sales suffer at the expense of new concept/unit growth (i.e. “The CapEx Wall”; see Brinker Int’l)

• We believe the company will inevitably be faced with choosing one of two options, neither of which is attractive for the stock

Trading at nearly 40X EPS, the Market is extrapolating BWLD’s historical growth rates far into the

future. We believe the company’s growth algorithm is fundamentally broken and the stock is poised for

multiple compression as EPS growth decelerates.

4

INVESTMENT THESIS: SHORT BWLD (CONT’D)

ALTERNATIVE #1: TRANSITION TO CASH FLOW; PROTECT THE BRAND, ACCEPT MORE MODEST EARNINGS GROWTH,

AND LIKELY A LOWER MULTIPLE

• Buffalo Wild Wings represents a valuable brand and asset base; the responsible course of action would be to transition the

company from growth mode to cash flow mode; decelerate unit growth, abandon efforts to incubate/invest in new concept(s),

accumulate cash to prepare for remodel campaigns to protect the brand, with the result being a reduction in earnings growth to

the low teens

• Under this scenario (base case), we believe the intrinsic value of the business is approximately $80 to $100/share

ALTERNATIVE #2: THE MID-LIFE CRISIS; CONTINUE THE PURSUIT OF GROWTH AT ANY COST, RISK PERMANENT

DAMAGE TO THE CORE CONCEPT

• Given management's obsession with (maintaining) the company’s growth image, we believe management is suffering from a mid-

life crisis as the core concept approaches saturation; continued investment in new company stores leads to weaker incremental

returns and slower EPS growth

• If, in the pursuit of new avenues for growth (i.e. new concepts), the store base is neglected, same-store-sales could suffer;

Restaurants represent a high operating leverage (incremental margins) business; loss of sales could force earnings to de-lever over

a high fixed-cost base

• Under such a scenario, intrinsic value could be materially impaired from our base case, leading to further declines in the stock

• We are already observing signs that this is the path that management has chosen

Growth to date has been the result of overinvestment of earnings and a long runway for unit growth,

neither of which is sustainable at this juncture. As EPS growth decelerates, we believe the depth of

stock’s decline will be determined by how the slow down is managed and which alternative is chosen.

5

INVESTMENT THESIS: SHORT BWLD (CONT’D)

VALUATION

• At nearly 40X EPS, the stock is priced for perfection; Despite decelerating growth at the core concept and efforts to incubate

new concepts, stock is trading at the highest P/E multiple in 5 years

• Applying comp multiples to franchise and company-owned businesses suggest at least -30% downside

• Restaurant industry trading at historically peak cyclical levels; Industry multiple compression offers further downside (up to -45%)

WHY DOES THIS OPPORTUNITY EXIST?

• BWLD represents the “goldilocks” choice for growth and GARP investors; company is exhibiting attractive revenue, SSS, EPS

and unit growth but does not trade at “nosebleed” multiples of other high-growth consumer names (e.g., CMG @ P/E >50X; WFM

@ P/E ~45X)

• One time benefits in input costs/pricing have buoyed earnings:

– Collapse in chicken wing prices provided margin reprieve and easy comparisons

– BWLD is (currently) benefitting from what is effectively a large price increase by eliminating wing orders by the count

• The Street supports the stock/story; emphasizes the income statement and focuses on EPS growth, believing the model is self

funding and +20% EPS growth can be maintained. Looks at flawed “cash-on-cash” (EBITDA/Build-Out) metric. Believes 1,700 store

count is achievable and excited by the prospect of emerging brands. Growth multiple is justified

VARIANT PERCEPTION

• Management has painted itself into a corner in the uncompromising effort/fixation to manufacture consistent +20% EPS growth;

refresh the existing asset base and slow growth or gamble on unproven concepts at the expense of neglecting older stores

• Prior years of robust EPS growth were achieved by >200% reinvestment of earnings, which is unsustainable

• Management has grown reactive and short-term oriented, placing the concept and company at risk;

• The Street support is based on faulty premises; As system approaches maturity, BWLD will face a maintenance CapEx wall (e.g.,

Brinker/Chili’s); marked deceleration in franchisee growth is a leading indicator and telling of saturation (True market TAM is

below 1,700 stores); Correct unit analysis methodology demonstrates stores generate returns below the cost of capital and

inferior to fast casual alternatives; growth multiple is not justified

We view BWLD as a compelling short opportunity and set a price target range

of $80-$100/share over the coming 12-24 months.

6

COMPANY DESCRIPTION

Buffalo Wild Wings, Inc. (BWLD)

BWLD is an owner, operator and franchisor of Buffalo Wild Wings Grill & Bar restaurants

Casual dining concept with menu centered around New York-style chicken wings and wide beer selection (20-

30 on tap) with layout/atmosphere focused on viewing sporting events

Locations are typically ~5,700 sq. ft., outfitted with 50 HD TVs and up to 10 projection screens

Founded in 1982 near Ohio State University

Franchising program began in 1991

Completed initial public offering in 2003

Over 900 restaurants (>400 company-owned) across 49 states and Canada

TTM Revenue of $1.2bn (93% restaurant sales; 7% franchise royalties and fees); TTM Adj. EBITDA of $179mm

