BJ's Restaurants, Inc.
Q4 2007 Earnings Call Transcript

Published: 19 Feb 2008

[Operator:]

Good afternoon, ladies and gentlemen and welcome to the BJ’s Restaurants Incorporated Fourth Quarter 2007 Results Conference Call. (Operator Instructions). I would like to turn the conference over to Mr. Jerry Deitchle, President and CEO. Please go ahead, sir.

[Jerry Deitchle:]

Thanks, Joshua, and hello, everybody. I am Jerry Deitchle of BJ’s Restaurants and welcome to our quarterly investor conference call which we are also broadcasting live over the internet. Joining me on the call today are Greg Levin, our Executive VP and CFO; Greg Lynds, our Executive VP and Chief Development Officer and Dianne Scott, our Director of Corporate Relations. I think everybody knows that after the market closed today, we released our financial results for the fourth quarter of fiscal 2007 that ended on January the 2nd, 2008 and if you hadn’t had a chance to see our press release today, you can view it on our website, that’s www.bjsrestaurants.com Our agenda today for the call will be as follows. First, I’ll provide brief business and operational overview for the fourth quarter and full year of 2007. And then Greg Lynds will give us an update on the status of our new restaurant development pipeline which is in excellent shape. And then Greg Levin will then comment on our consolidated income statement, balance sheet and liquidity position as of the end of the fourth quarter, which is also in great shape. And then after that, we will be happy to answer your questions. So, we would like to wrap up the call in about 45 minutes or so. And we will get started right after Dianne provides our standard cautionary disclosure with respect to forward-looking statements. Dianne, go ahead.

[Dianne Scott:]

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 14th, 2008. We undertake no obligation to publicly update or revise any forward-looking statements or to make any other forward-looking statements whether as a results of new information, future events or otherwise, unless required to do so by the Securities laws. Investors are referred to the full discussions of risks and uncertainties associated with forward-looking statements contained in the company’s filings with the Securities and Exchange Commission.

[Jerry Deitchle:]

