BJ's Restaurants, Inc.
Q4 2008 Earnings Call Transcript

Published: 13 Feb 2009

[Operator:]

Welcome to the BJ's Restaurants fourth quarter 2008 fiscal results conference call. (Operator Instructions). This conference is being recorded today, Thursday, February 12, 2009. I would now like to turn the conference over to Mr. Jerry Deitchle, President and CEO. Please go ahead sir.

[Jerry Deitchle:]

Thanks, Operator and hello, everybody. I am Jerry Deitchle with BJ's Restaurants and welcome to our fourth quarter 2008 investor conference call, which we are also broadcasting live over the Internet. And after the market closed today, we released our financial results for the fourth quarter of 2008 that ended on December 30, 2008. And if you haven't seen our press release yet today, you can see it on our website at www.bjsrestaurants.com. Joining me on the call today is Greg Levin, our Executive VP and CFO; Greg Lynds, our Executive VP and Chief Development Officer; and Dianne Scott, our Director of Corporate Relations. The agenda for our call today will be as follows

[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 12, 2009. 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 Deitchle:]

Thanks, Dianne. Now on to the details of our conference call today. In spite of some of the toughest operating conditions for retail and restaurant companies that I have seen in my 35-year business career, our leadership team here at BJ's was very, very pleased that our business was able to maintain its forward momentum during the fourth quarter and full year of 2008 and continue to build additional market share in the estimated $90 billion casual dining segment of the restaurant industry. We believe that our restaurant operators, our brewery operators and infrastructure support team did an outstanding job of moving BJ's forward during 2008, despite the difficult operating environment and we always want to thank all of our colleagues at the company for all of their hard work and their contributions to our successful growth this past year. As we all know, most of the consumer businesses continue to feel the impact of the current recession. While our business is certainly not immune to the pressures of the recession, we do believe that BJ's continues to perform relatively well, when compared to most of our similarly-situated casual dining competitors in terms of size, scope of operations, available resources, and geographical concentration. Our fundamental shorter-term objective at BJ's is to keep out working and outperforming most of our peers during these tough times and simultaneously, continue to prudently invest in the overall quality and differentiation of the BJ's concept, as well as continue to invest in the strength of our restaurant support and growth infrastructure. By doing so, we believe that BJ's can be a high quality early recovery opportunity for even more consumers and investors when the current recession cycle eventually begins to bottom out. Moving to our financial results for the fourth quarter of 2008 when compared to the same quarter of last year, our total revenues increased about 16.5% to $99.3 million. Our comparable restaurant sales decreased by only 0.7% during the fourth quarter, which we believe ranked among the better performances on that metric in the casual dining segment during the quarter. Our net income and diluted net income per share for the fourth quarter were $2.3 million and $0.08 per share respectively. As we previously announced in our January 8th press release earlier this year, our fourth quarter results include $2.1 million of pre-tax charges that were related to a couple of items

[Greg Lynds:]

Thanks, Jerry. Good afternoon, everyone. Jerry just mentioned our 2008 new restaurant development growth targets were achieved. For 2008, we opened 15 successful new restaurants and achieved our targeted growth in total restaurant operating weeks for the year. In the fourth quarter, we opened three restaurants. We opened Tacoma, Washington on October 13th, and Chula Vista, California and Newark, California both opened on November 10th. Geographically, during 2008 we opened five restaurants in our home court state of California, three restaurants in Texas and Arizona region. We opened our first restaurant in the state of Washington in the cities of Tacoma and Tukwila. We also opened our first restaurant in the state of Louisiana in Baton Rouge, it is on a freestanding out parcel path within the new lifestyle wing of the Mall of the Louisiana. Additionally, we continue to infill Ohio Valley region in Florida. Within the Ohio Valley region we opened restaurants in Cincinnati, Louisville and Indianapolis. And our fourth restaurant in the state of Florida opened in Kissimmee, a suburb of Orlando. We now have a strong base of restaurants from coast to coast and we are well positioned to build our brand in our core western state, Texas, the Ohio Valley, Florida and also mainly other strategic East Coast markets as time goes on. Looking forward into 2009 and 2010, we believe the softening commercial real estate market represents an even better opportunity for BJ's to continue to securing prime locations favorable to these economics. Our new restaurant development strategy continues to focus on acquiring AAA quality location, mature densely populated trade areas with premier cotenants to create maximum synergy in terms of guest traffic and our brand positioning. Over the last several months, our real estate campaign completed a detailed evaluation of the potential restaurant sites available in our targeted trade areas. Based on this evaluation and taking into account the slowdown in retail development, and as we announced earlier this year we currently expect to open 9 to 11 restaurants during 2009. As of this date, we plan to open as many as two restaurants during the first quarter. We have no planned openings in the second quarter, and as many as four to five restaurants in the third quarter and as many as three to four restaurants in the fourth quarter. All of our potential 2008 openings have been secured with signed leases or letters of intent, and four of those restaurants are already under construction. As we stated before it's difficult to precisely predict the actual timing of our 2009 restaurant openings due to many factors that are outside of our control, including the weather, landlord deliveries, contractor delays, and certain approval needed from municipalities. Again our quarterly opening schedule can fluctuate due to the many factors, and we'll keep everyone apprise of any future changes. As indicated in the past, our development plan for the next three years or so calls for one-third of our new restaurants to be built in California; a third of our new restaurants in western states outside of California; and a third of our new restaurants on East Coast are new markets. This continues to be our long-term geographic development focus. In 2009, however, we plan to open as many as eight of our new restaurants in the states of California and Texas, where we already have a good presence and where our concept is still underpenetrated. This will allow us to even better leverage our strong brand position, our consumer awareness, our supply chain infrastructure and field supervision. In addition to these eight restaurants we are currently under construction at Henderson, Nevada and Gainesville, Florida. Both restaurants are projected to open in the first quarter and are located within mature densely populated submarkets with no co-tenancy or development issues. Overall the 2009 and 2010 development pipeline remains in excellent shape and we continue to be very pleased with the quality of the new types in our pipeline. As stated early, our team views the current economic issues surrounding retail and restaurant development with the time to capitalize on securing these prime sites. Our team will remain disciplined in our approach to site selection and lease economics so that our new restaurants will be well positioned to take market share in each designated trade area. In the designing and construction area, our team continues to focus on delivering restaurants with a non-chain image and ambience, and as Jerry mentioned, we are also working on more efficient seating and kitchen layouts here to improve the overall productivity of our restaurants. Our team knows that we compete in the largest and the most competitive segment in casual dining and the best way to profitably gaining of 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 brand broad approachability of the BJ's brand. 2009, which means opening our new restaurants in AAA location within dense, high sale volume trade areas and delivering gold standard experience to our guests. Our team is ready and I am confident BJ's will have many years of solid new restaurant growth to come. Jerry, back to you.