93%

7%

Revenues by Segment

Restaurant sales Total Franchise revenue

Source: Company Filings, Bloomberg Estimates

Financial Summary

Fiscal Year Ending 12/31

($ in millions) 10/31/2013 2010A 2011A 2012A 2013E 2014E

Share Price $142.58 Revenue $613 $784 $1,041 $1,268 $1,492

52 Week Low / High $69.72 / $126.36 % Growth 27.9% 32.6% 21.9% 17.7%

FD Shares Outstanding (M) 18.9 EV/Revenue 2.5x 2.1x 1.8x

Equity Value $2,693

Net Debt/(Cash) (44) EBITDA $98 $125 $153 $186 $229

Enterprise Value $2,649 % Margin 15.9% 15.9% 14.7% 14.7% 15.4%

EV / EBITDA 17.3x 14.2x 11.6x

12-Month Target Price $90.00

Downside -37% EPS $2.10 $2.73 $3.06 $3.68 $4.56

P/E 46.6x 38.7x 31.3x

Projections reflect consensus estimates

7

MARKET PERCEPTION VERSUS ECONOMIC REALITY

Source: Bloomberg

Source: Company Filings

Over the past year, the market price of BWLD has meaningfully diverged from fundamentals. In spite

of lower profit expectations, the stock’s cash P/E multiple has expanded >85%.

The table above depicts key data points since just before the company issued Q3’12 results and

provided initial 2013 EPS Guidance

Profit expectations have declined 4%, despite the largest input cost dropping 25% and the

acquisition of 21 restaurants from franchisees

Cumulative free cash flow in the 5 quarters since has been negative, with balance sheet cash

declining by nearly 43%

In addition, the company has taken on a line of credit for $100MM, even though the company had not

previously carried any debt in its history as a public company

$3.40

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Last Price 2013 Consensus EPS

8

INFLECTION POINT: SIGNS OF STALLED GROWTH

In four consecutive 10-Ks (2007-2010), management cited a desired system mix target of “approximately 40%

company-owned restaurants and approximately 60% franchised restaurants.”

• During the same period, annual franchised unit growth was largely commensurate with management’s overall system

growth target

In 2011, franchise unit growth decelerated sharply. We believe this reflects the concept approaching

market saturation (by 2011, BWLD’s system reached 817 stores or 82% of management’s original goal of

“over 1,000 restaurants in the united states”) and unappealing unit economics, particularly when compared

to emerging fast casual options.

Franchise unit growth is a strong leading indicator; franchisees have their own capital as risk (versus

shareholders) and thus tend to be better stewards of capital (than management)

To maintain system growth targets, management dramatically accelerated company-owned unit growth, on a

proportional (to franchised), absolute and percentage basis, while also breaching the supposed target of a

60/40 franchise/company mix.

• The language referencing this mix target was subsequently removed from the 2011 and 2012 10-K

Year 2007 2008 2009 2010 2011 2012 2013-YTD

Company-Owned Stores 161 197 232 259 319 381 415

Growth 16% 22% 18% 12% 23% 19% 9%

Franchised Stores 332 363 420 473 498 510 534

Growth 14% 9% 16% 13% 5% 2% 5%

Total Stores 493 560 652 732 817 891 949

System Growth 15% 14% 16% 12% 12% 9% 7%

System Growth Target 15% 15% 15% 14% 13% 11% 11%

Company-Owned Mix 33% 35% 36% 35% 39% 43% 44%

Franchised Mix 67% 65% 64% 65% 61% 57% 56%

Until 2011, system % growth was consistently double-digits, requiring an increasing number of new

stores built each year, which no longer appears feasible as the concept approaches market saturation.

9


Specifically, in the company’s 2011 10-K, management set a target of 60 new company-owned units in 2012.

• Through the first nine months of 2012, BWLD opened 27 units (on a gross basis)

• In 4Q12, the company purchased 18 stores for $44mm and opened 22 units

• Gross store count for the year grew by 68 stores

Without the acquisition, gross store count grew by 49 stores compared to 48 stores in 2011 (excl.

acquisitions), missing management’s target by nearly 20%

In BWLD’s 2012 10-K, management reiterated the 60 unit target for 2013; on the 3Q conference call,

management guided to 54 openings (implied) for 2013 and 45 openings for 2014

Based on updated Q3 guidance, the company will miss its target again for 2013, confirming a trend that

system % growth has fallen to mid to high single digits

• Likely to continue as the company reduces the absolute number of units opened going forward

Year 2007 2008 2009 2010 2011 2012 2013-YTD

Company-Owned Stores 161 197 232 259 319 381 415

Growth 16% 22% 18% 12% 23% 19% 9%

Franchised Stores 332 363 420 473 498 510 534

Growth 14% 9% 16% 13% 5% 2% 5%

Total Stores 493 560 652 732 817 891 949

System Growth 15% 14% 16% 12% 12% 9% 7%

System Growth Target 15% 15% 15% 14% 13% 11% 11%

Company-Owned Mix 33% 35% 36% 35% 39% 43% 44%

Franchised Mix 67% 65% 64% 65% 61% 57% 56%

BWLD does not appear to possess the operational wherewithal to execute the company-owned store

growth necessary to recreate historical growth levels (or the market cannot support it).