Thanks, Dianne. As we indicated in our press release today, our leadership team was very pleased with BJ’s financial results for the fourth quarter and full year of 2007. Just briefly going over our consolidated financial results compared to the same quarter last year, our revenues for the fourth quarter increased a strong 29% to $85.2 million. Our net income increased an impressive 31% to $3.7 million and our diluted net income per share increased 27% to $0.14. Now for the full year of 2007, our revenues increased a strong 32% to $316.1 million compared to the prior fiscal year and our net income and diluted net income per share increased to about 33% and 20% respectively to $13.1 million and $0.49 respectively, when excluding the effect of a non-cash pre-tax charge of $2 million that we took in the first quarter in 2007 related to certain asset disposals. Now, that’s a non-GAAP comparison. So, please refer to the reconciliation of GAAP to non-GAAP results that’s included in our press release today. We also mentioned in our press release today that despite the continuing difficult operating environment in general, for casual dinning overall, BJ’s achieved a very solid 4.9% increase in comparable restaurant sales for the fourth quarter and a 6.2% increase in comparable restaurant sales for the year. Our 4.9% increase in comp sales during the fourth quarter represented our 45th consecutive quarter of positive comparisons on that measure, since BJ’s IPO back in 1996. Additionally, after adjusting for non-cash stock compensation and our restaurant labor, our four wall restaurant operating cash flow margin increased to 20.2% for the fourth quarter and compared to 19.7% for the same quarter last year, thus indicated that our efforts to offset the impact of prior commodity cost, particularly cheese and other planned and unplanned operating cost were pretty successful during the fourth quarter. For the full year of 2007, our adjusted four wall restaurant operating cash flow margin was 20.1% compared to the same percentage for the prior year and again, that’s in line with our general long-term target in the 20% range. Since this conference call is being webcast, and we have many listeners from the BJ’s family on the line today, I just want to take a minute and express our sincere thanks and appreciation to all of our BJ’s team members and supplier partners that are listening into our call today for their wonderful contributions to BJ’s growth in sales and earnings during 2007. You know we could not have achieved our outstanding financial results for the year without you and all of your hard work and support, so thanks. Just to recap some of our key accomplishments during 2007. We successfully opened 13 new restaurants during the year, including our first restaurants in the Eastern Time zone and we achieved a strong 24% increase in our total restaurant operating weeks for the year. We were also able to recruit about 200 high-quality restaurant managers to join BJ’s team last year. That’s probably the most important achievement I think in my perspective, because we can only grow BJ’s as fast as we can recruit, train and develop high quality restaurant management talent. We also made a considerable progress last year in completing the full evolution of the BJ’s concept to a more complete casual plus positioning, which is critical in differentiating BJ’s from the literally thousands of other varied menu or grill and bar restaurants in America. And we also successfully completed the rollout of additional operational tool sets and systems, all of which have contributed to our strong growth in sales and earnings for the year and will benefit our results as we move forward into 2008. Finally, our brewery operations made a considerable progress in ramping up production in our new Reno brewery during the year and in preparing our company for expanded contract brewing operations which I’ll talk about in just a minute. And we completed a lot of work to strengthen our field supervision and corporate support infrastructures in order to support our planned future growth. It is very, very remarkable that during the last three fiscal years, 2005, 2006 and 2007, BJ’s comparable restaurant sales increased approximately 4.6%, 5.8% and 6.2% respectively. That represents a cumulative increase of 16.6% in comparable restaurant sales during the last three years and we know of few publicly held casual dining concepts that have achieved that high level of performance on that metric during their period. We think that’s a pretty strong testament to the sustained popularity of the BJ’s concept with consumers, and we also believe those sales results were also directly attributable to the strategy that we’ve been executing during the past three years to more clearly define BJ’s as a higher quality, more differentiating casual plus concept, again coupled with the favorable impacts of our operational tool set rollouts, on our four wall execution and modest menu price increases that have accepted by our guests. About three years ago, we concluded that the BJ’s concept was essentially sitting on the fence with respect to its fundamental competitive positioning. We kind of had one foot in what we call mass market or highly commoditized casual dining and it kind of had its other foot in premium casual or casual plus dining. During the past couple of years, we have worked hard as a company to move BJ’s off the fence, so to speak, and move it clearly upward to a more de-commoditized casual plus positioning in every respect with greater quality and greater differentiation. We strongly believe that positioning represents BJ’s best opportunity to capture additional market share in the varied menu or grill and bar segment of casual dining, which happens to be the largest segment of casual dining in terms of number of restaurants and total sales. But it also is the segment where the level of competition for the consumers dining away dollar is -- dining away from home dollar is very, very intense. There is no question that our work during the past couple of years to upgrade and strengthen BJ’s fundamental competitive positioning has required us to make significant and higher costing investments in the concept to add more quality and differentiation and to provide our restaurant operators with better tools to enable them to more correctly and consistently execute our restaurants at a higher level. While these investments certainly had their typical rollout costs and their initial earning curve challenges to overcome, I think the good news is, all of that is largely behind us now as we move into 2008. We really believe that all of the work that we have accomplished to better position BJ’s to continue profitably growing its market share will really benefit us during the challenging year that’s ahead of us. It also continues to be our belief that the higher quality, more differentiated and more approachable casual dining restaurant concepts with better value characteristics have a better opportunity to navigate through the tougher times in the economic cycle. Going forward into 2008, BJ’s leadership team has never felt better about the factors in our business that we can control. We are very well positioned to execute our 2008 restaurant expansion plan, which calls for the opening of as many as 15 new restaurants at high quality locations and with increased levels of landlord construction contributions. Our targeted 20 to 25% increase of total restaurant operating weeks for the upcoming year of 2008 represents the most significant component of our expected growth in total revenues for the year. Greg Lynds is with us today. He is our Chief Development Officer. He is going to comment in more detail