[Jerry Deitchle:]

Thanks, Greg. We continue to believe that BJ's four-wall economics are very sound. They support a continued steady pace of new restaurant expansion. Now, the hallmark of our development program, as Greg mentioned, has been AAA quality locations in mature densely populated trade areas with premier cotenants that create maximum consumer synergy. We strongly believe that delivering a high quality ROI on each of our new restaurant serves our long-term interest better than opening a bunch of new restaurants just for the sake of maintaining a certain growth rate particularly during a recession. There is certainly not any lack of sites in general to support our longer-term growth but there are less high quality sites available in the trade areas where we want to develop during the next couple of years, as Greg outlined, that will best leverage our supply chain and our field supervision infrastructure. So if we have to choose between quality and quantity in a restaurant expansion plan during a recession, we're always going to choose quality. We can only grow as much as the operating environment will allow and it's important to grow with quality because that facilitates dependability and predictability which are two pretty important considerations for investing in restaurants. Additionally, based on our current plans and expectations, we should be able to finance our new restaurant expansion, and in fact, our entire capital expenditure plan for the upcoming year, primarily with internally generated cash from operations and committed landlord construction contributions. We believe that's a very favorable position to be in. And now, I'm going to turn the call over to Greg Levin, our CFO for his comments on the quarter. Greg?

[Greg Levin:]

