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BJ's Restaurants, Inc. (NASDAQ:BJRI)

Q2 2009 Earnings Call

July 23, 2009 5:00 pm ET

Executives

Diane Scott - Director, Corporate Relations

Jerry Deitchle - Chairman, President and CEO

Greg Levin - EVP, CFO and Secretary

Greg Lynds - EVP and CDO

Analysts

Tony Brenner - Roth Capital Partners

Robert Weiler - Piper Jaffray

Greg Ruedy - Stephens Inc.

Operator

Welcome to the BJ's Restaurants Second Quarter 2009 Results Conference Call. (Operator instructions). This conference is being recorded today for replay. You may access the replay system any time by dialing 1-800-406-7325 or 303-590-3030 and the access code number of 41141111.

I would now turn the conference over to our host Mr. Jerry Deitchle, Chairman and Chief Executive Officer. Please go ahead, sir.

Jerry Deitchle

Thanks, operator, and hello, everybody. I'm Jerry Deitchle with BJ's Restaurants and welcome to our second quarter 2009 investor conference call, which we're also broadcasting live over the Internet.

After the market closed today, we released our financial results for the second quarter for our fiscal year 2009. Our second quarter ended on June 30, 2009 and if you have not seen view our earnings release yet, you can view the full text of our release on our web site at www.bjsrestaurants.com.

Joining me on the call today is Greg Levin, our Executive VP and Chief Financial Officer; Greg Lynds, our Executive VP and Chief Development Officer; and Diane Scott, our Director of Corporate Relations.

The agenda for our call today will be as follows: First, I'll provide a brief business and operational overview for the second quarter of 2009 and also review the status of some of our current key initiatives and expansion plans. Next, Greg Lynds will comment on the status of our new restaurant development pipeline. After that, Greg Levin will comment on our consolidated income statement, our summary balance sheet, and our liquidity position as of the end of the second quarter, and after that, we will be happy to answer your questions and then we are going to finish up the call with short conclusion comment today. We will get our call started right after Diane provides our standard cautionary disclosure with respect to forward-looking statements. Diane, go ahead.

Diane Scott

Our comments on the conference call today will contain forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. Forward-looking statements involve known and unknown risks, uncertainties, and other factors that may cause the actual results, performance, or achievements of the company to be materially different from any future results, performance, or achievements expressed or implied by forward-looking statements. Investors are cautioned that forward-looking statements are not guarantees of future performance and that undue reliance should not be placed on such statements.

Our forward-looking statements speak only as of today's date, July 23, 2009. We undertake no obligation to publicly update or revise any forward-looking statements or to make any other forward-looking statements, whether as a result of new information, future events, or otherwise, unless required to do so by the securities laws.

Investors are referred to the full discussion of risks and uncertainties associated with forward-looking statements contained in the company's filings with the Securities and Exchange Commission.

Jerry Deitchle

Thanks, Diane. Our leadership team is very pleased to report that in spite of the ongoing difficult environment for consumer discretionary spending in general and for dining allocations in particular, BJ’s has continued its forward momentum during the second quarter, as evidenced by our overall favorable financial performance for the quarter. Most importantly BJ’s has continued to gain additional market share gain in the quarter and the estimated 80 billion causal dining segment of the restaurant industry, which is our principal long-term objective.

Obviously in the shorter-term, we have to prudently manage our business in response to the pressures of the current economic recession, and frankly we believe that we have been very effective in balancing both our short and long-term objectives, as evidenced by our recent performance, particularly when compared to that of our similarly situated casual dining competitors in terms of size of operations, available resources and geographical concentration.

Moving to our financial results for the second quarter, when compared to the same quarter last year, our total revenues for the quarter increased about 17% to $107.7 million. Our net income and diluted net income per share for the second quarter increased approximately 52% and 45% respective to $4.4 million and $0.16 a share respectively compared to the same quarter last year.

Our results for the second quarter benefited from a favorable comparison to restaurant pre-opening cost compared to the same quarter of last year, which impacted the quarterly diluted net income per share comparison by approximately $0.04 a share.

We opened just one restaurant during the quarter just ended compared to four openings during the same quarter last year. However, even after adjusting for that comparison we still increased our bottom-line profits when compared to the same quarter last year in spite of the ongoing recession.

Additionally, we were pleased to have maintained our estimated four-wall restaurant operating cash flow margins in the 19% range during the quarter, compared to the same quarter last year, in spite of the deleveraging effect of the 1.3% decline in our comparable restaurant sales during the quarter. Also our estimated four-wall operating cash flow margins for the quarter just ended, achieved a 40 basis point improvement compared to the sequential quarter. Greg Levin will comment on our operating margins in more detail later on our call today.

As we noted in our press release today, our comparable restaurant sales decreased by 1.3% during the second quarter of fiscal 2009, compared to an increase of 0.6% of a percent during the same quarter last year, which we believe will rank BJ's among the better performances on that metric in the casual dining segment for the quarter just ended.

We were also pleased that our performance on that metric for the second quarter will once again outperform the widely-followed Knapp-Track benchmark survey for casual dining comparable sales, which is expected to report an estimated decrease of at least 6% in casual dining comp sales for the second quarter.

In particular, after considering the slowing national economy and BJ's significant presence in the state of California, Arizona and Florida where 46 of our 67 comparable restaurants for the second quarter were located, we believe that BJ's ability to retain the vast majority of our comparable restaurant sales in the aggregate during quarter is a pretty strong testimonial to the continuing popularity, the relevancy and the overall value of the BJ restaurant concept for the consumer, coupled with our steadily improving ability to correctly and consistently execute within the four walls of restaurants.

