BJ’s Restaurants, Inc. (NASDAQ:BJRI) Q4 2022 Earnings Call Transcript

BJ’s Restaurants, Inc. (NASDAQ:BJRI) Q4 2022 Earnings Call Transcript February 16, 2023

Operator: Greetings, welcome to BJ’s Restaurants, Incorporated Fourth Quarter 2022 Earnings Release and Conference Call. At this time all participants are in a listen-only mode. A question and answer session will follow the formal presentation. Please note this conference is being recorded. I will now turn the conference over to Greg Levin, Chief Executive Officer and President. Thank you, you may begin.

Greg Levin: Thank you, operator. Good afternoon, everyone and welcome to BJ’s Restaurants fiscal 2022 fourth quarter investor conference call and webcast. I’m Greg Levin, BJ’s Chief Executive Officer and President and joining me on call today is Tom Houdek, our Chief Financial Officer, and we also have Greg Lynds, our Chief Development Officer on hand for Q&A. After the market closed today, we released our financial results for the fiscal 2022 fourth quarter and you can view the full text of our earnings release on our website at www.bjsrestaurants.com. Our agenda today will start with Rana Schirmer, our Director of SEC Reporting, providing our standard cautionary disclosure with respect to forward-looking statements. I will then provide an update on our business and current initiatives and then Tom Houdek will provide some commentary on the quarter and the current environment. After that, we will open it up to questions. So Rana, please go ahead.

Rana Schirmer: Thanks, Greg. Our comments on the conference call today will contain forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. Forward-looking statements involve known and unknown risks, uncertainties and other factors that may cause the actual results, performance or achievements of the company to be materially different from any future results, performance, or achievements expressed or implied by forward-looking statements. Investors are cautioned that forward-looking statements are not guarantees of future performance and that undue reliance should not be placed on such statements. Our forward-looking statements speak only as of today’s date, February 16, 2023. 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 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, filing with the Securities and Exchange Commission. Greg.

Greg Levin: Thanks, Rana. BJ’s fourth quarter results demonstrated continued growth across key metrics, as we beat the industry as measured by comparable sales and comparable guest traffic according to Black Box, and we made further progress improving our restaurant level cash flow margins. Our comparable restaurant sales increased 6.6% over the same quarter a year-ago, on a 14-week versus 14-week basis. While a slower start to December and late winter storms provided a slight headwind to the industry, BJ’s still delivered its highest weekly sales average ever, reaching more than 131,000 a week before Christmas. With our focus on staffing our restaurants to ensure we are delivering gold standard service and gracious hospitality in our high energy, lively restaurants, we were able to increase dining room sales, while maintaining off premise sales at twice the pre-COVID levels.

Of note, our comparable sales performance has accelerated in fiscal 2023 to-date, driven by growth in the dining room guest traffic and an additional 3.7% of menu pricing, which is 190 basis points more than our pricing round that we took last February. If our year-to-date sales trends continue, first quarter comparable restaurant sales should be in the high-single-digits. Currently, we are carrying pricing in the mid 7% range compared to a year-ago. Like all consumer facing businesses, we are closely monitoring customer trends and the broader macro environment. To-date, we have not seen any meaningful change pointing to a slowdown in spending at BJ’s. For example, our check driving incidents for add-ons such as appetizers, drinks, and of course, our remain above pre-COVID levels and we are not seeing negative mix shifts towards lower priced or discounted items.

The one area that has moderated somewhat has been our alcohol incidents. We are still selling more alcohol per check-in our dining rooms than before the pandemic. But the amount of extra drink incidents has declined modestly. This trend began in mid-2022, so we believe it has to do more with a return to the more normal guest behavior than any macro impact on our consumer. During the fourth quarter, we made progress improving our restaurant level cash flow margins, despite the ongoing inflationary pressures. We all know growing sales leads to incremental profit and margin expansion. The sales growth we generated in the quarter coupled with some early success from our margin improvement initiatives and to a lesser extent the extra week in the fiscal year helped to propel our margins ahead of both the same quarter a year-ago as well as the third quarter of 2022.

To that end, our focus for 2023, this current year is about expanding our restaurant level margins through our sales driving initiatives, our margin improvement project, and allocating capital to high returning investments. Our sales driving initiatives target capturing even more dining room traffic through a menu focused on craveable, familiar made Brewhouse fabulous offerings, high return on investment remodels that are proven to lift sales, as well as driving additional off premise sales through our own channels with our new e-commerce platform and through our third-party partners. In regards to our margin improvement initiative, and as we have discussed on our third quarter conference call, we are targeting at least 25 million of annual cost savings worth 200 basis points of margin improvement.

