BJ's Restaurants (BJRI) Gregory A. Trojan on Q1 2016 Results - Earnings Call Transcript

| About: BJ's Restaurants, (BJRI)

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

Q1 2016 Earnings Call

April 21, 2016 5:00 pm ET

Executives

Gregory A. Trojan - President, Chief Executive Officer & Director

Rana Schirmer - Director, External Reporting

Gregory S. Levin - Executive Vice President, Chief Financial Officer and Secretary

Kevin E. Mayer - Chief Marketing Officer & Executive Vice President

Analysts

Matthew Kirschner - Guggenheim Securities LLC

Joshua C. Long - Piper Jaffray & Co. (Broker)

Pratik Patel - Barclays Capital, Inc.

Chris O'Cull - KeyBanc Capital Markets, Inc.

Jeff D. Farmer - Wells Fargo Securities LLC

Will Slabaugh - Stephens, Inc.

Sam J. Beres - Robert W. Baird & Co., Inc. (Broker)

Operator

Please stand by. We are about to begin. Good day and welcome to the BJ's Restaurants First Quarter 2016 Earnings Release and Conference Call. Today's conference is being recorded. And at this time, I'd like to turn the conference over to Mr. Greg Trojan, President and Chief Executive Officer. Please go ahead, sir.

Gregory A. Trojan - President, Chief Executive Officer & Director

Thank you, Operator. Good afternoon, everyone, and welcome to BJ's fiscal 2016 first quarter investor conference call and webcast. I'm Greg Trojan, BJ's Chief Executive Officer, and joining me on the call today is Greg Levin, our Chief Financial Officer. We also have Greg Lynds, our Chief Development Officer; and Kevin Mayer, our Chief Marketing Officer on hand for Q&A.

After the market closed today, we released our financial results for the first quarter of fiscal 2016, which ended on Tuesday, March 29. You can view the full text of our earnings release on our website at www.bjsrestaurants.com.

Our agenda today will start with Rana Schirmer, our Director of SEC Reporting, providing our standard cautionary disclosure with respect to forward-looking statements. I will then provide an update on our business and current initiatives. And then Greg Levin, our Chief Financial Officer will provide a recap of the quarter, and some commentary regarding the remainder of fiscal 2016. And after that, we'll open it up to questions.

So, Rana, please go ahead.

Rana Schirmer - Director, External Reporting

Thanks, Greg. 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, April 21, 2016. 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.

Gregory A. Trojan - President, Chief Executive Officer & Director

Thanks, Rana. Well, fiscal 2016 is off to a very solid start, with record Q1 financial results extending our concepts momentum following our record setting 2015. We again generated positive comparable restaurant sales, while improving efficiencies throughout the organization and executing our long-term new restaurant opening strategy.

BJ's positive 0.6% comp restaurant sales marked our seventh consecutive quarter of positive comp sales and lapped our most difficult quarter of last year at a 3.2% comp gains.

Once again BJ's sales and traffic outpaced both Knapp-Track and Black Box by a solid margin during the quarter, an average of about 170 basis points in both sales and guest traffic, respectively. Our $0.47 of EPS was a 32% improvement over last year's Q1, and our restaurant level operating margin of 20.1% was our highest Q1 restaurant level operating margin since 2011.

We are demonstrating every day that our focus on quality and differentiated menu items along with efforts to streamline our menu and back-of-house processes is a powerful combination, driving impressive top-line and bottom-line growth.

In addition to our record results, the great news for BJ's is that the majority of our menu and promotional initiatives are working pretty well for us, which is an affirmation that our ability to influence guest behavior through marketing is improving.

As I mentioned on our call in February, one of our key traffic initiatives is to energize our lunch offerings with a priority on improving our value in this daypart. Last year, we were very successful in driving guest check growth during the second half of the year with our burger launches and other menu changes, but likely lost some of our more value sensitive, lunch guest check traffic in the process.

As a result, in the first quarter, we rolled out a new menu focusing on some great new lunch items at compelling price points, including both piadinas wraps and grilled cheese sandwiches, starting at $6.95. These new menu items were also featured in a lunch combo starting at $9.95.

We backed this launch with focused promotional firepower on this daypart, and I'm pleased to report that it resulted in a nice bump in our lunch sales with positive guest traffic.

Importantly, these new menu items and our ability to promote them served to remind guests of our great lunch offerings and the quality and value that BJ's delivers. Despite this emphasis on our lunch value offerings, we still grew our lunch guest check however.

We also executed our plan to be more promotionally aggressive in our most competitive battle grounds in Texas and to a lesser extent Florida. We carried mid-2% nominal menu pricing in the quarter overall, but consciously built a portion of that back in increased incentives, mostly through our valuable loyalty program and digital marketing.

We were still able to drive healthy guest check growth of approximately 1.8% due to the continued success of our check building menu items in the back half of last year. Burgers and our new pasta line-up leading the way.

It's also important to note that in a number of our promotions, we are able to maintain or even slightly grow our check average by offering attractive incentives to spend up through bundled offerings.

We think this promotional cadence will continue and make sense for our business, particularly given the wide swath of guests, who frequent our concept on a regular basis.

Just as we serve a wide spectrum of culinary preferences, we also serve a wide range of guests with varying degrees of sensitivity to deals and promotional offers. We know there are guests who would like to dine at BJ's more often, but who base their decisions on where to go in large part by which restaurant has a compelling deal at any given time. We are seeking to offer price points, menu items and promotional offers that attract every guest along that value spectrum, and tailor their BJ's experience appropriately.

In addition to our more traditional marketing efforts, BJ's loyalty program, app and digital platforms are allowing us to more effectively and efficiently offer promotions than never before.

So the formula of taking moderate, nominal pricing, selectively spending a part of that back promotionally and offsetting that through continued positive menu mix, and check building promotional activity is the right answer for our business given the current competitive environment.

Our team's incredible focus on continuous improvement through our Project Q initiative has also enabled us to increase these investments in traffic-driving marketing and promotion, while generating the profit margins we believe are warranted by our business model.