While we are on the subject of comparable restaurant sales for the first three weeks of fiscal July, our comparable sales comparison for those three weeks in total continues to be soft at minus about 2% when compared to the same three weeks in the third quarter of last year. However, we should add that comp sales for the third week of July improved to flat when compared to the same week last year.

Again, our weekly sales comparisons continue to quite choppy during the current recession and as a result, are really of much value and helping us to accurately predict the future. But, we always caution that our results for any partial period of time do not necessarily represent what our results might be for a full period of time.

I think its also important to keep in mind that BJ's is still a relatively small, more of a regional competitive player in the varied menu or grilling bar or pizza and beer segment of casual dining. Most of our direct competitors in the segment have greater numbers of restaurants opening, greater penetration of most of our major markets than we do. A greater media spending and capital resources than we do. They have got greater economies to scale than we do.

But having said that, being smaller also enables us to be a little more nimble, maybe a little quicker and more agile in terms of winding up and allocating what resources we do have for a more speedy and effective execution. We also have an intense mindset at our company that while we might be outspent by our largest competitors, we are sure they are not going to be outworked by us.

So not only will we continue to be relentless in terms of outworking our peers during these tough times but we are also going to continue to prudently invest the overall quality in differentiation of the BJ's concept and the strength of our restaurant support infrastructure.

For example, during the first half of the year, we retrofitted eight of our existing restaurants with our expanded guest tap beer offerings in order to strengthen our competitive position as the leading merchant of high quality craft brewer in the causal dining space. In these restaurants that we offer up to 24 guest craft beers on tap, in addition to our proprietary BJ's beer on taps and we see nothing but favorable responses from our guest, as well as better per guest economics.

Additionally, we have upgraded three more of our older restaurants with our new 103 inch plasma television technology. We know of no other causal dining concept that has had the courage to step up to this type of an investment and believe me, our guest love what we have done. We believe the BJ's ranks among the leaders in audiovisual technology for casual dining and we are very committed to maintaining this competitive advantage, so that we continue to stay relevant and contemporary with consumer.

We are continuing to move forward with several major re-models and interior-exterior enhancements of some of our older existing restaurants this year because we have got to preserve the longer run productivity of our [cash flows]. In addition to investing back into our restaurant facilities, we also continued to invest in our menu and operational processes to further raise the overall quality of our concept and our four wall execution.

While some of our peers have adopted a save your way to success strategy during these tough times, our strategy is a little bit different. Our strategy continues to be a grow your way to success strategy , but only in a productive and in a effective manner. As most of our investors know, during this past quarter we rolled out our most comprehensive menu update in many year and our new menu and beverages creations have been extremely well received by our guests.

In order to properly implement this extensive menu change we prudently increased the amount of our training investment to support this roll out. We also invested an informal sampling program to our new menu creation. We believe all of these investments are beginning to pay of very nicely as most of our new menu items have risen to become the top sellers in their respective menu categories and have also yielded a favorable impact on our average gross profit per guest.

We also continued to make investment in technological tool sets in what we call quality, [fast] operational systems that are intended to enable our restaurant operators that could become even more productive and efficient in their four wall execution.

We are currently testing an improved version of our automated kitchen display system that we rolled our a couple of years ago and its associated, order expediting and food vending processes that in a one restaurant to us has improved the speed of service in our restaurants and also improved our labor productivity. So, based on the results of that one restaurants test we are planning to expand this test for more restaurants this coming quarter. And we’ve just begun recently implementing a new rate time or quoting system for our front desk operations that’s intended to reduce the chances of creating false waits and simply over quoting the wait times to our guests. With our industry leading guest traffic per square foot, we absolutely can’t afford to be misquoting wait times, particularly during peak meal periods. We want to process every bit of business that’s being offered to us.

In addition to these two initiatives, we have other sales building in productivity initiatives, it’s under test or plan to rollout during the next six months or so and we will be happy to update you on those initiatives when they reach our restaurant.

In addition to our four wall productivity initiatives, last year we made a decision to increase our media marketing spending level to about 1% of sales to more effectively communicate with our customers during this recession. We currently plan to maintain that general level marketing investment during the rest of this year although the amount for any given quarter might be slightly more or slightly less depending on the timing of our internal marketing in the calendar of the events.

While our media war chest is still very small compared to the collective hundreds of millions of dollars spent annually by some of our larger mass market, casual dining competitors, we believe that we are strategically investing our limited resources very efficiently using free standing newspaper inserts, restaurant point of purchase merchandising, E-mail database marketing, and an increasing use of online media including Yahoo, Google, and Facebook, which we have initially found to be very effective for us.

Additionally, we would like to also comment that while our media promotions are intentionally designed to convey a value message during the recession, the offerings that we are promoting themselves do not represent significant discounts in terms of absolute dollars or profit margins.

Basically our media promotions are targeted to do one of four things; a, promote existing menu items that are designed to be sold at everyday low prices like our lunch specials; b, introduce new guest services with a one-time incentive to try it, like our recent incentive to try our new online ordering capability; c, introduce new menu items at their everyday low prices, like our new flatbread appetizer line; and d, in certain isolated trade areas that really need a special stimulus offer a discount of a large purchase amount, where there is a tendency for the guest to trade up anyway.

So we work very, very hard to ensure that our promotions are financially prudent. They are fairly balanced, and really represent a proportionate response to the pressures of the recession in each trade area. We plan to follow the same strategic and focused approach to our promotions in key events, media events for the remainder of this year to maximize the effectiveness of our overall media stack.