10


Management’s (re)stated system target of 1,700+ units strikes us as aggressive

Chili’s – a concept we view as similar in terms of occasion and menu positioning – system growth stalled at

~1,300 units and has declined modestly since, with company/franchise mix of ~65%/35% (10)

EAT Management understood and acknowledged the store base reaching maturity; transitioned running the

company for maximum cash flow rather than growth

"I'd like to outline to you how our financial strategies will support this continued transformation from

Brinker's history primarily as a unit growth story to, now, what is a consistent, reliable and diversified

earnings growth story.“ (11)

"So when we met with you in March 2010, we laid out a plan for our turnaround….At the time, we were

willing to acknowledge what no one else in the casual dining would acknowledge, that the casual dining

segment was entering maturity and the history experienced when the quick-service segment matured in the

early 2000s was now repeating itself in casual dining“ (12)

Source: Brinker International Filings

(11) & (12): CFO & EVP Guy Constant, 2/27/13, Brinker Analyst Day

Year F2006 F2007 F2008 F2009 F2010 F2011 F2012 F2013

Total Chili's Domestic Stores 1,085 1,220 1,291 1,292 1,293 1,299 1,279 1,265

Growth 12.4% 5.8% 0.1% 0.1% 0.5% -1.5% -1.1%

Company-Owned Mix 84% 75% 69% 66% 64% 63% 64% 65%

Rather than gracefully transitioning from a hyper-growth phase to a decelerating growth/cash flow

phase, management wishes to maintain its growth mantle, stating very recently, “Buffalo Wild Wings is

a growth company and we’ve begun implementing strategies to…sustain long-term growth”

11

Assuming a build-out cost of $2mm, pre-opening expense of $285k and an initial franchisee fee of $40k, it

costs over $2.3mm to build a new store

Assuming $60K in average weekly sales (in-line w/ the system avg.), restaurant level margins of 20% (a

generous +200bp lift from estimated BWLD stores), 3.5% of sales committed to advertising and 5% of sales

paid as a royalty to BWLD, we estimate after-tax operating profit of less than $100K.

This equates to roughly a 4% after-tax return on invested capital

Given such paltry returns, a modest decline in AUV due to cannibalization resulting from market saturation

could send franchise growth into negative territory

INFLECTION POINT: DECLINE IN FRANCHISE GROWTH

Domestic franchisee store growth has decelerated ahead of company-owned growth. We believe this is

due to unattractive unit economics both on an absolute basis (due to market saturation)…

Notes

2013E Avg. Weekly Sales 60,000$ Franchise System Avg.

(x) Weeks 52

Average Unit Volume (mm) 3.120$

(x) Restaurant-Level Margin 20.0% +200bp above 2013E BWLD store margin

'Store-Level' EBITDA 0.624$

(-) Royalty to BWLD 0.156 5% of Sales; Company Filings

Store Cash Flow, ex-Royalty 0.468

(-) Advertising Fee 0.125 3.5% of Sales; Company Filings

(-) Depreciation 0.200 10-Year Depreciable Life of Capital Investment

Operating Income 0.143$

(-) Taxes 0.050 35% Tax Rate

NOPAT 0.093$

Build-Out 2.000 Company filings

Pre-Opening Expense 0.285 Company filings

Franchise Fee 0.040 Company filings

Invested Capital (mm) 2.325$

Return on Invested Capital 4.0%

BWLD Franchise Unit Economics

12


Alternative fast-casual concepts are likely to divert capital investment away from casual dining over time,

as they tend to offer superior economics

By our estimates, a PNRA restaurant would cost a franchisee nearly half as much to build as a BWLD

location, yet would generate over +20% more in after-tax operating profit

PNRA franchises yield an unlevered return of >9% vs. a return on BWLD stores of ~4%

• We suspect other privately-held companies’ concepts (e.g. Smashburger, FiveGuys) offer similarly attractive economics

to franchisees

In addition to superior unit economics, we believe PNRA has a more differentiated concept and is thus more

likely to stand the test of time

Running a fast-casual concept where lunch is the main day-part offers a more attractive/normal

lifestyle/schedule for operators


Source: Panera Bread Company Filings

… And on a relative basis (proliferation of fast-casual concepts). As an example, compare investing in a

BWLD franchise vs. a PNRA franchise:

(in millions) BWLD PNRA

Average Unit Volume $3.120 $2.457

Store-Level EBITDA $0.624 $0.479

Margin 20.0% 19.5%

NOPAT $0.093 $0.115

Invested Capital/Build-Out $2.325 $1.235

Return on Capital 4.0% 9.3%

13

As an example, assuming 20% equity down, a 10-year debt amortization schedule and 5% cost of debt, a

franchisee could magnify a 4% unlevered, after-tax return into a 7% return-on-equity or a 10% cash flow yield

in year one

However, if borrowing rates increased +200bps, that levered return would compress to 2% return-on-equity

or a 5% cash flow yield in year 1



We also believe franchisee growth, as a function of returns on equity, is sensitive to interest rates and the

availability of financing.

Notes


(x) Weeks 52






(-) Advertising Fee 0.125 3.5% of Sales; Compnay Filings


Operating Income (EBIT) 0.143$

(-) Interest Expense 0.093 5% Interest Rate; 80% Debt Capital

Pre-Tax Income 0.050$


Net Income 0.033$





Debt-to-Capital 4.0X 10-Year Debt Amortization Schedule

Franchisee Equity Investment 0.465$

Return on Franchisee Equity 7.0%

Cash Flow: Year 1 0.047$ EBIT+D&A-Interest-Taxes-Debt Amort.