on our 2008 development plan in just a few minutes. So while we feel very confident about the factors in our business that we can control, frankly, it’s the cumulative effect of all of the uncontrollable headwinds in the operating environment that continue to present the most challenges for smaller emerging casual dining concepts and companies like BJ’s and even impacting the larger, more mature casual dining companies as well. I have mentioned in our last couple of conference calls that in my 30 years of experience in the chain restaurant business, I personally can’t recall a more difficult operating environment in general than the one we have all been experiencing and continue to experience. There are always uncontrollable factors at work that impact any business, but I personally can’t recall a time when nearly all of the uncontrollable factors that could impact a casual dining restaurant business have come together to represent the collective headwind they do at the current time. And not only is overall casual dining traffic under increasing pressure due to the weakened economy and weakening consumer sentiment in general, but so are the prime costs of doing business that are under significant pressure, particularly commodity cost and hourly wages. As we noted in our press release today, we currently recognize that the operating environment in general for casual dining continues to be impacted by negative consumer sentiment, declining guest traffic. BJ’s is certainly not immune from these uncontrollable pressures as evidence by a slight traffic decline in our comparable restaurants during the fourth quarter, and some softer sales trends that we have experienced during the month of January particularly in our home court market of California where 33 of our 50 comparable restaurants are located. Now we certainly rather leave the weather reports up to the weather man believe me, but the fact is that California was hit with a series of winter storms, and lots of rains, snow and wind this January when compared to the last January, which happened to be one of the driest winters on record in California. So, it’s very, very difficult for us to distinguish the weather impacts from other impacts on our sales or the potential impact of weakening consumer sentiment, and the restaurant spending behaviors in general. But, we do sense there’s probably more going on in our January California sales than just the weather. So, we think it’s prudent to currently expect our consolidated comparable sales comparisons for the full year of 2008 to probably track closer to our longer-term targeted run rate expectation of 1% to 3%. Having said that, we continue to work on many of our previously announced sales building initiatives, that we believe are going to offer BJ’s a solid opportunity to drive increased sales with, some of these initiatives kicking off next month and potentially hitting their full strive during the second half of the year. First of all, beginning with the month of March, we are going to be a little more aggressive with external print media promotional activity to really drive top of mind awareness, and some new product introductions that we have got in the hopper during the remainder of this year. We are also planning to externally promote our successful car-side cashiering, to-go technological program in most of our markets, and we are also in the final testing of web-based online ordering in certain restaurants and once, we are finished with our testing we plan to roll that and promote that new guest service along with car-side cashiering with print media as well most likely in the second quarter. Combining online ordering with car-side cashiering should give BJ’s a real competitive edge over the most of the mass market casual dining curbside programs out in the market today. We’re also rolling out a “call-ahead” seating program for the convenience of our guest that’s going to be managed within our new computerized table management system that’s in every large restaurant. We think that’s going to provide a competitive advantage over similar programs offered by our competitors. Anything that we can do to make it easier and more convenient for consumers to choose BJ’s, that’s exactly what we are going to continue to focus on. On the menu front, we have got initiatives being executed to introduce some new high quality signatures entrées, upgraded bar offerings, including new wines and specialty drink offerings and we are working on an upgraded lunch program that will feature many of our signature items. And finally, we are also evaluating the potential expansion of third-party delivery services to more of our restaurants, so only about half of our restaurants offer delivery service today. Well, no one can accurately predict how the consumer is going to react in a changing economy like we are all experiencing, we’re going to continue to execute our planned initiatives to drive top of mind awareness in this stuff environment, but at the same time, we are always going to keep our eye on the longer term competitiveness and relevance of the BJ’s concept. You know, our average check is still only in the $12 range and when you think about that coupled with our strengthened casual plus competitive positioning, those should really help to provide BJ’s with a darn good opportunity to continue to outperform most of our varied menu or grill and bar or casual dining peers in this environment. Moving to sales volumes for our new restaurants, we continue to be very pleased with the sales from our 2007 year class of restaurant openings, which in the aggregate continue to trend higher than we initially expected. But we think those sales volumes are principally due to a combination of improved site selection, our upgraded and differentiated brand identity and image, as reflected by our new facilities, better operational execution and growing overall awareness, the BJ’s concept with consumers of who we are and how best to use us, particularly in our non-California markets. Our restaurant expansion plan for 2008 remained solidly in place and we are well underway with its execution. Our new BJ’s at Tri-County Mall in Cincinnati, Ohio opened this past Monday. Our new BJ’s at Oxmoor Mall in Louisville, Kentucky is scheduled to open either late this month or in early March. Both of these new restaurants are inline custom footprint layouts at two very productive and proven malls in mature stable trade areas. And I think that is the most important hallmark of our 2008 new restaurant development plan. We are avoiding the greener trade areas for the time being and we are going to focus on the more matured densely populated trade areas, where we are able to know exactly how the major retailers and the restaurant competitors in those trade areas perform. By elevating the BJ’s concept to the full casual plus level, that now puts BJ’s in a very exclusive restaurant club, so to speak, with the national mall and retail center developers. As these major developers reinvest in a more productive projects with major phase lifts and other upgrades, they typically add lifestyle wings to their projects with a few exiting high volume restaurants to help drive overall traffic at these projects. And once you get into that club, the major developers usually offer landlord construction contributions. During 2008, we expect to receive about 13 million in total landlord construction contributions to help finance development of our new restaurants. I personally believe that our 2008 new restaurant year class has the opportunity to be our best yet. And now here’s Greg Lynds, our Executive VP, Chief Development Officer to give you his perspective on our development pipeline. Greg, go ahead.