We have leading guest traffic, beverage mix and wonderful base of high margin pizza sales that collectively fuel our top tier profitability.

I could not be more proud of how our restaurant and restaurant support center team members continue to drive more common sense ways to improve our cost structure and the guest experience and make BJ's great.

We made a lot of progress on this front over the last eight quarters or so quarters, and I've shared numerous examples of the way we've introduced new efficiency, value and flavor into our process and our people continue to come up with additional ways to make BJ's great.

For example in Q2, after much testing I might add, we're changing the sequence of when we add sauce to our deep-dish pizza. The new method simplifies our prep process, gives our culinary team more flexibility in terms of pizza flavor combinations and produces a fresher and more robust tomato flavor for our pizzas, a suggestion again born from our restaurant team members.

As I said before, our cost structure gains don't come from one, two or three big ideas, they are results of literally scores of ideas implemented carefully one at a time and it's just the nature of our business.

All of this good work enabled us to achieve a 20.1% restaurant level margin, an improvement of 120 basis points over last year. Despite incurring the significant increase in minimum wage in our California restaurants, we were able to keep our labor costs as a percent of sales below last year for the quarter, and we continue to leverage our scale in other areas of our business and scour our operations for further incremental savings opportunities to deflect labor and other inherent cost increases.

In addition, competition for our restaurant-level talent is intensifying, particularly for back-of-house kitchen talent, putting pressure on the market's wage rates for qualified team members. Given all of that, I'm pleased with our team's ability to improve our efficiency and operate with significantly lower levels of team member turnover, compared to the industry in both the hourly and management ranks.

Looking ahead to the remainder of the year, our menu and marketing emphasis will be focused on guest check building opportunities, with center of the plate entrées, new combinations and flavors for the May-June celebration season coming up and new better-for-you options.

Additionally, we continue to introduce unique new exciting beers that you can only get at BJ's. In fact, this year marks our 20th anniversary of brewing award winning craft beer, for which we have won over 150 medals at various beer competitions. We won two gold medals alone this past year at the Great American Beer Festival for example.

To celebrate this 20-year milestone, we just rolled out one of those gold medal winners, Magnolia's Peach. Earlier this month and later in the year, we'll be introducing a new ginger IPA and a rye IPA, for which we are once again collaborating with one of the industry's leading craft brewing brands.

We will also be posting some new and exciting Pizookie flavors, extending that powerful franchise and keeping our pizza flavors fresh as well.

So, looking at our development and expansion, we remain very excited about the performance of our new 7,400 square-foot prototype and have opened five very impressive new restaurants this year.

We are exceeding our internal plan, in terms of restaurant operating week growth, and surpassed our internal expectation of opening sales levels at these new restaurants. Importantly, our early restaurant openings have spanned a broad geographic swath, ranging from Winston-Salem, North Carolina, to our first new prototype in California in Victorville, where we set a new prototype weekly sales record of $184,000.

Our concept also received strong receptions in new markets from Canton and Akron, Ohio, to Lafayette, Louisiana. We're encouraged by the top-line and bottom-line advantages of our new prototype. And note that at an average net cost of approximately $3.5 million, this new prototype provides even more flexibility to build new restaurants in a wide variety of demographic areas.

All-in-all, it's fair to say that with record operating results, we are navigating extremely well in what can still be described as choppy waters in the restaurant space. The combination of our focus on improving food and service quality, while driving attention to the value we are known for, coupled with our tremendous opportunity to extend the BJ's concept is a solid foundation for continued growth. But the passion of our team members, who consistently deliver that Wow! experience is a valuable intangible and I'm proud to say it's unique to BJ's.

I'll now turn over the call to Greg Levin for his remarks.

Gregory S. Levin - Executive Vice President, Chief Financial Officer and Secretary

All right. Thanks, Greg. As noted, our strong first quarter bottom line results reflect a continuation of the trends established over the last seven quarters and were driven by positive comparable restaurant sales, our ongoing success with productivity and efficiency initiatives, and the continued execution of our return-focused new restaurant development plans.

Revenues for the 2016 first quarter increased approximately 8.1% year-over-year to $243.4 million, while net income grew 21.1% to $11.6 million and diluted net income per share grew 32% to $0.47.

Reported first quarter net income and diluted EPS were impacted by approximately $370,000 or $0.01 per diluted share due to a California employment practices lawsuit settlement. Excluding this one-time settlement charge on a non-GAAP basis, our net income and diluted net income per share increased 23.8% and 33%, respectively.

Our comparable restaurant sales rose 0.6% during the quarter, as an increase in our average check of approximately 1.8% more than offset an approximate 1.2% decline in guest count. As noted, when we reported Q4 in February, we continued to see softness in our Texas restaurants, which were offset by solid comps in California and other areas. In general, the Western part of the U.S. continues to demonstrate some of the strongest comp sales for us.

As Greg Trojan mentioned, we had nominal menu pricing in the mid-2% range during the quarter, though our average check was up about 1.8%, as we focused our new menu and marketing promotions on the lunch daypart and value. Overall this drove positive lunch traffic for us during the quarter and reconfirmed value message with our guests.

Our weekly sales average for Q1 was a little over $109,000, which was down about 0.9% from last year's first quarter.

Our Q1 cost of sales at 24.9% was 10 basis points better than a year ago quarter. Overall, our cost of sales was higher than planned due to a change in the way we internally allocate promotional costs, between cost of sales and marketing.

Previously, we recorded to marketing a food cost charge related to promotional activity. This resulted in lower cost of sales and higher marketing expenses. However, with the increases in promotional activity, especially due to activity in our loyalty program, it was prudent to change this practice. This change in the allocation of promotional costs between cost of sales and marketing resulted in about a 50 basis point net increase in cost of sales and a subsequent 50 basis point net decrease in marketing when compared to the prior year. On an overall basis, our commodity basket was slightly down for the quarter.

Labor up 34.8% for the first quarter, represented a 60 basis point reduction from the year ago period, and came in under the expected mid-to-high 35% level. This year-over-year decrease resulted primarily from some leverage in restaurant-level manager costs, primarily due to lower incentive compensation and workers compensation expense, offset by higher hourly labor as anticipated due to higher minimum wages, primarily in California.