Thanks Jerry. Let me I apologize everyone, I have a problem with a bad cold and cough here and I'm going to do my best to get through these prepared remarks but not coughing in your ear too much. As Jerry previously noted our total revenues for BJ's fourth quarter of 2008 increased to 16.5% to approximately $99.3 million from $85.2 million in the prior year's comparable quarter. The increase was the result of approximately 20.5% more operating weeks, offset by a 3.4% decrease in our weekly sales average. The operating week increase is due to the 15 new restaurants that we opened this year and a full quarter of operating weeks from the four restaurants we opened in the fourth quarter of last year. As Jerry mentioned, our aggregate comparable restaurant sales for the fourth quarter decreased approximately 0.7%, which is pretty impressive, since not only did Halloween fall on a Friday in the fourth quarter, but we also lost New Year's Eve and Day was flipped into the first quarter of 2009, as Jerry mentioned the concentration of restaurants that we have here in California, Arizona, and Florida. While we do get out our monthly comparable restaurant sales, I would like to note that normalizing for the shift in the holidays, our comparable restaurant sales within the fourth quarter was fairly consistent from week-to-week. We did notice a decrease in our large-party business, primarily due to the size of the parties being smaller in previous years and really not due to the actual number of reservations we take. Additionally, those smaller parties tended to choose one of our lower price buffet options, and ordered less alcohol than they had in the past. As we have previously mentioned the softness in our overall comparable restaurant sales is primarily isolated to the Sacramento Central California region, the Inland Empire areas of California, and the Phoenix Arizona market. These are regions of high growth over the last several years and the housing melt down and the latest slowdown in overall construction activity is taking their toll on these local economies. And we do hear the same sales trends are from either casual dining competitors in those markets. As we stated before, we have 10 restaurants in the Sacramento Central California region and the Inland Empire areas of California that were of our comparable restaurant base beginning in the first quarter of 2008. These 10 restaurants in the first quarter of 2008 had comparable restaurant sales decreases in the 6% range. In the second and third quarters, these same restaurants had comparable restaurant sales decreases in the 5% range. In this past fourth quarter, the same restaurants had a comparable restaurant sale decreases in the mid 2% range. Additionally, these restaurants continue to generate weekly sales averages in excess of 115,000 a week, without those sales levels these restaurants well exceed our return on investment targets. In addition to the improvement in our comparable restaurant sales in the Sacramento and Inland Empire areas of California, our Phoenix, Arizona restaurant also saw improvement in the fourth quarter. These three restaurants had comparable restaurant sales decreases in the 7% to 8% range in Q1; in the 6% range in Q2, and in the 5% range in Q3 of 2008. In the fourth quarter, these three restaurants had comparable restaurant sales decreases just below 4%. During the fourth quarter, our estimated menu pricing factor was a little over 4% and I'll give you some comment on the menu pricing a little later in my formal remarks here. Before I move on to the middle of P&L, I do want to elaborate on a quarterly comparison. As Jerry noted in this quarter compared to the same quarter last year, we recorded a $2.1 million charge related to accrued compensation and related benefits from the December 2008 departure of the company's two co-founders and estimated costs to settle two Californian employment practices lawsuits that have been outstanding since 2004 and 2005. We definitely incurred a pre-tax charge of approximately $500,000 related to the disposal of certain assets in connection with our ongoing facility image enhancements and upgrades. These charges resulted in reducing our effective annual income tax rate to approximately 25% to approximately 21%. As a result, we had over expensed our taxes through the first three quarters of 2008. This resulted in a net tax benefit in the fourth quarter of approximately $386,000 to achieve a 21% annual tax rate. If we exclude the $2.1 million of charges from the accrued compensation and legal settlement costs in the $500,000 for the disposal of assets, our fourth quarter pre-tax income would be $4.5 million. Applying a normalized tax rate of approximately 25% to this adjusted non-GAAP pre-tax income of $4.5 million, results in our net income excluding these costs $3.4 million for the fourth quarter and net income per diluted share of $0.13 for the fourth quarter. We did file a reconciliation of this non-GAAP net income and net income per diluted share in our earnings release today. So, if you have not seen it or have any questions I would refer everyone to today's earnings release. In regards to middle of our P&L, our cost of sales of 25.4% of sales was 20 basis points higher than last year's fourth quarter and flat sequentially from the third quarter of 2008. This increase compared to the prior year was principally driven by higher commodity cost for meats and oil, and it was offset by lower cheese cost and some menu pricing. Sequentially compared to Q3, our cost of sales as I mentioned were flat at 25.4%. Labor and benefits during the fourth quarter increased by 20 basis points to 35% from 34.8% sales last year. This increase is primarily due to higher management wages as a percent of sale as a result of the deleveraging from the fixed nature of management salaries over lower comparable restaurant sales. Looking at labor on a sequential basis, we saw a 10 basis point increase from 34.9% in Q3. This slight increase is primarily due to higher workers compensation costs in Q4 compared to the prior quarter and that was offset by lower hourly labor. Our operating and occupancy costs as a percentage of sales increased to a 160 basis points to 21.6%. The majority of this increase is due to higher marketing costs and deleveraging of a fixed nature of many of our costs related to occupancy and other fixed contract costs. As we mentioned, on our third quarter conference call, beginning in the second half of 2008 we increased our marketing costs closer to 1% plus of sales compared to really only that 4/10 of a percent of sales in prior years. Our operating occupancy costs sequentially as a percentage of sales decreased a 130 basis points as utility and energy costs came back down from those extremely higher rates in the late summer. In fact utility costs make up over 100 basis points of the decrease from 22.9% in Q3 to 21.6% in Q4. Our General and administrative expenses in the fourth quarter of 2008 decreased 60 basis points from prior year to 7.2% of sales. Included in G&A for both 2008 and 2007 is approximately 634,000 and 572,000 of equity compensation, respectively, or 60 basis points in 2008 and 70 basis points for 2007. The reduction in G&A as a percent of sales compared to prior year was primarily due to less cost related to managers and training resulting from lower manager turnover, which Jerry commented on earlier today. This reduction in turnover should not only help our G&A cost, but as we all know, the more experienced the management team is, the better the results. Depreciation and amortization was 5.5% of sales, which sequentially was up about 30 basis points, primarily due to deleveraging from softer sales owing to the fixed nature of these costs. Our restaurant opening expenses were $1.4 million during the fourth quarter of 2008, which was the result of the three restaurants in the quarter. For the year, our pre-opening cost was 7.3 million, which approximates our expected average cost of 500,000 per restaurant. Our CapEx for 2008 was approximately 65 million and that's net of landlord approval allowances. Before I turn the call back over to Jerry, let me spend a couple of minutes commenting on our liquidity position. We also provide some forward-looking commentary for 2009. In regards to our option rate securities, we were able to redeem and additional 300,000 of these securities during the fourth quarter at par. At such, we currently own 35 million in states for par value option rate securities. The option rate securities we own are off due to loan collateralized obligations. This peer loans are public sealed loans guaranteed by the U.S. government under the Federal Family Education Loan program or the FFEL program. Additionally, during this quarter, quarter one of 2009, we have or expect to be redeeming an additional 600,000 of these securities to partial redemption, all at par. I do want to remind investors that the interest we earn on our auction rate securities