Cash Flow to Equity 10.0%

Franchise Unit Economics Notes


(x) Weeks 52






(-) Advertising Fee 0.125 3.5% of Sales; Compnay Filings


Operating Income (EBIT) 0.143$

(-) Interest Expense 0.130 7% Interest Rate; 80% Debt Capital

Pre-Tax Income 0.013$


Net Income 0.008$





Debt-to-Capital 4.0X 10-Year Debt Amortization Schedule

Franchisee Equity Investment 0.465$

Return on Franchisee Equity 1.8%

Cash Flow: Year 1 0.022$ EBIT+D&A-Interest-Taxes-Debt Amort.

Cash Flow to Equity 4.8%

Franchise Unit Economics

+200bps

rise in rates

14

THE PRICE OF GROWTH PAST: MORTGAGING THE FUTURE

Without additional outside capital, a company can only reinvest >100% of earnings if maintenance

capital expenditures, over the life of the asset, are truly and materially below stated depreciation,

which we do not believe is the case for BWLD

How, then, has BWLD maintained its growth trajectory despite unimpressive ROICs?

BWLD’s store base is relatively young, as >40% of stores are 3 years old or less, so maintenance

capital needs have been low

As these stores age, inevitably they will require significant amounts of capital to refresh/reimage


Reinvestment Rates 2009 2010 2011 2012* 2013E

New Stores 35 35 48 49 54

Implied Cash Investment/Store 1.5 1.8 1.8 2.0 2.1

Implied Growth CapEx 52.5 61.3 86.4 99.3 115.4

Acquistion CapEx - - 33.7 43.6 10.3

Total Growth CapEx 52.5 61.3 120.1 142.9 125.7

Prior Year Net Income 24.9 30.7 38.4 50.4 68.4

Reinvestment % 211% 200% 313% 283% 184%

Previously high rates of EPS growth were achieved by reinvesting >200% of earnings into growth

CapEx. This was made possible by maintenance CapEx levels (per store) that were considerably below

depreciation, given the youth of the store base.

15


Since 2008, the company has spent very little in the way of maintenance capital expenditures on

per store basis, relative to stated depreciation

While existing assets may not demand capital at this moment, we view growth CapEx in excess of

earnings as borrowing against legacy stores to fuel growth

Chronically under-spending on existing stores, effectively, creates an off-balance sheet liability in

terms of future maintenance CapEx needs

Since 2009, maintenance CapEx per store has fallen nearly -40%, while build-out costs (plus pre-

opening) and depreciation per store have risen nearly +40%; this strikes us as an enormous

disconnect


In essence, the company mortgaged its existing asset/store base to fund elevated levels of growth

CapEx .

2003 2004 2005 2006 2007 2008 2009 2010 2011 2012

New Stores 15 19 19 17 23 39 35 35 48 49

Cash Investment per Store ($mm) 0.80 1.00 1.1 1.2 1.4 1.5 1.5 1.8 1.8 2.0

Implied Growth CapEx 12.0 19.0 20.9 20.4 32.2 58.5 52.5 61.3 86.4 99.3

Total CapEx 10.7 23.3 21.9 23.8 41.4 90.5 73.7 73.4 130.1 130.5

Tech Spend - - - - - - - - 4.0 10.0

Implied Maintenance CapEx NMF 4.3 1.0 3.4 9.2 32.0 21.2 12.1 39.7 21.2

BOP Stores 70 84 103 122 139 161 197 232 259 319

MCX/Store NMF 0.051 0.010 0.028 0.066 0.199 0.108 0.052 0.153 0.067

Depreciation/Avg. Store 0.106 0.112 0.117 0.135 0.152 0.164 0.179 0.200

16


EAT’s (Brinker) recent capital allocation is instructive; though the store count has remained largely static

(implying most expenditures are maintenance in nature), CapEx per store has doubled and is now

commensurate with D&A per store

Per EAT’s 10-K: “Capital expenditures increased…driven primarily by the ongoing Chili's reimage program,

purchases of new and replacement restaurant furniture and increased investments in new equipment and

technology related to our kitchen retrofit initiative” (19)

Managements estimates, “that our capital expenditures during fiscal 2014 will be approximately $150

million to $160 million”, despite the projection, “both our company-owned and franchise domestic Chili’s

system to see unit growth of 1% to 2% each year”(20).

This implies maintenance CapEx per store will exceed depreciation per store; we believe this supports

our view that D&A expense, while non-cash, must be viewed as a reasonable proxy for ongoing

maintenance expenditures over time

Source: Brinker International Company Reports

Year F2009 F2010 F2011 F2012 F2013

Company stores 1,024 871 868 865 877

D&A 147.4 136.3 132.8 143.4 134.5

Per Store 0.144 0.156 0.153 0.166 0.153

CapEx 88.2 60.9 70.4 125.2 131.5

Per Store 0.086 0.070 0.081 0.145 0.150

The last meaningful re-model cycle was in 2008 and we believe older stores will require fresh capital

injections, lest traffic and same-store-sales suffer at the expense of new concept/unit growth.

