BJ’s Restaurants, Inc. (NASDAQ:BJRI) Q2 2023 Earnings Call Transcript

BJ’s Restaurants, Inc. (NASDAQ:BJRI) Q2 2023 Earnings Call Transcript July 27, 2023

BJ’s Restaurants, Inc. misses on earnings expectations. Reported EPS is $0.1 EPS, expectations were $0.33.

Operator: Greetings. Welcome to be BJ’s Restaurants Incorporated Second Quarter 2023 Earnings Release and Conference Call. [Operator Instructions] Please note this conference is being recorded. I will now turn the conference over to Rana Schirmer, Director of SEC Reporting. Thank you. You may begin.

Rana Schirmer: Thank you, operator. Good afternoon, everyone and welcome to our fiscal 2023 second quarter investor conference call and webcast. After the market closed today, we released our financial results for our fiscal 2023 second quarter. You can view the full text of our earnings release on our website at www.bjsrestaurants.com. I will begin by reminding you that our comments on the conference call today will contain forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. Investors are cautioned that forward-looking statements are not guarantees of future performance and that undue reliance should not be placed on such statements. These statements are based on management’s current business and market expectations and our actual results could differ materially from those projections in the forward-looking statements.

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. We will start today’s call with prepared remarks from Greg Levin, our Chief Executive Officer and President and Tom Houdek, our Chief Financial Officer, after which we will take your questions. Greg Lynds, our Chief Development Officer is also on hand for Q&A session. And with that, I will turn the call over to Greg Levin.

Greg?

Greg Levin: Thank you, Rana. BJ has delivered another solid quarter growing top line sales and expanding margins year-over-year. Our total revenues increased by more than 6% led by strong comparable restaurant sales of 4.7%. We are proud that these results once again beat the industry as measured by Black Box both in terms of sales and traffic for the quarter. Consumer demand trends were generally stable and consistent throughout the second quarter and these same trends have continued into the first 3 weeks of the third quarter. Importantly, our margin improvement initiatives are also delivering results as we made meaningful progress on this front, with restaurant-level margins reaching 14.5%, which was 260 basis points higher than last year and our highest margin level since the pandemic.

We still have wood to chop to get back to the high-teens pre-pandemic margin levels, but the progress we have made to-date confirms the effectiveness of the strategy that we have laid out last year. Our teams are laser focused on methodically executing against the strategy, which drives our confidence and optimism that we can continue to build margins in the near-term and over longer horizons. Our sales and margin growth strategy is based on our in-depth consumer research and focuses on building the BJ’s brand over the long-term, quarter-by-quarter and year-by-year. We know that our guests escaped to BJ’s for a dining experience, rooted in gold standard service and gracious hospitality delivered by our restaurant team. Our guests want familiar food items made brewhouse fabulous, all in an ambience that is of higher quality, differentiated and full of energy compared to mass-market casual dining concepts.

To deliver gracious hospitality and gold standard service, we methodically rebuilt our restaurant teams to make sure we are always delivering memorable experiences for our guests. Our second quarter of restaurant manager retention exceeded the same quarter in 2019 and we continue to see improvements in our hourly team member retention as we narrow the gap to pre-COVID levels. As a result of more tenured key members at both manager and hourly ranks, our labor productivity metrics in the second quarter were better than a year ago and better than 2019 highlighting that we cannot only drive record sales, but drive those sales very efficiently. We are also able to drive those efficiencies, while maintaining our strong net promoter scores. In regard to our culinary strategy, we rolled out our new menu in July that has 15% fewer items and is focused on familiar items made brewhouse fabulous based on our guest research.

Having less items, but the right items for our guests will allow us to improve our daily execution by increasing repetition of guest favorites, while reducing prep hours in our kitchen, both of which can over time contribute to our sales and margin growth goals. At the same time, we introduced some new items that squarely fit with this culinary strategy, including our new big twist pretzel appetizer, served with beer-cheese made with BJ’s Brewhouse Blonde beer, Hickory Brisket Nachos, and we upgraded some of our signature cocktails. Demand for these new items is strong, demonstrating our product innovation is connecting with the preferences specific to BJ’s guest. Because we know that our ambience coupled with our team members’ gracious hospitality and higher quality food profile is key to serving memorable brewhouse experiences for our guests, we continue to invest in our remodel initiative.

As you may recall, our remodel program includes a variety of potential improvements, including additional seating capacity and updated bar statement, new lighting, artwork, booths and tables. The new bar statement is amazing and includes a much lighter, more contemporary bar, featuring a new 130-inch television that screams brewhouse theater to all guests. We now expect to remodel 35 to 40 restaurants this year, that’s up from our original plan of approximately 30 remodels due to the encouraging results and financial return profile these restaurant remodels have delivered to-date as measured by incremental guest traffic and restaurant profit. When including the 9 remodels we completed last year, we now expect to have remodeled at least 20% of our restaurants by year end.

While the best way for us to continue our margin growth is by driving top line sales, since every additional sales dollar earned leverages the fixed elements of our restaurant’s cost structure, we also laid out a plan last year to identify at least $25 million affordable cost savings opportunities that will benefit our restaurant operating margins, while maintaining our quality standards. I am pleased to announce that during the second quarter, we surpassed the $25 million goal on an annualized basis, which helped reduce food, labor and operating and occupancy costs. While we are proud to have achieved this milestone, the team has identified significant additional savings opportunities, which we expect to realize later this year as we continue to execute against our cost savings initiative.

As we continue to build top line sales and expand margins, we also continue to open new restaurants in a balanced manner. To-date in 2023, we opened 2 new restaurants and expect to open 3 more restaurants this year for a total of 5 new restaurants in fiscal 2023, including 1 of which will be a relocation in Chandler, Arizona. As many of you know, overall new restaurant construction costs, including furniture, fixtures and equipment, as well as the related supply chain costs have increased by over 35% since 2019, bringing some of our new restaurant builds to the mid-$7 million range on a gross basis before any tenant allowance funding. As a result, our development department has been busy designing a new prototype that takes the best features of our current restaurant, but reduces the cost of build by about $1 million.