We have also mentioned on our last couple of conference calls that our leadership team has never felt better about the factors in BJ's business that we can control and we still feel that way. We believe that our restaurant operators continued to do a good job of managing our food waste, the meals, our labor productivity and the other controllable costs and expenses within the four walls of our restaurants during the second quarter. Although we all recognized but we still have significant opportunities to improve our productivity and efficiency in many of our restaurants.

Additionally, we believe that our G&A expenses were also well controlled during the quarter, and that our infrastructure is solidly in place to allow us begin leverage as we continue to grow our business. However, as we have already mentioned, the BJ's is still a relatively small regional competitor. We've only got 85 restaurants opened as of today, and we are still one of the few casual dining concepts out there today with a pretty active new unit development effort underway.

So we've got to continue to make incremental G&A investments in our restaurant manager recruiting, training, talent development, recognition, and retention programs, because talent development and the restaurant manager talent base is the most critical resource requirement for future growth for us and our peer company operations business model. We can only grow our restaurant base as fast as we can recruit, train, develop, and became the very best restaurant managers available.

Speaking of growing and capturing market share in our new restaurant development plan remains in excellent shape, and now I am going to turn the call over to Greg Lynds, our Chief Development Officer for his update on our new restaurant development pipeline. Greg, go ahead.

Greg Lynds

Thanks, Jerry. As we noted in our press release today, our 2009 new restaurant development pipeline remains in excellent shape, and we continue to be very pleased with the quality and the size in our new pipeline this year. Our shorter-term new restaurant development plans continues to focus on taking advantage of the softening commercial real estate market so that we can better secure prime size and densely populated more mature trade areas with more favorable lease economics and also with lower construction costs.

We've opened three restaurants so far during 2009, including one that we opened at the end of the second quarter on June 29 in Mesquite, Texas which is the suburb of Dallas. As I mentioned in our last call, we have two openings in the first quarter this year, in Henderson, Nevada and Gainesville, Florida. Within the next few weeks, we plan to open our fourth new restaurant of 2009 in Downey, California. This restaurant is located within the successful Stone Oak regional shopping center in a mature, densely populated trade area, like here in home court, Southern California.

As we mentioned in our press release today, including Downey, we have seven new restaurants under construction. We currently expect to open all seven before the end of this year. By doing so, we would achieve our previously stated goal for 2009 to increase our total restaurant operating weeks by 15% to 16%.

As we said before, it's difficult to precisely predict the actual timing of our new restaurant openings due to many factors that are not under our control. So with that in mind as of today, we currently expect to open two restaurants in the third quarter and five restaurants in the fourth quarter.

As I mentioned earlier, the construction cost for our new restaurants that we plan to open this year coming in, in less than we originally budgeted. Based on our latest information, we are currently expecting an average cost reduction of approximately 250,000 to build each of our 10 restaurants this year. Most of this cost reduction is coming from the lower construction labor cost. We currently expect these average costs reductions to continue into next year.

Thinking of next year, we are in a process of finalizing our 2010 new restaurants that are in a pipeline during the next 30 to 60 days, and we should be in a good shape and good position to share more detail about our expansion plans for next year on our third quarter Investor Conference call in October.

By the ongoing recession, the credit crunch has got the many real estate developers to postpone or cancel most of their new retail projects. There are still some attractive locations available for the new BJ's restaurants in established retail projects. A new restaurant development strategy has always been centered on AAA quality locations, densely populated and more mature trade areas with proven levels of retail sales, all within our current 13 states footprint of operations. We will maintain this discipline and we analyze to secure our future pipelines or looking forward to another relatively robust schedule of new restaurant openings for 2010.

Longer term we continue to believe that we have room to open at least 300 BJ's Restaurants across the country over time. With only 85 restaurants opened today, we have plenty of quality growth opportunities on our core California and Texas market and we have now established a strong national ground presence and national footprint from California to Florida and into the Ohio valley.

Jerry, back to you.

Jerry Deitchle

We continue to believe that BJ's four wall economics were very sound, and they currently support a continued steady pace of new restaurant expansion. As Greg mentioned, there are certainly not any lack of sites in general to support our longer-term expansion plan, but currently as a result of the recent slowdown in retail project development, there are less visibility of high quality sites available in the trade areas where we want to develop that will best leverage our supply chain, our field supervision infrastructure and our overall brand awareness with consumers.

Overall, it's going to affect the quality over quantity when it comes to our new restaurant locations. So we will keep you informed as to the status of our potential 2010 new restaurant development pipeline as the rest of this year unfolds. One benefit of our reduced pace of plan expansion this year is that we should be able to finance our new restaurant expansion this year, primarily with internally generated cash from operations than our committed landlord construction contribution. So we believe that’s a pretty favorable position to be in.

Before I turn the call over to Greg Levin, I'd just like to reemphasize that here at BJ's, we have a sales building mentality, first and foremost. It’s clear that while the current recessions presents some definite challenges in retaining sales as much as building sales, our fundamental operational mindset in BJ's is to work hard, to try to overwhelm the events instead of letting the events overwhelm us.

By doing so, we believe that BJ's can be a high quality early recovery opportunity for even more consumers and more investors when the current recession abate. Until then, we have to be very, very careful to maintain a very balanced focus on the achievement of both our short-term and long-term key initiatives and expansion plans, as we continue to do our best to navigate our business through the current recession.

Now, I’m going to turn the call over to Greg Levin, our CFO for his comments. Greg, go ahead.