17

THE PRICE OF GROWTH PAST: CAPITAL (MIS)ALLOCATION

In spite of a large franchisee base providing high-margin, annuity-like royalty stream, to which there little-

to-no capital intensity, BWLD has generated negative free cash flow over the trailing 5 and 10-year periods

Implicitly, the company has reinvested all of the cash flow from the royalty business into the company-

owned business

While an imprecise exercise, backing out estimated operating income from the royalty/franchise business,

allows us to approximate the return profile of the company-owned business

• Historically, this segment has generated returns commensurate with the industry’s cost of capital; not overly attractive

If we were able to back out the impact of SSS growth (which flows through at high margins), we suspect the

implied returns on new stores would be worse


Free Cash Flow calculated as Cash from Operations less additions to PP&E and acquisitions of franchisee stores

2008 2009 2010 2011 2012

Franchise Revenues 42.7 50.2 58.1 67.1 76.6

Estimated Operating Margin 75% 75% 75% 75% 75%

Estimated Operating Income 32.0 37.7 43.6 50.3 57.4

Consolidated EBIT* 45.7 54.0 66.8 89.3 100.5

Implied Restaurant EBIT 13.6 16.3 23.2 39.0 43.1

Taxes @ 32% 4.4 5.2 7.4 12.5 13.8

Restaurant NOPAT 9.3 11.1 15.8 26.5 29.3

Assets 243.8 309.1 380.4 495.4 591.1

(-) Marketable Securities 36.2 43.6 56.8 40.0 9.6

(-) Restricted Cash 7.7 24.4 32.9 42.7 52.8

(-) Goodwill 11.0 11.2 11.2 17.8 32.4

(-) NIBCLs 40.5 42.3 45.1 70.0 89.3

Invested Capital 148.5 187.5 234.3 324.9 407.0

Estimated Company-Owned ROIC 6% 6% 7% 8% 7%

* - Excludes pre-opening and impairment charges

Given management’s uninspiring history of capital allocation, we do not think it is likely a new growth

engine will be constructed in a way that is accretive to shareholders

Cumulative Free Cash Flow ('03-'12) ($31)

Cumulative Free Cash Flow ('08-'12) ($47)

18


BWLD made two large acquisitions

from franchisees in 4Q11 and 4Q12

consisting of 15 and 18 stores,

respectively, for a total of $78mm(21)

We estimate these acquisitions, in

total, were accretive to earnings by

~$2.2mm, representing a 3% return

on equity

The economics of these transactions

appear even more unattractive than

building stores outright due to the

loss of the high margin royalty

stream, which the market implicitly

affords a higher multiple

The second acquisition came in 4Q12

when the company would have

otherwise missed its unit growth

guidance


In response to dwindling system growth driven by saturated markets, management has continued

ahead with acquiring growth, in spite of generating de minimis returns.

Franchise Acquistion (4Q11)

Locations Purchased 15

Purchase Price 34

Per Location 2.2

∆ EBITDA 4.6

"Cash-on-Cash" Return 13.5%

EBITDA Multiple 7.4X

∆ EBIT 1.6

Pre-Tax ROIC 4.6%

∆ Net Income 0.9

Return on Equity 2.8%

EPS Accretion $0.05

Franchise Acquistion (4Q12)

Locations Purchased 18

Purchase Price 44

Per Location 2.4

∆ EBITDA 5.8

"Cash-on-Cash" Return 13.2%

EBITDA Multiple 7.6X

∆ EBIT 2.2

Pre-Tax ROIC 4.9%

∆ Net Income 1.3

Return on Equity 3.0%

EPS Accretion $0.07

19


With a fully equitized capital structure, returns on new stores are sufficiently below a reasonable required

rate of return and value-destroying relative to the foregone free cash flow (i.e., opportunity cost)

Returns appear comparable to what the company might reasonably expect, in terms of yield, if it issued

bonds (i.e., no benefit to leveraging the balance sheet to lower the cost of capital in the pursuit of growth)

The company would be better off returning free cash flow to shareholders and focusing on the franchise

business, which offers virtually infinite returns on capital


Notes

2013E Avg. Weekly Sales 56,000$ Company-Owned System Avg.

(x) Weeks 52


(x) Restaurant-Level Margin 18.0% 2013E Store-Level Margin


(-) Incremental G&A 0.116 4% of Sales


Operating Income 0.208$


NOPAT 0.141$




Return on Invested Capital 6.2%

New Store Unit EconomicsIncremental ROIC Profile 2009 2010 2011 2012*

New Stores 35 35 48 49

Implied Cash Investment/Store 1.5 1.8 1.8 2.0

Implied Growth CapEx 52.5 61.3 86.4 99.3

Acquistion CapEx - - 33.7 43.6

Total Growth CapEx 52.5 61.3 120.1 142.9

Prior Year Net Income 24.9 30.7 38.4 50.4

Reinvestment % 211% 200% 313% 283%

Growth Investment 52.5 61.3 120.1 142.9

Pre-Opening Exp. 7.7 8.4 14.6 14.6

Cash Investment 60.2 69.6 134.7 157.5

∆EBIT (Ex-Pre-Opening) 8.1 12.7 22.6 9.9

Taxes @ 32% 2.6 4.1 7.2 3.2

∆NOPAT 5.5 8.6 15.4 6.7

ROIC (Incremental) 9.1% 12.4% 11.4% 4.3%

* 2012 includes a 53rd week

New company stores do not earn their cost of capital (EVA-destroying), and Sell-side’s view of

attractive “cash-on-cash return” convention (~25%) ignores incremental G&A costs,

depreciation/maintenance and taxes.