Because of the significant savings, we are submitting new plans for most of our 2024 new restaurants. Our development team is working closely with planning commissions in each city to get their new plans approved as quickly as possible. However, to be conservative, we expect the timing of approvals of these new prototypes will result in some 2024 new restaurant openings moving later into the year and possibly into 2025. As such, I expect 2024 new restaurant openings to be similar in number to this past year and then we will see an increase in new restaurant openings in 2025. As we have said many times, our goal is to reaccelerate our new restaurant expansion and grow restaurant weeks by 5% plus annually. However, we are going to do it with the right quality and at the right investment cost to continue to drive strong new restaurant investment returns.

With 5% plus new restaurant growth, consistent comp sales in the low to mid single-digit range and expanding restaurant margins, we should achieve very strong EBITDA and earnings growth for our shareholders. In summary, we laid out a plan last year to methodically drive top line sales, grow our restaurant margins and continue our national expansion. Over the last several quarters, we have been consistently executing against this plan and building momentum in our business. I am extremely proud of our restaurant team members who, day in and day out, get to provide memorable experiences for our guests, thus enabling us to drive towards our goal of growing BJ’s to $2 billion in sales and beyond. With the positive reactions from our guests to all that we are doing, we are increasingly confident that guest affinity for our brand and concept, coupled with the trajectory of our business and our current growth and margin-enhancing initiatives will enable us to achieve attractive near and midterm overall growth and margin expansion.

And finally, I’m excited to announce that we will be hosting an Analyst Investor Day later this year when we will share greater detail around our near-term opportunities and our longer-term growth strategy. Stay tuned for further information in the coming weeks. Now, let me turn it over to Tom to provide a more detailed update for the quarter and current trends. Tom?

Tom Houdek: Thanks Greg and good afternoon everyone. I will provide details of the quarter and some forward-looking views. Please remember this commentary is subject to the risks and uncertainties associated with forward-looking statements as discussed in our filings with the SEC. In the second quarter, total sales grew 6.1% to $350 million. On a comparable restaurant basis, sales increased by 4.7% over the prior year. Our restaurant level cash flow margin was 14.5% in the second quarter, an improvement of 260 basis points compared to the prior year. Comparable sales growth in conjunction with improving operating efficiencies and further progress on our cost savings initiatives contributed to our margin improvement. Adjusted EBITDA was $31.8 million and 9.1% of sales in the second quarter, which beat the prior year by $8.4 million with a margin that was 200 basis points higher.

We reported net income of $11.9 million and diluted net income per share of $0.50 on a GAAP basis for the quarter, both of which were materially higher than year ago levels. Our net income included a $2.2 million income tax benefit, which includes the usual FICA tip credit and applying our estimated annual effective tax rate as compared to a $2.2 million income tax expense from the same quarter a year ago. From a weekly sales perspective, we averaged more than 124,000 per restaurant in the second quarter. The second quarter tends to be our strongest sales quarter seasonally, with outsized sales during the celebration weekends of Mother’s Day and Father’s Day as well as throughout graduation season. In fact, during the week that included Mother’s Day, we set a new all-time high weekly restaurant sales average of $140,000, which beat our previous weekly record by nearly $10,000.

Our California strength continued as it was again our strongest market, with Q2 comparable sales of 8%, with similar outperformance across all regions of the state. Moving to expenses. Our cost of sales was 25.9% in the quarter, which was 170 basis points favorable compared to Q2 of 2022 and 70 basis points favorable to Q1 of 2023. Food costs were about flat quarter-over-quarter and slightly deflationary year-over-year, which was moderately favorable to our expectations. The inflation figure would have been approximately 2 percentage points higher, if not for the benefits from the changes we implemented to date across our food basket as part of the cost savings initiative. Labor and benefits expense was 36.2% of sales in the second quarter, which was 110 basis points favorable compared to the second quarter of last year.

We made further strides improving our labor efficiency in the quarter, which was driven in part by increased labor retention in our restaurants, which was at its best level in more than 2 years. A number of the labor efficiency metrics we track, including items per labor hour were better this quarter than pre-COVID levels from the second quarter of 2019, illustrating the high level our restaurant teams are operating at as well as the effectiveness of our cost savings initiative to date with respect to refining and optimizing our labor model. Operating and occupancy expenses were 23.4% of sales in the quarter, which was 20 basis points unfavorable compared to the second quarter of last year. Marketing was 2.1% of sales, which was 20 basis points unfavorable versus a year ago and 70 basis points unfavorable to last quarter due to a media campaign using new creative with all of the production cost expense in the quarter.

G&A was $21.2 million in the second quarter. Included in G&A with $600,000 of deferred compensation expense tied to fund performance in our deferred compensation plan, which was $400,000 higher than in Q1. As a reminder, this is a non-cash item that has an offsetting entry in other income and expense line in our P&L. Turning to the balance sheet. We ended the quarter with $53 million of debt after repaying $7 million of our revolver during the quarter. Note that our ending cash balance of $6 million was impacted by the July 4 holiday falling on the last day of our fiscal quarter. We typically receive credit card transaction funds for Fridays, Saturdays and Sundays on the following Tuesday. Since this Tuesday, July 4 was a bank holiday, we had $19 million of cash in transit from credit card sales that was not reflected in our quarter end cash balance.

Looking ahead to the third quarter, we are entering what is typically our lowest sales quarter seasonally. Factoring in recent trends, we expect comparable restaurant sales in the high 3% to low 4% range for the quarter, taking into account less of a pricing benefit once we begin lapping our August 22 pricing round, which equates to sales in the $330 million area. Factoring in our sales expectations and cost trends, we expect restaurant level cash flow margins to be in the mid-12% area for Q3, significantly above last year’s Q3 margins. Based on the current momentum in our business and our cost savings initiatives, we remain committed and optimistic to deliver low to mid-teens restaurant-level margins on a run rate basis as we exit the year.

