BJ’s Restaurants, Inc. (NASDAQ:BJRI) Q3 2023 Earnings Call Transcript

BJ’s Restaurants, Inc. (NASDAQ:BJRI) Q3 2023 Earnings Call Transcript October 26, 2023

BJ’s Restaurants, Inc. misses on earnings expectations. Reported EPS is $-0.16 EPS, expectations were $-0.02.

Operator: Hello, and welcome to the BJ’s Restaurants Third Quarter 2023 Earnings Release and Conference Call. All participants will be in listen-only mode. [Operator Instructions] After today’s presentation, there will be an opportunity to ask questions. [Operator Instructions] Please note, this event is being recorded. I would now like to turn the conference over to Rana Schirmer, Director of SEC Reporting. Please go ahead.

Rana Schirmer: Thank you, operator. Good afternoon, everyone, and welcome to our fiscal 2023 third quarter investor conference call and webcast. After the market closed today, we released our financial results for our fiscal 2023 third 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.

A close up shot of a pizza being freshly made in a restaurant kitchen.

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. And with that, I will turn the call over to Greg Levin. Greg?

Greg Levin: Thank you, Rana. BJ has delivered another quarter of positive comparable restaurant sales and year-over-year margin expansion. Our total revenues increased a little over 2% led by a 1.5% increase in our average weekly sales, driven by continued positive comparable restaurant sales and the strong performance f our new restaurants. For the 10th consecutive quarter, our comp sales results beat the industry as measured by Black Box. We expanded our restaurant margins to 11.9%, representing an increase of 160 basis points from the prior year and generated adjusted EBITDA of approximately $20 million in the quarter, marking a 29% increase over the prior year. In fact, in the first three quarters of fiscal 2023, we have generated over $76 million of adjusted EBITDA, which is roughly equivalent to all of last year with of course one quarter to go.

Compared to 2022, industry-wide sales trends normalized in the 2023 third quarter. Historically, weekly sales volumes peak in May and June and then come down in July before taking further steps down in August and September. Last year, with consumers free of COVID restrictions, weekly sales average actually increased in August compared to July with a smaller step down in September. This year third quarter sales trends reverted to pre-COVID, patterns resulting in a return to an August and September sales slowdown. Tom will provide more details on the quarter, but since regular seasonality returned in the fourth quarter of last year, we have seen our comparable restaurant sales rebound to positive low-single digits starting in October. As we mentioned previously, our sales and margin growth strategies are rooted in our in-depth consumer research and focus on building the BJ’s brand over the long term quarter-by-quarter and year-by-year.

We know that our guests escape to BJ’s for a dining experience featuring familiar food items made Brewhouse fabulous with gold-standard service and gracious hospitality delivered by our restaurant teams, and packaged in an ambiance that is of higher quality differentiated and full of energy compared to mass market casual dining concepts. Therefore in the third quarter to enhance our already high service and hospitality standards, we rolled out new server scripts as well as an updated mystery shopper program focused on consistently delivering gracious hospitality to our guests. As a result of these recent programs, we have increased hospitality stores year-over-year on our guest surveys. Additionally, our hourly and management staffing levels continue to improve year-over-year as we narrow the gap to pre-COVID levels.

In fact, our hourly team member retention rate in September matched our pre-COVID level illustrating our improving operating environment which has enabled us to execute at even higher levels of service and efficiency. We also rolled out a new menu that has 15% fewer items and is focused on familiar items made Brewhouse fabulous based on our guest research and careful testing in our restaurants. Having fewer items but the right items for our guests resulted in improved pays scores year-over-year. Our innovation team continues to create new menu items and drinks that provide the familiar yet made Brewhouse fabulous. In the third quarter, we rolled out our Big Twist Pretzel paired with BJ’s Brewhouse Blonde Beer Cheese and the Hickory Brisket Nachos for a limited time accompanied with a line of Wow margaritas, including our new White Peach Boba-Rita.