is tax exempt. But for my understanding because we own the tax exempt student loan auction rate securities, our investments continue to pay interest during the penalty period and do not reset at 0 for any period of time unlike some of the other student loan auction rate securities. Because of the illiquidity of these investments at the current time in accordance with FASB-157, the fair value of measurement, we continue to obtain third-party valuations for investments. Because it was currently not an aftermarket to compare to like investment, the valuation process is very subjective and which slight changes to the inputs used can have a dramatic effect on the valuation of these securities. Based on these valuations, we have recorded a temporary impairment in the value of these investments of approximately $4.4 million or about 12% of the face value. This temporary impairment was recorded at a comprehensive income, which is part of the shareholder's equity on our balance sheet and was recorded in accordance with FASB 115, accounting for certain investments and debt and equity securities. This temporary impairment does not affect current income or earnings. However, if circumstances change in the future, and we determine that we have a permanent impairment in the value of these securities, then we would be required to take a charge directly to our income statement. In regards to our liquidity, we ended fiscal 2008 with approximately $9 million of cash and $9.5 million of outstanding on our line of credit. Our line of credit is for $45 million and does not expire until 2012. Due to our higher day anticipated cash balance at year end that's based upon our projected capital expenditures over the next few months, we did make a principal payment of $1 million in our line of credit in January and therefore, as of today, our outstanding balance on the line of credit is only $8.5 million. In regards to our capital expenditures plan for 2009, we anticipate spending about $32 million to $33 million net of landlord allowances for our 9 to 11 new restaurants and approximately $12 million to $13 million related to maintenance CapEx and capital initiatives. As such, we expect our entire capital expenditures for 2009 to be approximately $45 million, which includes the landlord allowances. We anticipate funding our capital expenditures primarily from our cash balances, operating cash flow and these allowances from our landlord. At the current time, we do not expect to draw meaningfully on our line of credit in order to achieve our growth plans and initiatives for 2009. I will now apply some forward-looking commentary in regards to sales and margins for 2009 and this information is really based on the expectations as of this date. All of this commentary is subject to the risks and uncertainties associated with forward-looking statements as discussed in our filings with the SEC. Although we remain very confident in the vital organs of the BJ's restaurant concept and to-date our comparable restaurant sales are positive as Jerry mentioned. We remain cautious about fiscal 2009. I know I am restating the obvious, but our economy is still in the midst of a deep recession and unemployment continues to rise. Consumer spending decreased in the last half of 2008 and most experts do not expect consumer spending to increase at least in the first half of 2009 if at all in 2009. These macroeconomic forces make it very difficult to drive meaningful comparable restaurant sales, which really are the key to not only maintaining restaurant level margins, but also to expanding restaurant level margins. That being said, as Jerry mentioned, we have numerous sales building and productivity initiatives for 2009 in our casual plus positioning with broad approachability in an average guest check of only $12 or so should allow us to continue to have a good opportunity to gain market share and outperform many of our peers. In regards to revenue for 2009, as we mentioned today, we are targeting about a 15% increase in operating weeks. Specifically for the first quarter we expect to open two new restaurants in mid-March. I still anticipate seeing a decrease in our weekly sales average in the 2% to 3% range for 2009. This decrease is a result of primarily two functions. First over the last 18 months, about two-thirds of our restaurants were built outside of our home state of California, where our restaurant sales volumes are extremely strong. Therefore these newer restaurants, put into aggregate, are performing within our expectations would generally have lower sales volumes than our California restaurants. Second, as I previously mentioned, with the continued slowdown in overall consumer spending, it will make it difficult to drive meaningful comparable restaurant sales. In regards to our margins, our restaurant operators continue to do an excellent job at managing what we call the prime cost of our business. That is cost of sales and labor. We all know that volatile food commodity markets were a major factor for most restaurant companies during this past year, including BJ's. As per information available and our expectations as of today, we currently estimate the total cost of our food commodity basket to increase about 3% during 2009. This current estimate is based on negotiations with suppliers that have been completed to date, coupled with current and expected market conditions for certain fresh and other commodity items that the company is either unable to or has currently elected not to contract for longer periods of time. However, unlike past years where we were able to lock in 75% of our commodities for either six months or annual contracts, this year we have decided at this time to contract for only about 50% of our commodities on an annual or semi-annual basis. Therefore, our 3% expectation could materially change for the better or worse during the year. However, assuming the 3% increase in our commodities, we would expect our cost of sales to remain in the mid 25% range. Just as a reminder our commodity cost and availabilities are subject to a number of factors outside of our control whether contracted for or not. BJ's competitive strategy has always been focused on providing a higher quality, more contemporary casual plus dining experience at about the same average guest check of many of our mass market competitors. Accordingly to the extent that our cost for key input such as food commodities continue to be lower than expected, we will be able to better protect our value concept positioning with consumers and therefore keep our expected menu price increases as small as we can. Our effective menu price increase for 2008 was in the mid of a 4% range, which was generally in line with most of our casual dining competitors. We believe that based on what we know and expect as of today, we can keep our 2009 price increases in the 2% to 3% range and still help protect our profit margins everything else being equal. Currently we have menu pricing in the mid 3% range and expect to be in that range at least through the first half of 2009. Our next schedule of menu pricing if we decide to take any menu pricing would be in late May with our regularly scheduled menu updates. In regards to labor, we do have the last leg of the federal minimum wage increase in July and we do have some states that have annual CPI increases to the state minimum wage rates. That being said I would anticipate labor to remain in the low 35% of sales range. I anticipate that operating occupancy cost will be in the mid 21% of sales range for 2009 and that is based on the current marketing plan and the current cost of energy. Our G&A expenses in absolute dollars should increase by about 14% to 15% compared to 2008 total dollars spent. However I do want to mention that in 2008 we only earned about 25% of our targeted cash incentive performance awards for the year. As you may recall on our third quarter conference call we noted that we reversed $1 million of accrued expenses for such performance awards that had been previously recognized in Q1 and Q2 of 2008. Assuming that we had earned a full targeted level of those performance awards during 2008 and our expected absolute increase in G&A dollars during 2009 will only be about 11%. As I've already mentioned, we currently expect restaurant opening costs to be $500,000 per restaurant. However, we will incur pre-opening non-cash rent as much as 5 or 6 months before a restaurant opens and therefore pre-opening cost for any quarter may not be indicative of the number of restaurants that opened in that quarter. We currently anticipate interest income to be in the $1 million range for 2009. And its not current estimate of cash and investment balances as well as expected interest rates on those balances. We currently expect our income tax rate for 2009 to be in the 27% range and finally we expect the diluted shares outstanding for 2009 will likely be in the $27 million to $28 million range. Jerry back to you?