We continue to expect G&A in the $80 million to $82 million range for the year. Our CapEx expectations remain in the $90 million to $95 million range for the year, which includes 5 restaurant openings and now the higher 35 to 40 restaurant remodels target. Two of our new restaurants are opened and performing very well and we expect to open the remaining 3 later in the third quarter, one of which will be a relocation. In summary, we know the best way to grow margins and profit is to grow sales. Recent sales trends have been encouraging, with demand for higher quality experience of dining remaining strong, especially at BJ’s, and we expect to continue making progress with our sales building initiatives. At the same time, we remain committed to productivity and cost savings through our margin improvement initiatives with momentum continuing to build.

We have a clear path to sales and margin growth ahead and our long-term strategy and stronger consumer appeal for the BJ’s concept position us well to continue building on our successes in enhancing shareholder value. Thank you for your time today and we’ll now open the call to your questions. Operator?

Q&A Session

Operator: Thank you. [Operator Instructions] Our first question is from Joshua Long with Stephens Incorporated. Please proceed.

Joshua Long: Great. Thank you for taking my question. I was curious if you could dive in a little bit more on the top line trends. There has been – I think you have noted some strength across region, positive to hear that. Curious if you could talk about daypart trends, any sort of other kind of maybe store level trends that you are seeing in terms of trade down or kind of check management. I know you have a kind of a holistic approach to both the ambience, the hospitality, menu innovation, a lot of great things that are working. But just curious what you see from the consumer as you parse through all of those initiatives.

Greg Levin: Hey, Josh, it’s Greg. I will let Tom add on here, I am sure. It’s been very consistent across all the dayparts in our business as well as looking at the business both on the weekend and the week days. We haven’t seen much trade down or I don’t want to say much. I don’t think we’ve seen any trade down at all. I think the way our menu is set up with things like daily Brewhouse Specials seems to be able to bring in people from a traffic standpoint. But we are not necessarily seeing people trade down to daily Brewhouse Specials. We continue to sell a lot of our higher end items like our prime rib as well as our ribeye and alcohol incidence and all those continue to do well for us, especially versus 2019. And as we look through April, May, June and into July, as we said earlier, April was a little choppy to begin with and things got really consistent in June.

First week of July was a little choppy. I think just with the way July 4 played. But as we got out of July 4 timeframe, again, trends have been consistent. Tom, is there anything you want to add to that?

Tom Houdek: Yes, that’s a great summary. Just to build on the incidence side, we continue to track just across our menu, how guests are using BJ’s and we are really seeing very similar levels of dessert attachment, appetizer attachment, drink attachment and consistent levels of what types of things that they are ordering. So yes, we are watching to see if we will see any consumer pressure leading to trade down or even increased usage of our things like daily Brewhouse Specials and Happy Hour and all of that. But it still seems very balanced. What we are seeing now is more seasonality driven than anything else, which is great.

Joshua Long: That’s very helpful. As a follow-up, when we kind of deconstruct that 4.7% same-store sales results for the quarter can you talk about price that is embedded there, any sort of other mix or traffic components as well? And then as we think about just the back half of the year, what does that pricing look like? Is there anything planned? And if not, kind of how would that pricing component flow as we get into 3Q and 4Q?

Tom Houdek: Sure. So for the quarter, the pricing was pretty similar to check and kind of the high single-digits in that 7% or 8% range. We are exiting closer to that, I think going into Q3, we will start to lap over a 2% round in August last year. So, pricing will come down a little bit going into Q3. So that was embedded in the Q3 estimates there. But traffic was down in the low single-digits, little bit better on the dining room side, but yes, overall, that’s about how it worked between the pieces.

Joshua Long: Great. And then last one for me, as we think about the opportunity around the remodel, it’s exciting to hear that things are progressing. You found some opportunities there to tick that up a little bit. How are you thinking about that? Or maybe how is – do you have the units to date flowed in terms of those various styles or approaches to the remodels? You’ve got everything from bar statements to upgrade and seating to lighting. There is definitely a portfolio or a spectrum of options there. How are you thinking about that? And as we think about the kind of incremental upside there in terms of number of remodels, how would you – how would you describe kind of the portfolio and how it’s shaping up?

Greg Levin: Yes. Good question, Josh. I think the thing that we’ve seen out of the remodels is when we spend – or we take the time to do the bar, you really get [Technical Difficulty]

Operator: We are having technical difficulties. We will resume in just a moment. Once again, we are having technical difficulties, and we will begin again in just a moment.

Greg Levin: I’m going to take the assumption that we’re back on, Josh, and let me answer your question. Are you there?

Joshua Long: I am here.

Greg Levin: Alright. Sorry about that. A little technical difficulties. So what we found in the remodels is we do in the bar get that pop to our guests, and it actually energizes our team members as well. So as we’ve been going through the remodels, we’ve been trying to push more for the bar remodel, which does cost more. The bar remodel we said can be anywhere from $400,000 or $500,000 up to $700,000, but we end up getting a higher weekly sales average increase and we see higher profit from it and ends up driving still what we consider to be some good ROIs in the mid to 20% – mid-teens up to the 20% range. So as we continue to work through this, we will continue with barrel booth remodels as we call them, adding, expand capacities and some other remodels. But we’re trying to concentrate on getting that bar updated and refreshed for our team and for our guests.

Joshua Long: That’s helpful. And maybe just as a follow-up there. As we think about that being maybe the highest priority return opportunity, how much of the current remodels that had the bar refurbed and/or what does that ultimate opportunity look like if you think about all the stores out there that could receive a remodel?