Operating and occupancy costs were 20.2% of sales for the first quarter, which is 50 basis points better than the prior year quarter. Included in operating and occupancy costs is approximately $4.4 million of marketing spend, which is about 1.8% of sales. As I noted a moment ago, we changed the way we allocate certain cost related promotions and discounts which had been charged directly to marketing in previous quarters. This resulted in marketing being about 50 basis points less than anticipated. In last year's first quarter, marketing spend was approximately 2.1% of sales.

Excluding marketing, operating occupancy costs in the first quarter averaged approximately $20,000 for restaurant operating week and that equates to about 18.4% of revenue compared to $20,500 last year or 18.6% of sales. G&A was $14.4 million in the first quarter, representing 5.9% of sales and that's down about 10 basis points from 6% in the year ago period.

Our depreciation and amortization of $15.6 million was 6.4% of sales and again averaged about $7,000 per restaurant week, which is in line with our recent D&A trends. Pre-opening expenses were $1.4 million, which is primarily for the four restaurants that we opened in the quarter. Our quarterly tax rate of 29% was slightly below our targeted rate of 29.5% to 30% per year and that's due to some additional WOTC credits.

In terms of capital allocation, we continued to use our strong cash flow from operations to execute on our national expansion plans while opportunistically repurchasing shares. Total capital expenditures for the first quarter were approximately $25 million, and we still anticipate gross capital expenditures for fiscal 2016 to be in the $110 million to $120 million range, covering the construction of 18 to 19 new restaurants, as well as maintenance CapEx and other sales building initiatives before any tenant improvement allowances.

We also continued our program of returning capital to shareholders, allocating approximately $24.5 million towards the purchase of approximately 587,000 shares of our common stock in the quarter. Since the authorization of our initial share repurchase program began in April of 2014, we have repurchased and retired approximately 5.5 million shares of BJ's stock for approximately $220 million. This leaves us with approximately $30 million remaining on our current authorized share repurchase plans. The weighting and benefit of the repurchases in our share count is becoming more evident in our financial results, specifically while Q1 net income rose a healthy 21.1%, diluted EPS increased 32%.

With regard to liquidity, we ended the first quarter with approximately $27 million of cash and $95.5 million of funded debt on our line of credit, which is in effect till September 2019.

Before we open the call up to questions, let me spend a couple of minutes providing some updated commentary on expectations for the rest of fiscal 2016. All of this commentary is subject to the risks and uncertainties associated with forward-looking statements discussed in our filings with the SEC and is based on information we have as of today.

As we begin Q2 sales, the weather and some shifts in the holiday calendar have made it difficult to ascertain a consistent read or trend in comp sales. To date, our comp sales are in line with what we saw in Q1, with comp sales around positive 0.5%. We continue to see the strength in the West being somewhat offset by Texas, which has also been impacted by recent rain storms and flooding, and we lost around three days of sales in the Colorado area due to the recent snowstorm last weekend.

Notably, given our continued success with the new lunch offerings and other promotional cadence, primarily around the lunch daypart, we are seeing guest traffic improvement and our traffic is down around 0.5% through the first three weeks into the new quarter.

As Greg Trojan mentioned, our comparable restaurant sales appear to be outpacing the industry to start 2016. However, based on recent trends and choppiness, we remain guarded on comp growth until we see clear evidence that casual dining consumers are back on a consistent basis and the Texas market becomes more stable. Therefore we continue to lean toward conservatism in building comp sales forecasts, taking into consideration the menu pricing in Q2 should be in the mid to upper 2% range, which is fairly consistent with what we saw in Q1.

Moving past comps, for the second quarter, I would expect approximately 2,275 restaurant operating weeks, marking an approximate 9.5% increase from the 2,076 weeks in last year's Q2. Also, as we move into new markets, I expect to continue to see a negative 100 basis point to 150 basis point spread between comp sales and weekly sales average. This has been pretty consistent over the last couple of years, as most of our restaurants are being opened outside of California.

Investors should keep in mind that our lower cost prototype, and lower operating costs from our operating initiatives, along with the fact that most of our newer restaurants are in states that are significantly less expensive to operate than California, are leading to returns on these new restaurants that are meeting or exceeding our internal targets.

Moving onto the rest of the P&L, I would expect cost of sales to be in the mid to upper 24% range in the second quarter. This is a little higher than our original estimate because, as I mentioned, we will no longer be allocating a food cost charge to marketing.

Again, I want to remind everyone that this change has no impact on our overall financial performance or restaurant level margins. It is purely an internal allocation between cost of sales and marketing. As such, cost of sales will be higher than originally estimated and marketing will be lower than originally estimated as a percent of sales.

Right now, we have locked in about 60% of our commodities for fiscal 2016, and I am still expecting our commodity basket to be around 1% or less. I would expect labor to be in the low 34% range in the second quarter, as the benefits of Project Q help offset some of the costs related to California minimum wage and other employee-related costs.

While we did leverage labor in Q1 over Q1 of last year, that was primarily due to lower incentive compensation and workers compensation benefit. Going forward, I would expect our labor to be up slightly due to minimum wage increases.

We are targeting total operating and occupancy cost to be around in the low 20% range. Included in this total will be approximately 2% of marketing spend.

Our G&A expenses for the second quarter should be in the $14.7 million to $15.2 million range, as we still expect total G&A for fiscal 2016 in absolute dollar terms to be approximately $60 million.

Pre-opening costs should be in the range of $1.2 million to $1.7 million for the second quarter based on three restaurant openings plus some pre-opening costs for restaurants that are expected to open in the third quarter and fourth quarters of this year.

We're expecting our tax rate in second quarter to be in the 30% range, as we are likely to realize fewer WOTC credits this quarter than we did in Q1. I anticipate our diluted shares outstanding will be in the 24 million to 25 million range for the year. And again, we will have $30 million remaining under our current share repurchase authorization.