We expect to see savings from sourcing changes where we can enhance and differentiate BJ’s high quality products through our kitchen technology competitive advantage. So, for example, which we touched on last quarter, the change to slow roasting our own wings alone will save us over $4 million annually and benefit our margins by 30 basis points. We continue to test the number of other impactful opportunities to optimize our business, including a simplified menu that is still broad, but reduces the menu item count complexity and SKUs, while improving execution and prep hours in the kitchen. We intend to roll out a menu with approximately 10% less menu items in July, and we will test removing even more items later this year. Additionally, we just started testing AI driven sales forecasting to provide an additional tool to our restaurant operators to forecast sales more accurately, which then improves labor scheduling efficiency as well as kitchen prep.

I’m very confident that we will achieve our goal of identifying at least 25 million of annualized restaurant cost savings this year. We also continue to evaluate our menu pricing strategy and expect additional rounds of menu pricing later this year in order to manage ongoing inflationary pressures and manage our margins. With commodity and labor costs now each up approximately 30% since 2019, menu pricing will play a role in our expected margin growth this year. To-date, we have priced more conservatively than many peers during the recent period of rapid inflation, which has benefited our guest traffic trends and value scores. As a result, guests continue to see their tremendous price point value provided at BJ’s from our Lunch Specials, Daily Brewhouse Specials, and Happy Hour offerings, along with our more indulgent favorites still at great prices like our Slow-Roasted Prime Rib and Fresh Atlantic Salmon.

Remodels will also play a key role in our sales building initiative for the next few years. The guest response measured by increased traffic, sales and profit has been excellent. Our remodel program includes adding seating capacity and updating our bar statement where applicable and other highly impactful elements inside and outside the restaurants. To-date, the return profile in these investments has been highly attractive, so we have made additional remodels and important part of our 2023 capital allocation strategy, which Tom will cover in more detail shortly. Based on our current and expected sales growth trends, our margin improvement progress to-date, and expected further margin opportunities and additional pricing, we expect run rate restaurant level cash flow margins in the low to mid-teens as we exit 2023, assuming a continued healthy macro and consumer environment.

Photo by Lily Banse on Unsplash

Finally, our new restaurant expansion strategy continues to provide strong results and growth. In the fourth quarter we opened the final three restaurants of the year for a total of six new restaurants open in 2022. We tend to open restaurants in markets with high sales and attractive restaurant cash flow potential. To illustrate in January, our class of 2022 restaurants had average weekly sales more than 20% higher than the rest of the BJ’s system. We are very pleased with the strong sales performance of our new restaurant openings, which reinforces our confidence in the attractive financial returns by allocating capital to new restaurants. We expect to open another five new restaurants in 2023, one of which is a relocation of our Chandler Arizona restaurant to a new prime location in the same trade area.

Also, reflecting prudent portfolio management, we will close two older restaurants in the first half of this year. On the people front, last quarter I announced that we added BJ’s first standalone Chief People Officer, Amy Krallman, to our leadership team early in the fourth quarter. Also in Q4, we welcome Putnam Shin as our new Chief Growth and Innovation Officer to BJ’s. We are thrilled to have Amy and Putnam join the executive team. They are both already making significant impacts across the organization and I know they will be strong leaders as we drive the business on our road to two billion. So in summary, we are focused on the comprehensive side of initiatives aimed at significantly increasing our average weekly sales, growing our restaurant margins and continuing our national expansion with a controlled pace in top quality sites with a goal of growing BJ sales to two billion and beyond.

Alright. Thank you, operator. I believe we had some technical difficulty here. I’m just going to do my last paragraph, because I hear that is where we dropped off. And then we will turn it over to Tom Houdek, our Chief Financial Officer. So sorry about that everyone. As I was saying, in summary, we know the best way to grow margins and profit is to grow sales. Our recent sales trends have been encouraging and we remain committed to being sales drivers first and foremost. We intend to continue building sales into 2023 with demand for experiential dining remaining strong. And our goal is to grow our sales into two billion and beyond by delivering this meaningful earnings growth and shareholder return. In the meantime, we are incredibly 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 growth and margin objectives.

Now let me turn it back over to Tom to find a more detailed update from the quarter and current trends. Tom.

