BJRI - HUMMING ALONG

BJRI is one of the casual dining names that defies gravity in the current environment, although the skeptics abound with 64.7% of sell-side ratings calling the stock a “Hold” and 5.9% rating it “Sell”.  Buy-side sentiment became less bearish throughout the quarter, declining from 19% of the float to 16%.

BJRI - HUMMING ALONG - bjri buy side sentiment

BJRI - HUMMING ALONG - bjri sell side rating

Not surprisingly, BJ’s restaurant is currently being awarded a lofty multiple of 17.8x EV/EBITDA NTM.  Considering that DIN is currently trading at 9.3x, as the second most highly-valued company in the casual dining space behind BJRI, investors are clearly willing to pay up for the growth that BJ’s offers. 

In terms of top-line trends, the company bounced back strongly post-recession.  Last quarter’s company same-restaurant sales growth of 7.8% growth was an acceleration from the 4Q10 number despite a far more difficult compare for the first quarter.  Management struck a cautious tone regarding the second quarter, stating on March 20 that, excluding the shift in the Easter holiday and spring break vacations, same-restaurant sales were estimated to be trending at approximately +5.5%. 

This would imply a sequential slowdown in two-year average trends of 70 basis points.  Looking at California Sales Tax receipts for the second quarter, it seems that consumer spending in the Golden State was robust during April, May and June.  The two-year average trend, however, in sales tax receipts was slightly down.  Approximately half of BJRI’s restaurants are in California so the chart below suggests that strong 2Q trends could be in store for BJ’s California units.  

BJRI - HUMMING ALONG - bjri pod1

FORWARD LOOKING COMMENTARY FROM THE 1Q11 EARNINGS CALL

SALES TRENDS - POSITIVE BUT CAUTIOUS OUTLOOK

  • “Sales comparisons continue to be favorable to date for the second quarter.”
  • “Currently, we anticipate having about 3% of menu pricing for the second quarter and then menu pricing in the mid 2% range in both Q3 and Q4 for this year.”
  • “The recovery of the economy, the job market and consumer asset values all continue to be slow, choppy and geographically uneven. Foreclosure rates and unemployment rates are still quite high in many of the states that we operate restaurants. Additionally, as we all know, consumers are facing significantly higher grocery and gasoline prices, which could negatively impact the discretionary spending on restaurant occasions in general going forward.”
  • “So in light of all of these external factors that are outside of our control, our sales volumes remained difficult even for us to reliably predict so we don't even try to publicly predict them. And we also recommend that those who are in the business of predicting sales keep their expectations on the conservative side.”
  • “Additionally our comparable sales comparisons become increasingly more difficult as 2011 progresses.”
  • “Our guest traffic and throughput continue to benefit from improved operational execution driven by more complete management staffing levels and also by what we internally call our Quality Fast operational initiative.”
  • “We've intentionally kept most of our pricing power in reserve during the past couple of years.”
  • “Furthermore, I would expect that our weekly sales average will be a little less than our comparable restaurant sales for at least the second quarter of this year until some of our strong new restaurant openings from the latter part of the second half of 2009 enter our comparable sales base.”
  • “Additionally, as we mentioned, fiscal 2011 will be a 53-week year for us and therefore Q4 will be comprised of 14 weeks as compared to our traditional 13-week quarters.”

SECULAL TRENDS - POSITIVE BIAS

  • “We continue to believe that the battle for casual dining market share is going to be a much more significant factor going forward than it has been historically, primarily because the casual dining segment doesn't have as strong of a macroeconomic tailwind that it enjoyed during the past couple of decades.”
  • “Now having said that, annual casual dining segment sales are still estimated to be well north of $80 billion and annual sales growth for casual dining chains, excluding the independent casual dining operators, is still expected by most observers to be in the 4% to 5% range for the next couple of years. Now that 4% to 5% projected increase in casual dining chain sales would likely be comprised of a 2% to 3% annual increase in capacity and a 2% or so increase in sales on the existing capacity base.”
  • Increased capacity base as measured by total restaurant operating lease in the low double-digits during the next couple of years in the approximate range of 12% to 13%. Additionally, over the longer run, we also expect annual sales increases on our existing capacity base to eventually settle in the 2% to 3% range, assuming a more normalized cost and operating environment.
  • So it's our intention to continue to gain market share at a much higher rate than the expected growth rate for the overall casual dining segment.

DEVELOPMENT

  • “With respect to our new restaurant expansion plan, we've successfully opened two new restaurants during the first quarter of 2011. We remain very pleased with the initial sales volumes of those two new restaurants. We have seven restaurants currently under construction for potential openings later this year. We remain solidly on track to open as many as 12 to 13 new restaurants during 2011 and achieve our capacity growth goal for this year. And we're well under way in securing high quality locations for potential new restaurant openings in 2012.”
  • “Our development plan for this year calls for all of our new restaurants to be developed within a 13 state footprint which will allow us to continue leveraging our brand position, consumer awareness, supply-chain infrastructure and field supervision resources.”
  • “All of our remaining 2011 openings have been identified and secured with signed leases or letters of intent. Seven of these restaurants are currently under construction.”
  • “As of today we still are targeting approximately $75 million in gross capital expenditures for 2011, which we anticipate funding from cash flow from operations as well as our expected landlord allowances and our current cash and investment balances.”
  • “Anticipate opening costs of approximately $1.7 million to $2 million in the second quarter related to the expected three new openings in the quarter plus preopening rent for restaurants expected to open later in 2011.”

COMMODITY COSTS

  • “While we are currently beginning to see some relief in our produce costs, I still anticipate higher cost of sales for the remainder of 2011.
  • “In regard to the cost of sales for the rest of 2011 and based on information available and our expectations as of today, we currently estimate the total cost of our food commodity basket to increase approximately 4% during the second half of 2011. As I mentioned earlier, we started seeing a more pronounced increase in our actual commodity costs towards the March period as compared to January and February. As such, I anticipate cost of sales for the remainder of 2011 to be around 25% or so.”
  • “In regards to labor, we currently do not anticipate significant pressure for the remainder of 2011 for both wages and salaries. As such, the slight increase or decrease in labor as a percent of sales will be more based on the ability to gain leverage on our comparable restaurant sales.”
  • “In general, I would expect to see some increase in operating and occupancy as a percent of sales for the remainder of 2011 due to some higher energy costs. We are still anticipating a 3% increase in these costs per operating week as compared to 2010. As such, much like labor, the change as a percent of sales in operating and occupancy will be more dependent on the leverage obtained from comparable restaurant sales.”
  • “I would anticipate our G&A costs to be slightly less than Q1 costs as a result of some lower recruiting costs but in general I would anticipate G&A to be around the $9.7 million to $10 million per quarter including equity compensation. And as expected it would be slightly greater than that range in that quarter due to the extra week.”

Howard Penney

Managing Director

Rory Green

Analyst