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

Q3 2009 Earnings Call Transcript

October 22, 2009 5:00 pm ET

Executives

Jerry Deitchle – Chairman, President and CEO

Diane Scott – Director, Corporate Relations

Greg Lynds – EVP and Chief Development Officer

Greg Levin – EVP, CFO and Secretary

Analysts

Matt DiFrisco – Oppenheimer

Matt Van Fleet [ph] – Stifel Nicolaus & Company

Nicole Miller – Piper Jaffray

Larry Miller – RBC

John Dravenstart [ph] – KeyBanc Capital Markets

Amol Desai – Johnson Rice & Company

Greg Ruedy – Stephens

Conrad Lyon – Global Hunter Securities

Operator

Good afternoon, ladies and gentlemen. Welcome to the BJ's Restaurants third quarter 2009 results conference call. (Operator instructions) This conference is being recorded today, Thursday, October 22, 2009.

I would now like to turn the conference over to Mr. Jerry Deitchle, Chairman and CEO. Please go ahead, sir.

Jerry Deitchle

Hey, thanks, operator. I'm Jerry Deitchle, with BJ's Restaurants and welcome to our third 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 our third quarter of fiscal 2009 that ended on September 29, 2009. You can view the full text of our earnings release on our Web site at www.bjsrestaurants.com.

Joining me on the call today is Greg Levin, our Chief Financial Officer; Greg Lynds, our 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 third quarter. Next, Greg Lynds, our Chief Development Officer will comment on the status of our new restaurant development pipeline. And then after that, Greg Levin, our CFO will comment on our consolidated income statement, our summary balance sheet, and our liquidity position at the end of the quarter. After that, we will be happy to answer your questions. And we are going to get our call started after Diane provides our standard cautionary disclosure with respect to forward-looking statements. Diane?

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, October 22, 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. And we're pleased to once again report that in spite of the ongoing difficult environment for consumer spending for restaurant allocations in general, BJ’s sustained its forward momentum during the third quarter, which we believe was probably one of the toughest quarters in recent memory for casual dining restaurants in general.

Most importantly, to us, BJ’s continued to build its overall base of restaurant capacity during the quarter. We were able to thereby gain additional market share during the quarter and the estimated 80 billion casual dining segment of the restaurant industry. And that's really our principle longer-term objective. In the shorter-term we also have to stay focused on prudently managing our business to response to the pressures and the recession.

Our principal job is BJ's managers to effectively balance our focus on our resource allocation so that we can make progress on the simultaneous achievement of both our short and long-term objectives and we believe that we are continuing to do a reasonably good job of doing that to-date.

Moving to our financial results for the third quarter of 2009 when compared to the same quarter last year, our total revenues for the quarter increased about 8.5% to $103.9 million. Our net income and diluted net income per share for the third quarter of 2009 increased approximately 55% and 50% respectively to $3.2 million and $0.12 respectively compared to the same quarter last year.

Our results for the third 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 earnings per share comparison by about $0.03 per share.

We opened just two new restaurants during the quarter just ended compared to six openings during the same quarter last year. So when you exclude restaurant pre-opening cost from the results from both quarters, our income from operations were increased about 19% compared to the same quarter last year in spite of the pressures on our top-line results due to the ongoing recession.

Additionally, we were very pleased to have maintained our estimated four-wall restaurant operating cash flow margins in the 18% to 19% range during the quarter, in spite of the deleveraging impact of the 1.6% decrease in our comparable restaurant sales during the quarter.

We also mentioned on our last couple of conference calls our leadership team had never felt better about the factors of BJ's business that we can control; we still will be that way. And we believe that our restaurant operators did a good job of managing our food waste, our labor productivity, our other controllable costs and expenses during the third quarter, although we still have opportunities to improve in many of our restaurants. And Greg Levin will comment on our operating margins in more detail later on the call today.

As we noted in our press release, our comparable restaurant sales decreased by only 1.6% during the quarter, which we believe will once again rank BJ's among the better performances on that metric in the casual dining industry for the quarter. We were also pleased that our performance on that metric for the quarter once again outperforms the widely followed Knapp-Track benchmark survey for casual dining comparable sales, which we believe will likely report an estimated decrease of at least 6% for the third quarter.

In particular, after your consider our significant presence in California, Arizona, Nevada and Florida, where two-thirds of our base of comparable restaurants is located, we believe that BJ's ability to retain over 98% of our aggregator comparable restaurant sales during the third quarter was a pretty strong testimonial to the popularity, the relevancy, and the overall value of the BJ's restaurant concept, they could also reflects our steady and steadily improving ability to correctly and consistently execute within the four walls of our restaurants.

In fact, if you go back to the start of the current recession in May 2007, we believe that BJ's has retained more of its aggregate comparable sales dollars in most publicly held casual dining restaurant concepts have during the past summer quarters.

While we are on the subject of comparable restaurant sales for the first three weeks of our fiscal October, our aggregate comparable sales comparison has actually improved a bit, it's now exactly flat at 0.0%, while this is encouraging news that we always caution that our results for any partial period of time not necessarily represent one of our results might be for a full period of time.

Also keep in mind that our weekly sales comparisons continue to be quite choppy during the current recession and they really not of much value and helping us here to accurately predict the future. Finally, much like last year that the upcoming holiday season will combine a relatively short selling period with even more cautious consumer spending.

So we continue to urge our investors and analysts to remain on the conservative side of the ledger and setting your comparable sales expectations for the upcoming fourth quarter. And Greg will give some additional color on our comparable sales trend in his comments later in the call today.

Here there is no question that every restaurant operator in America would like to have better comp sales right now and so would we. And we also realize that it's necessary for us to all pay attention to the shorter term pressures that we're all currently facing in terms of reduced customer traffic and comp sales. But we also think it is very important to investors to keep an eye on longer-term opportunity for each restaurant concepting company.

We think the key question last year when the economy does turn around which restaurant concepts and companies are going to be the ones that, A, have not damaged their brands and operations by overreacting to the current recession either through excessive cost cutting or excessive menu discounting. B, the ones that have a leveragable business model in place that can effectively capture the benefits of sales increases when the overall economy begins to improve and C, the ones that have clear advantages in their competitive positioning that enabled them to take market share away from their competitors.

So when we look at the BJ's concepting company and when we consider the strengths of our competitive positioning in the growth infrastructure that we carefully build over the past three years or four years, we believe that BJ's still a very special casual dining company with an equally special opportunity to gain market share in a very large fragmented space, where consumers are demanding more innovation, more freshness, more energy, more relevance, and more quality and differentiation at a good value. These are the fundamental strengths of the BJ's restaurant concept and we are going to maintain our courage to continue to invest in our strengths during doing both good times and bad times.

There are basically three principal drivers of enterprise value in the most same-store consumer companies; unit expansion, four wall unit economics and overall leverage of the business model. Not only economic leverage, but also consumer leverage. We think that BJ's matches up very well on one of those three drivers.

First of all, we are continuing to open new restaurants, we are continuing to steadily increase our overall capacity base, but we are also doing it with a careful discipline. And next we are also working very hard to preserve our unit economics as we grow notwithstanding the leveraging of that's comparable sales either decreases principally caused by the current recession. And this is the primary reason that underlies the investments that we've made and we plan to make in better operational talent and better operational systems and processes.