Thomas 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. For the fourth quarter, we reported total sales of 344.2 million, an 18% increase from the prior year. Included in fourth quarter sales were 26.5 million from the extra week in our fiscal year and 3.2 million gift card breakage revenue related to a change in estimated redemptions of gift cards issued prior to 2022, which have yet to be redeemed, resulting from the COVID-19 pandemic. Excluding the extra week and gift card breakage adjustment, our sales increased approximately 8% versus Q4 2021.

On a comparable restaurant basis, which is unaffected by the gift card breakage adjustment, sales increased by 6.6% compared to Q4 of 2021 on a 14-week to 14-week basis. The comparable sales improvement in conjunction with certain savings, we began to realize from our margin improvement initiative and to a lesser extent, the extra win in our fiscal year helped BJ’s improve margins in the fourth quarter. Our restaurant level cash flow margin was 12.9% in Q4. After removing the gift card breakage benefit discussed earlier, restaurant level cash flow margin was 12.1%. Our Q4 2021 restaurant level cash flow margin was 10.1% or 9.6% when removing the 1.6 million in employee retention tax credit benefit. When comparing margins, excluding the gift card breakage and ERTC benefits restaurant level cash flow margins improved by 250 basis points in the fourth quarter compared to the prior year.

Adjusted EBITDA was 26.1 million and 7.6% of sales in our fourth quarter, which included the gift card breakage benefit, when again excluding the gift card breakage benefit from 2022 and the ERTC benefit from 2021, Q4 2022 EBITDA beat the prior year by 10.8 million with a margin that was 260 basis points higher. We reported net income of four million and diluted net income per share of $0.17 on a GAAP basis for the quarter. Our Q4 GAAP, net income and EPS benefited by approximately 2.4 million and $0.10 per share, respectively from the gift card breakage adjustment discussed earlier, when applying our 24.2% effective tax rate. From a weekly sales perspective, we average more than 112,000 per restaurant in the fourth quarter or approximately 7,000 higher than our Q4 of 2021.

We maintained our off-premise weekly sales average in the low 20,000 while generating dine in sales of more than 92,000 in Q4. Moving to expenses, our cost of sales was 26.8% in the quarter. After removing the gift card breakage benefit to revenue described earlier, our Q4 cost of sales was 27.1%, which was 20 basis points favorable compared to Q3 of 2022 and 30 basis points favorable compared to Q4 of 2021. Food costs remain high through – so year over year inflation moderated to the low single-digits in the fourth quarter. The inflation figure would have been approximately two percentage points higher, if not for the first round of margin improvement changes we implemented across our food our food basket, including the new slow-roasted wings that Greg highlighted, which were fully rolled out across our system early in the fourth quarter.

We did not take any additional pricing in the fourth quarter and our pricing carried was slightly less than 6% in both the quarter and the full-year compared to the year-ago levels. As Greg noted, we took 3.7% of menu pricing in January to combat ongoing inflationary pressures and to recapture additional margin. To-date, we have not, we have seen no guest pushback to our menu pricing rounds. We are finalizing plans for an additional pricing round early in the second quarter. Labor and benefits expenses were 36.8% of sales in the fourth quarter after removing the gift card breakage benefit described earlier, our Q4 labor and benefits expenses were 37.1% of sales in the quarter, which was 140 basis points favorable compared to the fourth quarter of the prior year after removing the ERTC benefit.

We continued to improve our labor efficiency in the quarter, which is driven in part by improving labor retention in our restaurants, which was at the, at its best level over the past two years in Q4. Our overtime and training hours improved as well, which as a percentage of sales were 20 basis points better than Q4 of 2021 and within 20 basis points from pre-pandemic levels in Q4 of 2019. Occupancy and operating expenses were 23.5% of sales in the quarter after removing the gift card breakage benefit described earlier, our Q4 occupancy and operating expenses were 23.7% of sales in the quarter, which was 80 basis points favorable compared to the fourth quarter of the prior year as we leveraged higher sales. We continue to identify O&O savings opportunities as part of our margin improvement initiative with the first round of cost savings rolling out in the coming months, including new leftover packaging containers and changing the frequency of certain maintenance programs.

G&A in the fourth quarter was 19.3 million, coming in lower than our prior estimates due to a true up for annual incentive bonuses, lower deferred compensation expense tied to fund performance in our deferred compensation plan and other savings against our original G&A budget. Turning to the balance sheet, we ended the quarter with debt of 60 million and net debt of about 31 million. We are very pleased with the strength of our balance sheet and will remain consistent in our approach of prioritizing growth driving investments by return profile, including building new restaurants, improving our existing restaurants and funding sales driving initiatives. We finished 2022 spending 78.6 million in CapEx. CapEx would have been approximately 85 million, but approximately seven million shifted from the end of 2022 to the beginning of 2023 due to timing of year end construction payments.