Before I open the call up for questions, I want to reiterate Greg's message regarding the strategic plan we have been following for the last couple of years. That plan focuses on building top-line sales, improving our efficiencies and productivity throughout our entire organization, and continuing our steady double-digit capacity growth.

As a result, we now have seven completed quarters of positive comparable restaurant sales. Our margins have consistently expanded over the last year-and-a-half, with restaurant level margins of 20.1% this past quarter, our highest first quarter margin since fiscal 2011.

Our 2016 restaurant pipeline is solid, with 18 units to 19 units planned for this year, and with 175 restaurants open today and estimated national capacity for at least 425 restaurants, the majority of growth remains ahead of us. In addition, our balance sheet is strong and leverage is modest, providing us flexibility to achieve continued growth while opportunistically returning capital to shareholders in the form of share repurchases.

In closing, we remain confident that our initiatives to continue BJ's expansion, drive sales, productivity and efficiency, combined with prudent management of our capital structure, is a proven formula for sustained, long-term financial growth and the appreciation of shareholder value.

That concludes our formal remarks. Operator, please open the line up for questions.

Question-and-Answer Session

Operator

Thank you, sir. We'll take our first question from Matthew DiFrisco with Guggenheim Securities.

Matthew Kirschner - Guggenheim Securities LLC

Hey. This is Matt Kirschner on for Matt DiFrisco. I was wondering if you could just go into the quarterly trend and the cadence of last year? I see that at this time it is 1.5%.

Gregory S. Levin - Executive Vice President, Chief Financial Officer and Secretary

I said our quarter-to-date comps right now are about 0.5%, positive 0.5%. Last year at this time, I think they were also about 0.5% I think from earnings call a year ago. Is that what you're asking, Matt?

Matthew Kirschner - Guggenheim Securities LLC

Yeah, that's correct.

Gregory S. Levin - Executive Vice President, Chief Financial Officer and Secretary

Okay.

Matthew Kirschner - Guggenheim Securities LLC

Is there a cadence through the quarter?

Gregory S. Levin - Executive Vice President, Chief Financial Officer and Secretary

We don't get specific on the quarter, I would tell you last year on the call, we said that our comp sales were about 0.5% as we went into this call and we finished Q2 at a 0.5%.

Matthew Kirschner - Guggenheim Securities LLC

Okay. And then just on the loyalty program, do you guys breakout or can you just kind of offer anything on the number of users that have downloaded the app along with the percent of transactions?

Gregory A. Trojan - President, Chief Executive Officer & Director

Go ahead, Kevin.

Kevin E. Mayer - Chief Marketing Officer & Executive Vice President

Yeah. We have – as a percentage of transactions?

Matthew Kirschner - Guggenheim Securities LLC

Yes.

Kevin E. Mayer - Chief Marketing Officer & Executive Vice President

Let me think here.

Gregory A. Trojan - President, Chief Executive Officer & Director

I know, the percent of transactions is in the mid teens, and have been consistent on the loyalty front and we're seeing good acceleration on that in both spend per user and that number has been heading in the right direction as we've been using that database and rewarding our guests.

Gregory S. Levin - Executive Vice President, Chief Financial Officer and Secretary

And Matt on the app, you mentioned as well, we've always mentioned that's kind of in the low single digits. We continue to push that forward. I think that's a great opportunity to drive business, make BJ's faster, which is something that we've always talked about. Speed is a – it's not one of our competitive advantages and we believe the mobile app gives us that advantage as we get more guests to use that. But as we are today, that's still in the low single digits with a huge opportunity for increases over time.

Kevin E. Mayer - Chief Marketing Officer & Executive Vice President

The only thing I'd add there Matt is, we're seeing good growth on the app actually, given some of the features that we keep improving and when you combine some of our lunch marketing into the app. So we are seeing nice growth but admittedly off of a low base, right. So we like the direction it's headed, we like it to happen more quickly there, but are pleased that it is growing.

Matthew Kirschner - Guggenheim Securities LLC

Okay. Thank you, guys.

Operator

And we'll take our next question from Joshua Long with Piper Jaffray.

Joshua C. Long - Piper Jaffray & Co. (Broker)

Great. Thank you for the question or for the time. My first question was regarding your read on the consumer environment right now and just from an industry perspective? And then secondarily as we get some more – as you get some more time working with marketing the BJ's brand, I was curious if you would be able to share any sort of takeaways that you've learned? Is there an emotional connection with the brand that you had not been able to tap into previously that now is showing up, is it overwhelmingly price point driven, just any sort of read you can talk about as you try to work with the guest in driving awareness and trial of the BJ's brand?

Gregory A. Trojan - President, Chief Executive Officer & Director

Okay. I'll give that a shot. In terms of the overall consumer, I think we're continuing to see sort of better economic news particularly or maybe even solely sometimes, it seems like from a U.S. perspective and around the world and in terms of employment growth, et cetera. But there's no question the consumer is still nervous about what's in front of them, right. And so, therefore, I think we're still not seeing the level of retail spending you might expect otherwise with similar economic news and employment and et cetera. So, that results in still pretty choppy environment in restaurants and in retail, in general, more so than you might suspect.

And so, I don't have any other sort of forecast or crystal balls in terms of that and on that front. But I do in terms of our marketing and our opportunity and I think what we're really starting to tap into and Kevin and his team have been working furiously on is, the core of our brand is this amazing quality at the value price points that we offer. And if there is something we've coined this term, more internally than externally around CRAFT MATTERS that really gets to the essence of the quality of our food and the experience, right.

And it's an unexpected quality given the price points we operate in and that's been the focus, to do that in a fun way. It sounds like a pretty serious mathematical equation, but we're trying to do that in a way that conveys that value quotient in a way with some personality. And I think it's starting to having an impact and we're trying to make that transition happen more quickly in some of our newer markets. So we're pleased that we're headed in the right direction in the essence of the brand, but like most things we're impatient to make that happen more quickly. Kevin, do you have any other?