20

DECISION POINT: MANAGEMENT & “THE 20-MILE MARCH”

True to the spirit of Amundsen’s strategy (our Alternative #1), former Chairman and CEO of BJRI, Jerry

Deitchle said it best

• “We’re going to continue to carefully balance our six pipelines for growth. Those six are capital, real estate, restaurant

management, support infrastructure, brewing capacity and our supply chain structure, so that we don’t outrun our

headlights when it comes to setting [the] optimal pace of high-quality, predictable and leveragable expansion”

In contrast, more closely reflecting the approach of Scott (our Alternative #2), we believe that BWLD

management’s strategy of maintaining +20% EPS growth, has become increasingly short-sighted and reactive

- with respect to store development, menu/concept positioning and capital allocation

Source: http://www.jimcollins.com/article_topics/articles/how-to-manage-through-chaos.html

Simple Concept: Stick to the plan regardless of exogenous/uncontrollable variables

Analogy: In 1911, two teams of adventurers embarked on a 1,400 mile roundtrip journey to reach the South

Pole; the team leaders – Roald Amundsen and Robert Falcon Scott - were of similar age and experience

• Amundsen’s Strategy: Strict adherence to a plan of traveling 15 to 20 miles per day, irrespective of conditions

• Scott’s Strategy: Adjust travel plans based on weather conditions; travel to exhaustion during favorable periods and

hunker down during inclement ones

Result: Amundsen’s team completed the journey, while Scott’s team perished

Lesson: “The 20-Mile March imposes order amid disorder, consistency amid swirling inconsistency. But it

works only if you actually achieve your march year after year.”

We apply Jim Collins’ mental model of “The 20-MileMarch”, from Great by Choice, to evaluate

management teams at the helm of a unit growth story; success through measured progress and a long-

term orientation

What does this lesson mean to us, in the context of building a restaurant chain?

http://www.jimcollins.com/article_topics/articles/how-to-manage-through-chaos.html









21

DECISION POINT: TRANSITION OR MID-LIFE CRISIS?

In the context of higher wing prices (largest contributor to COGS for BWLD), we believe the reaction of

management is instructive

Alternative #1 (Amundsen Approach):

• “You’ve got bigger wings across [the] industry than you used to, but our customers expect wings by the count, so we’re

going to stick with that, and hope it evens out in the end”(16) – Patrick Doyle, Domino’s CEO

Alternative # 2 (Scott Approach):

• “We took menu price increases in July and subsequently [took] price increase in mid August to compensate for the bigger

wings and record high wing costs. These adjustments are beginning to ease the pressure on our cost of sales. We are

currently testing, serving our wings in flexible portions rather than fixed quantities, which will lessen the cost of sales

impact from future fluctuation in wing size”(15) – Sally Smith, BWLD CEO Source:

Company Reports, Company Menu

(14): http://www.jimcollins.com/article_topics/articles/how-to-manage-through-chaos.html

(15): CEO Sally Smith, 10/23/12, 3Q12 Company Conference Call

(16): DPZ CEO Patrick Doyle, 2/3/12/, http://online.wsj.com/news/articles/SB10001424127887324156204578278373193092156

When confronted with business challenges that are largely out of their control, we believe

management that is capable of a balanced and measured response are more likely to retain their

customers and brand equity.











http://online.wsj.com/news/articles/SB10001424127887324156204578278373193092156

22


Over the past year, wing prices have retreated sharply, leading to starkly different management approaches

Alternative #1 (Amundsen Approach): Take steady pricing over the course of a commodity cycle, like most industry participants

Alternative #2 (Scott Approach): Make a major change to the concept’s menu, at the risk of customer goodwill

• “…wings by the portion rolled into all restaurants July 15, so it’s been in effect I guess, for a couple of weeks, so half of

July. To go back to when we tested it, the first round of testing, we did have a few negative comments from guests and

probably saw a decline in same-store sales just briefly in a few of the test markets. We believe that we needed to ramp

up our training around serving wings by the portion and we did exactly that when rolled system wide…we really focused on

training our team members…we had information on tables for our guests [emphasis added]”(17) - Mary Twinem, BWLD CFO

2Q13

We would expect consumers to react unfavorably; paying $5.99 for five wings instead of six wings equates to

$1.20/wing vs. $1.00/wing, a +20% increase!

Source:

Bloomberg

Company Filings

Company Menu, http://www.yellowbook.com/profile/buffalo-wild-wings-grill-and-bar_1856025763.html

(17): CFO Mary Twinem, 7/30/12, 2Q13 Company Conference Call

$1.30

$1.40

$1.50

$1.60

$1.70

$1.80

$1.90

$2.00

$2.10

USDA Georgia Dock Chicken Ready to Cook Wings Spot Price

In contrast to disciplined execution and sticking to the proverbial 20-Mile March, reactive

management tends to compound their problems by further adjusting their strategy even as conditions

improve.

http://www.yellowbook.com/profile/buffalo-wild-wings-grill-and-bar_1856025763.html












23


Alternative #1 (Amundsen Approach): Slow unit growth and allow free cash flow to build, ultimately for the

purpose of reinvesting and reinvigorating the existing store base

Alternative #2 (Scott Approach): Continue to pursue unit growth, diverting attention from the core concept

in pursuit of investment in “emerging brands”

• In March of this year, the company made a minority in PizzaRev. At the time of the investment,

PizzaRev had 3 locations

• On the company’s most recent quarterly conference call, management stated, “So we would

anticipate that should PizzaRev prove successful and or we add other emerging brands to our portfolio,

that will help continue to drive unit growth and revenue growth…we’d like to acquire several small

emerging concepts. PizzaRev certainly has that ability to be the next growth vehicle…But we are also

evaluating other concepts that could add to the portfolio and them out and really provide that growth

momentum we love.”