Greg Levin

For those of you that have been following BJ’s over the last year, we have mentioned that our softness in the comparable restaurant sales metric primarily began in the Sacramento, Central California region, the Inland Empire areas of California, and the Phoenix, Arizona market. These were regions of high growth over the last several years and the housing meltdown and related slowdown and overall construction activity has taken their toll on these local economies. As we stated before, we have 10 restaurants in the Sacramento, Central California region and the Inland Empire areas of California and three restaurants in the Phoenix, Arizona market that were in our comparable restaurant base since the beginning of 2008.

These 13 restaurants had comparable restaurant sales decreases in the 6% to 8% range beginning in the first quarter of 2008, and then gradually improved through all of last year. In the first quarter of 2009, these same 13 restaurants were only down approximately 6/10th of a 1%. In the second these, 13 restaurants had flat comparable restaurant sales, and therefore, they actually exceeded the company's comparable restaurant sales for the second quarter.

However, as I mentioned before and as we expected, we continue to see pressure on our comparable restaurant sales from our newer restaurants as they come into the comparable restaurant sales base. These restaurants were opened in 2007 in the pre-recessionary environment, and are just now becoming part of the comparable restaurant base after their first 18 months of operations.

If we exclude these 13 restaurants that obviously came into our comparable sales base that opened really in this pre-recessionary period, our overall comparable sales metric for our other 55 comparable restaurants would have been negative 0.6%. I do want to be clear on this, even though the costs of 2007 restaurants are pressuring our comparable restaurant base, we are pleased with the aggregate overall averaging sales for these restaurants.

The fact of the matter is as I mentioned before, these restaurants were simply opened in a pre-recessionary environment, and are coming into the comparable restaurant base in a very challenging economic period for our country. This way, the class of 2007 is very geographically dispersed. So there is now one specific region or area that is driving the negative comparable restaurant sales for this class. In 2007, we opened restaurants in Florida, Oklahoma, Ohio, Kansas and California.

During the second quarter our estimated menu pricing factor was approximately 3%. We did not add any meaningful pricing when we implemented our new menu earlier this quarter. At the current time, we expect menu pricing to be around 2.8% for the third quarter. Any additional menu pricing will be evaluated before we implement our next menu update, which will probably come in the mid-October timeframe.

In regards to the middle of our P&L, our cost of sales of 24.9% of sales were 10 basis points lower than last year's second quarter and 10 basis points higher than the first quarter of 2009. A slight decrease compared to prior year is primarily due to higher dough, bread, and chicken cost compared to the second quarter of 2008, offset by lower cheese prices and menu pricing that we implemented in the second half of 2008.

As you may recall, the majority of our commodity cost increases in 2008 occurred in the middle of the year and then subsided towards the end of the year. Sequentially, compared to Q1, our commodity costs were pretty consistent. The slight uptick was really a result of some high costs related to the introduction of our new menu. Our labor benefits during the second quarter with 50 basis points lower than last year's second quarter. This reduction was primarily due to lower worker's compensation expense and management labor as a percent of sales, offset by higher hourly labor compared to last year.

The higher hourly labor resulted from the additional training for our new menu that rolled during the first week of June. At BJ's, we continue to staff our restaurants to take excellent care of our guests and to capture every sales dollar that we can in a productive and efficient manner. We had not specifically put in place any changes to our labor staffing metrics that will result in less hours for guests serve in our restaurants.

We believe in these difficult times when consumers are going to use more prudent determining what he that now more than ever we need to exceed the guest dining experience on all levels and frankly that starts with service and hospitality. We are not sure how restaurants can ever expect to grow their comparable restaurant sales by reducing the guest dining experience.

Sequentially, labor benefits decreased 70 basis points from the first quarter of 2009. This decrease is primarily a result of lower payroll taxes, as we incur higher payroll taxes at the beginning of each year, as we work through many state and federal minimum tax requirement. Additionally, our management labor cost as a percent of sales has been lower in the second quarter compared to the first quarter, really resulting from sales leverage of higher weekly sales averages.

The savings was offset by higher hourly labor as a percent of sales, again related to the training and implementation of our new June menu. On an overall basis, hourly wages have been flat over the last few quarters, and they are really only up about a 0.5% compared to the second quarter of 2008.

Our operating and occupancy costs as a percentage of sales increased 70 basis points to 21.4%. The majority of this increase is due to the planned higher marketing costs as a percent of sales. As we previously mentioned beginning in the second half of 2008, we made a business decision to increase our marketing costs closer to 1% plus of sales compared to about 4/10th of a 1% in prior quarters. We believe that our incremental investment in marketing has generated a good return as evidenced by our continued outperformance on comparable restaurant sales, compared to the industry and our overall profit margin trends.

Before I move on to G&A, I do want to point out that over the last four quarters, we had gradually improved our restaurant level cash margins to just slightly under 19% as of the end of this second quarter. While 19% of restaurant level cash flow number is say top quartile number compared to many of our peer restaurant companies, at BJ's, as we said before, our goal is to continually move this number closer to its historical average, which is around 20%.

We believe we have the concept, the people and the technology to continually enhance the business to become more productive within the four walls of the restaurant. We understand that the margins and the churns in this business are determined by revenues, and therefore, our focus is to continue to drive top-line revenues and not save our way to success. Therefore, as Jerry mentioned, we will continue to invest in our business to enhance the differentiation, quality, and four wall productivity so that we can continue to be a market taker in the casual dining industry.

Moving back to our results for the second quarter; our general & administrative expenses decreased 50 basis points in the prior year to 7.1% of sales, including G&A for both 2009 and 2008 is approximately 600,000 of equity compensation, which is really about 60 basis points in 2009 and 70 basis points for 2008. On an absolute dollar basis, G&A increased about 600,000 and its increase in G&A is the result of increased costs of field supervision and support costs, plus some additional costs related to marketing, research and other consulting and legal costs.