Kevin E. Mayer - Chief Marketing Officer & Executive Vice President

Yes, I think to Greg's point, we're seeing strength in the emotional connection, in the brand as well as responsiveness to discounting within the data. As Greg mentioned, we're seeing some growth in terms of engagement with the app. We're seeing of our active loyalty guests some growth in regards to the average frequency over a month's time period. I know that we're on with our media, we're seeing an improved responsiveness to our media and we've expanded some of those markets. I think the last thing is we've got initiatives such as lapsed users where we actually through our loyalty program try to activate those folks who haven't been to our restaurants in the last six months, and we see a very strong responsiveness to that. So I think there's both responsiveness to our discount as well as the brand engagement right now.

Joshua C. Long - Piper Jaffray & Co. (Broker)

Great. Appreciate that color. As I shift gears into thinking about the restaurant-level costs' setup, curious if there's either an opportunity or willingness to maybe contract more, I think Greg Levin you had mentioned about 60% of your basket was locked. Just curious on the philosophy there in terms of maybe looking to lock more or if that's a good spot to be just given the overall food outlook?

Gregory S. Levin - Executive Vice President, Chief Financial Officer and Secretary

Yes, Joshua, we always opportunistically look to lock when we can lock. At the end of the day, we want to run restaurants and not have to worry about commodity inflation. So if we knew the exact price of where everything was going to go, we would go long all day long and get into just pure focus within the business.

At the same time, there are just certain items that you can't necessarily lock, except on those monthly basis from that standpoint. So it gets a little bit harder to lock in a significant amount above the 60%. But when we have the opportunity for now, let's say, to even buy out into the first quarter of 2017 or further, we will. So, again, it's a little bit of art with science there, but generally speaking, we don't want to be out there fluctuating with the environment. We'd rather lock it in because, again, it allows us to plan our promotions and just worry about executing within the four walls of the restaurant.

Joshua C. Long - Piper Jaffray & Co. (Broker)

No, that makes sense. So good way to think about is 60% is fully locked for your brand on a regular ongoing basis?

Gregory S. Levin - Executive Vice President, Chief Financial Officer and Secretary

As best we can.

Joshua C. Long - Piper Jaffray & Co. (Broker)

Yes. Okay. That's helpful. And then my last question is on the labor side. I think previously we had talked about labor on a margin basis being elevated and then maybe slowly coming down over the course of the year. Is that still kind of the look? You had mentioned that it could be up slightly for the year, so just curious on what you're thinking about the cadence of that given the minimum wage pressures and just the overall labor pressures as we go through the course of the year?

Gregory S. Levin - Executive Vice President, Chief Financial Officer and Secretary

Yes. I am still expecting it to be up slightly over the next few quarters, as I mentioned earlier, just looking at how things are playing out. We did get a benefit here in this first quarter, as I mentioned, on lower incentive compensation. Last year we came out of the gate with a 3% plus comp that allowed for higher incentive compensation, and we did get a benefit this quarter on our workers comp that brought it down. So you start to stripping those things out and you see the pressure from the minimum wage, as I mentioned on the call. And therefore I'm assuming absent of that in those benefits in Q2, Q3, and Q4, I would see a slight uptick there.

As I mentioned before, I don't think this changes. That would be offset with, in this case, now holding cost of sales in line because of the way we're changing our internal allocation, but then seeing lower operating occupancy cost. So, ultimately, I still think there is ability to get margins above where they were last year.

Joshua C. Long - Piper Jaffray & Co. (Broker)

Great. That's helpful. Thank you.

Gregory S. Levin - Executive Vice President, Chief Financial Officer and Secretary

You're welcome.

Operator

And we'll take our next question from Jeff Bernstein with Barclays.

Pratik Patel - Barclays Capital, Inc.

Great. Thanks. This is Pratik Patel for Jeff. Just wanted to see if you could talk about the unit performance in your newer markets. As you mentioned before, the brand is a little bit less familiar to folks in these markets and just wondering if you could comment on the initial sales and margins relative to the rest of the system and the trajectory you expect over time as you infill some of these markets? Thanks.

Gregory S. Levin - Executive Vice President, Chief Financial Officer and Secretary

Yes. This is Greg Levin. Those restaurants are actually they're doing the sales levels we internally projected and are frankly consistent with other restaurants in those markets that might have been some of the newer prototypes. And, look, like any portfolio, you have restaurants that outperform, you have restaurants that are a little bit lower in that regard and we tend to have that. As we mentioned on the call today, our Victorville, California restaurant did $184,000 and continues to hold up with some strong sales. That's our home court of California, but it does prove one thing, and that is the smaller prototype, which is about 20% smaller than our existing 8,400 square foot prototype, can do sales volumes at the level of some of our existing prototypes. So we don't think that there is any reduction in sales, because we decided to build our newer prototypes a little bit smaller.

When we go into some of these newer markets such as the Northeast Ohio market, we're seeing some pretty strong sales coming out that are in line with our sales if not better than some of our other sales in that Ohio Valley market. Same thing in the Mid-Atlantic with their newer restaurants. When I look at our restaurants in Alabama and Murfreesboro, Tennessee, they are doing what you'd expect compared to restaurants in Florida putting them in there or restaurants in the Mid-Atlantic or even restaurants in Texas.

So, overall, we feel very good. I do reiterate the point that with BJ's and we've always said this, our restaurants in California give higher volumes. They have higher pricing. There is more density, so we expect them to be higher. As we move outside of California, again, to other markets, we expect those to be a little bit lower in volumes and that's what we're seeing and there's been no difference with this latest class versus restaurants we built four years or five years ago.

Gregory A. Trojan - President, Chief Executive Officer & Director

I'd just take on the margin one...

Pratik Patel - Barclays Capital, Inc.

Thanks very much.

Gregory A. Trojan - President, Chief Executive Officer & Director

...what I'd say, just in general is, they're opening up and getting to steady-state margins more quickly. Literally on a very consistent basis, we're seeing the benefits of that new layout and is more efficient to open our restaurants, both in terms of preopening and our opening margins and are seeing them operate at compared to the larger restaurants at the same sales level and more efficient labor and other operating costs, as you would expect, but that's actually happening in real execution in these new restaurants.