In my 30-plus years of working in chain retail and restaurant businesses I have found that preserving the original unit economics of a concept when the concept embarks on an expansion plan outside of its original home core market that's usually the most difficult feat to accomplish. It's difficult, but it's not impossible to achieve, but it has to be aggressively and constantly attacked.

We've also worked very hard during the past few years to set up our infrastructure in our business model to achieve steadily increasing leverage as we grow. A good example of that in our business model is our gradual evolution to a contract brewing approach for our handcrafted beer. So recession or no recession, BJ's is going to keep moving forward. We believe that the 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 our overall enterprise value over the long-haul.

Our leadership team is currently in the process of setting our key initiatives for our 2010 business plan. We are going to share some of those specific initiatives with you on our next investor conference call.

As in the past we categorize our key initiatives into seven general categories. Sales building, preserving four wall margins, elevating the quality and differentiation of our group beverages and service, improving the productive capacity of our facilities, the building talent in all levels of our organization, leveraging our brewing operations and last but not least, minimizing the risk of doing business in the restaurant industry.

As we develop our business plan for 2010 we believe that it’s very important that we balance our managerial time in our capital resource allocation between new restaurant expansion which is usually the most fun and exciting part of building a restaurant business and the need to reinvest and establish restaurants, which are the very core of our business. So reinvesting in the core will be a key thing for BJ's during 2010 in addition to building new restaurants.

We still have many opportunities to improve the productive capacity of our core base of established restaurants. For example, we can improve the abilities of our restaurant managers to be better restaurateurs and better restaurant business people. We can add additional technology to improve our speed of service in our labor productivity. We can remodel some of our order of cash cal restaurants to help sustain their performance. We can upgrade our signature video capabilities of many restaurants. We can reengineer the table and seating layouts of many of our capacity constrained restaurants. We can roll out our expanding guest beer cap configuration the more restaurants. So we can become even more effective merchants and marketers of our food, beer and the BJ's brands.

While some of our peers have clearly adopted what we call a save your way to success strategy during these tough times, and have essentially stopped investing in their core we have not. Our strategy continues to be a grow your way to success strategy, but only in a productive and efficient manner

In order to our four wall productivity initiative last year we made a decision to increase our media marketing spending level to about 1% of sales to more effectively and communicate with our customers during the recession. We currently plan to maintain that general level of marketing investment during the fourth quarter this year and also throughout 2010. Although the amount for a given quarter might be slightly more or less depending on our internal marketing calendar of the events.

While our media promotions are intentionally designed to convey a value message during the recession, we do believe this is absolutely critical. The offerings themselves do not typically represent significant discounts in terms of absolute dollars or profit margins for BJ.

At the upcoming print and online media advertising for our semi-annual menu update which rolled out last week I think it is a good example of our primary media advertising tactic. In this upcoming Sunday, the newspaper and most of our markets will be advertising five new menu creations starting at $7.50, our lightly breaded Crispy Calamari and Barbeque Pulled Pork sandwich, Grilled Barbeque Chicken Sliders, Barbeque Pulled Pork Sliders, and BJ's Pizookie Trio deserved. All of these new menu items are being advertised at their full gross margins.

We'll also reinforce our common head seating in a large party reservation services in our advertising. So we are continuing to focus on advertising new products and new services, not price discounts, with the objective of building our base of royal guests that also happen to beat our most profitable guests.

Moving to our new restaurant expansion activities we are very, very proud of the successful execution of our 2009 a new restaurant development plan in spite of the significant difficulties faced by most of our retail project development partners during the current recession. So now I'm 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. Good afternoon, everybody. Our development team has worked very effectively that the year to successfully achieve our previously stated development target to grow our total restaurant operating week by approximately 15% successfully execute ten new restaurant opening during 2009.

To-date in 2009, we have opened seven new restaurants and we are very pleased with the initial performance of all of them. In the third quarter just ended we opened two restaurants, Downey, California on August 3rd and Allen, Texas on September 8th. So far in the fourth quarter, we have opened Culver City, California on October 5th and Concord, California on October 19th.

We have three more planned openings for the fourth quarter which are Carlsbad, California, which is the northern suburb of San Diego, San Jose, California up in the San Francisco Bay area, and Hurst, Texas located within the Dallas, Fort Worth trade area. All three of these restaurants are under construction and should open before Thanksgiving, that's assuming the weather and other factors outside of our control continue to be favorable. We're also very pleased with the initial sales volume that the restaurants we opened in the third quarter and fourth quarter, particularly our home court restaurants in Downey, California and Culver City, California have enjoyed record breaking sales weeks and both continued to perform very well above our initial expectation.

As we noted in our press release today looking forward to our development plan for 2010, we currently expect to open 10 restaurants to 11 restaurants in next year and similar to our 2009 development plan where we opened 8 of our 10 restaurants within our core California and Texas markets, our current plans for 2010 call for all our new restaurants be built within our existing 13 states footprint.

In today’s economic environment we believe it's more important than never to continue to cluster the development of our restaurants within our existing markets to achieve better leverage of our supply chain, ELC [ph] provision, marketing and overall BJ's brand awareness.

In terms of our longer-term development plan we continue to believe that we have room to open at least 300 BJ's restaurants at various site size and sizes across the country. At the end of this year we will have 92 restaurants open in 13 states. We have plenty of quality growth opportunities remaining in our core California and Texas markets. And we have now established a strong national brand presence and national footprint from California to Florida and into the Ohio Valley. We are currently evaluating couple of new markets for potential entry into 2011 and we will keep everyone posted on that as we move forward.

As I said in the last call the current economic conditions have taken a toll on many national retailers and our internal development partners and landlords as a result of the difficulties in the current soft commercial real estate market, our teams are more focused than ever on securing real estate within densely populated, more mature trade areas and we will maintain this discipline as we build our 2010 and 2011 site pipeline.

In addition of slowing economy created a small, but measurable reduction in our construction costs for 2009 opening, we anticipate that we will continue to see slightly lower construction costs and slightly improved lease economic as we move into 2010 and 2011. Even though today's down market has postponed or canceled many new retail project, our BJ's new restaurant development pipeline remains in excellent shape, our brand within the development community has never been stronger and our team will continue to leverage a strength of our brand to secure the AAA real estate opportunities and gain market share as we grow from coast to coast.

And to reiterate a very important point that Jerry made in our press release we believe that BJ's is one of the few publicly held casual dining restaurant companies that achieved high quality, double-digit capacity growth during 2009 and plans to do so again during 2010.

Jerry, back to you.

Jerry Deitchle

Thanks, Greg. We continue to believe that BJ's four wall economics are sound and they support a continued steady pace of new restaurants 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 lease is sold down and retail project development and there is less visibility of high quality sites available in trade areas where we want to develop that will best leverage our supply chain, our build to provision infrastructure and our overall brand awareness with consumers. We're always going to pick quality over quantity when it comes to our new restaurant location. I'm going to turn the call over to Greg Levin, our CFO for his comments. Greg?