[Jerry Deitchle:]

Thanks, Greg. I'm going to take one more minute before we open up the call for questions and just reiterate our confidence in BJ's longer-term ability to continue to build market share in the casual dining segment. In our view, casual dining is still a very attractive place to be in the restaurant industry. We don't think the billions and billions of dollars of annual casual dining sales are going to disappear anytime soon. Depending on current pressures and the macro environment, casual dining sales may not grow in the aggregate as fast as they have in past years, and they might even know a little bit, but it's still a much highly fragmented segment that's populated with thousands of restaurants that in our view have gradually felt a gravitational pull downward over the years in terms of their overall quality, their points of differentiation, their overall energy level, their approachability, their relevance and frankly their overall value for the money. And we believe that all of those factors play to the strength of the BJ's restaurant concept. We also agree with the recent comment that I read that was made by Harry Balzer, who is a chief restaurant industry analyst at the NPD Group. When he said and I quote, 'The growth of restaurant companies in 2009 will be for market share. Even if the average number of meals that Americans eat out annually is down from 207 in 2007 to 205 in 2008, it's about getting a larger share of those 205 meals. People aren't cutting out eating and there are 800 or so other meals in a year that are prepared at home as a result of potential market for food service is nowhere near saturation'. So at BJ's we are going to stay committed to our longer-term strategy to drive our comp sets and business forward and we are going to do as much as we can to position our business to really capitalize when the current economic cycle eventually begins to turn around. Until that time we are going to do our absolute best to control what we can control in order to do our best to drive sales and to do our best to become even more productive and efficient in our overall execution. So that concludes our remarks and at this time we are going to open up the call for your questions. If we don’t have time to get everybody's questions today we will stay on as long as we possibly can. We are in California and you can call our offices after the call. We'd be happy to take the question. Okay, operator go ahead.

[Operator:]

(Operator Instructions) Our first question comes from the line of Jeff Farmer with Jefferies & Company.

[Jeff Farmer:]

Great. Thank you. Going back to the center sales in the first seven weeks of the quarter. Do you control for that, I believe the new year shift, would you still be looking at positive comps for the first seven weeks of the quarter?

[Greg Levin:]

We probably would. I would tell you that to your point there Jeff we did have a strong first week in January because of that New Year shift. Since that time it's probably come back down to what we have experienced for 2008 maybe slightly better than that, but there is no doubt that that our first week has helped us.

[Jeff Farmer:]

Okay. And then I guess this might be for Greg, but as it relates to the 9 to 11 planned unit openings in '09, what does it look like in terms of new versus existing retail developments and has it mattered in recent years in terms of being in established retail developments versus brand new sort of the greener developments?

[Greg Lynds:]

Yes. For 2009, I'm looking at our list here; everything is really in kind of a mature densely populated area with no real co-tenancy risk and that's been our strategy going forward. Our strategy back from really 2005 has been dense mature areas and existing centers. So, I don't know, Jerry, do you have anything to add?

[Jerry Deitchle:]

No. I would agree with that as I look at the potential list of openings for this year. I really only see one out of the 9 to 11 that might be characterized as somewhat of a new project, although it's in a very, very densely populated trade area. The vast majority of them are in established projects either additions or remodels, very densely populated retail trade areas with proven levels of retail sales and that's why we selected these to move forward.

[Jeff Farmer:]

Okay. That's helpful. Then, as it relates to development past '09, is it safe to assume that it's probably too early in 2010 to start reaccelerating this. You are probably set through the current '09 run rate in terms of absolute unit development?