Pratik Patel - Barclays Capital, Inc.

Great. Thanks very much for the color. Appreciate it.

Gregory A. Trojan - President, Chief Executive Officer & Director

Welcome.

Operator

And we'll take our next question from Chris O'Cull with KeyBanc.

Chris O'Cull - KeyBanc Capital Markets, Inc.

Thanks. Good afternoon, guys.

Gregory A. Trojan - President, Chief Executive Officer & Director

Hey, Chris.

Chris O'Cull - KeyBanc Capital Markets, Inc.

Greg, you mentioned that you're pleased with the targeted promotions that you ran in Texas. Can you quantify how it impacted the traffic or comps in the markets that you ran it?

Gregory A. Trojan - President, Chief Executive Officer & Director

We don't really roll it up that way from a cumulative perspective. We do analyze the individual promotions for when they are running there, Chris, but I don't know, Greg, I don't think there is something from a cumulative perspective that we have that can answer that. But...

Chris O'Cull - KeyBanc Capital Markets, Inc.

I'm just trying to figure out if you noticed a difference in the same-store sales after you started running these targeted promotions?

Gregory A. Trojan - President, Chief Executive Officer & Director

Well, yes. I mean, we look at every single one of them, as I mentioned. So I can tell you on a cumulative basis, but on an individual basis, they are needle movers. And I think the most important thing to understand where we're trying to get to on this front and I tried to cover this in my remarks is what we don't want to do is on a consistent basis have it become an expectation in order to come to BJ's, I just have to wait for a deal, so to speak. But we do know that and we've just done some pretty recent or actually very recent market research where there are folks out there that because of their economic circumstances are making that decision on a Friday night based upon what deal is in effect where.

So, the idea is, let's target those guests, whether they're loyalty members or externally as folks that we know are more deal sensitive, and we're not obviously anxious to drive incentives towards people that were going to come anyway. So we're trying to do that, understanding behavior from a loyalty perspective, which is easier to do, obviously, because we know those folks' frequency and spend, but also think of different other ways that we can target the more value-conscious folks with some incentives that also change up over time and celebrate whether it's things going on in the market or things about BJ's that make it fun and more brand positive than here's just a discount.

Look, we're not all the way there on that, by the way, but we're making some good progress. We've done some things like – institute some just pretty frankly old school basic franchise night kind of ideas where we're doing half off family pizzas at certain dayparts and that's building over time and it gives people a chance to come to BJ's who otherwise might not think that they can. And so it's not just offers, it's finding other way through bundled combinations and some of these day part focused promotions that we think are brand positive, because at the end of the day that's the fine line here is incrementally, frankly, given the marginal economics of our business, you almost always are in a place where you are driving enough traffic to make money, per se. But over time, if you've just like anything overdone, it's going to erode the brand and that's not something we're going to let happen.

Chris O'Cull - KeyBanc Capital Markets, Inc.

I noticed that a lot of your competitors in Texas have used bar promotions or pretty aggressive value promotions at the bar to try to drive traffic. Have you guys tested any type of alcohol value promotion?

Gregory A. Trojan - President, Chief Executive Officer & Director

We have added some value to our Happy Hour. And I won't go into excruciating detail, but we have done a bit of that. But given Texas alcohol incidents has always been on the higher side, which we love and respect, so there may be some more opportunity to go further in that direction, frankly, but we have done some of that.

Chris O'Cull - KeyBanc Capital Markets, Inc.

And certainly, I was a little confused on your comments. It sounds like you're trying to target more check growth to drive same-store sales this year, but it also sounds like the recent trend, the check growth has waned a little. Can you help me understand what should we expect in terms of same-store sales growth? More check driven or....?

Gregory A. Trojan - President, Chief Executive Officer & Director

Well, really what we set out and the way I described this year I think starting back in December was striking a balance, because 2014 was more about given the investments we made and the price points, a more traffic-oriented focus. Last year we took advantage of some opportunities to grow check a bit more and, frankly, we're trying to do a bit of both here. So the early part of this year with lunch and value is a bit more focused on the traffic side and look we're always going to try to drive traffic as the most important metric, let's not get confused, but we do think there is continued opportunities.

What we are seeing time and again, Chris, in things that we're both testing and some of these new products, I wouldn't put the lunch items in this category, is that we have the permission to stretch on price point and quality. People trust us to do a bone-in New York Steak where we've done our Atlantic salmon and we do a good job with those products and there are opportunities like that in future center-of-the-plate and elsewhere in our menu to drive check but still provide a great value and people leaving saying, well, that was an amazing whatever, even though it was on the higher end of our range of check.

And so let me try to make sure in terms of my comments that they are not confusing is look we're going to use that guest check growth. The reason our guest check wasn't quite as high as it was trending before is we are dealing more of that check back in incentives and in discounts. But that's giving us some very important air cover to still relative over the last couple of years 1.8% of check growth is pretty healthy. So again we are trying to strike that balance between traffic and check, but think of it as with a mid-2% pricing, we had mix in our favor, we consciously dealt that pricing back through incentives where we needed it most and ended up at a level that wasn't that far different from where we were pricing. Does that make sense?

Chris O'Cull - KeyBanc Capital Markets, Inc.

It does, that was helpful. And then, just last one, there has been a greater focus from chains on takeout sales and you guys were really early with the digital ordering platform, not just the app, but online and have a very good system. But yet if you look at your takeout business as a percentage of your food sales, it's pretty low relative to the rest of the segment. Is there an opportunity to drive growth there?

Gregory A. Trojan - President, Chief Executive Officer & Director

Yeah, yeah. Actually it is one of those things that we are growing it and it is one of the faster growing elements of our business, but we agree with you. It's an opportunity to grow even higher. We are doing more with the app in terms of capabilities there and improving that, but also our website. If you look at the percentage of our takeout sales that are coming from online orders, that's a healthier percentage than one might think as well. And so, we're also making an important investment in our website and mobile site to make it easier and for a lot of things translate a lot of the features if you will that are in the app to website as well.