In our view, management’s fixation on maximizing EPS growth – and not necessarily shareholder

value – is clear and is laying dry tinder for future problems by not accumulating cash/”dry powder” to

prepare for an aging store base.

24

VALUATION

Despite decelerating unit growth and several EPS

guidance reductions by management, BWLD is

trading at its highest P/E multiple in 5 years

Why?

Given the scarcity of growth (TTM S&P earnings are

roughly flat) in the market, coupled with

“nosebleed” valuations for super-unit-growth

consumer names, we suspect BWLD represents the

“goldilocks” choice for GARP and Growth investors;

exhibiting nice revenue and EPS growth, but trading

at relative discounts to the likes of CMG or WFM.

Source: Bloomberg

0.0X

5.0X

10.0X

15.0X

20.0X

25.0X

30.0X

35.0X

40.0X

45.0X

Oct-08 Oct-09 Oct-10 Oct-11 Oct-12 Oct-13

BWLD US Equity - Est P/E Curr Year

Market Enterpise 1-Year Growth Rates Multiples

Company Ticker Cap Value Sales EBITDA 2013E P/E 2013E EBITDA

CHIPOTLE MEXICAN CMG $16,307 $15,775 20% 26% 50.4X 20.6X

CHUY'S HOLDINGS CHUY $613 $614 32% 44% 53.9X 20.8X

FIESTA RESTAURAN FRGI $1,002 $1,199 7% 3% 55.1X 15.8X

FRANCESCAS HOLDI FRAN $793 $753 45% 76% 15.9X 6.8X

FRESH MARKET INC TFM $2,461 $2,490 20% 23% 33.2X 12.7X

NOODLES & CO NDLS $1,252 $1,252 17% 21% 108.7X 26.7X

RESTORATION HARD RH $2,714 $2,786 25% NA 41.1X 14.1X

ULTA SALON COSME ULTA $8,237 $7,950 25% 35% 38.6X 14.1X

WHOLE FOODS MKT WFM $23,517 $22,555 16% 26% 43.2X 15.8X

Mean $1,805 $1,820 23% 32% 48.9X 16.4X

Median $1,857 $1,871 20% 26% 43.2X 15.8X

BUFFALO WILD WIN $2,660 $2,634 33% 23% 38.1X 11.4X

At nearly 40X EPS, the stock is priced to perfection: to deliver historical growth rates - which we view

as unsustainable - far into the future.

25

VALUATION

Restaurant industry P/E multiples are expanding toward prior cyclical peaks (P/E of ~25X)

Short-sellers have capitulated; short interest has collapsed from >4.5mm in 1Q13 (23% of the float) to <1.7

shares (9% of the float)

We think investors and the sell-side have largely missed the inflection point in the growth story and are

awarding increasingly higher multiples when expected growth rates are growing increasingly at risk

Sell-side 2014 EPS (growth) estimates appear aggressive, in our view; given prevailing valuation, stock may

be vulnerable to multiple compression even on modest misses or disappointing guidance

Source: FPA Crescent Fund 3rd Quarter Letter, 10/8/13, http://www.fpafunds.com/docs/quarterly-commentaries-crescent-fund/2013-09-crescent-commentary52A0CAAAB07E.pdf?sfvrsn=2

Source: Bloomberg

10.0X

15.0X

20.0X

25.0X

30.0X

35.0X

Oct

-93

Oct

-94

Oct

-95

Oct

-96

Oct

-97

Oct

-98

Oct

-99

Oct

-00

Oct

-01

Oct

-02

Oct

-03

Oct

-04

Oct

-05

Oct

-06

Oct

-07

Oct

-08

Oct

-09

Oct

-10

Oct

-11

Oct

-12

S5REST Index - Price Earnings Ratio (P/E)

0.0%

5.0%

10.0%

15.0%

20.0%

25.0%

0.0

0.5

1.0

1.5

2.0

2.5

3.0

3.5

4.0

4.5

5.0

BWLD Short Interest (shares; mm) Short Interest, % of Float

Restaurant industry P/E multiples are fast approaching historically peak cyclical levels.

Commensurate with the broader market for high interest stocks, the ‘shorts’ have capitulated; short

interest in the stock has collapsed.

http://www.fpafunds.com/docs/quarterly-commentaries-crescent-fund/2013-09-crescent-commentary52A0CAAAB07E.pdf?sfvrsn=2













26

VALUATION: FRANCHISE BUSINESS

FRANCHISE BUSINESS

The franchise business is an enviable business model; it exhibits recurring revenue and high margins, requires

virtually no capital to maintain or grow, the royalty stream grows with inflation and pricing and the business

is not subject to cost inflation. Yet, BWLD is making this an increasingly smaller part of its enterprise

• Due to the favorable characteristics of this business model, highly franchised system are awarded large(r) EBITDA multiples

Looking at highly franchised peers, we believe a reasonable valuation range for BWLD’s franchise business is

10X-12X EBITDA

For companies that provide franchise segment-level financials, we found the average TTM operating margin

was ~75%, which we applied to BWLD’s 2013E franchise revenue to estimate EBITDA

Source: Bloomberg, AFCE Company Reports, DENN Company Reports, DIN Company Reports, DNKN Company Reports, JACK Company Reports, PNRA Company Reports