[Greg Lynds:]

Thanks, Jerry, and good afternoon, everyone. As we mentioned in our press release today, our 2007 new restaurant development growth targets were achieved. For 2007, we opened 13 successful new restaurants and increased our total operating weeks by approximately 24%. In the fourth quarter, we opened four restaurants, Temple, Texas, Montebello, California and Glendale, all opened in the month of October and our Austin, Texas restaurant opened on November 5th. In 2007, we opened our first restaurants in the Eastern Time zone, as we successfully extend our brand into Orlando, Florida, Tampa, Florida and Columbus, Ohio. Additionally, we opened two new restaurants in Oklahoma, which is also a new state for BJ’s. Initial sales volumes for our new restaurants continued to exceed our expectations and we are well positioned to build the brand in the Ohio Valley, Florida and other strategic mid-West and East Coast markets going forward into 2008 and beyond. I would also like to recognize our construction and development teams as they did an excellent job in 2007 of delivering all of our restaurants before our internal goal of December 1st. There was also a lot of rain in the Texas and Oklahoma markets in 2007. Moving onto our targeted 2008 new restaurant development pipeline, we currently expect to open as many as 15 restaurants this year and increase our total restaurant operating weeks by approximately 20 to 25%. As of today, all of our potential 2008 openings have been secured with signed leases or letters of intent and nine of the restaurants are already under construction. In the first half of 2008, our development plan called for continued growth in the Ohio Valley region in Central Florida. As Jerry mentioned, we had a successful opening at Cincinnati, Ohio on Monday and a later this month or early March, we’ll open our second restaurant in 2008 and that is in Louisville, Kentucky. In the second quarter of the year, we plan to open in Kissimmee Florida, a suburb of the Orlando market, Indianapolis, Indiana, Torrance, California, our home court, and lastly, in Baton Rouge, Louisiana. During the second half of 2008, our development plan called for several new restaurants on our home court or core market. This allows us to balance our growth in both established and new markets. This balance strategy allows us to better leverage and optimize our field supervision, supply chain infrastructures and to improved consumer awareness in our new markets. As we said previously, it’s difficult to precisely predict the actual timing of our 2008 new restaurant openings, due to many factors that are outside of our control. With that in mind, as of today, we currently expect to open two openings in the first quarter as many as four openings in the second quarter, as many as five openings in the third quarter and as many as four openings in the fourth quarter. Again, our quarter openings schedule can fluctuate due to many factors and we will keep everyone advised of all future changes on our call. Overall, our 2008 and 2009 and 2010, pipeline remains in excellent shape. We continue to be very pleased with the quality of the new sites in our pipeline. Our team views these current economic issues surrounding retail and restaurant development, as a time to capitalize on securing prime sites and dense high-volume retail trade areas. Over the last three to four years, we have opened high-quality differentiated restaurants with some of the largest retail developers in America, including Simon Property Group, General Growth Properties, Westfield, Macerich, CBL, and a few others. These relationships are in place, should become even stronger over the next few years. The fact that we have delivered on all of our development commitments over the last 36 months places us in a strong position with these great landlords in terms of obtaining first shot and getting first shot at securing AAA sites under favorable lease economics. In the design and construction area, our team continues to focus on delivering restaurants with a non-chain image and ambiance, our new prototype and custom footprint restaurants, feature large impressive entry statements, high ceilings with detailed contemporary decors, wood floors in the dining room, natural stone and the materials in the bar, our raised high energy bar is visible from all dining rooms, and contains the latest in audio-visual of technology. When we combined this higher energy casual plus atmosphere with our broad menu, signature pizza and beer, we have a unique differentiated positioning and brand to present to our guests in the communities we serve. Our team knows that we compete in the largest and most competitive segment in casual dining and the best way to profitably gain market share in this segment is to steadily increase the overall level of quality and points of differentiation, and at the same time, keep the broad approachability of the BJ’s brand. In 2008, that means, opening our new restaurants in AAA locations with dense high sale volume trade areas and then deliver a gold standard experience to our guest. Our team is ready and I am confident that BJ’s should have many years of solid new restaurant growth to come. Jerry, back to you.

[Jerry Deitchle:]

Hey, thanks for the update, Greg. You know BJ’s only has 69 restaurants open today in only 9 states and we continue to believe that there is room for at least 300 BJ’s restaurants domestically of various sizes and site types. As Greg mentioned, we continue to plan to increase our productive capacity as we think about it in terms of total restaurant operating weeks by 20 to 25% for the next few years or so, but having said that, we are going to maintain the discipline to execute our growth plan in a very careful and controlled manner and with the right operational talent, infrastructure and modern tool sets in place. I am going to comment on two more areas of our business before I turn the call over to Greg Levin. First with respect to our G&A expenses. Our plan for 2008 calls for a mid-teen percentage increase in absolute G&A expense dollars compared to fiscal 2007’s approximate 31% increase in absolute G&A expense dollars versus 2006. In other words, we are planning a 50% reduction in the rate of growth in this expense category in 2008. I think most of our longer-term investors know that we have been intentionally strengthening our field supervision and home office support infrastructures for a growth during the past couple of years. But the good news is substantially all of what I would call, our catch up investments in that respect have now been completed and we should be on more of a more normalized incremental G&A investment pattern going forward in our business. We are going to continue to make incremental investments in our restaurant manager recruiting, training, development and retention programs, as that’s really the most critical resource or requirement of future growth and our business model. We are a pure company operations business model. We are in a casual plus segment of casual dining. There is a level of complexity and quality that’s required to execute at the level that we are competing at. So, we’ve got to continue to make those investments in our talent base. We can only grow our restaurant base as fast as we can recruit, train, develop and retain the very best restaurant managers available. Last but not least, after several months of very careful operational due diligence, we currently expect to execute an agreement with a large contract brewing entity before the end of this month and we expect to begin receiving two of our higher volume proprietary beer flavors brewed by that entity in our restaurants starting in the second quarter. That’s really exciting. Previously, our total beer requirements were really too small to attract the attention of a large scale contract brewers, but now that we’ve grown, now that we have 69 restaurants opened with an estimated annualized total beer requirement in the 50,000 barrel range right now, we’ve been able to get their attention. During 2007, about 15% of our beer was contract brewed and we expect this percentage to gradually grow to the 35% range during 2008 and greater percentages thereafter. Our longer term objective remains and that is to have large contract brewers produce substantially all of our larger volume beer flavors and we will continue to internally brew our smaller volume seasonal and specialty beers. Now, before I turn the call over to Greg Levin, our CFO. I just want to take a minute and reiterate our confidence that 2008 offers a significant opportunity for BJ’s to continue to gain market share, and the estimated 90 billion plus casual dining industry. As I mentioned before, our leadership team has never felt better about the factors in our business that we can control. We are well positioned to execute our expansion plan for the coming year. We have got a targeted 20% to 25% increase in total restaurant operating lease that, when you take a look at the internal forecast, that really represents the most significant component of our expected growth in total revenues for 2008. And again, I want to reiterate that we also feel confident that our average guest check in the $12 range coupled with our strength in causal plus competitive positioning, and all of our sales building initiatives in progress should provide BJ’s with a solid opportunity that continue to outperform most of our peers, in this very difficult environment. Now, I am going to turn it over to Greg Levin. Greg?