Greg Levin: The bars are right now a little bit on the less. We’ve done a lot more of the barrel booths and we’re going back and doing some of the bars in there. We’ve expanded the bar movement into – or the bar refreshes really into the second half this year. And Greg Lynds, our Chief Development Officer, who’s leading this initiative might have more on how many you think we can get in total, Greg?

Greg Lynds: Well, I think next year, we’re thinking about the similar number overall. And the ones where this year, where we didn’t do the bar remodel, we will go back and just come back to do a bar remodel. So I mean, I don’t have that number in front of me, Greg, but I would say 70% still we could probably upgrade our bars over time.

Greg Levin: So there is – I mean you think about the 130-inch plasma or the 130-inch TV that we’re putting in there. that is not in any of our restaurants. So you take out the – what we’ve been building the last couple of years, we’ve got probably a good 150 or 160 restaurants that we can do this to.

Joshua Long: Got it. That’s very helpful. I hop back into queue. Thank you.

Greg Levin: Thank you.

Operator: Our next question is from Alex Slagle with Jefferies. Please proceed.

Alex Slagle: Thanks. Congrats on the progress. I wanted to ask on the restaurant level margins. And just to the degree you’re seeing the slightly stronger comp trends and the new stores opening well and now exceeding your previous expectations on the productivity cost reductions. I mean it sounds like you’re still looking for restaurant level margins next year in that low to mid-teens range like you previously talked about. But I would think that trajectory maybe move a little bit higher and just kind of wondering what some of the other drivers there that we need to think about in terms of pricing and commodity inflation trends that might be offsetting that to some degree, or just the pushes and pulls behind where that goes?

Greg Levin: Yes. Great question, Alex. And as I said, there is still a lot of wood to chop here to continue to move the margins up. Our big wildcard really continues to be where the beef costs are going to be. So we start to look at it going into the second half of this year. We’re expecting a little bit more commodity inflation even though we’re working on some additional initiatives around the commodity side. And I think that’s going to be our biggest challenge from that perspective. As Tom mentioned on his formal remarks, we do have some pricing rolling off, and we will look and determine what’s the right amount of pricing to go into the second half of this year to offset some of those inflationary pressures? And then we continue to work through other initiatives around labor productivity, some of it we’ve talked about before, like using AI to help us sales forecast and therefore provide a more accurate schedule, which will – should deliver both labor productivity improvements but also better efficient – better guests – better taking care of the guests if we have the right people on at the right time.

And now that we’ve just rolled out our smaller menu, we’re continuing to work through that and optimize the labor on that smaller menu. And that will take a little bit of time as much as we remove that menu, let’s call it July 1. We haven’t seen any changes from our guests from that smaller menu, which is the reason we tested it over the last year. We still have to continue to adjust schedules down a little bit based on how this new menu is rolling out, and that should give us additional efficiencies as well. And I think as we mentioned in our remarks here, as a result, we feel very good about the momentum in our business and the optimism to get into where we want to go from our margins in regards to kind of low to mid-teens exiting this year and then growing margins in the next year.

Alex Slagle: That’s helpful. And to clarify on G&A, I guess it’s stepped up a little bit from 1Q or maybe you’re now tracking more towards the midpoint of the range versus lower end of the range? Is that the right way to think about it?

Tom Houdek: Yes, Alex, the – I called out the deferred compensation expense because that did – just with the market going up, we see that run higher, which pushes G&A up. So that’s probably fair. There is an element that’s just market-driven that could move it up or down in the second half. But yes, we gave up some of the favorability based on this non-cash item that reverses out further down to the P&L. But yes, that’s – we’re still targeting at least the midpoint if we could potentially get it lower. But yes, I think the midpoint is a good place to model.

Alex Slagle: Okay. And then just a final one on the traffic and weather impacts, if you’re seeing anything kind of from the heat waves and smoke from Canadian wildfires anything like that impacting your business from what you can tell?

Greg Levin: I can’t really tell. I mean the trends have been just really pretty consistent throughout our business and throughout different markets. So we’re not seeing any major changes one weekend or the other based on, I guess, weather conditions.

Alex Slagle: Awesome. Thanks.

Greg Levin: Thank you.

Operator: Our next question is from Brian Bittner with Oppenheimer & Company. Please proceed.

Mike Tamas: Thanks. This is Mike Tamas on for Brian. In the second quarter, your same-store sales were kind of where you guided to, but your restaurant margins of 14.5% were well above the low to mid-13% range that you guided to. So the first question is what were the positive surprises relative to what you were thinking internally for 2Q at the time? And was there anything timing-related there? Or how sustainable do you feel some of these movements are?

Greg Levin: Mike, it’s Greg Levin. A big part of the increase in margins was really on the labor line. And I got to give my hats off to Chris Pinsak, our Chief Restaurant Operations Officer and our Vice President of Operations and really the entire restaurant management team. As we kind of mentioned in the call, the tenure in our management team working through the challenges of rehiring people back and then driving the efficiencies or managing the efficiencies as we increased our weekly sales average week-to-week year from last year really improved. And ultimately, our restaurant level – or excuse, our overall labor, I think, came in at 36.2%. And last year, it was like a 36% or 35.9%. So when I started to think about that labor line, it’s gotten really, really close to where we were in 2019.

And again, hat’s off to the operators. They did a really nice job in regards to driving efficiencies in our business. I’ll let Tom talk through anything on cost of sales, operating occupancy.

Tom Houdek: Yes. And we’ve also mentioned on food cost. So we are getting some nice benefits from the margin improvement initiative, but also the market has – was a little better than we were expecting. There were some areas that we saw some deflation across the menu, even from Q1 into Q2 that we weren’t expecting. Things like our prime rib, salmon, ribs, we saw some modest upside as well as cheese. We saw go the other direction on things like tri-tip and ground chunks, but there was definitely areas that we saw some modest improvement there to. So we’re above and beyond just what we were gathering from our margin improvement initiatives. So yes, to Greg’s point, the labor side really helps when we can get these big sales weeks and get some great leverage off of them while driving those top sales. But yes, across the food cost as well, it was better than expected there as well.