Our depreciation and amortization was 5.5% of sales, which was pretty much in line sequentially. Our restaurants opening expenses were approximately 700,000 during the quarter of 2009, which is primarily the cost to open our new restaurants in the second quarter, plus about 225,000 non-cash pre-opening rent for the seven additional restaurants expected to open this year. Our cash rate for the second quarter was 30.5%, which is in line with our expectations of an annual effective tax rate between 30% and 31% for the year.

Before I turn the call back over to Jerry, let me spend a couple of minutes commenting on our liquidity position and also providing some forward-looking commentary for the rest of 2009. In regards to our auction rate securities, we were able to redeem an additional 1.19 of these securities during the second quarter, and they were all redeemed at par. As such, we currently own 33.3 million in face or par value auction rate securities. The auction rate securities as we mentioned for are all student loan collateralized obligations, and these student loans are public student loans guaranteed by the U.S. government under the Federal Family Education Loan Program, or FFELP program.

I do want to remind investors that the interest we earn on our auction rate securities is tax exempt. For my understanding, because we own the tax exempt student loan auction rate securities, our investments continue to pay interest during the penalty period and do not reset at zero for any period of time unlike some of the other student loan auction rate securities. However, as credit spreads have come down for LIBOR and other municipal indices so to of our interest rate returns for our auction rate securities. We are currently generating a return of approximately 1% for taxes or 1.4% on a tax effective basis on these auction rate securities.

Again, because of the illiquidity of these investments at the current time, in accordance with FASB 157, we continue to obtain third-party valuations for our investments. Based on these valuations we have currently recorded a temporarily impairment in the value of these investments of approximately 3.5 million or about 10.6% of the face value. This temporary impairment once recorded in the other comprehensive income, which is part of shareholders' equity on our balance sheet, and in accordance with FASB 115 accounting for certain investments in debt and equity securities.

In regards to our liquidity, we had generated approximately $23 million in EBITDA for the second quarter and paid down $2.5 million on our line of credit to-date. We ended the second quarter with just under $13 million of cash and $7 million outstanding on our line of credit. Our line of credit is for $45 million and does not expire until 2012.

Our CapEx to-date is approximately $21.7 million and that is gross of any tenant improvement allowance. We still anticipate our CapEx to be approximately $56 million to $60 million before any tenant improvement allowance. We anticipate tenant improvement allowance to be about $12 million in 2009, reducing our net use of cash for capital investments to be in the $45 million to $48 million range, which is in line with our original expectations for the year.

As Jerry mentioned, we anticipate funding our capital expenditures primarily from our cash balances, operating cash flow and our landlord allowances. At the current time, we do not expect to draw meaningfully on our line of credit in order to achieve our growth plans and initiatives for 2009.

I will now provide some forward-looking commentary on sales and margins for the rest of 2009, and this information is based on our expectations as of this date. All of this commentary is subjected to the risks and uncertainties associated with forward-looking statements as discussed in our filings with the SEC.

We currently continue to believe the environment will remain challenging for the consumer at least for the remainder of this year. We expect that the national unemployment rate will continue to increase, not to mention the fact that over two-thirds of our restaurants are in states with unemployment rates above the national average. Additionally, consumers are now increasing their saving rate to levels not seen over the last several years, and being very prudent in their discretionary spending. While most experts believe this will make our country stronger in the long term, it will cost some short-term pressure on many consumer discretionary companies.

Also as we previously mentioned, we expect our class of 2007 restaurants that were opened before the current recessionary environment will continue to pressure our overall comparable restaurant sales metric for the rest of 2009. Therefore, until we begin to see some improvement in general economic conditions in those states and trade areas, where we have significant concentrations of restaurants, as reflected by a topping out of the unemployment rate and/or an uptick in consumer spending, it will be very difficult to drive meaningful increases in overall guest traffic, which in our view is really the key to not only taking pressure off our restaurant level margins, but also giving us an opportunity to gradually improve those margins back to pre-recession levels.

As Jerry mentioned, our comparable restaurant sales three weeks into July are running around negative 2%. The first two weeks of July started of relatively slow due to the 4th of July holiday weekend and still from overlap of last year's stimulus checks. This last week our comparable restaurant sales were essentially flat, which is more consistent with our recent trends over the last year, which have been in the flat to negative 1% range.

In regard to restaurant weeks, I would anticipate an increase of approximately 12% or so both for Q3 and Q4, and as we have previously mentioned for 2009, we continue to anticipate a decrease in our absolute weekly sales averages in the 2% to 4% range.

In regards to cost of sales, our supply chain group has secured about 70% of our commodities under contract for the remainder of 2009. The major items not entirely under contract right now are cheese, which is about 9% of our cost of sales and Angus beef, which is about 6% of our cost of sales. On both cheese and Angus beef about 30% of our usage is under contract with the remaining 70% on the spot market.

Based on these contracts, as well as the current spot market for our items that are not contracted, we expect our commodity costs to be relatively flat from where they have been for the first part of this year. Therefore, I will anticipate our cost of sales to remain slightly below 25%. I do want to mention that in the fourth quarter we anticipate opening of the five restaurants, and therefore, we could see a slight increase in cost of sales in Q4 due to inefficiencies from the new restaurants compared to prior quarters.