We did not repurchase any additional shares in the quarter, which leaves our availability under our currently authorized share repurchase program at approximately 22.1 million. Looking to the first quarter of 2023 as Greg said, we are encouraged by recent sales trends and we expect Q1 comparable restaurant sales in the high-single-digits. Factoring in our current sales and cost trends, I expect restaurant level cash flow margins to be in the 12% area in Q1 and expanding through the year as we grow sales through strategic initiatives, make additional progress on our margin improvement initiative and take additional menu pricing. As Greg noted, we are targeting restaurant level margins in the low to mid-teens on a run rate basis as we exit the year.

We are expecting food cost inflation in the mid single-digit area in 2023. For 2023, we are targeting G&A in the 80 million to 82 million area taking into account investments in strategic growth areas such as off-premise and catering as well as a step up back to more regular bonus payout and deferred compensation plan return levels. Our CapEx spend is planned in the 90 million to 95 million range including the approximately seven million of construction payments that shifted from late 2022 to early 2023. In 2023, our capital allocation priority will continue to focus on investments with attractive returns, including a mix of new restaurant growth, restaurant remodels and other sales building and margin enhancing initiatives. This year, we plan to open five new restaurants with the first scheduled to open later this month and the second in early April and to expand our high return on investment remodel initiative to more than 30 restaurants or approximately 15% of our restaurant base.

Additionally, as part of our margin enhancing initiative, we plan to strengthen and optimize our restaurant portfolio by closing three legacy of restaurant this year, one of which will be relocated to a great new site in the same trade area, which is included in the five new restaurants. In summary, we know the best way to grow margins and profit is to grow sales. Recent sales trends have been encouraging and we remain committed being sales drivers first and foremost. We intend to continue building sales into 2023 with demand for experience of dining remaining strong, especially at BJ’s. At the same time, we have elevated productivity and cost savings through our margin improvement initiative with momentum continuing to build. We have a clear path to sales and margin growth and our long-term strategy remains intact.

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

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Q&A Session

Operator: Thank you. Our first question is from Alex Slagle with Jefferies. Please proceed.

Alexander Slagle: Thanks. Hey, guys. On the commentary on the restaurant level margin expectations, it sounds like the cadence is sort of a gradual ramp. Is that sort of given the timing of the initiatives or might there be maybe the seasonally strong 2Q maybe that one you could get to the lower mid-teens margin levels? Trying to dig into that a little bit more.

Greg Levin: Yes. Alex, this is Greg, and then I will pass over to Tom. He has got other additional commentary. That is generally how we are thinking about the cadence in the sense that, as our margin initiatives work their way through. I do think to your point, Q2 is our strongest weekly sales average. And I think based on where we are today and knowing how those sales can grow, we tend to see that number go up. And then to your point, it would go down into Q3 and then accelerate into Q4 and kind of get us onto that trajectory of where we are going. The other thing just when we think about it as well, much like you saw in the news yesterday with Producer Price Index, and so forth on inflation. We tend to have a certain amount of contracts that get reset on January 1st.

So in this first quarter, we have some of those resetting contracts, while our menu pricing of 3.7% will help offset that as well as some of our other initiatives. Our next round of pricing somewhere in that April, May timeframe is really meant to kind of take care of some of this additional pricing or some of that additional inflationary pressure that we are experiencing right now. So that generally, the ramp up that we see. And I don’t know, Tom, if you have anything to add to that?

Thomas Houdek: Yes, I would agree. It is the combination of pricing that we have taken some in January, we will take more later in the year, and the margin improvement initiatives that continue to build. So those that that is how the margin increasing as the year progresses.

Alexander Slagle: Maybe you could comment on the contract resetting and sort of where you are. Um, how much is contracted for the year at this point?

Thomas Houdek: Sure. So, in January, we have the majority of our contracts come due. So we are about 35% to 40% fixed, which is a little less than we have been in the past. There is some contracts we are staying floating on this year because just the extra premium to lock in contracts for the full-year. We saw it more advantageous for our cost structure to keep them floating, take the lower costs now, and not expecting them to go up as high as some of the fixed costs. So, that was the extent of our contract resets that that happened in January. But as is Greg mentioned, wings for example, that is an area where the market is good right now and prices are still low. So we kept that contract bloating to get the benefit of the current market as well as where we think the market should go for the balance of the year.