[Greg Levin:]

Hi. Thanks, Jerry. I am going to take a couple of minutes to go through some of the highlights for the fourth quarter, and I will provide some forward-looking commentary for 2008. As Jerry previously noted our total revenues for BJ’s fourth quarter of 2007 increased 29% to approximately 85.2 million from 65.9 million in prior year, the increase is a result of approximately 24% more operating weeks, coupled with an approximate 4.2% increase in our weekly sales average. The operating week increase is due to 30 new restaurants that we opened this full year, and a full quarter of operating weeks from the four restaurants we opened in the fourth quarter of last year. Our comparable restaurant sales for the quarter were solid 4.9%. During the quarter, all of the states that we operate in had in aggregate, positive comparable restaurant sales. Our Texas restaurants continue to show some of the best comparable restaurant sales for our company, and collectively, the Texas region again, had comparable restaurant sales in the double-digit range. We also continue to be very pleased with our new restaurants in our new markets. Just to name a few, the Polaris restaurant in Columbus, Ohio continues to generate sales of approximately 100,000 a week, and our Pinellas Park restaurant, which is a suburb of Tampa, is generating sales in excess of 100,000 a week. Our restaurants in the Bay Area of Northern California also had very strong comparable restaurant sales in the fourth quarter. In fact, our Cupertino and our San Jose restaurants, all up in the Bay Area, had comparable restaurant sales of 10% and 12% respectively. As we mentioned in our third quarter conference call, we began to see some weakness in two of our restaurants in the Inland Empire area, Southern California during the summer months. And as you may recall the Inland Empire area is one of those high growth areas both residential and commercial over the last several years, and is now one of the leading counties in California, and the nation in both the number of subprime loans, foreclosures and the number of homes currently offered for sale. Both of these restaurants in the Inland Empire continue to show negative comps and restaurant sales growth, during this quarter. If we exclude those two restaurants from our total comparable sales for the quarter, our comparable restaurant sales could be approximately 1% higher during the fourth quarter of 2006-2007. Both of these Inland Empire restaurants though, still average 5 million in average unit volumes, they provide a very healthy return on our investments for our shareholders. During the fourth quarter, our menu pricing was in the mid 5% range, which was a little higher than our recent trend as we took an approximate 2% of menu pricing, in mid November to get ahead of the anticipated cost increase, we expected in early 2008 related to both minimum wage increases in California, as well as federal and higher commodity cost. As we have mentioned before, additional menu pricing is really the last place that we look when we consider actions to protect our four wall operating cash flow margins. Our initiative is centered on providing guest counts by improving and differentiating the BJ’s experience from other dining choices facing the guest and by improving our efficiencies within our restaurants. We do not believe making guests pay more for our own inefficiencies. And basically, we do believe that BJ’s has a traditional pricing power, thanks to the many quality improvements that we made to BJ’s over the past couple of years, in terms of better food, service, facilities, and execution; and thanks to our relatively low average check at present. Having said that, we will continue to be very careful about our menu pricing, in order to protect our principal competitive advantage against the mass market barring real competitors; that is offering a better overall dining experience at BJ’s, at about the same price as the mass markets bar and grill guys. In regards to the middle of our P&L, our cost of sales are 25.2% with 40 basis points better than last year’s fourth quarter, and on a sequential basis, it was down about 30 basis points from the third quarter. This decrease compared to prior year and the third quarter was principally driven by two components