Our supply chain group is currently working on contracts for 2010, and we anticipate having some of these contracts fully negotiated before our Q3 conference call. At that time, we will update our investors regarding our expectations for 2010 food inflation. I anticipate labor slightly increasing from its 34.7% range in Q2 to the low 35% range for the second half of this year. The pressure of labor sequentially is primarily due to the increased restaurant openings, especially in Q4, which we anticipate opening five new restaurants as I mentioned.

Operating occupancy cost should continue to be in the mid-21% range, that’s based on our current marketing plan and the current cost of energy. In regards to pre-opening cost for Q3, I would anticipated about $1.2 million or so related to the opening of two new restaurants and pre-opening rent for restaurants expected to open in Q4. In regards to Q4, I’d expect pre-opening cost of about $2.3 million to $2.5 million related to the five restaurants we expect to open as well as pre-opening rent for restaurants expected to open in 2010.

As I previously mentioned, we expect our tax rate to be in the 30% to 31% range for 2009, and our diluted shares outstanding for 2009 will likely be in the $27 million range as well.

Jerry, back to you.

Jerry Deitchle

Thanks, Greg, for a very detailed review. Now, what we are going to do is open up the call for our question-and-answer session, and then after that, we will have a concluding comment for everybody. So operator, we are ready for some questions.

Question-and-Answer Session

Operator

(Operator Instructions). Our first question comes from Matt Difrisco with Oppenheimer. Please go ahead.

Unidentified Analyst

Hi. This is (inaudible) for Matt Difrisco. Just a quick question. Has the percentage of takeout sales increased at all with the delivery and growth side initiative that you rolled out, and in terms of same-store sales like day part, specifically launch, have you seen any change as a result of your marketing trend?

Greg Levin

In regards to the takeout and delivery side of our business, we have continued to see that number grow, specifically the takeout is grown probably about 1% or so since we started the initiatives really in the end of the first half of 2008. Second part, in regards to the marketing, have we seen any major changes in our day part? We really haven't. Lot of our marketing last year and earlier this year was to talk about our lunch menu, the value portion side of thing. We've seen people gravitate to that. It's now about a third of our lunch menu overall. So when we look at the overall shift, overall part of our business between lunch and dinner, it remained pretty consistent from period-to-period.

Operator

Our next question comes from the line of Tony Brenner with Roth Capital Partners. Please go ahead, sir.

Tony Brenner - Roth Capital Partners

As I recall, a major reason that your new store expansion rate slowed from 20% plus to about 15% for this year was the lack of new commercial development in the tour market areas. Given the current state of the commercial real estate profit, is it reasonable to conclude that your expansion rates will remain at 15% or less for a while?

Jerry Deitchle

We're in the process of putting together our pipeline for next year. I think we previously mentioned on our last conference call, and perhaps some other investor meetings that we've had over the last quarter, that we have as many as 50 to 55 different sites that are in various stages of evaluation in our real estate pipeline today. All of these sites meet our general requirements for new restaurant development in terms of demographics, income levels, co-tenancies and so for.

The real challenge is, is to get the various developers that we are in conversations with on a lot of these particular sites that really come up with firm commitments as to when these sites could be made available to us for our development. That’s really been the big change over the past year or two.

As we've been trying to really get our developers to be much more specific with their timing of the delivery to us so that we can properly sequence all of the available sites and get them into large development plan and line up all other resources that we have been lined up on our side from construction and pre-opening side of it. So what we are trying to do is to take all of these particular sites that were in various stages of negotiation with.

We are trying to really focus on filling in our established trade areas this year to really work on leverage in our overall business model. So we are trying to stay very disciplined within our 13-state footprint. As the pipeline becomes more and more definitive, and we get more and more specific landlord commitment over the next three or four months, then I think we'll be in a position to announce a very definitive new restaurant development plan for 2010.

We've just been very, very careful about trying to get ahead of it before it's really finalized, Tony, because one thing in the five years, almost five years that I've been involved with BJ's and Greg Lynds just had sixth anniversary with our company yesterday. One thing that we have been very, very proud of is that we consistently delivered and set and then done what we said we were going to do with respect to the number of new restaurants and the number of operating weeks that we were committing to at the beginning of each year. We are not going to start breaking that record anytime soon.

Greg, do you want to add any comments to that?

Greg Lynds

I think you caught it pretty well, Jerry. I mean as the landlords and the institutional investors start to take back some of the vacancies, vacant restaurants and large big boxes, we believe there would be more available high quality sites available for us.

Tony Brenner - Roth Capital Partners

As you move closer to 100 restaurants and over a 100 restaurants, does scale become a factor in your ability to sustain 20% to 25% increases in operating weeks?

Greg Lynds

In terms of our infrastructure, we opened 15 restaurants in 2008 with a very solid infrastructure that frankly was capable of opening even more restaurants. During this year, we made some slight adjustments at that infrastructure, but frankly the vast majority of that new restaurant opening infrastructure that we have is still in place, still intact. We have not significantly reduced it. So I think our infrastructure is in pretty good shape to flex back up to 15 or 16 restaurants, given where it currently stands today. I think beyond that, you would see a normal scaling of additional investment, if we were going to commit to opening even greater numbers of restaurants in the future.

Operator

Our next question comes from the line of with Brad Ludington with KeyBanc Capital Markets. Please go ahead.

Unidentified Analyst

This is (inaudible) for Brad Ludington actually. I had a question on the new distribution agreement, are you able to comment now? Were you able to bring down fuel surcharges? Or were there any other material changes that we should be aware of?

