BJRI: Company Overview
As of its 16Q2 earnings report, this Southern California-based company operated 177 casual dining restaurants under four banners, all with some variation of "BJ" in the name, in 23 states, but it's the "BJ's Restaurant and Brewhouses" with about 170 locations that dominate operations and are the vehicle on which the company has based its growth strategy. Per its 2015 10-K report, units average 8.2K sqft (range 7K-10K sqft and generate AUVs of $5.6M, or $686/sq.ft.). BJ's broad menu features over 130 items but the signature offerings are its deep dish pizza and craft beers. The average check is about $14, which compares favorably with the company's casual dining competitors as do its restaurant-level EBITDA margins at about 20%, although consolidated T12M, consolidated EBIT margins at 7.1% are only average and ROIC at 12.1% is about 200 bps below average.
As discussed below, the company has been re-tooling for growth after some missteps, and is seeing some success in improving comps, margins and cash flows. The balance sheet is strong. As of 16Q2, the ratios of debt to EBITDA and lease-adjusted debt to EBITDAR were a very comfortable 0.7X and 2.4X, respectively. Cash from operations for the T12M was $141.7M, which net of capex of $97.1M, left free cash flows of $44.6M. The company has been buying back stock, spending over $220M for 5.5M shares since initiating its $250M program in April 2014.
The company is executing major initiatives ("Project Q") on several fronts. The important two are developing a smaller store prototype and pruning a menu that had gotten too large. In addition, management has outlined an ongoing process to increase sales, improve margins and enhance the customer experience.
The new store prototype. The company believes there is potential for at least 425 units but as it has expanded beyond the dense markets of its Southern California roots, it found its legacy store model, at 8K square feet or more, did not generate satisfactory returns. To penetrate markets identified on its path to 425 units, it developed a smaller prototype, the first of which was tested in mid 2014. At 7.4K sq.ft. and costing about $4M before landlord allowances (est. $740K-1.1M), it is 15% smaller, 20% less expensive to construct and about 17% less in pre-opening expense.
Though generating lower AUVs, management is seeing increasing evidence that the smaller prototype will realize returns at least equal to those in its legacy markets. Specifically, the company targets AUVs of $4.5M at maturity, four-wall cash margins of 18-20%, and 30% cash returns on the net cash invested for its new restaurants. The menu. In recent years, the menu had crept up to 185 items. The combination of operational complexity and the promotional expense to support so many items affected comps and margins. In response, the company pruned the menu to its current 135 items, but so far, results have been mixed.
Comps have averaged about 1% in the last eight quarters, and have gone slightly negative in 16Q2. On the other hand, restaurant-level EBITDA margins have gained over 200 bps in the same period despite the tepid comps. Management sees the potential for continued margin improvement from tweaking the menu composition further. For example, it is not yet satisfied with its appetizers, but is pleased with customer acceptance of its Quinoa Bowls, Barbacoa Chicken and North Beach Mahi-Mahi and Shrimp dish selections introduced with the freed up capacity in the menu. Finally, management has outlined initiatives to improve advertising, use of technology to improve the guest experience (such as a mobile app to better navigate customer wait times and speed orders once seated), and to streamline kitchen operations and reduce waste.
BJRI: Current Developments per Q2 Report and Conf. Call
In its 16Q2, revenues were up 7.9%, entirely on store growth (+9.6% operating weeks offset by -0.2% comps). The negative same-store sales performance, the first in eight quarters, consisted of a 1.4% increase in average check, offset by a 1.6% decrease in traffic. On the conference call, management said it had reallocated advertising from its core Southern California market to some newer markets but the sales lift in the new markets didn't offset the drop in Southern California. Moreover, it said its Texas locations, in addition to sales softness due to the regional energy-related headwinds, were hurt by the severe rainstorms in April and May. Excluding Texas, management said Q2 comps would have been +1.2% and traffic only -0.5%.
Below the top line, the slightly higher food, labor and D&A expense as a percent of revenues were almost entirely offset by lower occupancy and G&A expense, with the result that the operating margin declined only 10 bps 8.4% (ignoring $707K and $641K losses on disposal of assets in 16Q2 and 15Q2, respectively). Net income at $13.8M increased by 10.9% YOY and with the benefit of share repurchases (though none in Q2), EPS grew 19.9% YOY to $0.56.
As presented most recently within a conference presentation, reiterated on the Q2 conference call, for 2016 (a 53-week year) management is on track to open its planned 18-19 new stores, representing about 11% store growth & about 10% increase in operating weeks. For Q3 management provided no comp guidance but said that the soft sales experienced in Q2 were continuing, with comps down 2% in July on -2% traffic. It expects a 6.9% increase in operating weeks (of smaller, lower AUV prototype units).
Below the top line, management implied lower margins in Q3, driven by deleverage, somewhat higher food and labor costs (particularly in California). Management did not change its guidance for 2016, a 53-week year, other than to lower its G&A forecast by about $2M (about 3%) and suggested that it had ample flexibility to manage margins, if necessary, by cutting back on planned marketing spend or menu promotions designed to stimulate trial. Management also noted its loyalty program is growing, as is its mobile app. It has high hopes for the mobile app to increase table turns, noting that speed of service is not one of the company's strengths.
Upcoming Earnings Release & Our Conclusion
BJRI is scheduled to report its 16Q3 earnings Wednesday, October 19th after the market closes with a conference call at 5 PM EST. Of the 15 sell-side analysts providing estimates, the consensus for revenue, comps and EPS of $240M, -1.7% and $0.33, respectively, are substantially unchanged since they were lowered following the Q2 report. Q4 and FY17 estimates are also substantially unchanged. According to Bloomberg, the mean target price is $43.50 (range $35-58) which is down $1.50 in the last four weeks (-$8 since the Q2 report). Also, on September 29th, Luxor Capital Group, a hedge fund, filed a 13G reporting it reduced its holdings in the company from just above 10% to just below (9.99%).
The industry has its current challenges, there is nothing dramatic here to think that it will substantially outperform expectations, but the stock has never been cheaper, and it will be increasingly attractive to private equity firms should any further weakness develop. In terms of reward to risk, we believe BJRI represents good value at this level, obviously better value even lower.
Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.
I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.