Importantly, our culinary and beverage innovation is working to grow sales adding both incidents and dollar sales to the appetizer and cocktail categories. In fact, the new innovative cocktails are now our top sellers in that category. We also just rolled out our limited-time-only Spooky Pizookie with orange-colored vanilla ice cream and chocolate syrup that guests pour over their dessert, which hardens to make a delicious chocolate shell over our world-famous Pizookie dessert. Our Spooky Pizookie has exceeded our expectations becoming our number one selling Pizookie this October and selling out sooner than anticipated. Given the extraordinary guest excitement and demand for this product expect to see Spooky Pizookie back next year. We are now looking forward to this holiday season as we plan to feature a new limited-time-only Brewhouse Blonde garlic shrimp appetizer a special filet surf-and-turf entree and our new Tipsy Snowman and Winter Paradise Pomegranate Margarita seasonal cocktails.

All of these items fit squarely in our menu strategy of familiar items again made Brewhouse fabulous. Furthermore, we know that guests come to BJs for a better dining experience rooted in what we call Brewhouse Theater. Each of these new items provide the guests with more theater and quality than what you find at other mass casual restaurant chains. For example, our Tipsy Snowman cocktail includes a holiday marshmallow shaped like a snowman in a Belgian beer glass and the Spooky Pizookie allows our guests to pour over the chocolate sauce and watch in anticipation as it hardens. All of these items allow guests to trade up, and indulge at BJ’s while creating a fun polished casual experience. Most importantly, for us to do this we needed to optimize the menu and simplify execution in certain areas so that we can provide our guests an even better culinary experience.

All of this has been made possible by our menu optimization process, that we began last year and the continuing passion and dedication from our team members. Through our research, we know that a key differentiator in full-service restaurants is ambiance. Guests don’t want to visit old worn-out restaurants, with wobbly tables, dirty floors and broken chairs. Guests want a contemporary, relevant atmosphere that complements team members’ gracious hospitality and BJ’s delicious food. Our remodel program focuses on that relevant ambiance, by providing enhanced seating capacity an updated bar statement, new lighting artwork booths and tables. As we’ve mentioned before, the new bar statement is amazing and includes a much lighter more contemporary bar feature featuring a new 130-inch television that screens Brewhouse Theater.

We are still targeting between 35 and 40 remodels this year, and we 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 dollar of sales leverages the fixed elements of our cost structure, we also laid out a plan last year to identify at least $25 million of four-wall cost savings opportunities that will benefit our restaurant operating margins while maintaining our high-quality standards. We have now unlocked over $30 million of cost savings on an annualized basis, as we reduce food labor and operating and occupancy costs. Additionally, the team has identified further savings opportunities, which we expect to roll out late in the fourth quarter which will continue to improve our margins and our EBITDA year-over-year We also continue to open new restaurants in a balanced manner.

In 2023, we opened five new restaurants including the relocation of our Chandler Arizona restaurant. Our 2022 and 2023 classes of restaurants are doing exceptionally well, with weekly sales average of more than $130,000 or approximately 10% higher than our system average and overall margins in the mid- to upper teens. As we discussed last quarter, we submitted new plans for the majority of our 2024 openings so that we can roll out our new prototype that will save us approximately $1 million per build versus our current prototype. Additionally, due to a more efficient layout this prototype should provide an opportunity for labor optimization. Overall, we believe this new prototype will provide even better returns on invested capital by delivering better margins and built at a lower cost.

Therefore, I expect 2024 new restaurant openings to be similar in number to this year, before we plan for an increase in the rate of new restaurant openings in 2025. As we’ve said many times, our goal is to reaccelerate our new restaurant expansion and grow restaurant weeks by 5% or more annually. However, we are going to do so 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. With the continued positive reaction from our guests to all that we are doing coupled with our increasing margins and EBITDA, we reinstated our share repurchase program this past quarter.

We are increasingly confident in our strategy to grow sales, expand margins open new restaurants and return capital to our shareholders in both the near and midterm. Finally, I am looking forward to seeing many of you at our Analyst and Investor Day on Tuesday November, 14 and the welcome dinner the night before. We’ll host a special beer dinner featuring some of our most iconic beers, as well as some of our new menu items and cocktails. At the November 14th event in Boston, we will share greater detail around our near-term opportunities and our longer term strategy. So I hope you can all join us for that event. Now let me turn it over to Tom to provide a more detailed update from 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 third quarter, total sales grew 2.3% to $319 million. On a comparable restaurant basis, sales increased by 0.4% over the prior year. From a weekly sales perspective, we averaged more than 113000 per restaurant. In a typical pre-pandemic year, the third quarter is our lowest sales quarter seasonally with the sales deceleration starting after Father’s Day in June and continuing to step down into August and September as Greg mentioned. This year our sales followed this normal seasonal pattern consistent with industry trends in our markets.