Mike Tamas: Yes. Thanks for that. And then in your release and in your prepared remarks, you talked about getting past the $25 million in cost savings. You also highlighted some additional cost savings that you’re now attacking. So what are those new areas? And can you put any guardrails around either timing or dollar amount for us? Thanks.

Greg Levin: So I don’t know if they are necessarily new areas in the sense that we’re always going after the commodity basket, we’re always going after labor and we’re always going after operating occupancy costs. And as we’ve mentioned before, supply chains have normalized. We’ve been able to find additional opportunities to work with vendors to take on additional items or different product for us that has helped to come in at a lower cost that have not run through our system yet, but hopefully, we will get these in, in Q3 or Q4. I mentioned earlier in regards to the new menu that we just rolled out with 15% less menu items. That should help us going into the back half of the year as we get our sea legs under us in regards to those menu items and what the new par levels will be and so forth.

On top of that, I also mentioned some artificial intelligence in regards to helping us labor schedule. And then in the operating occupancy side, we’re just being able to go out and bid things like takeout containers, things we use for to-go containers as well, looking at the way we do some of the facilities work and so forth. It’s a lot of small rocks that we’re moving, or as I said earlier, a lot of wood that needs to be chopped. There is nothing that I would say is huge dollar savings. It’s a bunch of little things that we just have to continue to execute and be disciplined against.

Mike Tamas: Thanks. And then just one quick follow-up. I think you originally expected inflation – commodity inflation to be like in the mid-single-digit range. Is that still fair? Or is there anything that has changed on that front? Thank you. For the full year, I’m sorry.

Tom Houdek: It’s probably a little lighter than that now. It’s probably more in the kind of low to mid-single digits. So it’s – we still are expecting some inflation in the back half of the year, especially around beef and the different items we sell there. But to Greg’s point, we’re still going against a lot of these ideas of ways to bring the cost down. So we definitely – even looking into Q3, we’ve seen some items stepping up as we went into the year, but we’ve also negotiated and got some lower rates elsewhere. So there is reasons for optimism. But yes, still where we came in for the year, it’s modestly better, but we are still expecting inflation going into the back half of the year.

Mike Tamas: Thank you.

Greg Levin: Thank you.

Operator: Our next question is from Andrew Wolf with CL King. Please proceed.

Andrew Wolf: Thank you. Good afternoon. On the sales side, I just wanted to focus on the traffic trends kind of in the context of you all expressing, it’s been consistent most of the quarter and into the current quarter. So I just wanted to basically ask you that. If you take out the low of the July 4th week and probably the high traffic, I guess, Mother’s Day week, has it been pretty close to that kind of low single – negative low single-digit traffic trends? Is that sort of what your expectation for this quarter is too?

Greg Levin: Yes. You kind of summed it up, Andrew. I would say, as we talked about that April was a little choppy. And I don’t know if it was the shifting of spring break and Easter, tax returns. But as we exited April and we got into May and June, our traffic trends, frankly, improved a little bit, still negative low single digits per se. And again, take out the first week of July 4 and look at the last we call it, 2 weeks here in July. It’s again, kind of lowest single digits. It’s flattened out a little bit here and there, but we’re kind of expecting, as I said, kind of consistent low single digits negative.

Andrew Wolf: Got it. Thank you. And on the some of the sequential deflation and just the lower expectations for food cost inflation. Could you give us sort of your thinking? I know you at least last reported, you were about one-third forward brought. I guess you were expecting the market to be friendlier than it has been. Is that still the case? Are you still kind of a below normal forward bought position? Or are you starting to enter into some more forward contracts as you see some more potential for some more inflation? Or do you expect it to continue to slow and deflate in certain categories?

Tom Houdek: It’s a great question. There are a couple of items that I’m thinking of that we probably will be entering into some more contracted positions than we have recently. But it has worked out for us. I think the going into the year, the risk reward on where the markets were and what you had to pay to lock, it’s worked out. We’ve seen some items move in the right direction, but it does seem like that there is a shift happening, at least in some markets where we can lock in things now at some attractive rates and ways to get some – take some of the risk off the table. So yes, percentage-wise, I don’t have that for you, but I would say just more conceptually, there are a couple of areas that we are circling that we think that it does make some sense to enter into some contracts.

Andrew Wolf: Okay. I think last quarter, you said some of the premium or whatever you want to call it, the premium, your vendors were asking was just too much. So it sounds like they are seeing things normalize and lowering their risk premium to lock in longer term, is that right?

Tom Houdek: I think it’s some of that, and it’s some of just more supplies coming to market. So when – in the past where there might have only been one or two suppliers talking now there is more. So more competition is better for us and other restaurants. So I think it’s some of what you said and just some of – just a little more balance in the market where we can be more creative and work with our great partners to find win-win scenarios for both of us. But I think when there is more competition, it just make sure there is the right type of balance there.

Andrew Wolf: Got it. If I can ask just a follow-up on the labor question or the labor area, I could say. So labor was up to – the benefits was up, I think, 2.8% year-over-year, obviously, leveraged up to sales. Can you kind of maybe unpack that a little between what was the rate of wage inflation versus what was the partial offset, I would imagine, from the battery cost efficiencies or productivity, your being able to do more with the amount of labor hours that you have. In other words, I would assume the wage rate inflation would be higher than that figure, and there would be an offset from improved productivity. And what does that mean going forward? I assume you keep the productivity, can you increase that as wages inflation, stays the same, or even goes down. Just some flavor for that.

Tom Houdek: Yes. In terms of the inflation on the hourly side, it was in the 4% to 5% range. So pretty similar or even a little bit less than it was in Q1. So right in line with expectations there. So yes, that’s right. We do – we did get the benefit of the efficiencies on top of this – what we’re paying on the hourly front.