Kevin E. Mayer - Chief Marketing Officer & Executive Vice President

Yeah. If I could just jump in. This is Kevin. We are on your way of building out a new web platform that will be a lot more contemporary to what you see that Google is looking for in regards to SEO, search engine optimization. So we think there is not only an opportunity to build an website that's little more custom to a personalized experience for the guests, meaning the site will have the data, the login state, it will know you've ordered in the past, et cetera, which I think will hopefully create frequency, but also allow our site to be stronger in regards to guests just looking for takeout at any given night. So we do think there's some upside here in the back half of your early next year.

Chris O'Cull - KeyBanc Capital Markets, Inc.

Great. Thanks guys.

Operator

And we'll take our next question from Jeff Farmer with Wells Fargo.

Jeff D. Farmer - Wells Fargo Securities LLC

Thanks. Just following up on an earlier line of questioning. It looks like over the last three years, you guys have opened up something like, looks like more than 25 restaurants outside of California, Texas, Florida, so those core markets for you. As a group, are those units entering the convertible store base as a headwind or a tailwind of same-store sales?

Gregory A. Trojan - President, Chief Executive Officer & Director

There's really been no change in our discussion on that, Jeff in the sense that when newer restaurants come into the comp base, they come in negative. And I will tell you right now, the class of 2014, it came in negative. I don't know what these act – hit was on comp sales, in the past we've talked about being around 50 basis points and looking at the trend, it looks pretty consistent. If you go back though and I look at the class of 2011, class of 2012, those classes at least in the first quarter here, all were positive. If I look at the class of 2013, the first half of 2013 restaurants, meaning restaurants that opened July and back on aggregate were positive. The restaurants that opened in the second half of 2013 were still negative. As they kind of come out of their honeymoon, they're less negative they were in this first quarter than they were two quarters or three quarters back. So, we're seeing the same patterns that we've always seen and that is, as a growth year company, we have probably a 50 basis points drag on our comp sales because of new restaurants.

Jeff D. Farmer - Wells Fargo Securities LLC

Okay. That's helpful. And just Greg, sticking with you on this one, again another question that was touched on, but over the last four quarters, you basically pretty handedly outpaced your labor cost guidance, looks like by about an average of 50 basis points to 60 basis points. I understand you guys made it clear Project Q is an ongoing effort, there is multiple moving pieces to it. But if we are looking at the guidance today, is there any reason to think that we should not be viewing this as conservative. Is there anything you are about to lap or implement? Any reason again that we shouldn't be thinking that this guidance that you've outlined and the labor line still isn't conservative?

Gregory A. Trojan - President, Chief Executive Officer & Director

No. I think, when I look at this data, kind of look at our cost for operating week and so on from that standpoint, which is one of the ways I look at at the size is just we're kind of lined-up from a percentage standpoint. And that is, as we start to head into the second half of this year, actually let's just call it Q2 going forward, we've taken that next step down below 35%, meaning beginning in Q2 of 2015, we are running labor all-in in the 34% range, prior to that we are running labor in the 35% and 36% range.

So, we are – which you guys have written about every time and I know we've tended to do a little bit better from a performance standpoint. We are now coming up against really our toughest comparisons from a margin standpoint. Even if you look at restaurant level margins starting in Q2 of last year, they move up to 20.9%, 19.7%, and 19.9% and we've always talked about getting our restaurant level margins back to 19% and I think we've shown that we can get above 19%.

But prior to that, in 2014, we were running restaurant level margins in 17% and 18% range. So it really starts to get to the point that starting here in Q2, it becomes probably grabbing the fruit really at the top of the tree, so to speak, or maybe the later innings and everybody is trying to figure out the exact innings. We've got things that we will work on, but I do think labor is going to start to flatten out year-over-year, if not go the opposite way as I kind of guided from that standpoint, that's what I'd be expecting. And frankly, we saw it in hourly labor this first quarter, again Jeff, the only difference there would be where comp sales come in. If you could drive stronger comp sales, I think we can get additional leverage there. But I do think based on what we're seeing in the choppiness of the market, labor is going to be more of a challenge for us and we'll start to see more of a pickup I think through cost of sales and operating occupancy to manage the margins.

Jeff D. Farmer - Wells Fargo Securities LLC

Okay. Very helpful. Thank you.

Operator

And we'll take our next question from Will Slabaugh with Stephens.

Will Slabaugh - Stephens, Inc.

Yeah. Thanks, guys. I just wondered if you could talk a little bit about more about the trends you saw throughout the quarter, just given the weakening industry data we've been seeing. Has there been any notable distinctions maybe for you from week versus weekends or I mean you talked a little bit about your focus on lunch versus dinner. I'd love to hear that or any additional color you may be able to provide about what you think is happening, is it sort of decelerating broad casual trends in the market?

Gregory A. Trojan - President, Chief Executive Officer & Director

Well, I'll start it. I'd just start-off by saying, our trends were consistent with what you've seen in terms of timing from an industry perspective, from Knapp-Track or Black Box, from that perspective. And I'd say because of our focus on lunch and value, lunch was a bit stronger from a year-over-year perspective, as we run promoting broader or much on the dinner front, so. But in terms of weekends or weekdays or other than things that are explained promotionally or from a menu perspective, there weren't big shifts. The only other thing that we don't have an exact explanation for, but it just did seem like spring break timing was not as beneficial in those traditional high volumes, spring break is helpful for everyone, but we tend to see nice bumps during those weeks.

And when the laps were going against us, it seemed to hurt a little bit more than when they were back and helping us. And overall, it's just our perspective that we just didn't see the benefit from the Easter and spring break season that we have had before. Some of that's probably weather, but in general, the calendar just didn't seem to benefit as much seasonally as it has in the past, is the only other color I could give.

Kevin E. Mayer - Chief Marketing Officer & Executive Vice President

Yeah. I would say with...

Will Slabaugh - Stephens, Inc.

Got it.