Greg Levin

All right, thanks, Jerry. I'm going to take a couple of minutes go through some of the highlights for the third quarter and provide some forward-looking commentary for the remainder of 2009 and some preliminary forward-looking commentary for 2010. All such commentary is subject to the risks and uncertainties regarding forward-looking statement that are included in our SEC filing. Additionally, my commentary may also refer to certain non-GAAP financial measures that we use in our internal review of the business and that we believe will help provide insight into our ongoing operations.

As Jerry noted total revenues for BJ's third quarter 2009, increased 8.5% or approximately 120.9 million from 95.8 million in the prior year’s comparable quarter. The increase is a result of approximately 12% for our operating weeks, offset by an approximate 3% decrease in our weekly sales average.

As Jerry mentioned our aggregate comparable restaurant sales for the third quarter decreased 1.6%. While we do not give out specific monthly comparable restaurant sales our weakness was primarily in July and August. As we mentioned on our second quarter conference call that for the first three weeks of July our comparable restaurant sales were in a negative 2% range. And that trend continued through August. However, in September, our comparable restaurant sales improved and we saw flattish comparable restaurant sales in September.

And as Jerry mentioned we continue to see flattish comparable restaurant sales through the first three weeks of October, albeit sales trend continues to be very choppy, it is just as common place to have a day which our comparable restaurant sales could be up 3% one day and then down 5% the next day. We don't expect this daily choppiness to abate anytime soon.

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 back in late 2007, 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 area 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 improving throughout last year. In 2009, these 13 restaurants have either been in line with total aggregate company comparable restaurant sales or slightly better than the total aggregate company comparable restaurant sales. In the third quarter these 13 restaurants were down approximately 1.4% which is pretty much in line with our overall comparable restaurant sales of negative 1.6% in the third quarter.

We do 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 operation.

If we exclude these 13 restaurants that recently came into our comparable sales base that opened in the pre-recessionary period 2007, our overall comparable sales metric for our other 56 comparable restaurants would have been negative 1.1% in the third quarter.

As I stated before 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 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 not 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, Texas and California.

During the third quarter our estimated menu pricing factor was approximately 2.8%. We just completed the rollout of our faman [ph], actually our faman, in which we only added about 0.9% of menu pricing. Therefore menu pricing should be around 1.6% or so for the fourth quarter and probably that same amount for the first quarter of 2010.

Our estimated guest traffic in our comp restaurants was down about 4% in the third quarter compared to the same quarter last year. That was about the same traffic decline that we saw for the sequential second quarter. For the first three weeks of October, our estimated guest traffic is down about 3% compared to the same period last year, which is encouraging but we want to caution investors that we continue to expect negative guest traffic comparison at least for the foreseeable future.

In regards to the middle of our P&L, our cost of sales of 25.1% of sales was 30 basis points lower than last year's third quarter and that was due primarily lower cheese cost. Our labor benefits during the third quarter was 30 basis points lower than last year's third quarter. This reduction was principally due to favorable adjustment to the forfeiture rate experienced in our restaurant level, equity compensation program, based on actual forfeiture activity today. As such, excluding this $350,000 true-up adjustment, our labor for the third quarter would have been approximately 34.9%, which is flat with the third quarter of 2008.

Our operating and occupancy costs as a percentage of sales decreased 100 basis points to 21.9%. This decrease compared to the same quarter last year was a result of lower energy cost by approximately 50 basis points and less marketing expense as a percent of sales by approximately 50 basis points. As such our marketing spend is currently at about 1% of sales.

Our general and administrative expenses increased approximately 90 basis points from the prior year to 6.8% of sales. Including G&A, this 517,000 of equity compensation for 2009 or 0.5% of sales compared to 636,000 of equity compensation for 2008 third quarter or 0.7% of sales. Excluding the equity compensation G&A increased about 1.5 million compared to the prior year.

For those of you that have been following BJ’s you may recall that last year’s third quarter we reversed 1.5 million of accrued corporate level incentive compensation based on our then assessment of the compensation most likely to be earned for the full year 2008. Therefore, excluding that incentive compensation adjustment for 2008 of 1.5 million, G&A on an absolute dollar basis was basically flat with the third quarter of last year.

Compared to the second quarter of 2009, G&A was down approximately 500,000, of which 100,000 was related to equity compensation and remaining 400,000 was due to lower costs for our general managers meeting then anticipated and other cost controls that we have implemented this year.

Our depreciation and amortization was 5.9% of sales, this increase was result of higher depreciation related to our newer restaurants and our commitment to reinvest and remodel our older restaurants as well as some deleveraging from a 3% decrease from our weekly sales average for the third quarter.

From a trend perspective, depreciation and amortization per operating week only increased a little over 1% from the second quarter of 2009, yet our weekly sales average in the third quarter was approximately 93,000 compared to a weekly sales average of close to 99,000 in the second quarter of 2009, resulting in a deleveraging from a margin perspective.

Our restaurant opening expenses was approximately 1.5 million during the third quarter of 2009, of which approximately 1 million was related to the opening of the new restaurants and the remainder related to pre-opening costs for the five restaurants scheduled to open in the fourth quarter of 2009.

Our tax rate for the third quarter was 29.6% and we expect our annual effective tax rate to be around 30% for the year. Now before I turn the call back over to Jerry let me spend a couple of minutes commenting on our liquidity position and also provide some forward-looking commentary for the fourth quarter of 2009 and some of our preliminary assessment of 2010.

In regards to our auction rate securities, we were able to redeem an additional 1.4 million of these securities during the third quarter at par, as such; we currently own 31.9 million in face or par value auction rate securities. The auction rate securities we own 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.

Because of the illiquidity of these investments at the current time, in accordance with FASB 157, fair value of measurements, 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 3.4 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 was recorded in accordance with FASB 115 accounting for certain investments in debt and equity securities.

We are currently scheduled for a FINRA arbitration proceedings regarding our auction rate securities in early December. Once we learn the outcome of that proceedings either in late December or early next year, we will have a better sense of our available options with respect to the ultimate liquidity of the securities. We will keep you posted on this development.

In regards to our liquidity we have generated approximately 33 million in EBITDA in the third quarter and redeemed approximately 3.1 million of our auction rate securities to-date in fiscal 2009 and 5.2 million of our auction rate securities in February 2008.

We ended the third 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 $41million and that's 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 we said before, 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, based on an information and expectations as of this date. Just want to remind investors that this commentary is subject to the risks and uncertainties associated with forward-looking statements and discussed in our filings with the SEC.

Although we have seen improvement in our comparable restaurant sales beginning in September and continuing through the first three weeks of October, we continue to believe the environment will remain challenging for the consumer at least through the remainder of 2009 and 2010. Additionally, we believe that any meaningful recovery will need to coincide with the stabilization of the unemployment rate and overall labor market, particularly in the State of California, Nevada, Arizona and Florida, where we have the majority of our restaurants located.

That being said, we are confident in not only with BJ's concept and brand positioning but our strategy to navigate our ways of a difficult economic environment. Our strategy, as we have mentioned many times is to continually raise the bar casual dining, therefore, we will not save our way to success by cutting into the muscle or vital organs in our business nor we discount our way to success. Instead, we will continue to focus on the GAAP, control everything we can control, leverage our supply chain and infrastructure, and ultimately grow our way to success.