However in 2022 the seasonal decline was much less pronounced as consumers enjoyed their first summer without any COVID restraints. As such last year’s weekly sales averages actually increased into August before coming down slightly in September. This year’s return to a more normal seasonal pattern resulted in comparable restaurant sales softening later in the third quarter from the mid-4% positive in July to about flat in August to negative low-single digits in September. Moving to more recent trends, comparable restaurant sales in the first three weeks of October are trending in the positive low-single digits, an improvement of more than 500 basis points from September levels as last year’s seasonality normalized in the fourth quarter. Our comp sales improvement in October is being driven by improving traffic trends compared to both August and September and to a lesser extent our late September pricing round in the upper 1%.

Looking at the sales trends from a different perspective, our comparable restaurant sales compared to 2019 were much more consistent throughout Q3 and into early Q4, providing us further confidence that 2022 seasonality was the main driver of the one-year comparable sales volatility in the third quarter. To date, we continue to see acceptance of our menu pricing rounds with no value-oriented shifts in our menu mix or less items ordered per check, which would indicate check management or changes in traffic patterns. Regarding dayparts, our late-night sales continue to outperform and grow faster than other dayparts. As our late-night check is lower than other dayparts this channel mix shift is adding a modest headwind to average check. Our restaurant-level cash flow margin was 11.9% in the third quarter, an improvement of 160 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. Further illustrating our progress, our third quarter restaurant-level cash flow margin was within 160 basis points of the same quarter in 2019, marking a 90-basis point improvement from the 250-basis point differential in the second quarter. Also Q3 was the first quarter in the post-COVID era where our restaurant-level cash flow dollars were higher than the corresponding quarter in 2019. We are encouraged by the progress made to date and continue to advance initiatives to further grow our restaurant margins. Adjusted EBITDA was $19.6 million and 6.1% of sales in the third quarter, which beat the prior year by $4.4 million with a margin that was 120 basis points higher.

We reported a net loss of $3.8 million and diluted net loss per share of $0.16 on a GAAP, basis for the quarter both of which would have been an improvement from last year when excluding the $4.1 million tax benefit from the year ago period. Moving to expenses. Our cost of sales was 25.9% in the quarter, which was 140 basis points favorable compared to a year ago and consistent with the prior quarter. Food costs were about flat quarter-over-quarter and year-over-year, which was moderately favorable to our expectations. The inflation figure would have been higher if not for the accumulating benefits from the changes we’ve implemented to date across our food basket as part of the cost-savings initiatives. Labor and benefits expenses were 37.1% of sales in the quarter, which was 60 basis points favorable compared to the third quarter of last year.

We made further strides improving our labor efficiency, which was driven in part by our reduced menu that requires less kitchen prep hours. A number of the labor efficiency metrics we track, including items per labor hour were better this quarter than pre-pandemic levels illustrating the high level our restaurant teams are operating at as well as the effectiveness of our cost-savings initiatives to date with respect to refining and optimizing our labor model. Occupancy and operating expenses were 25.1% of sales in the quarter which was 40 basis points unfavorable compared to the third quarter of last year. Approximately half of the increase was due to an investment in promotional and awareness-building activity to drive off-premise sales including catering which have a high level of incrementality and return on investment.

Our catering business continues to grow and delivered approximately 50% higher sales than the same quarter last year. G&A was $19.5 million in the third quarter. Included in G&A was a $100,000 deferred compensation benefit linked to fund performance in our deferred compensation plan compared to a $600,000 expense in Q2. As a reminder this is a non-cash item that has an offsetting entry in the Other Income and Expense line in our P&L. For the full year, we now expect G&A to be in the $80 million to $81 million range which is on the lower end of our prior guidance. Turning to the balance sheet. We ended the quarter with a debt balance of $60 million which was $7 million higher than the end of Q2 and equal to where we started the year. We ended the quarter with net debt of about $48 million.