Andrew Wolf: Can you comment on how you see things evolving in the back half? Pretty much the same? Or do you think there is some improvement on either the wage inflation side or the productivity side?

Greg Levin: Well, I think, Andrew, as I mentioned before, we are expecting to get improved productivity in the restaurants because we have 15% less menu items. So as we look at our current menu items and make sure that our new menu is focused on our guests and what our guests want, you should be able to continue to drive sales, but then we would have less prep hours because of certain items that were no longer prepping. So that would be another step of improved productivity. Now that being said, as you look through it, we just came off our highest weekly sales average. So we start to think about it as purely as a percentage of sales. We’re not expecting Q3’s weekly sales average to be nearly what it was in Q2 at 124,000.

And even in Q4, where weekly sales averages go back up, it’s still not as high as Q2 numbers. So that’s going to play a little bit into the percentage side. But generally speaking, we would expect to continue to see, I think, mid-single-digit labor inflation. Labor is still challenging out there as much as it’s normalized. Everybody still wants to get and hire good team members. We want to hire hard and manage easy by bringing in the right people within BJ’s from that perspective, but that’s still going to be kind of that low to mid-single-digit labor side of it. And then we’ve got to continue to do our job to drive efficiencies with this new menu, less items to continue to drive overall good labor percentage in our business.

Andrew Wolf: Great. Thank you.

Greg Levin: You are welcome.

Operator: Our next question is from Jeffrey Bernstein with Barclays. Please proceed.

Jeffrey Bernstein: Great. Thank you. Following up on a couple of the points mentioned earlier, the menu pricing I think you said high-single digit or I think you said 7% to 8% for the second quarter, which was similarly average check, which I guess is similarly encouraging, that there hasn’t been any consumer pushback or much negative mix. But I think you mentioned you are lapping a couple of points in August. So, I am just wondering what your thought process is, as you think about going beyond August, whether you are comfortable in the thought process of fully replacing that or maybe not keen to remain at that level as the food at home cost eases? I am just wondering, it seems like peers are talking about maybe taking a little bit less price going forward, but just wondering your thoughts, especially as inflation prevails?

Greg Levin: Yes, Jeff, it’s a really good question. We are always trying to make sure that we provide the right amount of value and balance on our menu. And while we continue to look at it and haven’t determined the exact amount of pricing quite yet, we will look at certain areas where maybe we have the ability to take pricing up, it could be something around some of the daily brewhouse specials, where we are giving some really great value at an unbelievable price point, because they include starters and desserts and so forth. That is just, frankly, a great discount comparative, if you are going to piece them individually. We will also continue to look at how that barbell and the good, better, best strategy lines up. So, we will look at another round of pricing.

We want to make sure we are doing things that are unique and differentiated to BJ’s. That also sit in a position where they are not necessarily known value items that you are competing on from the commodity standpoint. And thankfully, we have a lot of unique and differentiated items. And we also at the same time, which I think is really important, and it gets missed at times is we are investing back into our restaurant. We have talked about the fact that people are coming to BJ’s for a social dining experience. And price point and value are so important, but we are not necessarily competing on the pop-in guest that is just looking for a burger versus a burger. So, we want to continue to evolve that and that will be some of that pricing.

At the same time, we continue to look at certain menu items that we put on that are uniquely differentiated for us and have a little bit more we call the brewhouse theater, that brewhouse fabulous. That allows us to have some pricing, we can move the guests around on our average check. So, long-winded answer, there will be additional pricing, I don’t know if it’s going to be exactly where it is there. I think we also have some other areas that we have been very cautious on that can give us a little bit more ability to take pricing that’s not necessarily directly on the menu, but comes to things like our daily brewhouse specials, lunch specials, and so forth.

Jeffrey Bernstein: Understood. And clearly, it’s encouraging that you are not seeing any change in consumer behavior thus far. Just wondering if you were to see any kind of slowdown, the levers that you would be comfortable to pull, whether it would be to ramp up advertising, or again, bump up the discounting, or maybe there is further cost cuts like how do you think about that in a slowdown? Obviously, we have gone through slowdowns before, I am assuming you have some learnings on that front, but just wondering what you would consider to do versus what you would avoid doing if and when we were to see a slowdown in the back half of the year? Thank you.

Greg Levin: Yes. Again, another good question, Jeff. And well, we haven’t necessarily gone to this playbook yet. We do know that in the past, pushing things around our lunch specials, pushing things around the daily brewhouse specials that I just talked about, generally have been great place from a value perspective, that have been able to drive guests into our restaurants, when it’s been more challenging times. Both when I think back to the Great Recession, lunch specials worked really well for us. We also introduced snacks to Small Bites. So, we introduced kind of lower priced appetizers that have worked well for us to allow guests to kind of splurge without spending a lot. We still have those aspects on our menu, so we can lean into that side of it.

At the same time, we have always been saying this as well. It’s really important that we continue to invest into our restaurants and into our people, because during challenging times, guests want to go out for better. And what we are trying to do is make sure we are positioning DJ’s as a better alternative. And not an alternative that’s going to just compete on the lowest price point that’s out there. So again, as we continue to think about how to play to our strengths, and play to the guests that come to BJ’s, we want to have great price points. We want to have a good, better, best that we have been continuing to evolve. But we also want to make sure that that’s being matched with the gracious hospitality, gold standard level of service.

And frankly, the remodels, so that you are going out to a place that’s got energy, ambiance, and it becomes that dining experience.

Jeffrey Bernstein: Understood. And lastly just because you mentioned that the ideal scenario of getting back to the high teens restaurant margin, obviously there is lots of I think you said wood to chop, but just wondering, I mean from a realistic perspective on the range of stores that you have that are already achieving this. I mean is it a target you think you can achieve across the system in the short to medium-term, or maybe you already have some stores that are doing well above that, and there are some commonalities that you would like to apply to the rest of the system. But just trying to get a sense for the opportunity to really get back to that high teens level? What gives you the confidence you can achieve that over time? Thank you.