We believe this strategy has already worked well for us as evident by our continued outperformance on comparable restaurant sales compared to the industry. In fact, over the last 21 months beginning January of 2008, in the heart of the recession, our comparable restaurant sales have only been down 0.6%. Specifically regarding the fourth quarter based on the current estimate of restaurant opening dates, I would anticipate approximately 1,170 total restaurant operating week.

As I mentioned, to-date we have incomparable restaurant sales in the flattish range. However, in Q4, Halloween will be on the Saturday night and Christmas moves from a Thursday to a Friday, which is going to make December, a very challenging month. We currently estimate that losing the after Christmas Friday this year, everything else being equal can negatively impact comparable restaurant sales by as much as 7/10 in the fourth quarter, therefore I would continue to anticipate a decrease in our absolute weekly sales average in a 3% to 4% range.

In this upcoming fourth quarter we anticipate opening five new restaurants, because of a large amount of restaurant openings in the fourth quarter I would anticipate some normal pressure on restaurant level margins associated with these opening specifically cost of sales and labor due to the inefficiencies associated with opening new restaurant. Therefore, in the fourth quarter, we anticipate cost of sales in the low 25% range and labor around the 35% range if not in the low 35% range. I am anticipating operating and occupancy costs coming back into the mid 21% range in Q4 from 21.9% in the third quarter.

I expect G&A to increase in the fourth quarter on an absolute dollar perspective due to the travel related to the opening of as many as five new restaurants and the increase in our management, training pipeline for our 2010 new restaurant. As such I would anticipate G&A to be somewhere in the 7.9 million range, including approximately 600,000 in equity compensation.

In regards to pre-opening cost for Q4, I would anticipate about $2.5 million or so related to the opening of five new restaurants and pre-opening rent for restaurants expected to open in Q1.

We expect our tax rate to be in the 30% range for the fourth quarter, and our diluted shares outstanding will likely be in the $27 million range in the fourth quarter.

One final note on the fourth quarter. As I previously mentioned, we anticipate our arbitration regarding our auction rate securities to take place in early December. Based on discussions with our legal counsel, the cost to bring the suite the arbitration maybe in the $500,000 to $600,000 range

As such, separate of the information previously discussed we anticipate incurring a one-time non-recurring charge of approximately 500,000 to 600,000 in the fourth quarter of legal costs related to our pending auction rate securities arbitration. There is a chance that the legal fees incur could be reimbursed to us based on the decision and arbitration. However, we believe it is prudent to model these costs and as a one-time non-recurring cost for the fourth quarter.

In regards to some preliminary forward-looking commentary for 2010, as both Jerry and Greg Lynds mentioned, we anticipate opening as many as 10 to 11 new restaurants next year. And therefore, increase our operating week approximately 13% to 14%. As we previously mentioned, we are currently preparing our 2010 annual business plan and therefore certain size that we have identified for next year are still preliminary in regards to the actual opening date.

Therefore, as of today, I would anticipate one to two new restaurants opening late in the first quarter of next year resulting in an expected increase in operating weeks of about 11% to 12% for Q1 of 2010. However, as we said before the actual number and timing of new restaurant openings for any given period is subject to a number of factors outside of company’s control including weather conditions and factors under the control of landlord, contractors and regulatory and licensing authorities. Once we complete our 2010 business plan during the next couple of months we will be able to provide additional guidance regarding the 2010 opening schedule by quarters.

For 2010, as Jerry mentioned, we will continue to be investing in our core business and making sure our restaurants do not lose their appeal with the guest. Therefore, in addition to the 10 to 11 new restaurants for next year we will continue to allocate capital to remodel and productivity enhancement initiative. Therefore, I would anticipate our growth capital expenditure for 2010 to be around 60 million before any tenant improvement allowance, which is roughly the same amount of CapEx that we currently expect for 2009. As of 2009, we anticipate funding our 2010 capital expenditure plan from cash on our balance sheet, cash flow from operations and landlord allowances.

In regards to margins for 2010 and inflationary cost for next year, it is still very difficult for us to comment with a high degree of certainty as our supply chain department is currently in the middle of negotiations for many of our key commodities for 2010 and we expect to wrap up most of these negotiations during the next 30 days. For those smaller commodities that we have completed our negotiations for next year like our breads, tomatoes for our pizzas, bake and frying oil, and salad dressing. The vast majority will have 2010 cost that will be equal to or less than what we currently are paying, which is really good news.

We are currently considering a favorable proposal for our chicken that would finalize should result in lower costs for next year. Cheese really remains the wild card for us at this time. And as we remain largely on the spot market for that commodity it's difficult to predict where cheese will fall for 2010. So to be conservative at this time we shall anticipate the cost of our commodity cost basket to possibly increase in a 1% to 2% range next year then we will update you in more detail on our next conference call.

Again, our current expectations is subject to significant risk and uncertainties in the food and energy commodity market. Our hourly labor and management wages over the last year have been relatively flat; I do not anticipate any significant pressure on wages for 2010, outside of normal inflationary cost for management salaries and medical benefit.

We are currently reviewing our current operating cost so that we need to optimize some of these costs to better contract and better management system. However, because of significant percentage of these costs affect such as occupancy, insurance and preventative maintenance contract, our operating occupancy cost as a percent of sales will vary based on comparable restaurant sales comparison and average weekly sales level.

Given our current expectation for the cost of our key inputs for 2010, we are preliminarily targeted and effective menu price increase in the mid 2% range for next year. Of that target, approximately 1.5% or so would be carryover pricing from 2009 and a 1% or so would be new pricing. Having said that our 2010 commodity costs come in less we currently expect our requirement to take new menu pricing next year will also be reduced.

While we have not finalized our 2010 G&A plans at this stage our continued goal to gain leverage in our G&A cost. As such the only way we can do this is by making sure that our G&A cost did not increase at a rate greater than our top-line growth. Therefore, I would plan on increasing our operating weeks for 2010 by 13% to 14% we would anticipate G&A growth to be less in that amount. Our expected income tax rate for 2010 should be in the 30% range and we continue to expect the diluted shares outstanding for 2009 will likely be in the low 27 million range.

Jerry, back to you.

Jerry Deitchle

Hey, Greg, thank you very much for that very drilled review. So to wrap our prepared remarks we were very pleased with our favorable results for the third quarter. We are continuing our forward momentum so far in the fourth quarter and we are looking forward to 2010 as we continue to execute BJ's national expansion plan and that we increase our market share over time.

And to reiterate a very important point we believe the BJ's is just one of the few publicly held casual dining restaurant companies that achieved high quality, double-digit capacity growth during 2009, and the plans to do so again during 2010. Before we open up the call for questions I would also like to mention that it was announced last week that BJ's made the Forbes magazine list of the “Best 200 Small Companies in America for 2009”and a few weeks ago, BJ's stock was added to the SMBs small cap 600 index so those are an important milestones for a little casual dining restaurant company that continued to grow for which we are very, very proud.

And before we take calls, we want to thank all of our guests, our team members, our supplier-partners and our investors for their continuing support during these tough economic times as we continue to build our business and our brand. So that concludes our remarks and now we will open up the call for questions.

Question-and-Answer Session

Operator

(Operator instructions) Our first question comes from the line of Matt DiFrisco with Oppenheimer. Please go ahead.

Matt DiFrisco – Oppenheimer

Hi. I'm sorry I might have missed that, but can you guys talk about the fourth quarter guidance and what you might be seeing currently as far as regional trends, strength and weakness?

