BJ's Restaurants, Inc.
Q3 2008 Earnings Call Transcript

Published: 24 Oct 2008

Jerry Deitchle:

Thanks, Operator, and hello, everybody. I am Jerry Deitchle with 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 Chief Financial Officer and Greg Lynds, our Executive VP and Chief Development Officer. Our agenda for the call for today will be as follows
Greg Levin:

Alright, thanks Gerry. I will remind everyone today that our comments on the conference call 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, October 23, 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 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. Jerry
Jerry Deitchle:

Thanks, Greg. After the market close today, BJ’s Restaurants released financial results for the third quarter of fiscal 2008 that ended on September 30, 2008. If you have not had the chance to see our press release today you can see it on our website at www.bjsrestaurants.com. I think we all know that most consumer businesses continue to feel the impact of a slowing economy and all of the related financial and economic issues that we hear and read about everyday so we are not going to spend much time reiterating the obvious on our call today. While we are very fortunate that BJ’s has a large number of loyal guests and our topline performance is certainly not immune to all of these issues. However, we do believe that in our segment of the restaurant industry and the casual dining segment, BJ’s continues to perform relatively well compared to most of our similarly situated competitors in terms of size, scope of operations, available resources and geographical concentration. And while it is clear that the economic downturn is certainly taking its toll on some of casual dining companies in terms of damaging their vital organs, so to speak, we believe that not only at BJ’s vital organs are in great shape today, they are gradually becoming even stronger overtime. We consider our vital organs to be the overall quality and differentiation of our restaurants, the overall approachability and relevance of our restaurants for the consumer and, most importantly, the quality and spirit of the men and women that operate our restaurants. So, our fundamental strategy remains pretty straightforward that we intend to continue to capitalize on the competitive strengths of our vital organs here at BJ’s and we continue to position our business to gain additional market share going forward. We also think it is important to keep in mind that BJ’s does not yet have even one half of 1% of market share in the casual dining segment. With only 80 restaurants open today, the vast majority of our restaurant growth remains ahead of us. So while we definitely have to prudently react to the current economic slowdown in terms of our tactical execution, we still need to keep an eye focused on our longer term opportunity to build market share and to protect the competitiveness of our restaurant concept and the strength of our growth and our support infrastructure. By doing so, we should be even better positioned when the current economic cycle eventually begins to turn around until then we are going to do our absolute best to control what we can control, to do our best to drive profitable sales and to do our best to become even more productive and efficient in our overall execution. And moving to our financial results for the third quarter as we indicated in our press release today, our total revenues for the quarter increased approximately 19% to $95.8 million, compared to $80.4 million for the same quarter last year. Our net income and diluted net income per share for the quarter were $2 million and $0.08 respectively. We also indicated in our press release today that our diluted net income per share comparison for the quarter was also impacted by several key factors. First our results were unfavorably impacted by about $0.02 per share due to the estimated loss sales, loss offering profits and property damage from two hurricanes; hurricane Gustav and Ike that were in excess of our property and business interruption and insurance [coach]. Next, our results were unfavorably impacted by about $0.03 per share due to higher utilities cost during the quarter and as well as increased marketing expenses and I will comment on that in just a minute. Third, we incurred about $0.02 per share of incremental pre-opening cost quarter over quarter that were associated with six new restaurant openings in the current year's third quarter compared to only four openings in the same quarter last year. Next, we had a favorable comparison of about $0.03 per share due to a reduction of our estimated incentive compensation liability for this year and finally we had an approximately $0.01 per share favorable comparison that due to our lower estimated effect by tax rate for the current year. So, I might take a minute and comment on the couple of these factors and then Greg Levin will comment and address that a little later in my remarks today. First the two hurricanes cost us to loss about $500,000 of total sales during the quarter. Hurricane Gustav cost caused us to close our new Baton Rouge in Louisiana restaurant for about six days and also caused considerable water damage there at the restaurant facility. Hurricane Ike caused us to close our four Houston restaurants for a total of 33 sales days and also caused a little bit of damage to our facilities there. Unfortunately, on the case of our Houston restaurants, our re-openings were extensively delayed due to our lack of electricity, water and sewage services to our restaurants. So, our Baton Rouge and Houston operational teams did one heck of a job of making preparations to reopen our restaurants as soon as we have those services restored and we are very, very thankful for all the hard work. We also incurred higher marketing expenses during the quarter in order to prudently respond to the weakening economy and all of the pressure with economy has put in our overall guest traffic and casual dining in general and I think that deserves some additional attention on our call today. Historically, with respect to marketing expenditures, BJ's particularly spent less than 1% of sales. Over the years, BJ's has relied primarily on word of mouth, more vocalized marketing efforts to maintain its top of line awareness with the consumers. Now, BJ's also has and continues to rely on triple A locations and triple A operational execution to build and maintain our reputation with consumers and that approach has historically worked pretty well when you consider that prior to this year, BJ's has enjoyed 45 consecutive quarters of positive same-store sales comparisons. Unfortunately, in a major economic downturn that we are experiencing like this year, the "build it and they will come" approach is not going to work by itself. So, original business plan for 2008 did not compensate the economy with weakness is significantly as it has. So, as the current year begin to unfold, we made a decision to accelerate our plans schedule of 2008 key sales building initiatives and to do our best to prudently defend our comp line. So far this year, our team has successfully implemented an incredible number of sales building initiatives including our curbside cashiering services, our call-ahead seating service, our expanded delivery service, do lunch specials and improve happy hour programs, our new online ordering service as well as introducing through a menu items. In order to support a rollout of all of those initiatives, we decided that it was a sensible business building decision to invest in additional plant and electronic marketing resources up to an approximate level of somewhere between 1% to 1.5% of sales to comfortably introduce and see all of these products and services with consumers as well as to drive additional top of line awareness and to reinforce BJ's quality points of differentiation. In our business, the most effective marketing approach will always start with having high quality differentiated products and services and the consumers are laughing, we are always going to focus on that. However we do believe that we have and will continue to achieve a good return on our incremental marketing spending this year and in the future. I think that when you are continuing to face a tough economy where consumers are being more even careful about where to spend their hard-earned bucks on food away from home, it is very; very important to keep in contact with them and to remind them that we are here and we are still special. As long as the economy continues to remain soft, we plan to maintain our marketing spend at the approximate level of 1% of sales again to drive awareness for more new products and services that are in our pipeline and that are coming for next year. Now having said that, we are not going to resort to excessive discounting or couponing to buy market share as we often see with the larger mass market, casual dining chain. Now speaking about comparable sales, we are very, very pleased that our comparable restaurant metric for the quarter once again outperformed the net track benchmark for casual dining comparable sales. As we noted in our press release, our comparable restaurant sales decreased by about 1% during the third quarter, which was up against the strong 5.6% increase achieved in the same quarter last year. However, after you consider the fourth of July Holiday calendar shift that represented about half of percent of total comparable sales compared with the same quarter last year and after considering the closures of comparable restaurants due to Hurricane Ike which also impacted our total comparable sales for the quarter by another half of percent, our comparable restaurant sales would have been flat for the quarter year standing. We think that was a pretty respectable performance in these highly volatile times and in particular given the fact that 39 of our 56 comparable restaurants for the third quarter are located in the states of California and Arizona where the current economic slowdown has been quite pronounced. We can say that for the first three weeks of our fiscal October, our comparable restaurant sales were down about 1.5% although our major suite comparison improved being essentially flat. As we mentioned on our last quarterly conference call, no one can naturally predict how the consumer is going to continue to react in this very volatile and slowing economy but we do not believe that the current economic slowdown is likely to ease up anytime in the near future and we do not think that we are close to the bottom of this economic cycle. So, accordingly we continue to advice our investors to air on the conservative side in their short term comparable sales expectations that are like in most investors are doing with the casual dining industry in general and we are going to do our best to drive comparable sales as aggressively as we can. Greg Levin will provide some more detail on the comparable sales in his remarks later on our call today. We also commented on our last couple of conference calls when our leadership team has never felt better about the factors in BJ's business that we can control and we still feel that way. We believe that our restaurant management team did a darn good job of managing our food waste, our labor productivity and our other controllable cost expenses during the quarter. Additionally, our infrastructure support and G&A expenses were also well controlled during the quarter. As we mentioned on our last call, substantially all of what I would call our catch up investments in this respect were completed last year and we are on more normalized incremental G&A and best with spend pattern going forward in that business and we are going to continue to make incremental G&A investments in our restaurant management, recruiting, training, development, retention and talent development programs this year and next year and in every year as that is really the most critical resource requirement for future growth in our peer Company operations business model. We can only grow our restaurant base as fast as we can recruit, train, develop and retain the very best restaurant managers available. Moving to our new restaurant development plan, we were very successful in opening a record of six new restaurants during the third quarter of 2008 including one that was successfully moved forward from an originally expected opening in the fourth quarter and we are pleased to report that our initial sales volumes for these six new restaurants continue to meet, or in most cases, exceed our expectations. We remain very confident about BJ's ability to continue capturing additional market share in the casual dining segment and our view, the segment is still an attractive place to be in the restaurant industry and we do not think that the estimated $90 billion of annual casual dining sales is going to disappear anytime soon. Now, depending on current pressures in the macro environment, it may not grow as fast as it did in the past year, it might even narrow a bit but it is still a very large, highly fragmented segment that is populated with thousands of restaurants that in our view have gradually felt a gravitational pull downward over the years in terms of their quality, their points of differentiation, their energy level, their approachability, their relevance and their overall values for the money. That is where BJ's excels and we believe that all of those factors played at the strengths in the BJ's concept. Obviously, our primary opportunity to increase our market shares to open more restaurants, we have only got 80 restaurants open today in 13 states so we continue to believe there is room for at least 300 BJ's Restaurants of various sizes and site-types domestically but having said that, we are going to maintain the discipline to execute our growth plan in a very careful and controlled manner. Speaking of our development plan, I am going to turn the call over to Greg Lynds, our Chief Development Officer for his update on our new restaurant development pipeline. Greg, go ahead.
Gregory Lynds:

Thanks, Jerry and good afternoon everyone. As Jerry mentioned earlier, our development team has worked hard this year to successfully achieve our previously stated development targets to grow our total restaurant operating list by 20% to 25% and open as many as 15 restaurants evenly spaced throughout the year. To date in 2008, we have opened 13 successful restaurants. In the third quarter just ended, we opened six restaurants. The Peoria, Arizona opened on July 4. On July 21, we opened San Antonio, Texas; Tukwila, Washington, that is outside of Seattle opened on July 25; Pearland, Texas just outside of Houston opened on the July 28; in Modesto on August 4 and our last opening of the third quarter was at the right end of Southern California in the city of Chino Hills and that opened on September 29. So far in the fourth quarter, we have opened our Tacoma, Washington restaurant and we opened that on October 13 and we have two more planned openings in the fourth quarter, both the restaurants are under construction and should open before the Thanksgiving Holidays. These restaurants are both in our home quarter at California and one from the city of Newark which is just outside of the Bay Area, San Francisco bay area and one is in Chula Vista, California which is a suburb of San Diego. We are very pleased with the sales of the restaurants that we opened in the third quarter. Our restaurant in Seattle had a record-breaking first day of sales for any new BJ's restaurant outside our California home court and is still performing very well and the last two restaurants we opened in the third quarter and the depths down in Chino Hills have achieved initial sales volume as well in excess of our expectations. Looking forward towards a long term development plan, we continue to believe that over time, we have room to open at least 300 BJ's Restaurant of various site types and sizes across the country. At the end of this year, we run 82 restaurants opened in 13 states. We have plenty of quality growth opportunities in our core California and Texas markets and we have now established a strong national brand presence and national footprint from California to Florida and in the Ohio valley. In the near term over the next two years, our development team will continue to focus on being relentless, stop securing triple A sites and building a high quality pipeline. Our new restaurant development targets have always been centered around triple A quality locations with premier co-tenants in densely populated, more mature trade areas. We will maintain this discipline as we build our 2009 and 2010 site pipelines. As we have indicated in our press release today, the current economic conditions have taken their toll on many national retailers and our general internal development partners and landlords. Many retail projects have been delayed or cancelled due to challenges in obtaining funding or securing leases for both inland tenants and bankers. As a result of these difficulties in our retail development along with the discipline of our own capital investment approval analysis, we are in a process of carefully reassessing each potential, new restaurant sites. Specifically, we are currently reassessing every current site in our pipeline with respect to its lease economics, [TI] allowances, co-tenancies, future residential and daytime growth and projected sales. Once we complete these reassessments during the next 30 days or so, we will have a clear picture of the number of restaurants we planned to open and the expected time in each restaurants opening for 2009. For example, as we initially reassess our let us site pipelines for 2009 and 2010, there are about 17 perspective high quality size in our pipeline where the developers advised us that they had to delay their delivery of the site to us either the developer could not get financing or they could not get enough tenants to sign leases for the project. We have been pretty successful on approaching some replacing sites but we still have some more to do on them. So, with that in mind and what Jerry mentioned in the press release today, we currently anticipate our growth in total restaurant operating weeks for 2009 to be in approximate range of 15% to 18%. After we complete our full annual business planning cycles for 2009 during the next couple of months, we will announce the expected number of restaurants for the upcoming year and refine our expected operating rate growth target if necessary. I know that the entire BJ's team is excited to open more BJ's Restaurants next year and further increase our market share. Our entire development team continues to focus on delivering high quality differentiated restaurants with a casual plus, non chain image and ambiance. As we have stated before, by elevating the BJ's concept to the full casual plus levels, we are now in that exclusive restaurant club with a national mall developers. During the past few years, we have opened restaurants to some of the largest regional mall owners in America. Our relationship with Simon, Westfield, generally growth, Matrix, CBL and others are solidly in place and we will continue to leverage these relationships as we expand across the country. These major national developers usually offer larger landlord construction contributions along with favorable lease economics. During 2008, we expect to receive approximately $15 million in total landlord construction contributions to support the development of our new restaurants. Going forward, this is our goal to secure an average or at least a million dollars landlord construction contributions for every new restaurant. Some sites may have a little more dollars available, some maybe less depending in each size in each landlord. In the softening retail environment, we do expect to see a significant number of solid real estate opportunities both with our existing regional model owner partners and some smaller regional developers of time corners and parcels that we are previously slotted for or operated by banks, other restaurants or other specialty retailers. Lastly, our construction and design teams at BJ's are more focused than ever on delivering a high quality efficient and cost effective prototype that will simultaneously deliver the best possible labor productivity, guests experience, true put capacity and return on investments. Going forward, all of our new restaurants now feature large impressive entry statements, high ceilings with detailed contemporary decors, wood floors in the dining rooms and slated granite materials in the bar. Our raised high energy bar is visible from all dining rooms and contains the latest and high quality audio video technology. When we combine this high energy casual plus atmosphere with our broad menu, our signature pizza and beer, we have a unique differentiated dining experience and really a terrific value proposition to offer our guest in the communities we serve. So even though many retail projects have been postponed or canceled as a result of the slowing economy and as a result the number of our new restaurant openings in 2009 will be lesser now in this year but over the long run, we still remain very confident that BJ's will have many years of new high quality restaurant growth to come. Now, Jerry back to you.
Jerry Deitchle:

Thanks, Greg. As we note in our press release today that we still believe very strongly that BJ's economics and very sound and they certainly support a continued steady pace of new restaurant expansion and we also think that our currently estimated 2009 growth rate of 15% to 18% in total operating weeks is pretty darn respectable in this environment. On the whole light of our new restaurant and government program has always been triple A quality locations with premier cotenants that create maximum consumer synergy and we strongly believe that delivering a high quality are a line on each of our new restaurants serves our long term interest better in opening new restaurants just for the sake of maintaining a certain growth rate particularly in the slowing economy. Greg mentioned that we have internal process of carefully underwriting new restaurants one at a time, it is a very effective process and we are going to maintain that internal discipline to let that process work exactly the way it was intended to work. There are certainly not in the American site in America in general that support our longer term growth but as a result of the slowing economy, there are less high quality sites available in the trade areas where we want to develop during the next couple of years that will best leverage our supply chain and our real supervision infrastructure. So, if we are going to have to choose between quality and quantity in a restaurant expansion plan particularly during a slowing economy, we are always going to choose quality and we can only grow as much as the operating environment is going to allow us to grow and it is very, very important to grow with quality because quality facilitates dependability, it facilitates predictability and I think those are two pretty important considerations for investing in restaurants. So, now I am going to turn the call over the Greg Levin, our CFO for his comments. Greg?
Gregory Levin:

Thanks, Jerry. We will take a couple of minutes here and I will go through some of the highlights for the third quarter and provide some forward-looking commentary for the remainder of 2008 and really some preliminary commentary for 2009. As Jerry has previously noted, total revenues for BJ's third quarter of 2008 increased approximately 19% to approximately $95.8 million from $80.3 million in the prior year's comparable quarters. This increase is a result of approximately 23% more operating weeks, offset by a decrease in our weekly sales average of about 3% and this decrease in our weekly sales average of about 3% is inclusive of both the July 4 Holiday weekend shift and the loss sales weeks from our five restaurants that were closed for some period of time is about Hurricane Gustav and Ike. As Jerry mentioned, our average comparable restaurant sales for the third quarter was a negative 1% including the effects of the July fourth holiday weekend shift and the closure of those three high performing comp restaurant sales in the Houston market. As we mentioned in today's press release, we estimated the July fourth holiday weekend shift impacted comparable restaurant sales by about a 0.5% and at that the closure of those three comparable Houston restaurants, they were closed for a total of 28 days also impacted comparable restaurant sales for the quarter by about a 0.5%. Therefore, adding back the effects on these items, we estimate that the comparable restaurant sales for the third quarter would have been flat compared to last year. I think even more impressive was our ability to generate these types of comparable restaurant sales given our geographic location in which 39 of our 56 comparable restaurants for the quarter are located in the states of California and Arizona. In the soft macro environment, those states really put an impact on the comparable restaurant sales and not to mention that we are going up against the 5.6% comparison from last year. Looking forward we do have one more challenging comp sales comparison at the sort of upcoming fourth quarter in which we did a 4.9% comparable restaurant sales. After that comparison, it will begin to lighten up considerably in 2009. While we do not know normally give monthly comparable restaurant sales numbers and we would like to note that similar to comp sales reports that we have seen so far from other casual dining companies, we begin seeing softer comparable restaurant sales in September compared to the other months of the quarter. Additionally, I would like to note that in my entire career really in the restaurant industry, I have never seen the magnitude of the sales volatility and the overall choppiness from week to week and day to day than on this past third quarter. While am sure the anticipated external events which is the Olympics and the national political conventions and debate, create a larger hole on this volatility, the unanticipated event of the historic financial market freezing meltdown, things that play just as greater role in the sales volatility during the quarter. As we have previously mentioned, the softness in all of our comparable restaurants sales metric is primarily isolated to the Sacramento, Central California region, Inland Empire areas of California and the Phoenix, Arizona market. These were the regions of high growth over the last several years and the housing meltdown and related slow down in overall construction activity has taken their toll in this local economies and we hear the same sales trends from many of our other causal dining competitors in this market. As we stated before, we have some bank loans in the Sacramento, Central California region, in the Inland Empire areas of California that were not comparable restaurant base in the first quarter and second quarter and third quarter 2008. These set of restaurants in the first quarter of 2008 as we have previously said had comparable restaurant sales declines in the 6% range. In the second quarter, these same restaurants had a comparable restaurant sales decrease in the 5% range and in the third quarter, these restaurants continue to have comparable restaurant sales decreases in the 5%. Overall these restaurants in aggregate continue to have strong weekly sales averages and that weekly sales averages had remained stable in the $110,000 to $120,000 range, really depending on seasonality and most importantly as we stated before at these sales volumes, these restaurants well exceed our return on investment target. Now, we continue to see some slight improvement in our three restaurants in the Phoenix, Arizona market. As we previously mentioned, these three restaurants had comparable restaurant sales decreases in the 7% to 8% range in Q1 and in the 6% range in Q2 and in this past third quarter, these restaurants in aggregate had comparable restaurant sales decreases in the mid 5% range. For many of our other restaurants in different areas, we continue to see solid increase in the comparable restaurant sales. Our South Orange County in San Diego, California restaurant continues to do well as our Dallas and Houston restaurants. Our major restaurant in the San Diego area and California, had comparable restaurant sales increases in the 6% range and in Westwood restaurant which is one of our smaller gourmet legacy restaurants located by the University of California, Los Angeles had a comparable restaurant sales increases in the quarter about 8%. On Lewisville and Plano restaurants in the Dallas area, had comparable restaurant sales increases in the 6% range during the third quarter. As we stated in today's press release, we opened six new restaurants including our first in the state of Washington at the South Center mall in Tukwila, a suburb of the Seattle area. The six restaurants in one quarters the mostly have opened today and as such with other cash positioning, large footprint and many complexity opening these many restaurants in one quarter had a negative effect on our operating margins and not just on pre-opening cost. These new restaurants impacted our consolidated operating margins by above 70 to 80 basis points. We do expect to see gradual margin improvement in these six new restaurants during the fourth quarter as the sales volumes become more predictable and the staff gain experience. We do want to remind investors that many of our new restaurants particularly those opened in our home court market California will often open with higher but normal sales volumes due to the honeymoon period. This honeymoon period can last up to 6 to 9 months depending on the areas and that is right that we open them. In many cases, we have opening restaurants coinciding with grand openings to a new development. Those will result in significantly higher honeymoon period. On the flip side, some restaurants open in new markets for the BJ's concept often up in the commercial sales volume left with middle average and were usually build overtime with the consumer awareness, trial and usage. During the third quarter, our estimated menu pricing factor is approximately 4% which is down from the mid 5% range and at the 4% range in the first two quarters of this year. We do anticipate menu pricing for the fourth quarter to be right around 4%. The flying colors in the middle of P&L, I do want to elaborate on our quarterly comparison. As Jerry noted in this quarter compared to the same quarter last year, we recorded approximate $446,000 charge net of an insurance receivable related to incremental cost to get our restaurants that were closed from Hurricane Gustav and Ike back to normal operating conditions. Much of this cost is related to facility improvements. In addition to this cost, we also have approximately a $150,000 of loss operating profit which is now broken out separately on our financial statements and this is really related to our loss of sales in the profit from those loss sales. This is approximately $0.02 in net income per share related to the hurricanes in the third quarter. In regards to the middle of our P&L, our cost of sales where at 25.4%, 10 days are good better than last year's third quarter and on a sequential basis, 40 basis points higher than the second quarter. This decrease compared to prior year was essentially driven by key components; menu pricing and the reduction waste driven by the theoretical food comp system offset by higher commodity cost. Sequentially compared to the second quarter of 2008, the increase was due to higher commodity cost of produce primarily in potatoes and higher cost for our poultry, ground beef and dressings. In addition, about 20 basis points of the increase is due to inefficiencies from our new restaurant openings. Our labor benefits during the third quarter increased by 50 basis points to 34.9% of sales and 34.4% of sales last year. This increase is due to the expected inefficiencies related to the opening of six new restaurants in the third quarter and higher managed wages as a percent of sales as a result of the deleveraging from the six nature of this cost over lower comparable restaurant sales this quarter. Looking at labor on a sequential basis, we saw a 20 basis points decrease from 35.2% in the second quarter of 2008. This decrease is primarily due to lower workers compensation cost compared to the prior quarter offset by higher hourly labor due to the expected inefficiencies from the new restaurants as well as from existing restaurants as they try to manage through the unusually extreme sales volatility and choppiness that we experience in the third quarter. Our operating occupancy cost as a percentage of revenues increased 270 basis points to 22.9%, 70 basis points of this increase is due to our stepped up marketing efforts in the third quarter and as Jerry previously discussed. Marketing cost for the third quarter were approximately 1.3% of sales as we increase needs of electronic and print media to market our new menu items, guests services and lunch specials. Another 70 basis points of the increase is due to significantly higher summer for our electricity and gas in our restaurants. We saw rates increasing 11% to 16% across our chains in the prior months. To combat these costs going forward, we have engaged in outside specialist to implement a forward view of our rates and billings and added utility management systems. The remaining increases in operating occupancy cost will lead a higher facility maintenance cost of approximately 30 basis points and was deleveraging and a fixed nature of many of our cost related occupancy and added fix contract cost. Sequentially, operating occupancy costs were up 220 basis points in the second quarter of 2008 and this increase is really due to the higher utility and marketing cost which I spoke about that equates at about 150 basis points and the remaining increase as the percent of sales due to the deleveraging and fixed nature of many of our cost related to occupancy and added fix contract cost. Our G&A expenses in the third quarter of 2008 decreased 200 basis points from prior year to 5.9% including G&A for both 2008 and 2007 with $636,000 and $562,000 of equity compensation respectively with 70 basis points in each year. Excluding equity compensation, G&A for the third quarter of 2008 was approximately $5.1 million or 5.2% of sales. In the third quarter of this year based on our results today, we reversed approximately $1 million of performance compensation that had been previously accrued in the prior quarters as incentive compensation. As such excluding this reversal, our G&A would have been approximately $6.7 million or 7% of sales. Depreciation and amortization was 5.2% which sequentially was up 30 basis points and that is really due to the deleveraging from softer sales or the fix nature of those cost. Our restaurant opening expenses were approximately $2.6 million during the third quarter which is the result of the six restaurants that opened plus three opening rents of approximately $300,000 for restaurant rents expected to open this next quarter. As we previously mentioned, we anticipate total pre-opening to be in the $500,000 range per restaurant. Our effective tax rate for the quarter was approximately 23% compared to our prior run rate of approximately 29%. This decrease is a result of higher [inaudible] tax credits in previously estimated in our tax rate interest on our auction rate securities. As such, year-to-date our effective tax rate is right around 28% which is what I anticipated to be for all of 2009 as well as this fourth quarter of 2008. Our CapEx year-to-date is approximately $55 million net of landlord improvement allowances and we still expect our CapEx of 2008 to be around $60 million in net of landlord allowances. Before I turn the call back over to Jerry, let me spend a couple of minutes commenting on our liquidity position and also provide some forward-looking commentary on the rest of this year and 2009. In regards to our auction rate securities, we were able to redeem at par $1.8 million of these securities during the third quarter. As such, we currently own $35.3 million in face of par value auction rate securities. The auction rate securities beyond our all securitized loan, collateralized obligations and these field of loans, our public speed of loans guaranteed by the US government under the Federal family education loan program. The interest we earnED in our auction rate securities is tax exempt and that is to my understanding as we have said because they own the tax exempt speed of load of auction rate securities, our investments continue to pay interest during the penalty period and do not reset at zero for any period of time unlike some matters to run auction rates securities. Because of the illiquidity of these investments at the current time, in accordance with FASB 157, the fair value measurement, we continue to update in third part evaluation of our investments. Because there is currently not an aftermarket to compare to like investments, evaluation process is very subjective and with slight changes to the in part views that can have a dramatic effect on the valuation of each security. Based on this valuation, we have recorded a temporary impairment in the value of these investments at approximately $1.4 million or about 4% toward the quarter of 2008. This temporary impairment was recorded in other comprehensive income which is part of shareholders equity on our balance sheet and in accordance of FASB 115, accounting for certain investments and debt in equity securities. This temporary impairment does not affect our current income or earnings. However, if circumstances change in the future where we determine that we a have a permanent impairment in the value of these securities then we would be required to take a charge directly to our income statements. In regards to our liquidity, we currently have a $45 million line of credit with only $7 million outstanding at the end of the third quarter. This line of credit, cash flow from operations and our expected tenant improvement allowances should be sufficient to the provide us with the liquidity to execute our current restaurant expansion plan through 2009 not to mention that we also owned 4 key properties that we can monetize if it start to show. Now, I will provide some further commentary on sales and margins for the remainder of this year based on information and expectation as of today. All these commentaries are subject to the risks and uncertainties associated with forward-looking statements as we discuss to our filings with the SEC. Although we remain very confident in the vital organs of the BJ's Restaurant concept, as Jerry mentioned earlier, we remain cautious about the remainder of 2008 and fiscal 2009. Additionally, I would also restate the obvious and that the economy continues to flow in gas, energy and food prices continue to be high and the outlook for these commodities remain volatile to say at the least. Additionally, being only three weeks into October, it is hard to ascertain any real trends as of today. Specifically looking toward the fourth quarter, we believe it will be prudent to continue to expect negative comparable restaurant sales comparison. It is impossible for anyone to accurately predict how consumer will continue to behave in a slowing economy so we are unable to guide any prediction of our comparable sales for the upcoming quarter with a high degree of certainty. As Jerry mentioned, our comparable sales for the first three weeks of fiscal October are again about 1.5% and that is where we have to go at this point. We do know that during the fourth quarter, Halloween was shift to a Friday this year compared to a Wednesday last year and both New Year's Eve and New Year's Day will be in T1 or tier-one of 2009. Moving at Friday night to a holiday and moving both New Year's Eve and New Year's Day will unfavorably impact our comparable restaurant sales for the fourth quarter. Traditionally, about New Year's Eve and New Year's Day are high sales days stuff. We anticipate our restaurant operating weeks to increase about 18% to 20% in the fourth quarter however I do want to remind investors the actual timing of restaurant openings is generally difficult to precisely predict and is subject to a number of factors outside of the Company's control including factors that are in the control of the Company's manual and municipalities and contractors. I will continue to expect a decrease in our weekly sales average in the 2% to 3% range as a result of some of the holiday shifts in 2008 to 2009. We continue to expect a slowdown in the overall consumer spending and based on our current and average weekly sales over the last few quarters beginning in 2007 as we start our nationwide expansion and reduce the amount of count of re-openings as the percent of our growth to roughly 1/3 of our openings. In regards to margins, our restaurant operators did an excellent job managing food cost and labor despite the historic volatility we found in sales during the third quarter. I will anticipate that food cost and labor will remain in the mid 25% range and below 35% range respectively. In regards to operating occupancy cost as Jerry mentioned, we will continue to spend around 1.3% to 1.5% of our sales on marketing for the fourth quarter and we continue to expect to see high utility cost going forward. In addition, as we mentioned on our fourth quarter conference call earlier this year, we really anticipate a meeting about 4% increase in comparable restaurant sales this year to match our full round reference economics that we achieve in 2007. Our G&A expense dollars in the fourth quarter were more likely be closer to the $6.7 million to $7 million range. In regards for 2009 and as Jerry and Greg Lynds has mentioned, we are reviewing our current real estate pipelines. However, as we noted today, we do expect less new restaurant openings in 2009 due to the delay in many retail development and the slowing economy. As such, our restaurant openings next year will yield some short term benefit in terms of reducing our capital spending levels reducing our pre-opening cost, reducing our restaurant manager and crew training costs and it should allow us to move closer to achieving cash flow from operation to fund our net capital expenditure as the landlord allowances. As we previously mentioned after we complete our full annual business spending cycle for 2009 during the next couple of months we will announce the expected number of new restaurants for the upcoming year and refine capital spending plan as necessary. In this offering environment cash is king we prudently managed our capital resources to weather the continuing economic storm. In regards to margin for 2009 and inflationary clause for next year, it still very difficult for us to comment with the high degree of certainty as we stated on our second quarter conference call. While in general, many food commodity costs that recently come down from their highs there is still a lot of volatility in the market place and many of our suppliers are reluctant to close annual contracts unless you want to pay a large premium over the stock market. On our past conference calls we commented that we expected the overall cost for our basket of food commodities for 2009 to increase in the range of 68%. It is now the latest information from our supply chain department and is still very preliminary as we are continuing to negotiate with our suppliers we now anticipate our commodity cutbacks to increase in the 5% to 6% range next year. Again our current expectation is subject to significant risks and uncertainties in the food and energy commodities market. One thing to remember for BJ’s is we are still starting at a relatively low check average compared to many other restaurant companies. Our check average for the third quarter which was just slightly $12 and therefore as we said previously, if our market basket of commodities were to increase, for example by 6% next year, excluding a pressure on labor and other operating cost for us to be able to maintain our dollar profit in what we call prime profit percentage which is cost of sales and labor, we would only need to increase the average check by about 2.5% or approximately $0.25 to $0.30. Our average check will still be in the $12 range and if we compare that average check, many of our peers and casual dining we believe we will provide a much better value for the overall dining experience especially if we consider all the upgrades we have made for our current restaurants over the last few years. In regards to labor, there is another $0.70 increase in the Federal minimum wage in July of 2009 and certain states do have annual wage increases. However on the average we are now expecting significant inflationary increases in labor for next year. As such we believe labor for 2009 should be in the 35% range as we have seen in 2008. Included in this labor number will be about 20 basis points for our non-cash equity compensation for our Gold Standard Pack Ownership Plan. While we have increased our marketing cost for the remainder of the 2008 to closer to 1.5% or so we expect marketing cost for next year to be in the 1% range. Additionally we are reviewing our current operating cost that we may optimize some of these costs to better contract and better management systems. However because of significant percentage of these costs are fixed such as occupancy and insurance and preventive maintenance contract our operating cost as a percent of sales will vary based on comparable restaurant sales comparisons. Our expected cash rate for 2009 should be in the 28% range and we still continue as to diluted shares outstanding for 2009 to be in the $27 million range. Jerry back to you.
Jerry Deitchle:

Thanks Greg that was a very thorough commentary and hopefully answered everyone’s questions in advance. I want to take one more minute before we open up the call for any possible remaining questions and we reiterate our confidence with BJ’s longer trim ability to continue to increase its margins in the casual dining segments. As Greg mentioned that we also feel very confident that our average guest check in the $12 range coupled with our strength in casual cost competitive positioning, our sales building initiatives, the strength of our vital organs should provide BJ’s with a solid opportunity to continue to outperform most of our peers in this pretty tough environment. BJ’s remain full y committed to our longer term strategy to drive our concept and business forward and by doing so we should be even better positioned when the current economic cycle begins to turn around. So that concludes our remarks and now we are going to open up the call for your questions and again if we do not have time to get your question on this call we will try to run the Q&A session as long as reasonably possible please give us a call here at our offices in California we do not go home for several hours yet. So operator we will take some questions.
Operator:

Thank you, sir. (Operator Instructions) Your first question comes from the line of Jeff Farmer with Jefferies and Co.
Jeff Farmer- Jefferies & Co.:

Thank you, 15% to 18% operating growth implies a pretty wide range of unit opening and in the timing of those opening; can you guys give us any type of ball park absolute range?
Jerry Deitchle:

We are not in the position to really give an absolute expected number of new restaurants yet Jeff. We got a good pipeline that has come together very nicely. We are finalizing our reassessment of all of the economics of every sites in the pipeline. We are still working on a couple of potential sites here, trying to gather all the final details with respect to expected co-tenancies which is very, very important for us to open up in any retail project and traditionally we do have to have a full completion of our annual planning process and have a Board of Directors meeting which is going to be happening here shortly. So we ask to give us a little more time to complete all of our work and all of our processes and I think we will be able to give you a pretty solid number of absolute expected restaurants and pretty good idea to when they are going to fall. The good news is we are going to be opening many new restaurants next year but we cannot really dimensionalize until we finish these processes and I hope that you understand that.
Jeff Farmer- Jefferies & Co.:

I do and well I will be very persistent about this and I would ask for the overall run ten units next year. Having said that, I think you mentioned that 17 pipeline units have been sagged with co-tenancy issues. How many total units were in the pipeline to begin with?
Jerry Deitchle:

Well, we have well over 40 to 45 restaurants in the pipeline. In this business to really seek your high quality size you have to been at least 18 months to even three years out in order to really get on the developers to really begin to work over the economics. Greg Lynds and his development team, one of their hallmarks is then building a high quality pipeline of plenty of great sites particularly in the trade areas where we want to develop. As I have mentioned at our comments a little earlier we are trying to focus our development over the next two to three years in trade areas that really help us to leverage our model. That means our existing field supervision cost leverage our supply chain as best as we possibly can. So that is really what we a re trying to focus on. We are trying to avoid the temptation to jump to new markets ahead of win the rest. Could we Washington, Baltimore? Could we go to Charlotte? Could we go to St. Louis? Could we go to Chicago? Could we go to Atlanta? Could we go to Kansas City? Absolutely but we are trying to maintain a very strong discipline of opening restaurants to where we achieve maximum economic average. Greg you want to add anything to those comments.
Greg Lynds:

Yes we look at our 2009 and 2010 pipeline and there is more than 40 restaurants there that we are looking at and as our peers have stated that early on at 2009 pipeline is the one that really pushed the most. They continue to push quickly and I think that a lot of our peers that moved on early 2009 to late 2009 or earlier 2010 but as we look further into the future our 2010 pipelines were looking very strong and especially when you think about the Steak and Hams, the Bennigans and some of these restaurants that are coming online. We do not want to jump too early when we could get a prime corner that we know that we passed up today and that is going to be available in 2010.
Jeff Farmer- Jefferies & Co.:

And then my last question switching gears on you. Looking to get a little more color on sales by Day Park specifically lunch. Are you guys making any inroads with this incremental marketing expense?
Jerry Deitchle:

We are actually. As stated before our lines should have been where the softer area and we continue to be a softer area. However, I guess August we rolled out our lunch menu and we have seen that lunch menu actually take on about a third of the lunchtime visit and we have seen, I would say overall, the guest traffic has marginally improved since we brought out that lunch menu and we are still negative in that Day Park but we have seen improvements and the other thing too is that many of our sales building initiatives again we supported them with an initial burst of media both print and electronic support but these are all intended to build overtime. So as the words spread about our lunch specials that we would expect to see a gradual flattening of our traffic during lunch where in casual dining in all of my years of being in this business. Whenever the economy slows down, it is really the lunch business in casual dining that begins to feel it first. We responded with, I think very thoughtful one specials that have a reasonably low break even rate with respect to trade and per person check versus the required incremental guest counts in order to break even on absolute gross profit dollars and we are seeing at least a break even on gross profit dollars. So we are very pleased with our performance to date.
Operator:

Our next question comes from the line of Bryann with Redbush Morgan. Please go ahead.
Bryann with Redbush Morgan:

I guess a clarification, I think that you may have mentioned it from the last question. I am trying to understand the opportunity for conversions at the distinct relic retails development versus new retails development?
Jerry Deitchle:

I mean conversions have always been opportunistic for us, so as we travel around the country, you got new developers that are building new power centers or new regional malls and for that one opportunity of freestanding path in a new center and the conversion opportunity or the existing Steak and Hams or the Bennigan’s with the department store consolidation with the Mervynn's, as well as the other kind of lifestyle components that are being developed by our regional mall partners. We will have a fair amount of conversion opportunities compared to our freestanding opportunities.
Bryann with Redbush Morgan:

I guess on by geography you comment on, in terms of home court in California, regard to brand recognition.
Jerry Deitchle:

They still opportunistically, I mean, so I do not think we necessarily have a pipeline of conversion to trying to get to that. But the other thing that makes a little bit more challenging for BJs as well as our footprints a little bit bigger, like Steak and Ham and Bennigan’s some of them are in the 6000 range. So we need to look if there are freestanding can we have that opportunity to take them and really bolters them and make them a brand new BJs. So the one thing that really without we have to look at, when we only look at conversions.
Gregory Levin:

So just this is a quickly summarize all of our comments. We do have a handful with those opportunities that match up with required square feet in the required number of parts that we have to have to support our high volume restaurant. We do have a handful with them. We have a couple in Florida. We have a couple in California. We have a couple in Texas. Those are subject to bidding process. They are triple A locations and very mature densely populated areas, so you can bet that the other restaurant concepts are also putting in bids for those sites, and we hope we are going to be successful and we believe we will get a hold of the couple of them. They could be wildcards in our development for the next year and the year after but we are pursuing as they make sense for us.
Jerry Deitchle:

And just lastly Brian, I think the other thing that I think all of our peers will tell you is that a conversion that is not any cheaper for us, when you enter a restaurant so typically it is not a big savings that to convert one versus bulldoze it and then start over.
Bryann with Redbush Morgan:

I guess, for Greg clarification on the average check, did you mention something about a menu price increase for 2009?
Gregory Levin:

We still expect our overall average menu pricing to be around4%, maybe a tab less for 2009 based on what we have today. I mean our average check still kind of a holding below the $12 range.
Jerry Deitchle:

And again just to reiterate our menu pricing strategy which is purely defensive with respect to our operating margins, so if we get a better than expected break on some of our key commodity cost for the next year then our tendency will be do knock price aggressively for next year. We are trying to keep our average check as low as we possibly can because that is most important competitive advantage that I think BJs has. As we compare our concept and our pricing against the mass market casual dining chain. So we worry more about the precise pricing that we need next year to defend margins over the next couple of months when all the commodity contracts get finalized. But I think for now, a 4% assumption is probably a reasonable assumption.
Bryann with Redbush Morgan:

That is great. Actually leading to my final question which is you probably speak a little too quickly Greg for me to write down these numbers on the labor guidance but, are we looking for a restaurant level margin expansion in 2009 year-over-year? Are we looking for flat margins? How should we think about that?
Gregory Lynds:

Yes. I do not know if we get that specifically. I think the wildcards is going to be operating occupancy line based on where you believe compared to restaurant sales that are going to come in. I mean, I think the earnings that we can control, which allow us to go to that food cost and the ability on the wasting our commodity in a little bit wildcard and labor with our systems in place. I think we can do a good job as we done this year maintaining what we call that prime profit number. I think the operating occupancy have a lot of fixed cost from there and they are going to base on really how comparable restaurants sale come trough.
Operator:

Your next question comes from Analyst for Brad Ludington – KeyBanc Capital Markets. Please go ahead.
Lynne Collier Brad Ludington:

I have a question on the charges for the natural disaster and related expense that $446 million was just on repairs that were related specifically to the damage from the hurricane. We start to figure out that extraordinary and that will be taken out on a pro forma basis.
Gregory Lynds:

Well, have a several line items I would show on the keynote from that standpoint, but still an operating income. It is not an extraordinary item for, yes, part of our item. So it is part of operating income but great it could help.
Lynne Collier Brad Ludington:

Okay. Going on to the openings, not trying to get a number of openings for ‘09 but traditionally we would think that probably your first and second quarter ’09 openings were already in some sort of construction process, I think. So, if you compare it to first '08 should we expect the similar number, the six that were opened in first half '08 maybe locked in first half '09 or is that open for changes as well?
Jerry Deitchle:

Well, again we are just hesitant to begin the give pieces of our new restaurant development plan for the next year at this time, although, if you drive by a handful of those sites, you are going to see two restaurants already under construction and so that is obviously in the public domain and we have a number of other sites that are under permitting process for potential first half opening. So I guess, I would ask for just a little more patience here as we wrap up our final goals for next year over the next 30 days and we will have a Board of Directors meeting and then, we will have our full plan put together and we will have another announcement and I think everyone will be very, very satisfied with the pace of our continued new restaurant development for next year. We are all very excited about it here but as we mentioned earlier, there is still some moving parts and we just want to really nail it for you guys. One of thing at BJ’s is that we have always done as we have always done what we said we were going to do. So we are just hesitant start talking here but for we have our final plans prepared and approved by our Board of Directors. So we would just ask a little bit more patience but we are going to open some new restaurants next year. We are excited about it, and we will get the information out here very shortly.
Lynne Collier Brad Ludington:

Okay. And then final question, Greg, when you are going to the CapEx, I lost track. I think I heard $60 million guidance for ‘08 still but I did not hear if you said what you spent in the third quarter.
Gregory Lynds:

I did not say what we spent in the third quarter and I think, I have my year-to-date capital numbers here in front of me. Why don’t you give me call after then get it is out what it was.
Lynne Collier Brad Ludington:

Okay. Well, thank you again.
Gregory Levin:

We know, brad. I know it is 55 million, as I said year-to-date. I forget what I said it was at the end of the second quarter.
Lynne Collier Brad Ludington:

Okay. Well, I will get it then. Thank you very much.
Operator:

Your next question comes from Analyst for David Tarantino – Robert W. Baird & Co. Please go ahead.
David Tarantino:

Greg, this following up on a prior question related the restaurant level margin. What type of traffic do you think you will need to hold that flat next year given all the cost that are known right now in the pricing.
Gregory Levin:

Well I think what we be looking at next year is probably comparable restaurant sales somewhere in the…and when I say, When you guys are talking about holding the margins flat, I guess in my mind, I think getting back to that 19% level versus where we are today. And get in back to the 19% which we shared in Q1, Q2. I think if we are looking at several of that 3% range, with this kind of probably be flat as we get us traffic and we get our pricing through, which is always been kind of our business long term, business plan. We want to hold on to guests traffic and get some pricing through that we had to put in place in the inflationary standpoint. At the same time, continue to leverage the productivity and the efficiency within our four walls. So I do not think, it can really change this next year and based on that, 5% to 6% commodity cost, I mean labor somewhat flat. We said, we need about 2.5% to 3% in menu pricing to cover that.
David Tarantino:

Okay. Just to reconcile this Greg, I think you mentioned, I have 4% of pricing and you just said 2-1/2 to 3 years or what is the scrabble through there?
Gregory Levin:

I thought your question was where do you think you going to need for comp sales to kind of get flattish margins. Well, we might have 4% of pricing in there, I think it is really the needing somewhere than that 3% range to keep your margins flat.
Unidentified speaker:

So I guess just to clarify, is your plan to take 4% of pricing when you only need three to cover your past.
Gregory Levin:

We do not know what are menu pricing is going to be right now. Going in to next year, it is going to be below 4% and then we’ll determined data commodity contract in other stuff if we have to take more.
David Tarantino:

I got it. It makes sense. And then last clarification question on the average weekly sales, comments for Q4 where the 2% to 3% decrease. Were you talking about the gap relative to comps or is that the absolute decrease that you expect to have.
Gregory Levin:

That is the absolute decrease, I think best quarter we are down about 3% if you kind of added that the hurricane and the 4th of July, we actually get down about a little, actually I think just the hurricane itself gets you down into the negative 2.3% range. Well I think in the fourth quarter, do you think that unfortunately years even New Years day or big days for us last year and as a result, we are going to continue in an absolute basis to see that negative WSA in the 2% to 3% range.
Operator:

Your next question comes from Analyst for Sharon Zackfia –William Blair & Company, LLC. Please go ahead.
Sharon Zackfia –William Blair & Company:

I do not have that many questions and you guys did such a good job but I guess as your sales slightly slow in ’09 is just a slow development. I am just kind of curious about your ability to leverage G&A. Next year, you did a good job somewhat would help of some of the reversals this quarter, leveraging G&A at this year. I am just curious, or whether we can see any kind of G&A leverage continue?
Gregory Lynds:

I think the answer will be found when we complete our full year planning process for next year over the next 30 days or so Sharon but again, I think we are trying to run this business to where the absolute increase in G&A year-over-year will be less in the increase in capacity growth through our business. So right now, we have been indicated a 15% to 18% increase and potential capacity for next year. So we would intend to hold our absolute G&A expenditures at the rate of less than that. And I believe that again, depending on the absolute number of restaurants that we open next year. There is a portion of our G&A that there is related to the amount of restaurants that you open. So again, depending on how that all shakes out this year, for next year rather. Our 2009 comparison actually might be favorably impact with a temporarily reduced rate of growth that you get over those reduce G&A. You do not have to spend as much on management for recruiting and training. You do not have to spend this much on field supervision and some of the other variable factors in our G&A better more directly associating with the amount restaurant growth. So I think at this point, we are very confident that we will be able to keep the rate of G&A growth at last in the rate to capacity growth and gives some additional leverage.
Sharon Zackfia –William Blair & Company:

Okay. And then this is one final question. When I saw you guys in September you had some new initiatives with the draft beer and also I think you are going to asses to access in California. Anything there is kind of worth mentioning on either of those initiatives?
Gregory Lynds:

Yes. We are not in a position to really make any chain wide announcements with respect to those two initiatives, other than to say that we are very, very encouraged by the progress of both right now. We have, I believe it is four or five restaurants now where we kind of experimented with an expanded arrangement where we have surrounded our premiere quality beers with anywhere from 24 or 28 guests tabs. So high quality craft beers, we started doing that on our Austin restaurant over a year ago when we first opened to try to gauge how the consumers would react to it and in whatever amount we would cannibalize sales of our own beer and lo and behold. We sold more beers and it was the guests tabs and we actually held our own sales of our own branded beers. We thought, "Wow! Well, that is fascinating. So let us try that route, let us try that in Seattle. Let us try in our home court in California which we have just done in Del Amo and then Archino, I kind of lose track and so far of the results have been incremental for us. So we are not ready to make a chain wide decision with respect to that program as far as the weekend brunch program, we wanted to try it here in Southern California, kind of an under the radar test although your radar is pretty good, Sharon, you picked it up. So far the result has been pretty darn encouraging and being on the West Cost, with all of the games, game day coming on at 8 o’clock in the morning here on Saturday and with the Pro games and college games all starting at 9 and 10. It makes sense for us with our wonderful video statement, our televisions to open up our restaurants at 10 and we came up with a very small high quality brunch menu of about 08 or 10 different items that are executable in our kitchens and so far the results have been very, very encouraging. So we are going to continue to work it and then we will see where we end up with it.
Operator:

Your next question comes from Anton Brenner - Roth Capital Partners LLC
Anton Brenner:

We were all in the mode of talking about the price increases menu adjustments for inflation. At some point, we are going to have declining energy cost than any food and tax cost. Historically, what happens when you have price decline, cost decline and would you keep many pricing where it is and catch up on margins or would you drop prices.
Gregory S. Levin:

You know in all of my years of being in restaurant business, 30 plus years, and going through all of these particular cycles. I am not aware of any chain that has actually rolled back their pricing on their menus in a very material way. What I have seen when commodity cost tend to get a little more favorable of the major change, trade those benefits to an additional marketing expenses and they really go out and try the hamburger competitors with respect to offers. So, while they may not rollback with absolute sticker prices on their menus. What they will effectively do is discount back price increases to their guest in order to drive guest traffic. I have seen that several times over the years. And, if that manifests itself, going forward, clearly we are going to have to be prepared to think about that and to competitively respond to that. But in terms of reducing sticker prices, I personally can not recall any chain having done that in a big way in my 30, 35 years of being in the business. I think, they do it in the other way.
Anton Brenner:

How is the Take Out at Curbside knowing of what the percent of revenues and what about the cost of margins that come after.
Gregory S. Lynds:

You know, it is building very nicely and before we started the initiatives our premises are running about 4.5% of sales, it is up to 5% of sales, it continues to build. And there is a bit of the trade on the percentage basis. The percentage margin is going to be a little bit less because you’re attending sales as many side items and drinks, with higher margins. On the other side of the coin, the absolute gross profit dollars from the transaction are going to be higher, because you average check on an off premise order is typically much higher than your own premise orders. So, there is some trade over there, but overall, I think the other mass marker change have proven the off premise business, when they really driven it to be, at least 70 to 75% incremental and as time goes on, we would have the same expectation.
Anton Brenner:

I think so, that the change is getting much higher percentage of total revenues, right?
Gregory S. Lynds:

Yes they are, but they did not happen overnight. When you looked at what Appleby’s and Chili’s and Outback Steak house were able to achieve, by doubling their off premise sales as a percentage of total sales, I think it took him two or three years to do that and they were very early in our program but I think the opportunity is there for us. But, particularly when you consider our menu offering, our pizzas, our pastas, our salads and how well they travel.
Operator:

Your next question is coming from Matthew Difrisco – Oppenheimer & Co.
Matthew Difrisco:

I do not want to keep you any longer with this, so I appreciate you going this long on the call. I do not think you said anything about specifically about cheese. Where you are there versus how long you might be locked in if it all on that extended into ‘09. And then also, I am just curious on the tax rate. Why it was so low? I am sorry if I missed that on the call as well.
Gregory S. Levin:

That is fine Matt. In regards to cheese we brought in a small portion about 25% of our cheese for next year. We think for now, with the volatility in the commodities, we think it was prudent to say, some of that risk off the table and obviously still capture maybe some down side that may happen as the commodity seem to be coming down so to speak. So, a little bit update is on in annual contract and cheese as we have said before is about 8 to 9% of our cost to sales number. In regards to the tax rate, it was really due to tax credit, as unfortunately, our income is down low, but [inaudible] tax credit was significantly more than we thought and as a result, we were able to take a large portion of it, and that resulted in our lower tax rate.
Matthew Difrisco:

Okay. And then just a last question on the growth and how we should look at you with that. The modest amount of growth being pulled back, but getting into the teens instead of the 20s on your growth rate, how much dilution have you had I guess in the last couple of years from those stores, obviously the run rate usually is that sales start off strong profitability starts to look better towards the second year. You start your approach the more mature margin. How much of a drag or benefit could we see removed from the ‘09 number in the fix cost line such as the occupancy and operating expense in a modestly slower growth environment.
Gregory S. Lynds:

I have to get back to you on that, when I just turn that out in front of me, kind of pouring out, let us say the last year, year and half before that. Generally speaking, there are your points right on in the sense that newer restaurant until they reach their predictable sales level. They have gone through a holiday season; they have gone through what might transpire with the school starting and so on, allow them to be much better operated than the restaurants in their first year. But I can not tell you exactly what that number is –
Gregory Levin:

Jerry what I have is the benefits to be derived without necessarily be in occupancy in other operating cost in percentage of sales it is really in your prime cost, it is your food and labor because until the restaurant gets really predictable with respect to sales, it is a little harder to manage your inventories and most importantly it is harder to really get various to optimize your labor productivity. So, with the new restaurant situation, your tendency is to over staff. You do not want to disappoint guests, that you generally get your food cost inline within 30 to 45 days, in most cases, but your labor, you are young, you are very, very careful there. Then that is a little sticky here. You do not come and doubt. So, really that is where the benefit could be obtained with a slightly less impact of new restaurant operating weeks and your total operating weeks. So, we will just have to see about that.
Matthew Difrisco:

And then, any update on the other, the remaining 35 million or so of the auction rate securities is there, a time table or anything that is being discussed out there that there are changes in credit market that we might not be aware of that are now becoming available to you for possible liquidation of these securities.
Gregory S. Lynds:

Nothing near that, I am aware of that. As you know, that the banks have settled up, they settled up with really to small businesses and charities, retail investors and what they really promise is to use our best efforts to provide liquidity some time in 2009 on the auction rate securities. That is kind of where we are today, we have heard grumbling at different things that is happening out there, different tender offerings, different sheet of loan issues are trying to take out small portion that time, but I do not have anything real concrete on that.
Matthew Difrisco:

And this is a slide known I guess little humor here, I wish you guys, maybe the industry could petition congress next time when we have a slowdown like this. But, we do not have holidays falling Fridays so often. And Halloween is not being friendly to you.
Gregory S. Lynds:

This is a year of the goat and unfortunately I do not think it is friendly to the casual dining industry in general. When you kind off look at our business, you know in the long run, and we have a well positioned business. You got a wonderful concept that is very relevant but, this year, when you consider the slowing economy, the calendar shifts off of Fridays, or hurricanes, the auction rate securities. We have been a little bit snake pit unfortunately, on the short term basis, but over the long run, there are very few opportunities as well positioned and as legitimately positioned as BJ’s to execute a national growth plan, and that is why we were all hanging in here.
Operator:

Your next question comes from Analyst for Destin Tompkins – Morgan, Keegan & Company, Inc.
Analyst for Destin Tompkins:

Calling for Destin. Question really quickly on the vast and the goods, Greg that you talked about for 2009. You mentioned that it looked a little bit more favorable up about five to six percent versus previously up about 6 to 8. Wondering where you seing those raise of sunshine that are bringing yet down a little bit, or is that due to menu pricing or diesel cost or, can you give us some color?
Gregory S. Lynds:

It is a little bit coming down on some of the interest cost into some of those. [inaudible] coming down and helping us a little bit. Also, with the slowdown in some of the other proteins, chicken that has come down a little bit. Well, bread too. When you look at the drop of wheat prices and the potential impact on our pizza dough and our bread, we sell a heck a lot of sandwiches here at BJ’s. Actually, our projected increase is in most few commodities with wheat coming down have actually caused us to move our total commodity basket down a little bit. And then there have been have been some other things as well, but I think that pretty much explains it.
Analyst for Destin Tompkins:

Well, some of those things are actually down year over year, so I guess that turn it around the other way, which are the items that you are feeling the most pressure on?
Gregory S. Lynds:

At this point in time, chicken is still a little bit of a wild card for us. Cheese is still moving around a little bit those are pretty large pieces of our total cost of sales as Greg mentioned cheese is, you know about 8%, poultry is about 10% for us. So, those are still moving around and as well the dressings. And again, what we are trying to do as everybody else is trying to do, is trying to convince our key suppliers to enter into long term fixed cost contracts with us. So, at this stage of the game, on the supplier’s side there are still generally reluctant to give you four year quotes going into 2009 in a lot of these commodities. Now, they will but they are going to cushion those prices with a pretty good premium for that predictability. And so far, what we received has not really been acceptable to us. But as time goes on we are beginning to see a little more favorable price comp with respect to our suppliers in that respect so we still get another 30 days or so to go and if we cannot get acceptable fixed price contracts for a full year then we go to 90 days and do the best that we possibly can so it is still moving around a little bit and we still have some work to do.
Jerry Deitchle:

I think one of the other areas for us is, on our Pizza bread we had a three year contract. So we locked into that in 2006 and as a result even though we are coming down, it is going to be a little bit more impacted for maybe the last somebody else that had a weak contract last year.
Gregory Levin:

e We will take one more question and we will wrap it out today.
Operator:

And our final question comes from the line Greg Ruedy - Stephens Incorporated
Greg Ruedy:

Good afternoon. A question for Greg Lynds, your Tukwila, Washington location looks like it is fit to seat more guests than average. How do you see the shape and size of your footprint evolving over the next two years and can you comment on where you think the industry trends will move as well
Greg Lynds:

Our Tukwila restaurant is a custom footprint restaurant so it is a lot of our custom footprints depend upon the space where the landlord originally constructed. This one we had a little bit of flexibility but it slides in there in that 9000 square foot range in Tukwila. It steeps more importantly you got to look at the seats and the tables of this restaurant has and in Tukwila is about 62 tables sideway and seats about 280 which is very similar to our prototypes. In terms of the industry, I think, the industry have always been in the area of damming down or moving smaller and making it cheaper, better, faster, I think at BJ’s it is quality. It is about the guests. It is about efficiency and productivity. So at this point our goal is to continue to build restaurants that are more efficient and higher quality and serve the guests better. So we will continue to build our restaurants for the same type as we have building them.
Greg Ruedy:

I would shift to somewhat of a guest mix perspective. To what extent your business is supported maybe other service industry professionals or retail hourly staff that is around these Triple A sites that come straight from work?
Greg Lynds:

Greg each site is independent. I could tell you Westwood, California there is a lot of medical buildings in that area. We serve lunch to them as well as the kids in the schools and fortunately we do not have a general rule of thumb for our restaurants. It is very, very tight.
Greg Levin:

It really is. We do open later than most casual dining restaurants so when the malls and all of the other restaurants close up at 9 or 10 and we are still open until midnight or so. We get a little bit of late business in our late night happy hour for service industry professionals, Other restaurant workers and so forth but I do not think it is a material part of our business.
Greg Ruedy:

Greg Levin do you know offhand how much of the alcohol sales is as opposed to [inaudible]
Greg Levin:

Not much. I am trying to late night business is somewhat around 7% of our business. When we look at our instant rates we do see the liquor down a little bit from an instant rate than what we have seen in there past so we are seeing every other category holding very nicely.
Greg Lynds:

Our beer instantly for 100 is actually up. So that is a little bit fascinating but maybe it is kinf of sign of the times.
Greg Ruedy:

No one wants to give up their license in these environments? That’s all I have Thank so much.
Jerry Deitchle:

Thank you all for being on the call on today. That will conclude our call.
Operator:

Ladies and gentlemen, that does conclude the BJ's Restaurants Incorporated third quarter 2008 results conference call. If you would like to listen to a replay of today's conference, please dial 303-590-3030 or 1-800-406-7325. Then enter access code is 3930855. We would like to thank you for your participation. You may now disconnect.

BJ's Restaurants, Inc. Q3 2008 Earnings Call Transcript

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BJ's Restaurants, Inc.
Q3 2008 Earnings Call Transcript