Also during the quarter, we reactivated our share repurchase program to resume returning capital to shareholders. The resumption of our share repurchases reflects management’s belief that BJ shares are currently undervalued and our confidence in BJ’s longer-term prospects. During the third quarter we repurchased and retired approximately 164,000 shares of common stock at a cost of $4.3 million. At the end of Q3, we had $17.8 million remaining on our authorized share repurchase program. Looking ahead to the fourth quarter, we are encouraged by recent sales and traffic trends as comparable restaurant sales have returned to positive low-single-digits. Shifts in prior year seasonality have passed and we expect to continue delivering comparable sales in the low-single digits for the quarter.

Factoring in our sales expectations and recent cost trends, we expect restaurant-level cash flow margins to be in the low 14% area in Q4, significantly above last year’s Q4 margins. As a reminder, Q4 2022 margins had the benefit from a 53rd week and a onetime gift card breakage benefit which benefited last year’s Q4 margins by approximately 130 basis points in aggregate. Regarding CapEx our five 2023 new restaurants are now opened and most of our 2023 restaurant remodels are completed. Included in our Q3 openings was the relocation of our Chandler Arizona restaurant which is off to a fantastic start with sales approximately 50% higher than our previous location. Also in the quarter we closed an underperforming restaurant which required a non-cash write-off in the Loss on Disposal and Impairment of Asset line in the P&L.

Also related to CapEx we invested an incremental $2 million to purchase upgraded server handheld tablets for approximately half of our system which enabled additional functionality such as payment at the table and will lead to a meaningful operating cost savings with purchasing the tablets instead of the leasing arrangement with our prior-generation devices. Due to this incremental investment as well as increasing the number of our restaurant remodels last quarter we are now targeting the high end of our prior $90 million to $95 million CapEx range for this year. Looking ahead to 2024. As usual for this time of year we are in the middle of our planning process but I can share some early thoughts. We expect food cost inflation to remain in the low-single digits.

We will lock in most of our contracted items for 2024 over the next couple of months and we’ll have a better idea of any variances when we report Q4 results in February. Labor inflation could tick up to the mid- to upper-single digits given the added impact of California’s AB 1228 bill which is the bill that replaced the FAST Act. To note many of our California-based hourly team members earn near or above the new $20-an-hour minimum wage to be paid at fast-food type restaurants in the state starting in April 2024 but we do expect some impact. We expect higher menu prices in restaurants throughout the state as operators look to mitigate the added costs. We are still finalizing our menu pricing plan for next year but expect to be able to offset inflationary pressures.

We plan to open four to six restaurants next year similar to this year and continue our remodel initiative given the attractive financial return profile. We also intend to continue repurchasing shares. In conclusion we know the best way to grow margins and profit is to grow sales. Recent sales trends have been encouraging with demand for BJ’s higher-quality experiential dining remaining strong 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 margins growth ahead and our long-term strategy and strong consumer appeal for the BJ’s concept position us well to continue building on our successes and enhancing shareholder value.

Thank you for your time today and we’ll now open up the call to your questions. Operator?

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Q&A Session

Operator: Thank you. [Operator Instructions] Today’s first question comes from Brian Bittner with Oppenheimer & Co.

Mike Tamas : Hey, guys. It’s Mike Tamas on for Brian. Hope, you are well. I think you’ve talked historically about the fourth quarter margin being a pretty good read on what the next year’s full year margin might look like. So I’m wondering does that still hold with the guidance for like the low 14% range this year? And what do you think the big variances might be if any against that? Thanks.

Tom Houdek : Mike, thanks for the question. That’s right. If you look back to 2019, our Q4 margins were very consistent or the same as the full year margins. I would say for this quarter, we do still have cost-savings initiatives rolling out through Q4. So the average for the quarter at the low 14%s I think the exit rate should be something higher than that. We’re still in the process of — there’s a couple of things on the supply chain side that are meaningful. There’s some changes that we’re making for efficiencies on our operating and occupancy line which we’re starting to implement mid-quarter. So there’s still some bigger savings that we should be seeing through the quarter. So it’s a little different than a typical year, but you’re right this is — Q4 is about an average sales quarter for us, where it comes out and we see the margins about where we think they should be for the year, but with that added piece that the exit rate should be stronger given some of the margin-improvement initiatives that we’re continuing to execute on.