[Jerry Deitchle:]

Jeff, I don't think we've really targeted a specific number of new restaurants for 2010 yet. As you know in this business you have to build your pipelines anywhere from 18 months to 24 months in advance. Clearly Greg and his team are working on putting together a very robust pipeline for our ultimate decision making here as we move throughout this year. But, it's too early to really hone in on a specific number of new restaurants or targeted level of operating we brought. But, I think it is important to say that everything else being equal based on what we know about the overall economy as of this moment, we would intend to continue to open additional new restaurants next year. But, we're going to have to see exactly how many and when they're going to open here as kind of we move throughout the year, but we are moving ahead and putting together a very solid pipeline for our decision making later this year.

[Jeff Farmer:]

Okay. And then just one more final question. Greg, did you say that the '09 share count you expected that to be 27 to 28 million?

[Greg Levin:]

It's probably somewhere in that 27 million range.

[Jeff Farmer:]

Thank you, guys.

[Greg Levin:]

Okay, Jeff.

[Operator:]

Thank you, sir. And our next question comes from the line of Greg Ruedy with Stephens Inc. Please go ahead.

[Greg Ruedy:]

Thanks. Good afternoon. Greg, I think you mentioned that about a third of the system now is still less than two years old. You mentioned on aggregate they are meeting expectations. Maybe you could talk to some specific units or areas where you have market share and average weekly sales ramp opportunities?

[Greg Levin:]

Yes. I'm thinking about your question a little bit here, Greg. When I look at that and we talk about it in aggregate, we mentioned before with all of our children we have found that outperformed others. When we look at California in general in that pipe list and they did really well, but as I think about some of the areas out towards you, our Baton Rouge restaurant is doing extremely well. San Antonio, we're very, very pleased with. I think there's opportunity like in Temple, Texas. It' not disappointing as for those opportunity to bring that up. There is also a couple of other opportunities up in the Ohio Valley to bring those up a little bit, but Polaris does extremely well for us, very proud of that restaurant. In Florida, we got a couple of restaurants that do extremely well for us and others I think with the economic condition that Florida have opportunity over time, but we don't have a restaurant that disappoints us in that point. Jerry, I don't have.

[Jerry Deitchle:]

Well, the only other thing that I would say is that restaurant sales for emerging national concept like BJ's are really a function of awareness, trial and usage, the ATU formula if you will. When we open up in our California trade areas and most of our Texas trade areas where we already have high levels of awareness, we get higher levels of trial and then we are able to convert that trial to regular usage on a pretty predictable pattern. It's the opportunities in our newer markets, particularly Florida and Ohio Valley where we've opened up with very satisfactory volumes, but over time, awareness and trial will drive ultimate usage and it takes time for new concepts without national advertising umbrellas and national awareness to really build their reputations and get into the dining patterns or the dining location, if you will, of consumers in the trade areas. So I think I would say that Florida, Ohio, our newer markets probably have the most upside opportunity over time. Our restaurants in California are solid from day one and they spend, notwithstanding some of the press and media reports that we hear about the wonderful state of California. California is still a very, very attractive state for BJ's to open up restaurants in. We only have 44 restaurants in the state. We are clearly underpenetrated in the state. There are 36 million people that live in California. We have noticed and I mentioned in my comments earlier in our call today, we have seen over the past six months several franchisees of some of the very menu mass market casual dining concepts have decided to close several restaurants in California which is a tremendous benefit to us. It's our home court. So for those that might think that opening new restaurants in California might not be the best idea for our business, I would suggest that every data point that we have suggests otherwise and we are going to continue to play to the strengths of our home court.

[Greg Ruedy:]

Looks like the majority of the '09 openings will be California and Texas. So, are there things in specific trade areas or unique things going on in the pipeline that is precluding you from opening in Florida and the Midwest this year?

[Jerry Deitchle:]

Not at all, actually we are trying to focus our development specifically targeted into trade areas where we can get maximum awareness trial and usage which are a function right now of our California and our Texas development plans at this moment. We do have potential sites that we are working on for the next 18 months in central Florida and in Ohio, but right now we have chosen to really focus hard in the areas where we can achieve maximum awareness trial and usage and achieve maximum leverage of our field supervision organization or supply chain and our restaurant management talent.

[Greg Ruedy:]

Okay. Last one and I'll pass it on. Multiple casual dining operators will mention that their customer service scores are all-time highs. From a service standpoint and excluding your deployment of the quality fast tool sets and the aesthetics within your box, what is it about the guest server interaction at BJ's that differentiates you versus those other bar and grill or mass market operations? Thanks.

[Jerry Deitchle:]

That's a great question, Greg. We also track guest surveys and opinions with respect to food quality, service quality, facilities quality, overall intent to revisit the restaurant. We've been tracking those in our databases over the past four years that I've been involved with the concept and we have seen a gradual increase in the overall top box ratings of yes related to our BJ's attributes and it's very, very hard to try to pick certain attributes of the concept and say well, this favorable rating is due specifically to this factor or this attribute. It's very, very difficult. You really have to take the concept as a whole, where it was, a very, very good concept four years ago when you consider all of the investments and improvements that we made in our operational tool sets, in the overall quality of our execution, in raising the overall positioning of the business from kind of being on the fence, half mass market, half premium casual moving it more clearly up into the premium casual range. I think all of those factors have correctively acted in a synergistic way to improve overall guest ratings for us. It's very, very hard to isolate what we could have done with or without certain of those attributes because they're all working together to really drive our business forward. Next question?