Jerry Deitchle

There really aren’t any really material changes to the agreement. It does give us an increasing ability to leverage as we begin to cluster within certain trade areas and within certain distribution houses within the network services of restaurants over time. The fuel surcharge formulas have been adjusted. We believe that they will certainly benefit us going forward, but when you look at the overall economics of the new distribution agreement, the major advantage it provides BJ's is the ability to leverage as we continue to cluster and really add more velocity in terms of purchases from certain distribution houses as time goes on as we continue our development.

Unidentified Analyst

Could you give us little more color on marketing costs and the timing of when we can expect that to hit in the second half?

Jerry Deitchle

I think our overall goal is to run our overall media expenses at roughly 1% of sales. Again as I mentioned in our conference call comments, it could be a little more or little less than any given quarter. We are not anticipating any material changes for the second half of the year. So I think probably sticking with the 1% overall is the best that we could advise at this time.

Operator

Our next question comes from (inaudible) Robert W. Baird. Please go ahead.

Unidentified Analyst

This is (inaudible) for David Tarantino. It looks like the spread between average weekly sales and the comps narrowed a bit this quarter compared to the recent trend. I wondered if you could just talk about what's driving that shift and if you expect that to continue in the back half?

Greg Levin

In regards to thinking about how that shift or why that spread is narrowing, most of that really has to do with our development strategy, frankly. Back in 2007, we started making those decisions to move nationally. We opened up new markets and did not have brand awareness in those markets. Over the last year, we continued to cluster as Jerry and want to sell in existing markets. As a result, we got more restaurants in our development pipeline that are going to be in California and Texas. Those are areas that end up having a little bit higher weekly sales average again because of that branding, and I think as we continue to sell in, in certain areas, that will help us again with those weekly sales averages versus sometime going into brand new markets.

Unidentified Analyst

So is it safe to say that we could expect something similar in the back half of the year?

Greg Levin

I think that’s reasonable. Again, I talked about a 2% to 4% average weekly sales, absolute decrease in regards to thinking about modeling. I think the first quarter, we were down 1.5%. This quarter, we were down 2.3%. I remember on the first quarter, everybody going, hey, just finished down 1.5%, why you're paying down 3 to 4? Well, unfortunately, it's still choppy out there. We don't have a great crystal ball and I think honestly, it's probably going to be somewhere within that 2% to 4% reduction on absolute average weekly sales.

Unidentified Analyst

Then, if I could just clarify, did I hear you correctly that you are expecting labor in the back half of the year to be low 35% range?

Greg Levin

When I say low 35, it's probably that anywhere from 35 to 35.3. We do have five restaurants that are opening up in the fourth quarter. There is going to inefficiencies with that. There is no doubt about it that of course a lot of restaurant companies are getting productivity enhancements in this first half of the year, as the development has slowed down. In our case five restaurants in the fourth quarter will actually be more restaurants than what we opened in last year's fourth quarter and I think you have to take that under advisement.

Operator

Our next question comes from the line of Robert Weiler with Piper Jaffray. Please go ahead.

Robert Weiler - Piper Jaffray

First question, regionally speaking you guys made comments during the call about California and Inland Empire improving since the first half of 2008. If that's the case, is there any regions that you have been all try to identify that are dragging down restaurants, or is it just all your new stores that I know are geographically diverse across the country? Is there any one region I guess that dragging on same-store sales?

Greg Levin

Not really. It's really the new restaurants. It's pretty geographically dispersed. We do have areas like the Bay area continues to do well for us. Certain areas of Texas continue to do well for us. I don’t see anything myself that’s specific from a region standpoint. It's really the class of '07 right now coming into the comp base again opening in kind of that pre-recessionary time.

Robert Weiler - Piper Jaffray

Are you guys able to quantify in anyway the impact of the stimulus on both your EPS or same-store sales in the second quarter?

Jerry Deitchle

I don’t think we have any way of knowing what that benefit would have been.

Robert Weiler - Piper Jaffray

Why do you think you guys are outperforming, the benchmark in Knapp-Track down 6%, and I guess I just want to understand the value message in the marketing, but it's not discounting, it's just the value you are getting for your dollars. Is that what you are campaigning in the marketing what seems to be resonating, is that what it is?

Jerry Deitchle

This is Jerry. As I mentioned in our prepared remarks, we have a p shooter compared to our competitor's cannons and when it comes to the ability to market in the mass media, we have a very small limited budget. We're very opportunistic with it. We have the ability to rifle shoot it a little bit, probably a little bit better with specific offers targeted to specific trade areas and specific restaurants versus having to rely on a mass market television or radio campaign. I think that does play to our advantage of being a little bit smaller, a little bit more nimble or a little bit more agile.

I think when you look at our overall sales performance versus Knapp-Track, I think you have to look to the strength of the concept itself. We have a higher quality more differentiated casual dining concept. It's probably a little more contemporary, a little more relevant with much more energy and appeal than most of the mass market casual dining concepts out there that have been around for many, many years and that have become a little tired and a little more commoditize, in fact greatly commoditized over the past several years in terms of their overall presentation to the consumer.

When you take a look at what we offer, the quality, the differentiation, the variety of the menu items, our signature menu items in the facility that we offer it in, at the price point that we offer and our average check of around $12, that's equal to or even less than some of the average checks to some of mass market competitors.

So I really do believe that that's been one of the principal reasons why despite our unfavorable geographical penetration here in California and Arizona and Florida and Nevada and some of the states that felt the recession a little harder and a little bit faster and some of the other states in the country. Plus, we've also been working very, very hard to improve our overall ability to execute the concept within the four walls of our restaurants and we made significant investment over the past two and three years to enable our operators to execute the concept a little more productively and efficiently.

