March and April are my favorite months. Not because spring is here or because the Boys of Summer are back on the baseball diamond. Nope, just because it's time for many companies to publish their annual 10-K reports, which is perhaps the best place to locate juicy details on a company and its operations.
Using the 10-K, investors can study company operations from an annual perspective -- really see the forest rather than the trees of the 10-Q quarterly filings that Wall Street obsesses over. At a minimum, the 10-K provides two years of comparisons but can also include an exhibit with 10 or more years of results. For a serious investor, that's the equivalent of finding 25 delectable hot wings for free for the wing connoisseur.
The business and the competition
For starters, at the beginning of the filing, you can find one of the most thorough business descriptions out there for a company -- one that forms the basis for all of the company overviews found on the Internet, such as Yahoo! Finance. For Buffalo Wild Wings, we learn that the company is a "growing owner, operator, and franchisor of restaurants featuring a variety of boldly flavored, made to order menu items including our Buffalo, New York-style chicken wings spun in any of our signature sauces."
Anybody hungry? Barring the obvious advertising pitches, a pretty thorough description continues for another couple of pages, including store concept, business strategy, etc.
Buffalo Wild Wings also discusses who it considers competition. Although the company won't name names, it generally considers "well-established national, regional, or local chains." In terms of chicken chains, KFC, owned by Yum! Brands (NYSE: YUM ) , and privately held Chick-fil-A come to mind. Casual restaurant chains with a hang-out or sports-bar theme, such as Chili's (owned by Brinker (NYSE: EAT ) ), Applebee's (Nasdaq: APPB ) , or Texas Roadhouse (Nasdaq: TXRH ) , may make for more appropriate competitors. Knowing the competition helps determine how well your company stacks up and can also lead you to other possible investment opportunities.
Key company players and risks
There's also a description of employees and executive officers. Buffalo Wild Wings had just over 6,000 employees as of the end of 2005, and Sally J. Smith is the CEO.
While it's good to know Ms. Smith has been with the company about 12 years, the next section is the one we want to take our time with: risks. It's important to know what the company believes are the biggest matters that could adversely affect its operations. Buffalo Wild Wings identifies that chicken prices greatly affect operating income, that success depends on its ability to open new stores, and that new stores may cannibalize sales at existing stores. Granted, some of the risks are obvious, but you can decide whether you agree or disagree with them and whether the company left any out.
Stores, litigation, financial, and accounting
Since Buffalo Wild Wings' success depends on the number of restaurants it has, it would be good to know how many there actually are. Fortunately, there's a section for companies with retail store locations to describe their properties, listing items such as total number of stores, geographic location, square footage, etc. Buffalo Wild Wings owned 122 and franchised 248 stores as of the end of 2005, with the most stores located in home state Ohio.
There's one section where we want to find as few words as possible: the legal section. That's because we don't want our companies to be jumping through legal hoops if at all possible. Fortunately, Buffalo Wild Wings didn't detail any significant legal proceedings.
Management's discussion and analysis, also known as MD&A, provides perhaps the most substantial overview of a company's operations over the last couple of years. No need to pore over analyst reports or the Internet, because most analysts get their info directly from MD&A. For Buffalo Wild Wings, you can read about how 2005 compared to 2004 and 2004 compared to 2003.
Get ready, accounting sleuths. Next up is the accounting overview, describing the company's accounting policies, and the related financial statements, the balance sheet, income statement, statement of stockholders' equity, and statement of cash flows. To illustrate quickly what a Fool might look for, in Buffalo Wild Wings' consolidated statement of cash flows, we can see that cash flow from operations exceeded net income by a rather wide margin -- always a good sign.
The rest of the 10-K includes an extremely important section called Notes to Consolidated Financial Statements. This is where the CSI-type forensic accounting addicts really start to salivate. That's because the footnotes keep all the gory details on how a company records items in its financial statements. Although it can be difficult and time-consuming, which can turn the average individual investor off, it's important to read the footnotes along with the financial statements to get a good understanding of a company's performance.
The Foolish bottom line
Reading a 10-K can appear daunting, but I would definitely recommend it. The filing is fundamentally the same among companies but can include or exclude certain items depending on the industry. For instance, don't expect a property description for eBay beyond its headquarters. From perusing a 10-K, you may stumble upon something other investors didn't pay enough attention to and turn that knowledge into a potentially profitable investment opportunity.
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