Greg Levin

We didn't get into specifics in regards to regional trends, we didn’t know that our comparable restaurant sales at least through the first three weeks of October, are basically flat, we're at 0.0 right now, and we started seeing an improvement in that in September timeframe, however I did remind the investors that we're going to see the shift on to Christmas holiday move from a Thursday to Friday, we're going to lose that Friday which was a big booming day for us if we think about it the Friday after Christmas. And that is going to have an impact I think (inaudible) 7/10 in regards to our comp sales for the fourth quarter.

Matt DiFrisco – Oppenheimer

Did that comps also Halloween going on Saturday?

Greg Levin

Yes, it does looking at Halloween from a Friday to Saturday wasn't quite as its impactful, it was really losing a Friday versus you pick up a little bit of a Thursday per se, but that’s Friday afterwards going into kind of a full holiday weekend with a really big Friday for a class here.

Matt DiFrisco – Oppenheimer

And then I guess with the comp comparison you made us on how we've progressed throughout the quarter of last year I would assume you had a significantly easing comparison as we got closer to holiday?

Greg Levin

Looking at a last year I would say was that be fairly even, because last year Thanksgiving move for us and what we call P11 to P12 and a result of that if I had to strip off that out, look over P10, P11, P12, October, November December, we're actually pretty consistent week to week taking out the normal shift of the holidays.

Matt DiFrisco – Oppenheimer

Okay, and then can you also talk about I guess where do we stand as far as the investment costs on the box? And looking at your stores to come into 2010 relative to what you open over the last 12 months as far as investment costs and anything you could have removed from that?

Greg Lynds

What we have seen from reduction, Matt, is in the labor costs required to construct a restaurant. We're very pleased with the overall size and build out of our current box. We're happy with it, our current prototype at about 8500 resource square feet. We have a couple of different prototypes, one is a little bit of less than 8,000, and the one's about 8500 square feet, but in terms of the size of the box, and the build out of the box and the E-pac [ph] each and all of the penny shares and the core and the presentation of BJ's brand within the facility, we're generally very pleased with that although we always have ongoing efforts to engineer out as much of the discretionary costs as we possibly can to better purchasing practices and as the economy has taken its toll on some of the equipment manufacturers we have been able to sharpen our pencil and get some small decreases in some of the costs of our FF&E build out items.

But in terms of the overall construction costs where we have seen on average about a $200,000 to $250,000 cost reduction in the overall build of the restaurant has been and reduced construction labor. So coming into this year the average cost to construct our larger prototype and including our in line restaurant has typically averaged about $4.2 million, $4.3 million and we've seen that come down with reduced construction costs to about $4 million and in some cases a little bit less than that in the current environment.

Matt DiFrisco – Oppenheimer

Okay and then can you talk about the stores that you've opened not in your core markets of either Texas or California how those are ramping and what we could expect as far I know that you opened a little smaller of weekly sales but how are there soft on years and what's the growth rate as they are entering the comp base?

Greg Levin

Well, we don’t have that many of the 2008 restaurants coming this comp base, but it’s a mixed bag, I mean in that sense, we are happy overall with the aggregate from that standpoint when I look at this year we opened in Florida and we opened in Las Vegas, (inaudible) Henderson are great restaurants for us. We are very happy with that. When I think about last year’s restaurants we (inaudible) restaurants, very happy about restaurants as it gets ready to get that soft to our comp base.

One of the things that has happened to us this year you could see it a more in the Q3 and its purely just mathematic, is the fact of the matter is last year 15 restaurants had opened up, they went through 15 honeymoon periods as they're coming down from that honeymoon period and then we're replacing them with only 10 restaurants this year, its going to drag down your weekly sales average just as they come to the honeymoon, in fact, if you look at our press release we had opened 12 restaurants last year to this period or so and then at this time we have only opened up five restaurants, so you got 12 restaurants coming down from the honeymoon that’s going to drag down your weekly sales average being replaced by only five restaurants in the honeymoon period.

So, that’s what kind of happened. We see sales average here from that perspective but now overall it's very across the board, we are really happy with our restaurants whether they are in California, Texas, Florida, the Louisiana that we opened last year.

Matt DiFrisco – Oppenheimer

That’s great detail, I really appreciate that on the average weekly sales detail and I guess is it correct then despite them dragging the average weekly sales they will be coming more efficiently managed so better margin stores?

Greg Levin

Absolutely, I mean that’s got a halfway to start work class, no doubt about that. We have certain methods that we look at based on when restaurants been open for certain amount of time and those restaurants get better all the time.

Matt DiFrisco – Oppenheimer

Excellent. Thank you.

Operator

Thank you. Our next question comes the line is Steve West with Stifel Nicolaus & Company, please go ahead.

Matt Van Fleet – Stifel Nicolaus & Company

Yes, hi guys, its Matt Van Fleet [ph] in for Steve. Good afternoon. But a couple of questions on where the progression is on some of the delivery in curb side online order, online seeding and some of those convenient initiatives and how the progression may be if you could break out each one or as a composite what they are what the precise of sales is and maybe how much that you really think is incremental?

Jerry Deitchle

We're happy to do that. Overall when we started these programs about a year to 18 months ago, our total off premise percentage of sales was right around 4% since we brought those programs out and consumers have become more confident with them and more confident on our ability to executing against them our overall off premise percentage of sales has dripped in closer to 6% of sales.

It's been my experience and my observation that when these initiatives were put into place at other restaurant chains in the casual dining segment, its going to take three years or four years for you to really maximize the overall benefit of these programs, these are longer-term benefits, because consumers have to build their overall familiarity and level of confidence in your ability to correctly execute in that particular distribution channel. So we have seen some steadily increasing returns on that investment, we reinforce our caller head seating, our curbside cashiering or online ordering, in all of our external media promotions and we continue to build that distribution channel.

Matt Van Fleet – Stifel Nicolaus & Company

Okay, and then I guess sort of switching gears here in the development side, are you anticipating any of the 10 stores or 11 stores here taking a look at from next year to be in jeopardy at this point of may be not opening until the very end of the year possibly getting pushed back, I know you've said that you haven’t secured all the sites yet, I don’t know what kind of percentage maybe you are handicapped be put on and maybe changing that number at some point?

Jerry Deitchle

Well we have secured all of the sties, we just haven’t slotted them into a specific openings scheduled right now because we are still waiting for additional information from some of our landlords as to exactly when they are going to be able to deliver the sites or the spaces to us so that we can commence our build out. But we have signed leases or signed letters of intent on many more than 10 restaurants or 11 restaurants. We have 10 or 11 that we have preliminarily prioritized based on all of the information that's available to us at this time.

But, we also carry a both end of 10 to 15 additional sites that again depending on our ability to secure the sites and the landlords to timely deliver them to us, we have some flexibility if we run into a little bit of an issue with a particular site that's a primary site that where we can substitute one end, so Greg Lynds and his development team just don't really focused on 10 or 11 and if one has an issue or down to 10 or 2 have an issue we are down to 9, we have a very active bopen [ph] of site and it is very, very fluid and that’s why in this particular environment you’ve got to have about as many sites in your bopen signed and working as you do have on your primary lists.

Greg, you want to add anything to that?