[Jerry Deitchle:]

Hey, thanks, Greg for an excellent financial review. And so now we are going to wrap up our prepared remarks. Once again, we had very solid results for the fourth quarter and the full year of 2007, in this difficult operating environment, where consumer spending for casual dining occasions and the prime cost of doing business, will likely continue to be under significant pressure. We believe the more successful casual dining concepts are going to be those that really work hard to protect the overall approachability to the consumer for all dining occasions, and for those concepts that offer even greater quality differentiation and overall value to the consumer. Those have always been the competitive strengths of the BJ’s concept; in fact, the 30th anniversary of the opening of the first BJ’s restaurant will be on March 27th of this year, results. The BJ’s concept has been around for 30 years, it has proven its ability to pass the best of time, and I believe the concept through its various evolutions, over those 30 years, has ever been stronger from a competitive point of view. We have mentioned our pipeline for 2008 in terms of new restaurant development is in excellent shape, we have got a comprehensive strategic and tactical plan in place. So, now our challenge is to continue to correctly and consistently execute our plan and keep our unwavering focus on the longer term growth and success of BJ’s. So that wraps up our prepaid remarks, at this time, we are going to open up the call for questions. And again, if we don’t have time to get to your question on this call, please feel free to call us at our offices, we will help you as much as we can. So, Joshua we are going to open it up here.

[Operator:]

Thank you. (Operator Instructions). Our first question comes from the line of Larry Miller, RBC Capital Markets. Please go ahead.

[Larry Miller:]

Yeah. Hi guys. I had couple of questions. First, can you just talk about what the economics of the contract brewing is to you guys?

[Jerry Deitchle:]

We are not really prepared to really get into those specific economics at this time. We would like to finish the execution of our agreement, and then, probably we will be in a better position to talk about those economics as we get into some actual production. Obviously, over the longer run, when you are able to move a great deal of your beer production into a larger contract brewing situation where they have much greater economies of scale or they can brew in batch sizes of 4 or 500 barrels at a time, we would expect to have a significantly favorable production economics, given what we are able to do on our own. But to really get into specifics of that, I think we got to get our agreement finalized, and get a few brewing runs underneath our belt, and then I think we will be able to talk about it.

[Larry Miller:]

I guess, I was just thinking, Jerry in general terms, because obviously it’s something that we don’t model so specifically. So, does it help on the dedicated labor side, and the cost of sales effectively would come down, is that how we should think about it? I wasn’t asking for the terms of the agreement per se?

[Jerry Deitchle:]

I’m sorry, I misunderstood you, Larry. Well, obviously, the cost of our beer, whether it’s internally brewed or externally brewed, is reflected in our cost of goods sold. And overtime, we would expect again a favorable impact of that component, but we are not in a position yet to really put a dimension on that.

[Larry Miller:]

Okay, that’s fair. And then you talked briefly about some of those investments that you made in the last couple of years, and how they might help in ‘08. Can you kind of give us some flavor for how some of these things could help sales or at least how you hope they might help sales?

[Jerry Deitchle:]

Well, I think that when you – first of all, we have a technological platform in our business, within the four walls of our restaurants that I believe frankly is second to none, for casual dining companies of our size and scope of operations. So, when you take a look at KDS when you look at our POS system, when you look at our automated table management system, when you look at our technology with respect to car-side cashiering, when you look at the ability to use handhelds in the dining room on peak meal periods, to process orders, when you look at our upcoming online ordering capability, when you look at call ahead seating and how that can dovetail into our operation using the strength of our table management system, I believe that the synergistic impact of all of the technological investments that we’ve made within the four walls of our restaurants over the past couple of years, are going to be able for us to improve guest satisfaction to effectively process all of the business that’s being offered to us. And frankly, during peak meal periods, to actually increase our productive capacity, we’ve spoken in the past about our off-premise sales channel being quite underdeveloped for BJ’s with only 4 to 5% of our total sales coming through that channel. We know that the mass market casual dining chains over a period of time have doubled from say 5 to 10% based on information that we’ve seen the percentage of their sales in their curbside programs or off-premise channels. So, these are all opportunities from a technological point of view that I think we can leverage. On the other side of the coin, we’ve made significant investments in the overall quality of the BJ’s concept. And it’s hard to point to a single thing, I think you will have to judge the and consider the collective synergistic impact of upgraded uniforms, upgraded china and silverware, glassware, our linen program, and a number of other things which come together that clearly differentiate BJ’s from the mass market bar and grill or varied menu operators out there. And the key is having all of that come together in a casual plus way, whereas keeping our average check in that $12 range which is very, very comparable to that, if not a little lower than that of our mass market competitors in this particular segment. So that’s, I believe, will give us an advantage during these tough times to defend our business, and frankly perhaps to take advantage of the weaknesses of some of the other competitors in the mass market arena, where due to their various competitive positions, their level of maturation, they are really unable to keep consumers interested in their primary offerings unless they were able to discount the prices. And we are in a wonderful position where we don’t really have to get into that game to keep consumers interested in our concepts. So that’s how I would summarize it, Greg or Greg, would you guys want to add anything to that.