So when you combine the basic positioning of the concept and our average check of our ability to execute a little bit better, I think that has helped to carry the day with respect to the vast majority of our competitors, and that’s why we continue to make these prudent investment in the menu and in our operating systems and in our technology and in our facilities to maintain that competitive advantage going forward even through times are tough. So, that would be I think our best explanation.

Robert Weiler - Piper Jaffray

On G&A, what are your expectations for the second half of the year?

Greg Levin

I didn’t give there anything specific on that, but I would tend to say that G&A is going to be pretty much in line with what you saw on Q2. It could bump up a little bit just because the restaurants are being shipped a little bit to the back-end here. We’re going to end up having more travel and lodging costs that are going to come than what you saw in Q2.

Robert Weiler - Piper Jaffray

In line as far as dollar amount or percentage?

Greg Levin

In line as far as dollar amounts and then probably going to bump up a little but from Q2 because of that travel and related housing and lodging costs.

Operator

(Operator Instructions). Our next question comes from Greg Ruedy with Stephens Inc. Please go ahead.

Greg Ruedy - Stephens Inc.

California has balanced their budget and it appears that they’ve pushed some of those, they’ve used some accounting tricks to push it down on to the local municipalities, I know it’s early, but is there anything anecdotally you are hearing from market-by-market stores on what that impact could be?

Greg Levin

No, Greg. I think the combination of one. It's early as you mentioned. It’s obviously in the news here and people are aware of it, but I still think and I’ve said this before that really California has been dominated really from the housing market and the related industries that came up from the housing market. I still think the housing issues and the foreclosure rates and the unemployment rates in California are more important right now to our overall underlying business than the budget. The budget matters, don't get me wrong, but I think the core is still that unemployment related to housing in the housing market out here in California.

Greg Ruedy - Stephens Inc.

Last year you had an initiative where you began opening early on the weekend, how many (inaudible) placed on, what’s that boost same-store sales been?

Greg Levin

I don’t know the number to comp sales, but it’s really what we are hearing on Southern California restaurants. It hasn’t been anything significant in regards to comp sales.

Greg Ruedy - Stephens Inc.

Jerry, you talked about expanding the guest path program. Are there opportunities to maybe look at something like an expansion of import premium bottles?

Jerry Deitchle

Not, at this time. I think we already have a very wide selection of imported bottled craft beer. I think our inventory level is manageable given the demand from our guest. Obviously, if our guest were to start pounding the table and start demanding more, we’ve obviously offered to them in greater mass quantities, but the vast majority of our guests consume beer off tap. They love the fresh beer, and that's really what I think we're going to continue to focus on going forward.

Greg Ruedy - Stephens Inc.

Any change for the mix from the alcohol mix from the guest path program today?

Jerry Deitchle

No, not really at all. As we put in that expand in guest path program into our established restaurants, we have seen very little if any cannibalization of sales of our own BJ's beer. We've seen incremental consumption by consumers related to our guest beers and obviously, when guests are increasing their consumption of beers at pretty attracted margins to us that has a favorable impact on the average check per guest.

So we have seen nothing but favorable comments from our guests in terms of how they love the presentation and obviously from an economic perspective, it's been a win-win for us. It really further solidifies our desire positioning as the leading marketer and merchandiser of high quality craft beers in casual dining. That's very, very important to BJ's positioning as we continued to evolve the concept and so far it's worked very, very nicely for us.

Greg Ruedy - Stephens Inc.

Thank you.

Jerry Deitchle

I think that's all of the questions that we have today, and I want to thank everybody for their good questions. You know every restaurant operator in America would like to have better comp sales right now, and so would we and we realized that it's necessary to focus on the shorter-term pressures that we're all currently facing in terms of reduced customer traffic and comp sales. It's also very important to keep an eye on the longer-term opportunity for each restaurant concepted company.

You know basically when the economy does turn around, which restaurant concepting companies are going to be the ones that either a, have not damaged their brands and operations by overreacting to the current recession either through excessive cost cutting or differing spending or excessive discounting and b, are the ones that have a more leverage able business model in place that can better capture the benefits of sales increases when they do come.

When we look at our company and our competitive positioning, we think that BJ's is a pretty special casual dining company, with an equally special opportunity to gain market share in a very margin fragmented space, that’s absolutely begging for more innovation, for more freshness, for more energy, for more relevance and for more quality and differentiation and it could value for the consumer. These are the strengths of the BJ's restaurant concept and we are going to maintain our unwavering conviction and courage to continue to play to these strengths during doing both good times and tough times.

There are three principal drivers of enterprise value in most same-store consumer companies; unit expansion, four wall unit economics and overall leverage of the business model. So how does BJ's match up on each of those three key drivers? Well, we are continuing to open new restaurants with plenty of room for more, but we are doing it with strong discipline. We are also working hard to preserve our unit economics as we grow in spite of the recession, thanks to the investments that we've made and we continue to make in better operational talent and better operational systems.

Finally, we worked very hard during the past few years to get our infrastructure established, to get our business models set up or steadily increasing leverage as we go. Sp recession or no recession, we are going to keep moving forward. We believe that BJ's concept and business model is solidly intact, it's getting stronger over time and that’s why we are in this to build enterprise value over the long-haul.

So thanks for listening and thanks for being on our call today and operator that will conclude our call.

Operator

Thank you, sir. Ladies and gentlemen, that concludes the BJ's Restaurant second quarter 2009 results conference call. We thank you for your participation. You may now disconnect.

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Source: BJ's Restaurants, Inc Q2 2009 Earnings Call Transcript

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