Greg Lynds

No I think you got rid it, I mean there's always a risk of project slipping but our pipeline is pretty full and we continue to see additional sites come down the pipeline so we are working hard and we are in pretty good shape as of today.

Jerry Deitchle

One other comment is the one that I've been involved at BJ’s I am ramping up my 30 year, we have always delivered on our new restaurant expansion targets as long as I have maneuvered something that we are very, very proud of, we have consistently executed against achieving those annual targets that we set out at the beginning of the year we don’t have any intention of breaking that record next year.

Matt Van Fleet – Stifel Nicolaus & Company

Okay, great. But then I guess from the other side of that if you have this bopen of site that you are happy with then and they do start to progress, would you move forward on them more quickly than maybe you're anticipating and go to 12 or 13 or the bopen site to a little more flexible in terms of putting them off if you get the original 10 or 11 per se that are in play now?

Jerry Deitchle

Well I think for now we're going to stick with our as many as 10 to 11 new restaurants per next year and as opportunities present themselves we have the ability to take advantage of them, but I think for everyone’s planning purposes right now let's stick with as many as 10 to 11 and we will see how the year unfolds, we, a year ago, we opened 15, we kept our overall new restaurant development infrastructure largely in place, a lot of our competitors which have curtailed their new restaurant development program significantly have reduced their infrastructures appropriately, we really have not, so we are going to be very, very opportunistic and we will take a look at the sites and we will make those decisions as we move throughout the year, but for right now, I think sticking with 10 to 11 is really a good place to be.

Matt Van Fleet – Stifel Nicolaus & Company

All right, thank you very much.

Operator

Our next question comes from the line of Nicole Miller with Piper Jaffray, please go ahead.

Nicole Miller – Piper Jaffray

Good afternoon.

Jerry Deitchle

Hi Nicole

Greg Lynds

Hi Nicole

Nicole Miller – Piper Jaffray

Hi, I just want to understand sort of the context and margin this year comes down whatever they end up being down despite the 1% range and you had looks like the margin will be up to slightly in that theoretical context to the site environment next year can margins continue to expand?

Greg Levin

It really comes down to your commodity cost. I think this year the restaurant industry, in general, got a deflationary environment in regard to cost of sale. So as a result just purely looking across shelves even BJ’s being by 30 basis point this quarter over last quarter, three or four or five years ago, that was really unheard of in that regard because commodity cost continue to go up. The other thing that has benefited the restaurant industry this year is a slowdown in new restaurants and new units.

But, your (inaudible) we were speaking to earlier refreshment class becomes soft most and you get better productivity, but you got those two favorable variables going in your way, going into next year, in the context of the overall restaurant environment you didn’t grow your restaurant this year, not to growing restaurants next year, you are not going to get that benefit so it depends on where your commodity costs come in. I guess it is right now taking a conservative point of 1% to 2% increase in commodity cost, you know what, we probably need based on that cost sales to be a 25%. 26% of our cost, you probably need about 4/10 of a percent in regards to menu pricing. So if you saw a flat environment if you probably have the ability to kind of manage your margins in that perspective I don’t think you really improve your margins. I hope that answers your question.

Nicole Miller – Piper Jaffray

Yes, does, that’s exactly what I was wondering, that’s exactly right. And then just the longer term pipeline make really big picture here it does what it looks like the under 10 to 11 next year, not for many per year, but like what is in the future pipeline and what are some target markets?

Jerry Deitchle

Well I think for the next couple of years, Nicole, we are going to try to maintain a very strong discipline to continue to open restaurants within our 13 state footprint and order to drive overall consumer awareness and try over the BJ’s brand. And all of the consumer research that we have done when I first arrived at the company five years ago and we just did another second round an update round earlier this year, when you look at the attributes of BJ’s relative to awareness trial and usage and you compare those attributes as consumers have responded to our survey against other well-known casual dining brands in our key competitive markets.

Once they try us they become regular users at a rate equal to or higher than most other casual dining restaurants concept. The number one issue for BJ awareness. So what we got to do is to have a discipline to continue to build a raw awareness in markets like Denver and markets like Dallas, which by this time next year we'll have a restaurants and markets like Houston, and markets like San Antonio, and markets of Central Florida in the Ohio Valley because that has a very important synergistic impact on the overall awareness of the BJ’s brand, we don’t have a national advertising umbrella to where we can open up restaurants underneath and benefit from all of that wonderful awareness.

And if you recall, when BJ’s first expanded in the Texas back in 2002 and those first three restaurants in Texas were indexing at about maybe 65% to 70% of the sales average in the home court of California and it took a good three years or four years to those restaurants that finally build a reputation then to finally did into the rotation of a lot of casual dining consumers and now those restaurants in Texas are among the very best and in fact are equal in many respects to a lot of our home court California restaurant. So we got to continue to have a discipline to fill in.

At some point, as Greg Lynds mentioned, we are going to have to take on a couple of new markets. We are not ready to tip our hand yet as to which new markets we are looking at, they are currently being evaluated, we have so many opportunities like kid into candy store to some degree and we just want to be very, very thoughtful and very, very careful that we continue to leverage our business model as we expand to new markets. So that’s really the best outlook that we can give you at this point in time.

In terms of the absolute longer term rate of restaurant operating we grow back in the old days when you had great tailwinds in the casual dining industry and build it, they would come, annual increases in that particular metric with 18 year to 20 year maybe even as high as 25% for many of the casual dining concepts that were rapidly expanding back in the mid 1990s and into the early 2000s were kind of what was expected and those were considered to be the higher growth rate concepts in these particular times, where you don’t have a tailwind and where you have the casual dining segment kind of and all of the secular factors that drive casual dining restaurant occasions and kind of flattening out over the past five years, could very well be that a mid teen annual compound and annual growth rate and operating weeks will now become the high growth for a lot of casual dining companies and again I am just speaking as one long-term observer of growth rates when the restaurant business took in the casual dining segment.

So, I don’t think we have really made any particular announcement or set any long-term goal but clearly we have an opportunity to grow this business to 300 or more restaurants over time and we're going to continue to make steady progress towards that.

Operator

Thank you. Our next question comes from the line of Larry Miller with RBC. Please go ahead.

Larry Miller – RBC

Hey, guys. I was wondering if you could shed some light on what you think is behind the improvement that you’ve seen in September, October? And then in the context of the peer group, the other Palm Grove [ph] guys are doing a heavy amount of discounting. Do you think that’s have an impact on your business right now? Thanks.

Jerry Deitchle

In terms of the mass market casual diners and their various competitive discounting programs, we have not seen any impact on our restaurants in those particular trade areas where the mass market aren’t real, competitors have large numbers of restaurants, where they are actively driving these particular promotional programs. Now, it’s our sense that, and I think it makes a lot of common sense that the more higher quality differentiated brands of any consumer business, whether it’s restaurants or retail, you're going to have a higher percentage of more loyal customers. And you're going to have a lesser percentage of disloyal customers that are going to just chase the deal today.

So, I think we are fortunate at BJ's to have a much higher percentage of loyal customers that are going to be loyal to us and that recognize our everyday value in the menu. So, we have not seen any impact in those markets where the mass market guys have been heavily discounting their couponing. In terms of why we have been able to hang on to a larger percentage of our business during these tough times and maybe some of the others, particularly when considering our geographical penetration in a handful of states that have really taken it on the chin in this particular recession. I really do think it gets back down to two basic factors.