[Greg Levin:]

No. I think you, I think you stated a lot there, Jerry. I think, I guess, the only thing to add on there is, I really do think we are differentiated in the mass market casual dining players. And if you are going to go out, and you got to make that decision and you are spending $12, I think the BJ’s dining experience is right now I think better than a lot of mass market players.

[Larry Miller:]

Okay. And then just to reconfirm, none of that productivity that you just talked about is really in the 1 to 3% same store sales guidance?

[Greg Levin:]

Well, most of that productivity, a lot of that was put in place in the last couple of years, from the pure productivity within the four walls. I think, as Jerry talked about all those initiatives, most of those are going to rollout in the second half of this year, and as a rule, that’s where we think we might have some ability to be on the upside in regards to maybe our comparable restaurant sales.

[Jerry Deitchle:]

Well, particularly with respect to the off-premise channel. Once we get online ordering out of test and into a national rollout mode, and you can combine that with car-side cashiering with the handheld devices similar to where you go when you turn in your rental car, to be able to be cashed out in your car, and to really build that channel with improved packaging and then to promote it. That’s one thing that BJ’s frankly, we have been around for 30 years. BJ’s has really never been much of an external promoter of its business with respect to media whether print or radio. The fact of the matter is it has always been a small business until this point. It’s still kind of a small business, and we don’t really get the traditional efficiencies of mass market media that the mass market casual dining guys do with thousands of restaurants obviously. But now we are getting to the point of size, where in certain pockets of our company in certain markets, we do have some early efficiencies, and we are going to get out and be a little more aggressive as I mentioned in my prepared remarks with respect to promoting car side cashiering and online ordering and some of these things that we believe provide a clear differentiation for our concept.

[Larry Miller:]

Okay. Thanks, guys.

[Jerry Deitchle:]

Okay, Larry.

[Operator:]

Our next question comes from the line of Sharon Zackfia, William Blair. Please go ahead.

[Sharon Zackfia:]

Hi. Good afternoon. It sounds...

[Jerry Deitchle:]

Hi, Sharon.

[Greg Levin:]

Hey, Sharon.

[Sharon Zackfia:]

Hi. It sounds like you were hinting pretty strongly that comps have gone down to that 1 to 3% range, and we have been really spoiled by you in the past, where you have given these kinds of ranges, and then you completely beat them time and time again. And I guess, I am curious as to, we know there has been weather in California. Are the units outside of California showing any softening?

[Greg Levin:]

Not that we’ve noticed. When we think about our comp restaurants, and I think, we said 33 of 50 restaurants are in California. Well, the only other area that we have got a strong base is Texas, where I think we have 11 restaurants today, and probably 7 of those are in the comp base, so that puts you up to 40, and then you’ve got Arizona as well. Arizona has been a little bit softer, I think, people have talked about that. That’s an area of obviously high growth over the last few years. Texas has continued to do extremely well for us even into 2008.

[Jerry Deitchle:]

So, I would summarize in saying that again we really prefer not to comment on monthly same-store sales data or inter-quarter same-store sales data by market, because short periods of time don’t necessarily make a trend. And we really hesitate to comment on specific markets, because that kind of gives our competitors a roadmap to go as to where we are doing well. But again to summarize, I think, it’s fair to say that the Texas has really been on target with respect to our same-store sales expectations. It has really been California, particularly Southern California that I think has experienced a little bit of weakness here quarter-to-date. Although consolidated our same-store sales remain up slightly on a quarter-to-date basis. And we’ll just have to see how when this weather gets out of the numbers, and we get past Valentine’s Day and get into March, I think, we’ll have a better assessment and judgment as to what some of the factors might be.

[Sharon Zackfia:]

Okay. And then separately, I had a cost question. I know that through the operating and occupancy expense line, we have been seeing some of those initiatives, such as the tableware and linens run through that, and you mentioned some media that you are going to be exploring. So are we going to see – I had previously thought we would just see pressure there in the first half of the year. But, is it more prudent to expect that throughout the full year as you experiment more with media?

[Jerry Deitchle:]

Well, I don’t think I would characterize our media, our print media spending as experimental. We spend less than 1% of sales on advertising at BJ’s. I would think that in this environment, we are going to have to get a little more aggressive, but I don’t see us going to 2% or 3% or anything like that. And the types of print media that we will deploy, we do a pretty rigorous ROI analysis, and we really set breakeven guest count hurdle rates that are very, very reasonable for the amount of media that we may consider deploying. So we are not projecting any margin deterioration from ramping up our print media programs a little bit here throughout the rest of the year, because of those factors I have just described.