[Operator:]

Thank you, sir. And our next question comes from the line of Matt DiFrisco with Oppenheimer Capital. Please go ahead.

[Matt DiFrisco:]

Thank you. Greg Levin, can you give us a little update on what you might be doing right now with or what's ahead for '09 as far as the contracts with brewers in markets like Texas and outside of California where you might have greater advantage or move some more of your brews over in the capacity onto those lower cost basis, larger batch brewers?

[Greg Levin:]

Yes. We are continuing to move that forward somewhere to the point of getting close to maybe 55% towards the end of this year. What we found right now is while we can get it produced at a lower price with the large contract brewers, because of their efficiencies you lose a little bit in the transportation cost. Right now, the contract brewers that we're using for large contract brewing are out there really out on the East Coast. They are shipping some of our primary beer flavors into California. So, net-net, we're expecting our deliver beer cost to our restaurants for at least 2009 to be flat. But as we continue to grow, we should be able to continue to leverage the large contract brewers and bring down that number.

[Jerry Deitchle:]

This is Jerry. It's fascinating that in that particular part of our business when you look at the total delivered cost per kg of beer in our restaurants, 25% to 30% of that total delivered cost represents transportation and freight cost. The raw ingredients, the direct labor, the direct overhead, are much lower, the cost, the elements are taken separately. So as Greg mentioned, we do have our larger contract brewing operations in Texas, in the Midwest and on the East Coast. And as we continue to expand that way, we'll obviously get some leverage on transportation of freight cost. We're also working very, very hard with not only the independent freight companies, but also with our principal food service distributors to work on ways where we can cross dock and where we can get some backhauls and get some benefits with respect to freight costs in advance of building more restaurants further east and further north.

[Matt DiFrisco:]

Understand. And then I guess, Jerry, just want a comment on your commentary with respect to the world ahead, maybe the game changing a little bit more, the sharing taking than just sort of a rising tide, not necessarily for trying to swoop the guy out of the kitchen, but to compete against peers, is there a desire to maybe do a broader marketing campaign or anything in given that your growth seems to be heavily back filling, which might provide the opportunity for better leverage to do regional, more local advertising whether on radio or TV?

[Jerry Deitchle:]

Well, that's an excellent question. I think in the short run, we would not intend to increase our media advertising to really drive overall awareness and trial. We're running at about 1% of sales. And to your point, probably the only market where we have a chance of becoming semi-media efficient, well, that would be on radio would be here in Southern California. Our best bet in driving market share is to pick AAA locations and operate at the highest level of operational excellence and that's how you build your reputation and credibility with consumers, and to maintain the overall points of quality and differentiation than to play to the strengths of those differentiations as we continue to grow our business. And, frankly, we're up against our competitors as I mentioned in my previous comments. There are thousands and thousands of varied menu mass market casual dining concepts that frankly have kind of lost their warranty with consumers in many respects. So, we're going to start off by always focusing on AAA locations and AAA operational execution and then over time, as we cluster to develop and that's one thought that we've had in the back of our minds as we continue to fill in California and Texas. At some point, we might want to have the flexibility to increase media spending a little bit. But often by being in this business for over 30 years, being 15 years in fast food and 15 years in casual dining, frankly I worry a little bit about over reliance on media advertising rates to drive overall awareness and trial and convert it to predictable usage in your restaurant. We are always going to focus on quality and differentiation, great locations and great execution.

[Matt DiFrisco:]

Okay. And then I just have a last question. Actually on the occupancy deleverage, it looks as though you degraded on the comp side throughout the year, yet the rate or level of degradation of that relative cost to sales hasn't really accelerated as much. Is that reflective of deleverage or is that a reflection more expensive location or it maybe just something in the market where your occupancy you are willing to take on a little bit of a higher occupancy rent? I'm just curious why that hasn't been more sensitive to the movement on the topline, but more or so a by product it seems like a growth of some sort?

[Jerry Deitchle:]

Just a couple of things there, Matt. When I look at just purely the occupancy side of that, we've operating occupancy. The occupancy line has not moved that much over the last year or so. We spent some of it in the neighborhood of about $10,500 to $10,600 a week just on candidate, what I call operating occupancy side. Where we have seen the movement on that is one, we raised the quality in our restaurants and a lot of what we call the guest touch point the better China, silverware, plate wear, et cetera in regards to that. So that's one of the reasons that number has gone up to that standpoint. The other side of it was the marketing. As marketing move closer to 1% this last two quarters, we moved marketing a little bit above the 1% range in regards to that number. So, those are kind of the two primary drivers. The operating occupancy hasn't been quite as much for the on-site -- just the occupancy side hasn't quite as much as more of our deliberate decisions to really increase the guest touch points. We think over time that's how you're going to build sales. Quite frankly, as we put all these things in, we weren't expecting to go into the kind of the recessionary environment that we are in. That being said, I think it can really differentiates us from the other players out there and I don’t think we would ever take that back.