Kevin E. Mayer - Chief Marketing Officer & Executive Vice President

Jumping on to Greg's comments there. Our weekdays are stronger than weekends, but that's as expected because we were promoting lunch. And most of our lunch offers were through the weekdays, so we saw that's stronger. I still believe, Will, what you tend to see in casual dining is when there is a reason to celebrate events, casual dining tends to be stronger I think and that's because the way the competition might be with fast casual as well. So, you start off January pretty strong because people are still in celebratory modes, some people still have vacations those first couple of weeks, and then as you start to get back into the rest of the normalcy of your patterns, it seems to have gotten softer. I think we tend to see that through our business. And there's reason to celebrate, whether it's Valentine's Day, even days off at school, whether it might be a Memorial Day, a Veterans Day, et cetera, those tend to be very big days for us. And that's kind of what we've seen frankly over the last two years or so.

Gregory A. Trojan - President, Chief Executive Officer & Director

We're looking forward to Mother's Day and Father's Day and graduation season, just around the corner.

Will Slabaugh - Stephens, Inc.

Got it. That's helpful. Also I just wanted to ask about pricing a little bit, I know you mentioned where you're going to be, mid-to-high 2% this quarter, curious just given all the talk about California minimum wage continuing to increase, kind of what your thoughts are there over the longer term?

Gregory A. Trojan - President, Chief Executive Officer & Director

Well, we're not going to make any long-term forecast, it's going to – obviously somewhat dependent, that's why we're working as hard as we are on the cost structure side. So our point of view is the more progress we can make on that front, then we can take less price and even widen our value benefit and gap here, so that's our strategy around it. How that works out is going to be somewhat dependent on how successful we are on that front and whether what's happening competitively et cetera, but all the data that we're looking at is if you balance it regionally, like when it's a little deceiving or not deceiving, or you just have to keep in mind that when we say mid-2s%, we have a disproportionate amount of California pricing in that number, right, more or so than other concepts that aren't as California focused, right. So when we look at it regionally, we think we're doing a good job of sticking to that strategy where both our nominal pricing is in line, but our effective pricing after our promotional spend is if anything, widening the gap from a value perspective competitively.

Will Slabaugh - Stephens, Inc.

Got it. Thanks, guys.

Operator

And ladies and gentlemen, we'll take our final question today from Sam Beres with Robert W. Baird.

Sam J. Beres - Robert W. Baird & Co., Inc. (Broker)

Hi. Good afternoon. And then just one quick clarification and then I have a follow up, Greg Levin maybe, first I know trends have been volatile here in the last few weeks, but any sense of what the impact of the Easter shift on that quarter-to-date comp you provided was, any thoughts on the quantification of that would be helpful.

Gregory S. Levin - Executive Vice President, Chief Financial Officer and Secretary

I don't think it's that impactful. We pick up the Sunday, but as a result the rest of the week is a little bit softer because that would have been a spring break week in that first quarter, so you get a Sunday, but then you lose it during the middle of the weeks on the Monday, Tuesday, Wednesdays when everybody would have been on the spring break, Sam, so I think net-net it's actually immaterial to where we are right now.

Sam J. Beres - Robert W. Baird & Co., Inc. (Broker)

That makes sense. Thanks for the clarification. And then maybe just in terms of the Texas trends, obviously been a bit softer than the overall system here. So I know you've talked previously maybe not so much energy market-related and more or so just competitive environment in Texas. Any thoughts though on how you're thinking about Texas trends moving forward, and maybe factors that you think could help alleviate the strain that maybe it's putting on the overall comps for the system?

Gregory S. Levin - Executive Vice President, Chief Financial Officer and Secretary

Well, I'll try and take most of that question, I don't know if somebody wants to add on at the end here. But we internally still believe that Texas is going to continue to be softer, I mean, the amount of new restaurants still coming online from a competitive intrusion standpoint as well as frankly construction in a lot of our or a few of our big restaurant areas is really kind of impeding a acceleration of comp sales there.

So when I think about building models for BJ's and where comps are going to be this year, I take that into consideration even though we're seeing a little bit more pricing outside California or seeing stronger sales maybe in other markets with Texas still kind of taking us down from that standpoint. I do think, as Greg Trojan mentioned, part of our plan will be to be a little bit more incentive-based in some of those Texas markets because we do know, as Kevin also mentioned, that our guests – certain guests in those markets, they are looking for deals, that's a market with a lot of restaurants out there and sometimes they're making the decision based on what they think could be the best value of that day and that best value tends to be a deal in front of them versus maybe everyday low pricing.

Gregory A. Trojan - President, Chief Executive Officer & Director

Well, there is also no question...

Gregory S. Levin - Executive Vice President, Chief Financial Officer and Secretary

It will be combination of those two things.

Gregory A. Trojan - President, Chief Executive Officer & Director

There is no question that the energy may not directly impact family income, but it's a darker cloud in Texas than it's going to be elsewhere, right. So I do think for that reason, people are a little more or less confident about their future than elsewhere and that's clearly impacting it. But look the other thing I would add here is, like we're looking at this as an opportunity to make our concept even better, like there is nothing we can do about oil prices and frankly the number of restaurants that are being built out there and our attitude about it is, look, we run great restaurants, we run still among if not the busiest restaurants in the State of Texas and we love Texas and we make a lot of money in Texas.

So, it's how do we leverage that position, the volume we're already doing, to offset these negative trends, maybe a little differently and it's a challenge that maybe we get better as a concept that we can take to other geographies and as part of figuring out this challenge of how we get better as a concept in doing this. So look, we all wish that we're all smooth sailing and that's why we built restaurants all over the country is, you're going to have these kind of ups and downs and counter balances and we look at it as a challenge to get better, but at the end of the day, to Greg's point, the reality of the map is, Texas is going to in all likelihood continue to be growing at a lower rate and being a drag on comps for this year, but it's our goal to make that as little a drag as possible.

Sam J. Beres - Robert W. Baird & Co., Inc. (Broker)

Great. That's helpful. Thanks guys.

Gregory A. Trojan - President, Chief Executive Officer & Director

Thank you.

Operator

And ladies and gentlemen, that does conclude today's conference. We appreciate your participation.

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