Headquartered in Huntington Beach, California in the United States, BJ's Restaurants Inc. (NASDAQ:BJRI) has been gradually improving its financials for the last few years and generated a return of nearly 17% since the start of this year.
In July 2014, BJ's Restaurants reported impressive results for the second quarter of this year. The adjusted EPS of 30 cents surpassed the analysts' estimates of 24 cents by nearly 25%. The net revenue grew by nearly 10.5% compared to the corresponding period of last year. The company has been continuously making decent returns to its shareholders compared to its peer group. The graph below compares the returns generated by the company to those in its peer group in the last five years. I am quite optimistic about the company's future and expect it to report tremendous financials in the coming years.
Source: BJRI SEC Filing Form 10K
In this report, I will be discussing a few factors related to the restaurant industry that will make the company an attractive investment opportunity in the future.
Rise in the Consumer Spending
The consumer confidence index in the United States is continuously increasing and it has improved from 90.3 in July 2014 to 92.4 in August 2014. Americans are now more confident about their finances and job security which has caused them to spend more. The figure below shows the year over year increase in consumer spending in the United States.
Source: Trading Economics
According to the American Express Spending and Saving Tracker, the percentage of consumers spending on dining out has increased since last year. This year 28% of Americans said that they have increased their spending on dining out compared to 20% of Americans in 2013 reflecting an increase of about 40%. Nearly 45% of people in the U.S. expect their finances to improve in the next 6 months which will further increase consumer spending.
The U.S. Bureau of Labor Statistics (BLS) reports that non-farm payroll employment has jumped by nearly 142,000 in August 2014 resulting in the decline of the U.S. unemployment rate from 6.2% in July to 6.1% in August.
The figure above shows that the unemployment rate is gradually declining and is expected to decrease further in the near future. The improved employment levels are expected to increase the Americans' disposable income which will further boost consumer spending in the United States.
The rising consumer confidence in the U.S. and increasing consumer spending on dining out are providing decent growth opportunities to BJ's Restaurants. NPD Group, a leading global information company, expects the food service industry to grow this year. The number of visits to restaurants is expected to increase by 1% and consumer spending is expected to increase by 3% by the end of 2014. By successfully catering to the increased demand for its services BJ's Restaurants can grow both its top and bottom lines in the future.
Americans Are Becoming More Health Conscious
With increasing obesity problems, people in the United States are now becoming more conscious. They have started consuming healthier food by making better use of the available nutritional information. According to the United States Department of Agriculture (USDA), nearly 42% of working-age adults and 57% of older adults look for nutritional information when making eating choices. The use of nutritional information in the restaurants is also increasing. About 76% of working-age adults said that they would use this information if it were available.
I believe this change in Americans' eating habits could prove to be quite beneficial for BJ's Restaurants as the company made a few amendments to its menu a few months ago. In keeping with a more nutritious diet, the company has now added 15 new items to its menu which are lighter, healthier, and also priced below $10. This will help the company to generate a huge traffic of diet-conscious customers thus increasing its revenues.
Cost Reduction Initiatives
The company has been busy restructuring its restaurants' layouts for the past few months. The company has moved from an 8,500 square-foot prototype to a 7,400 square-foot prototype in order to reduce construction costs and improve restaurant returns. This will result in a cost savings of nearly $1 million. BJ's Restaurants will now be offering the same services to its customers but with reduced costs. The cost reduction initiatives enacted by the company can help it to boost its profit margin in the future.
Moreover, the company has also significantly reduced its interest costs as the long-term debt has been declining over the past few years. The total debt has decreased from $5 million in 2009 to zero in 2013 causing the D/E ratio to decline from 0.02 to zero.
In my opinion, the restaurant industry has bright future prospects since consumer spending in the U.S. is increasing. By successfully capitalizing on these opportunities BJ's Restaurants can generate decent returns for its shareholders in the long-term. Based on my analysis, I give the stock a buy rating.
Disclosure: The author has no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.
The author wrote this article themselves, and it expresses their own opinions. The author is not receiving compensation for it (other than from Seeking Alpha). The author has no business relationship with any company whose stock is mentioned in this article.