I think we have effectively communicated the everyday value of the BJ’s concept as best as we can with a limited media advertising budget of 1% of sales, I think we have been very thoughtful and effective in doing that, and I think we have also continued to better execute within the four walls of the restaurants. We have a number of operational initiatives that are intended to prove the overall speed of execution in our restaurants, and we have a couple of other initiatives that are underway to improve the overall allocation of labor within the restaurants in terms of our station sizes, in terms of front desk coverage, in terms of the number of bartenders that we have, the number of buses that we have on our shift.

As we continue to fine-tune to optimize our overall execution to make sure (inaudible) as efficient as we possibly can, and I don’t think that we can discount the impact of those initiatives in our overall sales performance over the past several months. So, I would have to attribute it to those two factors primarily, Larry.

.

Larry Miller – RBC

Okay, thanks. And then, just some clarification. When will you last, at 2007 class come in, Greg? And then when the 2008 class begins, will have an inverse effect, I mean by those guys entered at probably lower volumes because of the recession, and is it possible that they may get it a little bit of mathematical head start on your comp?

Greg Levin

Yes, first of all, with regards to 2007, it’s going to be continuous, because the outcome into the comp base at different times and we are already started to seeing here in the fourth quarter, a little bit of improvement in classes of 2007, and they just got through some of that initial honeymoon and so on, in regards to the comp base. In regards to the class of 2008, it’s hard to say because I think some of the space on the macroeconomic environment, I think overall looking at them, they look pretty good get there, but I don’t want to give you guys an indication if you are all going to see, get a juice – comp sales in that perspective. I think they have a better chance of coming in. What I have seen historically and that is neutral, maybe slightly up, and then that’s second year that’s through the comp, they end up generating better comps for us. So, I think we get back to more of our historical trends.

Larry Miller – RBC

Okay, and then finally, you actually completed the arbitration, is that gets resolved, either favorably or unfavorably, is that constitute that they would become an earnings P&L then?

Greg Levin

It could, I mean obviously I think we look at it as kind of a non-recurring one-time event both the fact that we resolved it at our, and Citigroup who were in disagreement with (inaudible) there’s a no P&L event from that perspective. The legal fees would probably be that non-recurring hit. There’s a possibility of recouping those again in the arbitration. It could be a couple of different things, but I think as we’ve always tried to do, we will highlight those for the investment community and let them know what is related specifically into the auction rate securities versus what’s going on in regards to our ongoing operations.

Larry Miller – RBC

Okay, thank you. That helps. I appreciate it.

Greg Levin

Okay, Larry.

Operator

Thank you. Our next question comes from the line of John Dravenstart [ph] with KeyBanc Capital Markets. Please go ahead.

John DravenstartKeyBanc Capital Markets

Great. Could you comment on whether you feel you have been successful in drawing a football bar crowd and if you have any goals as to that aspect of the business? Now, you are fully utilizing the bar area. Are there new menu items targeting that in anyway?

Jerry Deitchle

I won’t say that it would dramatically help our business, that the Angels and the Dodgers would have won. But the Angels are out.

Greg Levin

The Dodgers are out.

Jerry Deitchle

The Dodgers are out, too.

Greg Levin

So, those people in the U.S., we are still winning pretty Angels there.

Jerry Deitchle

But to answer your question, the BJ’s concept is really not presented to the consumer as a sports bar. We do have a very active bar, it’s segregated in the restaurant with our video statement, and we do attract a certain very vigorous clientele that loves to watch the game. But at the same time, when you look at the other two-thirds of our ceiling and our dining room, it’s polo soccer teams and folks like me with great hair and so in lots of families. So, again, what we really concentrate on in the concept with respect to sports is to really have a state-of-the-art video presentation without a 103-inch plasma, which I don’t think there’s any casual dining concept that’s willing to make an investment in that particular machine, which is absolutely incredible.

I mean, that does help to differentiate us and draw some patrons that love to watch some of the games, but we are not really a sports bar concept, we are a casual dining concept that offers 100 menu items. We offer some great handcrafted beer. We have some of the best video statement in casual dining, but we are also a family restaurant.

Greg Levin

Adding on to that I think, as Jerry mentioned, there’s a TV and video statement that we have really allow us to negate the (inaudible) that might happen when there is a big sporting event going on. And as a result, we don’t get the impact, the negative impact that maybe at a restaurant companies do or at a restaurant concepts do. So, it probably adds a little bit of a net positive from that perspective, but Jerry’s point, we are not putting tenants in our restaurants, we are not having our bartenders wear jerseys for Monday night football, but at the same time, because we have that statement, we will draw people in there, and as a result we get a little bit of a net benefit from it.

John DravenstartKeyBanc Capital Markets

That’s helpful, thanks.

Greg Levin

Welcome.

Operator

Thank you. Our next question comes from the line of Amol Desai with Johnson Rice & Company. Please go ahead.

Amol Desai – Johnson Rice & Company

Yes, hi good afternoon. Did you see any type of deterioration, any certain day part sequentially from 2Q to 3Q?

Greg Levin

From 2Q to 3Q, not really. Looking through our comp sales and I got to kind of broken down here by lunch, dinner and late night, they were all kind of consistent in that regard, ones tended to be a little bit softer in dinner and late night for us in the third quarter. And it kind of reversed a little bit in the second quarter where lunch were seeming to gain a little bit of traction, but the difference is not meaningful, meaning, lunch wasn’t down 5% or stuff like that. It’s kind of within 50 basis points of each other. We continue to see Monday through Thursday being a little bit softer than the weekend, and that’s been consistent through the last seven quarters.

Amol Desai – Johnson Rice & Company

Okay, and in terms of the 10 units to 11 units, not sure and I apologize if you alluded this earlier, but how many of those are remodels versus just non-remodels?

Greg Levin

Remodels as in new restaurants or conversions that exist?

Amol Desai – Johnson Rice & Company

I am sorry. Are any of these conversions?

Jerry Deitchle

You could probably characterize one, I am sorry, two, as conversions of existing restaurants to retail spaces already expanding there, but basically what we are going to do is we are going to get in with a bulldozer or we are going to scrape them off and we are going to start over from scratch.

There really isn’t any restaurant footprint out there, very few restaurant footprints that we can actually retain and just convert to a BJ's restaurant and get the full brand identity and the full image that we want to project to the consumer, the full quality and differentiation of that facility, which is a very, very important competitive strength of the BJ's concept. But there are a couple where we are going to bulldoze them off and put our restaurants up.

Amol Desai – Johnson Rice & Company

So how would the cost of a similar conversion vary from just an average door?

Jerry Deitchle

Well, there is really not that material, there is not a material difference in the costs really.

Greg Lynds

Sometimes we say fees and permits, that kind of things, but it’s overall construction costs, on what we call a remodel or a conversion versus a brand new restaurant is within a $200,000, right.

Amol Desai – Johnson Rice & Company

Okay, thank you.

Jerry Deitchle

Welcome. We’ll take a couple more questions.

Operator

Thank you. Our next question comes from the line of Greg Ruedy with Stephens. Please go ahead.