TTM Franchise Margins AFCE DENN DIN Dunkin US JACK* PNRA Average

Franchise and license revenue 123.4 135.8 430.5 510.7 104.4 108.4

Segment Costs 67.2 47.0 110.3 142.2 9.4 5.9

Segment Income 56.2 88.8 320.2 368.5 95.0 102.5

Margin 45.5% 65.4% 74.4% 72.2% 91.0% 94.5% 73.8%

* JACK results reflect F3Q YTD

Market Enterpise Metrics Multiples

Company Ticker Cap Value Franchise % EBITDA % LTM EBITDA Forward EBITDA

AFC ENTERPRISES AFCE $1,064 $1,117 98% 32% 18.0X 14.5X

DENNY'S CORP DENN $567 $736 90% 16% 10.2X 9.0X

DINEEQUITY INC DIN $1,562 $2,803 99% 39% 11.3X 10.4X

DUNKIN' BRANDS G DNKN $5,071 $6,695 100% 46% 20.9X 16.6X

JACK IN THE BOX JACK $1,762 $2,132 72% 15% 9.1X 8.2X

Mean $2,005 $2,696 92% 30% 13.9X 11.7X

Median $1,562 $2,132 98% 32% 11.3X 10.4X

We view BWLD as possessing two separate businesses: the franchise business (i.e., brand royalty) and

the company-owned business (i.e., “bricks-and-mortar”). As such, we believe BWLD should be

valued on a “sum-of-the-parts” basis

27

VALUATION: COMPANY-OWNED RESTAURANT BUSINESS

COMPANY-OWNED RESTAURANT BUSINESS

The brick-and-mortar restaurant business is capital-intensive, has high fixed-costs (i.e., operating

leverage) and low margins, is subject to input cost risk (i.e., limited pricing power), has limited barriers

to entry and suffers from barriers to exit (i.e., long-term operating leases)

Generally speaking, the restaurant industry represents a very challenging and fiercely competitive

business

• Accordingly, the market affords lower multiples to largely company-owned systems that are in their middle-age to

twilight years

Having followed the industry for a long-time, valuation multiples appear frothy

• For existing restaurants, we view an EBITDA multiple range of 6X to 8X (applied to EBITDA, less implied G&A, but excl.

pre-opening expense) as fair-to-generous

We ascribe no value to BWLD’s growth prospects, as returns on stores are below the cost of capital; the

present value of future EBITDA capitalized, net of cash investment, is less than free cash flow foregone

today

Source: Bloomberg

Market Enterpise 1-Year Growth Rates Multiples

Company Ticker Cap Value Sales EBITDA LTM EBITDA Forward EBITDA

BJ'S RESTAURANTS BJRI $763 $719 14% 5% 8.7X 7.4X

BOB EVANS FARMS BOBE $1,557 $1,767 -3% -15% 20.8X 8.6X

BRINKER INTL EAT $2,942 $3,690 1% 11% 9.1X 8.2X

CHEESECAKE FACTO CAKE $2,544 $2,413 3% 8% 10.3X 9.3X

CRACKER BARREL CBRL $2,614 $2,893 2% 5% 10.8X 9.4X

DARDEN RESTAURAN DRI $6,728 $9,376 7% -4% 9.3X 8.3X

RED ROBIN GOURME RRGB $1,091 $1,156 7% 15% 11.1X 9.6X

RUBY TUESDAY INC RT $365 $604 -5% -17% 5.0X 8.1X

TEXAS ROADHOUS TXRH $1,927 $1,897 14% 14% 11.4X 9.6X

Mean $1,951 $2,147 5% 2% 10.7X 8.7X

Median $2,051 $2,090 3% 5% 10.3X 8.6X

28

VALUATION: SUM OF THE PARTS

Using a sum-of-the-parts framework, we derive a price target range of ~$80-$100/share representing ~-45%

to -30% from the current price of ~$140/share

Our price target range, applied to consensus estimates, represents P/E and EV/EBITDA multiple bands of

~20X-25X and ~8X-10X respectively; we view these bands as reasonable and achievable, particularly if EPS

growth slows due to reduced growth CapEx spending

This valuation range assumes intrinsic value is not eroded by the pursuit of uneconomic growth

Source: Company Filings, Bloomberg Estimates

BWLD Sum-of-the-Parts Base Case Downside Case

2013E Franchise Revenues (mm) 82.0 82.0

Margin 75.0% 75.0%

Segment EBITDA 61.5 61.5

Multiple 12.0X 10.0X

Franchise EV 738.0 615.0

Restaurant-Level EBITDA 217.0 217.0

Implied G&A 74.5 74.5

Pre-Opening Expense - -

Company-Owned EBITDA 142.5 142.5

Multiple 8.0X 6.0X

Company-Owned EV 1,140.0 855.0

Total EV 1,878.0 1,470.0

(+) Cash 43.8 43.8

Equity Value 1,921.8 1,513.8

Per Share 102.00$ 80.00$

Implied 2013E EV/EBITDA 10.1X 7.9X

Implied 2013E P/E 27.7X 21.7X

Applying comp multiples to franchise and company-owned business suggest at least -30% downside.

Restaurant industry is trading at frothy multiples; industry multiple compression offers further

downside of up to -45%.

29

RISKS

Maintenance capital expenditure needs are structurally below stated D&A levels

Chicken wing prices decline

EPS growth exceeds sell-side estimates

Menu shift does not impact traffic; SSS momentum continues

TAM of 1,700 stores proves realistic

Recent price momentum cause remaining short positions to cover

Source: Bloomberg

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