Greg Levin: Yes. Look, we have got strong beliefs and optimism in our ability to get there. One is we are seeing great momentum in our business. Consistently, month-to-month right now, the things we are doing inside our restaurants that I just mentioned around the remodels, taking our menu and being more focused on who the BJ’s guest is, so we are giving them the right things. But that also drives efficiency because it’s less items to produce. And then right now, we have seen less inflation. And that less inflation allows us to adjust our numbers up. When we think about over the last several years for the BJ’s concepts, specifically, being a little bit concentrated in California that was taking the dollar minimum wage increase through some of the challenging times going through COVID hurt our restaurants and hit our restaurants pretty hard, as well as the fact that we had a very large menu and complex menu.

As we continue to work through that to concentrate on our core and California is now more CPI tied. It’s given us the ability to kind of manage against the inflation side of it. And then as Tom talked earlier, just the normalization of supply chain has allowed us to be able to go out to bid on certain products that we couldn’t a year ago. You have heard us talk about the wings story many times before. The wings story came because we couldn’t get wings. It just didn’t exist a year ago. If we were probably in this same environment today, we might not have made the move on wings that we had done that saved us a lot of money and made a better product for us because we would have been able to get supplies at a lower cost. Now, we have taken that same mindset though and started to ask ourselves what else can we do internally that’s different to save us money and drive up our margins.

That’s a lot of where the new menu is coming from. I guess it’s, again, it’s based on consumer research of who our guest is. But then we continue to look at how can we do something a little bit differently that we weren’t doing before that allows us to drive improved margins and frankly have an improved product.

Jeffrey Bernstein: Great. Thank you.

Greg Levin: You’re welcome.

Operator: Our next question is from Mary Hodes with Baird. Please proceed.

Mary Hodes: Good afternoon. Thanks for taking the question. On the traffic, you are running down low-single digits. So, I guess can you talk a little bit about how you are thinking about traffic driving initiatives in the current environment? Are there any internal initiatives other than maybe ramping up the focus on brewhouse specials that you are excited about for the second half of the year?

Greg Levin: Well, I think the big one we have talked about is remodels. Remodels have a tendency to drive improved traffic into our restaurants. So, remodels is one that’s a pure traffic driver for us inside the restaurants. We also continue to work on our loyalty program and doing updates on our loyalty program through our customer relationship management. And I think as we go into next year, we will end up with some changes to the mystery program, our mystery program to our loyalty program, mystery shopper program. And then the other one, which we continue to work on, is still building back that late night business. And we have talked about on prior calls, adding the additional half hour back in there and driving the late night business, which is a guest traffic part of our driving business as well.

And the other area, which has been a big surprise because we haven’t talked about a lot this year has been catering and catering has been driving a lot of traffic for us in the off-premise side of our business and helping continue to keep consistent from the sales numbers in that 21,000, 22,000 range.

Mary Hodes: Great. Thank you for that. And on the remodels, would you be willing to dimensionalize the sales uplift you have seen for those that have been completed to-date?

Greg Levin: We have talked about that sales lift go from anywhere from 1,500 plus if we just were doing kind of a brewhouse remodel or I would say brewhouse remodel, a barrel booth remodel where we add the capacity. As we expand that and do bar remodels and some of the others, we will see, obviously, that 1,500 number come up even higher. So, that we are seeing high teens trying to target around 20% cash-on-cash returns on that.

Mary Hodes: Great. Thank you so much.

Greg Levin: You’re welcome.

Operator: Our next question is from Todd Brooks with The Benchmark Company. Please proceed.

Todd Brooks: Hi. Thanks for squeezing me in and congrats on the margin progress in the quarter. I wanted to follow-up on some of the earlier restaurant level operating margin discussion. Obviously, over-indexed performance wise in Q2 forward commodity outlook, I know you mentioned maybe being worried about beef, but the full year, you are bringing it kind of down to low-single to mid-single. You are exceeding your cost save goals on the $25 million. I guess – and I think Alex has asked about this earlier, that low to mid-teens type of target, I guess what keeps us from hitting the mid-teens relative to the setup right now on the cost side as we are exiting the year?

Greg Levin: Todd, the business is always predicated on driving top line sales. And our formal remarks, and we have always talked about it on this call is about sales driving initiatives and cost savings initiatives. We are not going to get to our margins nor will any company get to their margins if they are not paying attention to top line sales and driving top line sales. So, when you think about the back half of the year, we have to have the viewpoint that the consumer is going to hold up, and it looks like based on GDP numbers and so forth that have come out that the consumer continues to be in a good position. And then I think the biggest challenge for us separately would probably be around commodities. We have seen a shift in the consumer that’s really much more kind of into maybe the red meat and indulgent menu items.

And those are areas that we aren’t as locked. So, that would be a little bit of a hit on commodities. I think those are the two bigger areas for us within our business. I think our teams have done an outstanding job on labor. And I am really excited about the smaller menu to help us there. Some of the AI forecasting and so forth to maintain our labor standards and our labor efficiencies to take care of our guests and deliver gracious hospitality. So, I like that aspect of it, but I really think it comes down to the commodity side and it’s the consumer side, you got to drive the top line sales. We are always doing our best to manage operating occupancy costs. I would probably tell you right now if you haven’t thought about it, we are running pretty high energy bills right now with the air conditioning being used because of the heat out there.

And that puts a lot of strain on our air conditioning units, puts a lot of strain on the equipment in our restaurants that we use to cool down things and keep things temp. So, that’s an area that I know our facilities team looks at every day. I know our restaurant managers are looking at that every day and our Vice President of Operations are looking at that every day. I think that’s a short-term challenge for us from just a utility standpoint and the heat that’s going on there, we have seen the same thing in winter months with cold weather and gas usage and so forth. But taking those out of it, it’s really, I think where commodities go and where the consumer goes.