[Sharon Zackfia:]

Okay. Thank you very much.

[Jerry Deitchle:]

You are welcome.

[Operator:]

(Operator Instructions).

[Jerry Deitchle:]

I think...

[Operator:]

Our next question is from the line of Greg Ruedy with Stephens, Incorporated. Please go ahead.

[Greg Ruedy:]

Thanks. Good afternoon. As we have rolled into this deteriorating macro, can you kind of walk us through your expectations of the length of the honeymoon period, any changes there versus home and away markets?

[Greg Levin:]

Not really. In fact, looking at our new restaurants last year, and we commented both on Columbus as well as Tampa, but even our restaurants in California have opened up really strong and continue to do really well. In fact, I think, we made the comment that the two in the Inland Empire are still over 5 million, they are great ROIs. Every one of our restaurants in California is a really strong restaurant. And we are not seeing any real changes in honeymoon factors or anything from that standpoint. And we wouldn’t stay away, we wouldn’t shy away from building in California at all.

[Greg Ruedy:]

Okay. Given that, before we talk your off-premise opportunities, how many of the 33 in the California comp base do you have close to capacity?

[Greg Levin:]

Do we have close to capacity, meaning actual sales capacity, is that what you are...?

[Greg Ruedy:]

Yeah.

[Greg Levin:]

I’d probably say none. I think all of our restaurants have the ability to increase sales both at off-peak meal periods. I think all of our restaurants in California still have the ability to increase off-premise sales. So I think there is ability to continue to increase capacity and build real sales in the sense of guest counts in all of our restaurants, both in California as well as in the other restaurants.

[Greg Ruedy:]

All right. Moving to the – your HR build out over the last couple of years, as you have built the pipeline, can you kind of walk us through some of the profiles of maybe where you have had some hits and some misses from the types of people you have brought on, and how do you narrow that focus going forward? And then what’s the leverage opportunity left there? Thanks.

[Jerry Deitchle:]

Well, with respect to HR, I would assume, Greg, that you are talking about our restaurant manager pipeline. Last year, we recruited 200 managers, higher quality mangers to join BJ’s. This year, I think, we are going to need about 275, 280 to support our planned growth this year as well as to cover attrition. Back when I got involved with BJ’s -- I am starting my fourth year this month -- but about three years ago, BJ’s generally sourced its restaurant management recruits from the mass market casual dining companies. And at that time, the recruitment, the assessment, the selection, the compensation that was applied to those recruits was pretty much of a mass market casual dining nature. In order for us to successfully elevate the complexity, the quality, the operation, the basic competitive positioning of the BJ’s concept and clearly elevate it to the casual plus level, we needed to make investments, not only in the amount of actual management talent in the pipeline, but the quality of the pipeline. So over the past three years, we have really addressed each one of those factors with respect to that pipeline. We have dramatically upgraded our experience requirements. We have improved the level of assessments in our interview process to ensure a higher quality, more successful candidate that will pop out at the end. We have increased our base levels of compensation slightly to position our compensation from a base perspective, where our concept is -- in between the mass market casual dining players, but not as high as the upscale casual dining players. We have also added additional developmental programs in terms of training and development, including our home office, the corporate portion of that training. So basically, those are all of the things that we have done. And then the other thing that we have done with respect to retention of our key managers is put in our, what we call our Gold Standard Stock Ownership Program a year ago, which involves restricted stock units for our restaurant general managers, our restaurant kitchen managers and our field supervision team. All of those have placed BJ’s in a much better position to go out and compete for the best available talent out there. And I think that this slowdown in the economy, and some of the retraction of growth of some of our competitors in this environment is really going to give BJ’s an opportunity to take advantage of some of the weaknesses of our competitors, in terms of – not only in terms of site availability and selection, as Greg Lynds mentioned a little earlier, but also in the flow of quality restaurant management talent to this business. So those are – all of the work that we have done over the past three years to really build this concept, build its standing in the operational community, build the overall quality, I think will enable us to continue to attract and retain the very best talent. But I don’t think we could have done that, had we not made all of those investments in recruiting, assessments, training, compensation to be able to get to this position. Does that help you on that one?

[Greg Ruedy:]

That does help. That’s great color. Thanks. I will pass it along.

[Jerry Deitchle:]

Okay. Thank you. Any other questions. Operator, I believe, we have no other questions at this time.

[Operator:]

That is correct, sir. Please go ahead with any closing or concluding remarks.

[Jerry Deitchle:]

Well, thank you all for your support, and we look forward to any calls that you might want to send our way here at the home office. Thank you.

[Operator:]

Ladies and gentlemen, this does conclude the BJ’s Restaurants Incorporated fourth quarter 2007 results conference call. We would like to thank you for your participation. Have a pleasant day. You may now disconnect.