Greg Ruedy – Stephens

Good afternoon.

Jerry Deitchle

Hi, Greg.

Greg Ruedy – Stephens

Jerry, I think you mentioned that you are not really seeing an impact from the discounting, but I was just wondering maybe are you experiencing any shift away on your menu from higher priced entrées. And I have a follow-up to that.

Jerry Deitchle

No, we haven’t. We track our average check. We track the average weighted contribution of each component of our menu as it adds up to the overall average check for the business. We track Internet rates of appetizers and desserts and beverages per 100 guests and over the last seven quarters that we’ve been in the recession, we really haven't seen any material shifts in any of those particular statistics.

I think the only thing that we’ve commented on in the past is that we’ve seen a slight increase in our beer incidents per 100 guests and a slight decrease in our wine and spirits incidents per 100 guests and I think that’s probably price related to some degree. But other than that, there really hasn't been any material mix shift or incident shift in our overall average check since we’ve been in the recession.

Greg Ruedy – Stephens

Okay. If competitors continue with the discounting strategy and you layer on growth from fast castles, what risk is there that the consumer will basically become conditioned to paying under $10 for an entrée?

Jerry Deitchle

I’m not sure that I’ve got an answer for that one, Greg. It’s very, very difficult to make a general statement as to what the likely impact would be. I think it has to be considered on a concept-by-concept basis.

And I think that when you consider BJ's and our current very attractive average check, which is still around the $12 range, and when you consider how flexible our menu is and the number of ways the consumers can use us, the fact that a large portion of our menu, particularly, our pizzas are very, very sharable and the fact that we do a substantial amount of business at Happy Hours either before the dinner day part, we also run a late Happy Hour, the fact that we have compelling everyday value on our menu, the fact that we have quality and differentiation and a selection that when you combine it with the facilities that we have and the overall service levels that we have, it’s a very, very difficult proposition for competitors to beat.

That’s not to say or suggest that we are undefeatable, we certainly are, but I think when you look at the overall landscape and consider the different concepts out there and if you take that particular factor into consideration, BJ's is probably positioned as well as anybody is to withstand that type of a competitive intrusion.

Greg Levin

I think Greg, your statement and you can’t – to speak your statement, but you mentioned a statement that means you are selecting purely based on price only. And I think everything that we’ve talked about at BJ's and Jerry’s touched upon it is to make sure that we are in reinvesting in our core – that’s 103-inch television. Those facilities that we’ve upgraded, the linen napkin, everything else that goes into that dining experience is something that I think personally differentiates BJ's from a lot of the other casual dining competitors that we face.

And therefore, we are not trying to just compete purely on price, we know it’s very important in a guest decision, but if can give them all the other wild [ph] factors there, I think we can have a compelling value statement for our guests and not get caught up just competing purely on price, what makes them the other casual dining concepts because they haven't reinvested over the years are subtle [ph].

Jerry Deitchle

Absolutely. And that’s exactly what our business strategic plan has been over the past four years or five years. When I came to BJ's, I thought that the concept is on the fence. I thought we had certain components to the BJ's concept that when we call that mass-market, low-cost provider segment of our industry, but then there were other components of the concept that really added more quality and differentiation and positioned us above the mass-market players and so we made a decision to move the concept off the fence and move it up a little bit of a notch here with more quality and more differentiation.

We cannot compete as a low-cost provider. We can compete with higher quality and differentiation at a great value and frankly, when you take a look at the fact that we retained over the last seven quarters during the teeth of a very, very difficult recession over 98% of our sales with that particular strategy in place, I think that says a lot about the longer-term competitive power of this concept and the ability to compete on that base.

Greg Ruedy – Stephens

I appreciate that color. Greg, a question on the forfeiture of equity compensation on the labor line. I’m assuming that’s for managers that entered the management pipeline after the implementation of the Gold Standard Program and I think you are reinvesting in management talent. How should we think about voluntary versus involuntary turnover of your restaurant managers?

Greg Levin

Well, to your point on the first part of the question, that is related to the Gold Standard Stock Ownership Program. And again, not having a history at that time, we used a different forfeiture rate. Now that we have a history, it gave us an adjustment from that perspective.

In regards to voluntary and involuntary, I don't have that in front of me. I would tell you right now that we are seeing management turnover somewhere in the 19% to 20% range and I think based on kind of a current environment, that’s probably a reasonable turnover rate looking into 2010. And then that’s down about 500 basis points from prior year.

Greg Ruedy – Stephens

All right, last question. Greg, you mentioned 300 units. You are sticking with that, but at various sizes. So should we think about other prototypes, I mean, below 8,000 square feet to get to the 300?

Jerry Deitchle

No, this is Jerry. I don't think that’s what we are thinking at this present time. I think we’ve preliminarily dimensionalized a 300 restaurant capacity domestically based on the current large format restaurants, which are right about in 8,000 square feet. We have the two different prototypes today. We also have the ability to do in-line restaurants of various square footages. But that’s where we’ve dimensionalized our – what we call our larger format restaurant opportunity at this present time.

And again, as we learn more about how the concept works in different trade areas and different locations and at different site types as we continue our expansion across the country, it could very well be that we’ll end up adjusting that 300 number up a little bit, which is typically what happens when you got both the consumer concepts that are moving across the country. But we are going to stick with that number for the larger format size right now.

Greg Ruedy – Stephens

That’s all I had. Thank you.

Greg Levin

Thank you.

Jerry Deitchle

We have one more question and then we are going to call it a day.

Operator

Thank you. Our next question comes from the line of Conrad Lyon with Global Hunter Securities. Please go ahead.

Conrad Lyon – Global Hunter Securities

Yes. Thanks for taking my question, guys. On the California menu law, has that presented any opportunities or issues or is it just something you guys look at as something you just have to abide by going forward?

Jerry Deitchle

Yes, this is Jerry, Conrad. And in terms of the required nutritional disclosures that we have to make here in California and frankly we had to make them in King County, Washington when we opened up our restaurant in Seattle last year that was effective at the beginning of this year, we have not seen any material change in consumer buying patterns or behaviors with respect to the disclosure of all of that nutritional information.

To this point, there really has been no material impact on our overall sales mix or our average check related to that particular disclosure. That’s really it. We would like to see a national disclosure versus having all of the states come up with their individual disclosures, from an ability to manage it and then deal with it. And I believe that there are various proposals in Congress underway to mandate kind of a standard national nutritional disclosure among all restaurants of a certain size. But to this date, it really hasn't affected our sales mix one way or the other.

Conrad Lyon – Global Hunter Securities

Got you. Okay, thank you.

Jerry Deitchle

You're welcome. Thank you, operator, and we're going to be at our offices here. So if anybody has any calls after we conclude the call here, we would be happy to take them here at our office. Thank you very much for being on the call today.

Operator

Thank you. Ladies and gentlemen, this concludes the BJ's Restaurants’ third quarter 2009 results conference call. If you’d like to listen to a replay of today’s conference, please dial 303-590-3030 or 800-406-7325 and enter the access code of 4169328. Those numbers again are 303-590-3030 or 800-406-7325 and the access code is 4169328.

We'd like to thank you for your participation and you may now disconnect.

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Source: BJ's Restaurants, Inc. Q3 2009 Earnings Call Transcript
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