Todd Brooks: That’s great. And then just following up on that, Greg. If you look at where things seem to be tracking for this year, you are probably looking at a couple of hundred basis points of improvement in restaurant level margins. As you roll to ‘24 and you think about all the work that you have done on the cost side, how does the next step function look as far as the operating margin recovery? And I know it’s top line dependent certainly, but there are improvements that you have made as well. Just kind of walk us through maybe what you are looking at as the slope based on some of the early wins that you have had and the upside that you saw in the second quarter here for restaurant level margin recovery in ‘24?

Greg Levin: Well, I think it kind of continues to move up in that regards to where the consistency of mid-teens is there for next year versus kind of the bouncing up and down that we have seen now, right. We started in the 12s and moved to the 14s. It’s going to go down because of weekly sales average and move back up. Where I would like to see us as an organization move to next year, and we continue to work on that is while we will have those ups and downs, but those ups and downs will all – the floor on all those ups and downs will be at least a teen number, if not and moving up versus now being in the 12% range. I don’t want to be there next year. So, I think that’s where we continue to move it forward. And I think we have got things in there from a productivity initiative as we talked about on labor, getting some other things coming through on the operating occupancy that will continue to bring those numbers down.

And then we will be able to offset that with better commodities going forward. If you think about our business and where we used to be, we still need to move labor or not labor, I am sorry, we need to move cost of sales really into the mid-25s and that should be more of a consistent number for next year. So, there is an additional 50 bps that we have got to go after. So, I think you will start to move those things in there into the numbers. It starts to move us more towards a low teens in the slower quarters and more in the mid to upper teens in the other quarters.

Todd Brooks: Perfect. Thank you. And then one follow-up for – or a separate question for Tom. Tom, you kind of implied with the August pricing rolling off to think about 6% for the third quarter before any other pricing actions with upcoming menus. Where do we stand on the test of the third-party delivery pricing? I know that BJ’s has been one of the few that had not taken a menu pricing premium. I think you were testing a couple of different tiers. I guess where does that stand? And how should we factor that into pricing across Q3 and Q4? Thanks.

Tom Houdek: Sure. So, just to be clear on the overall pricing, the 2% rolls off in August, so it’s not purely the entire quarter that we will be at that kind of 6%. So, I think we will still be more in that, call it, 7% or so level into Q3 as we carry pricing forward. And yes, we continue to test in terms of the third-party delivery pricing. I know we are one of the last in casual dining that hasn’t taken that price yet. And so we will update once we have something new to report there. But tests, I would say, are going well.

Todd Brooks: And does anything roll off after the August price increase, or should the 7% carry through Q4 as well?

Tom Houdek: So, as Greg mentioned, we do have another menu print that’s happening at the end of September. So, nothing else from last year that will roll off, it’s just a question of exactly what we end up doing for our late September pricing or menu that could have some more pricing in it.

Todd Brooks: Okay. Great. Thank you, both.

Operator: Our final question is from Nick Setyan with Wedbush Securities. Please proceed.

Nick Setyan: Thank you. I hate to belabor this point, but do we exit Q4 with costs under 26%?

Greg Levin: Nick, well, we got it under 26% in Q2. I hope we get there and I hate to use the word hope. We have got plans in place, I guess to look at items in regards to commodities, as Tom has talked about before on today’s call where we are looking at many different things that we have input into commodities, into like soup, sauces, dressings, some of the other things we are doing and trying to see if we can get other vendors to help us here, work with vendors from a commodities market perspective and continue to work that side of it. The real wildcard is, I think beef on us. And I want to say like ribeye steaks are now one of our number one selling items for BJ’s. It’s something that’s changed really coming out of COVID.

And that product, we don’t have locked. So, we see the same thing with our prime rib. Our prime rib weekends are huge. And again, that’s a product that floats on the market. So, when we think about cost of sales and where it is, a lot of that is dependent on some of the market dynamics in regards to commodities. As I mentioned earlier, even to Todd, our goal, as you just kind of mentioned, is we would like to get cost of sales to be really in the mid-25s. And while we are happy to have 25.9% in Q2, the next step is to move that down to the mid-25s. And that’s why we are working with our suppliers. We have some great suppliers that are helping us try and think through this, that we can figure out ways to bring that down, that provides the same quality and differentiation that we do at BJ’s.

We have mentioned many times on this call, things that we have just said no to. We are not using frozen salmon. We are sticking with staying with our fresh salmon. Like those things make a difference for us in what we are trying to do as a differentiated concept out there that’s focused on what our guests want and what our consumers want. And we heard loud and clear from our consumers that we provide a better quality dining experience and that comes with better quality products. So, we are going to continue to do that in the right way to move our margins in the right direction.

Nick Setyan: That’s very helpful. And then on labor, with all the productivity, etcetera, year-over-year, the seasonality is pretty much the same, but like why can’t we see the similar amount of leverage year-over-year in Q3?

Greg Levin: I think year-over-year, we will see decent leverage there. It’s really that weekly sales average and then you would lose the ability to leverage your fixed cost and labor. So, you are going to not be able to leverage and manage your labor. So, that’s why you won’t see that as much versus Q2. You are not going to leverage your hospitality desk as much as you do in Q2.

Tom Houdek: Yes. I will give a little more background, too. So, when we launched our margin improvement initiative in Q3 of last year, we did make some changes to our labor table starting then. So, we are going to start lapping some of those efficiencies that we put into place. We have done more since then. But it won’t – when you think about Q2 year-over-year versus Q3 year-over-year, we will start going over some of those efficiencies that we implemented last year as well.

Nick Setyan: Got it. Thank you very much.

Operator: We have reached the end of our question-and-answer session. We will close the conference. We want to thank everybody for their participation, and to have a great day.

Greg Levin: Thank you.

Tom Houdek: Thanks everybody.