Mike Tamas: Got you. Thanks. And then I know you haven’t decided anything yet for 2024 on pricing, but if you didn’t take anything and I know obviously California is going to force your hand on that, but if you didn’t take anything can you just give us a sense for where 2024 pricing would be just with what you’re carrying for this year? And then if you could, can you just give the breakdown of pricing and traffic mix for the third quarter? Thanks.

Tom Houdek: Sure. So I think for a base case, there will be some pricing next year. So as we think about it, we will get some extra carryover because we did take a pricing round in January that was on the heavier side and another one in April. So again, we’re still finalizing the plan but let’s say it is something closer to a 3% round taken in-year. We’ll have extra pricing flowing through in the year because of the carryover from 2023. And I’m sorry remind me the second part of the question?

Mike Tamas: I was just hoping you can give the breakdown from the third quarter. Thank you.

Tom Houdek: Sure. So we mentioned this in the prepared remarks, but through the third quarter, no extra pricing taken. So pricing in the quarter was closer to in the high 6% or 7% area. And then we had another pricing round come in in late September. So that put us in that 7% to 8% range.

Greg Levin: So in the quarter, 2% dropped off from last year. We replaced it with kind of upper-1%s. So it brought it down a little bit. And kind of our exit rate going into next year would probably be somewhere in the 6% to 7% range frankly with about 2% falling off in January of 2024. So we’ll probably end up replacing that 2% with something around there or a little bit less which means we’ll probably start the year somewhere in the 5% to 6% range.

Mike Tamas: Thank you.

Greg Levin: Actually, 3.7% falls off. We’ll replace 3.7% with something less than that.

Tom Houdek: That gets you down to the 5% to 6% range.

Mike Tamas: Thanks.

Tom Houdek: You’re welcome.

Operator: The next question comes from Alex Slagle with Jefferies. Please go ahead.

Alex Slagle: Hey, thanks. Just following up on the question on pricing. What was the — did the check component how did that look relative to the pricing just in terms of thinking about the mix piece of check?

Greg Levin: I’ll give you a high level and Tom can add some details there. But in general, Alex what we’ve seen in our business is no change in regards to how consumers are ordering and what they’re ordering from a check standpoint. But as Tom mentioned on the prepared remarks we’ve seen an increase in late-night business. So the late-night business has a lower overall average check. So, when we start to think about our business we’re seeing about a 200-basis points kind of drag negative drag from a mix standpoint which is just not because consumers are shifting to lower items; it’s just the fact that the late-night business is accelerating as part of our comp. I don’t know Tom you can–

Tom Houdek: Late-night is certainly playing a role. And even some of our off-premise traffic is either growing or some of the takeout check is declining as well. So, there’s a couple of things that are just out — like if we look at purely our on-premise check that’s where we’ll look to see if there’s any movements in terms of shifts toward more value-oriented items and no change there. But we are seeing some areas of off-premise where check is going down a little and then the late-night piece as well. Which is great that we’re seeing that traffic pickup it’s just shifting some more checks a little bit lower of a check-in. So, all-in as Greg said, in kind of that 1% to 2% band is kind of that delta from the pricing to where our check growth is.

Alex Slagle: Got it. And as you step back and look across your system of restaurants and see what the top tier of restaurants are doing those that are driving the strongest traffic growth, I mean is it largely the remodels that drive that, or are there other sort of differences like service levels or retention or something else that you’d point to that drives the strongest outperformance?

Greg Levin: Yes. It’s an interesting question Alex. And there’s no doubt about it that service levels and restaurants that are well-staffed with tenured team members tend to have higher comp sales. And we saw that coming out of COVID and I know it’s sometimes weird still to talk back to COVID, but we saw that and those restaurants have continued. I think the other side of it is when we look across our system California and I know you’re up there in the Bay Area California is probably the last state to kind of feel free of COVID so to speak. So, they’re still — as we think about the third quarter there was kind of that pent-up demand last year in the third quarter and that’s where we saw maybe a little bit of the biggest shakeout in the third quarter when sales softened even though it softened across all geographies.

And as we’ve gotten into October all those geographies have come back including California is probably coming back a little bit stronger. So, a tad on geography. But at the end of the day it’s really service levels I think that have played a bigger portion in our business.