[Greg Levin:]

And the other thing too that I would add onto that, Matt, is when you rollout all of these sales building initiatives, and all of these platforms, online ordering curbside cashiering, call-ahead seating, third-party delivery and so forth, you've got to communicate with your customers periodically and tell them that you’ve got these services in. And these services will take a little bit of time to build their productivity over time. So, initially, we made the decision we're going to have to spend a little bit of media marketing dollars to make sure that everybody knows that we have these and over time as they begin to build and consumers begin to feel confident that their credible services and they can rely on them, then perhaps we can take the foot off our media marketing and get back to something that’s a little less than 1% of sales.

[Matt DiFrisco:]

Okay. So just to conclude that, I guess, if we were to look forward not backwards, then 2009 would be more along the line of a 1% not necessarily the degree of de-leverage or the sort of in excess of 1% in 3Q and 4Q?

[Jerry Deitchle:]

Yes. I think that would be right if I understand what you are getting at. I would still go with my general commentary that I made in my prepared remarks that operating occupancy are going to be in that mid 21% range.

[Matt DiFrisco:]

Perfect.

[Jerry Deitchle:]

Okay.

[Matt DiFrisco:]

Thank you.

[Operator:]

Thank you, sir. And our next question comes from the line of Sharon Zackfia with William Blair. Please go ahead.

[Sharon Zackfia:]

Hi, good afternoon.

[Jerry Deitchle:]

Hey, Sharon.

[Sharon Zackfia:]

Greg, I think I have your cold. A couple of questions. I guess as California looks like it's firming a little bit for you, how much of a tailwind does that give you going into 2009, because you have some of those really easy comparisons now in California. And then, secondarily, we're starting to hear some kind of rumors that Texas is starting to weaken some across the restaurant space. Are you seeing any of that?

[Greg Levin:]

Yes. A couple of things. I love the comment that you have a easier comparison to go. I think if you talk to folks in other casual dining companies based on probably same out for a year and a half to two years that it should get better next year because we're going over easier comparisons. That being said, what I think we are seeing here is a little bit of what you talked about where I think if you looked at 2008, we had a little bit higher dispersion in regards to comp sale. So the Texas restaurant doing some pretty nice comp sales, kind of offsetting some of the California restaurants to get BJ's more or less factor a flatter type number. I think as we go into 2009, you're going to see the California numbers as I had talked about in Q4, and those areas probably being a lot less negative in comp, but the fact of the matter is Texas has been almost high single digits if not double digits, the comp rests for almost three or four years now and we are starting to see those come down a little bit. So I think in essence, you are going to see comp sales to semi retail like what we saw this year in 2008, but the dispersion is going to be less.

[Sharon Zackfia:]

Okay. And then, secondarily, Greg if you kind of go through some of the different parameters you gave us for restaurant contribution margin, it sounded as if you were expecting to hold that more or less with what you saw in 2008.

[Greg Levin:]

Yeah, I think, we have the ability to hold those restaurant level margins. I would tend to hope, that I mean we hope not a strategy here, but I think we have the ability with the slowdown to get some of the newer restaurant to get a little bit more productive. So depending on where comp sales come in, I think we might have an opportunity to expand margins a little bit but again a lot of that is driven by comp sales.

[Sharon Zackfia:]

What kind of comp do you need to see expansion year-over-year. Just given the difference and you will have less new restaurant penalty this year than you saw in 2008.

[Greg Levin:]

Everybody loves that question and it's always a difficult question to answer. Really looking at 2009 the headwinds or the tailwinds, I guess that we faced this last couple of years or the headwinds that we faced in regards to commodities and labor and still not have abated a little bit. We still got it with somewhat on commodities, labor and little bit less. If energy costs stay where they are, we wouldn't see the spike that we saw in Q3 and a lot of companies cost. So, I think you get back on what was a 2 percentage range or you could start to have maybe maintain your margins if not extend your margins where the prior years you neared somewhere in the 3.5% to 4% range.

[Greg Lynds:]

What I would also add to that Sharon that the real key to driving improvements in restaurant margins would be an increase or a flattening of guest traffic. That's really the key. It's kind of like a reduction in the unemployment rate is the first indicator that the economy might be turning around or one of the early indicators that the economy might be starting to turnaround. Guest traffic remains negative, but for us as soon as we begin to see that flattened out or even peak up a little bit, I think you will see us with a strong ability to get our overall cash flow margins within the four walls of the restaurants back closer to 20% over time. But I think in 2009 that's going to be a pretty tough challenge.

[Sharon Zackfia:]

Okay, well best of luck.

[Operator:]

Thank you, ma'am. And our next question comes from the line of [Jonathan Comp] with Robert W. Baird. Please go ahead.

[Jonathan Comp:]

Yeah hi this is [Jon Comp] for David Tarantino. Just one quick question on your commodity costs. I know you said you had about 50% of your overall basket locked for 2009. Can you just give a little more color on the specific items and maybe talk about the greatest opportunities for positive or negative variances versus the 3% that you quoted?

[Greg Levin:]

I think it's easier to talk about may be where the pressures are going to be. Chicken is going to be a pressure point for us. We are right now in kind of a quarterly contract and we think we had a good chicken contract in 2008. So that's going to be an area of pressure and the other one would be our pizza dough. The other item, and just on hand chicken is somewhere in the 12% range of our total of food cost or cost of sales. So you can get an idea that, that impact there. That should be offset with lower cheese prices, which were priced currently on the spot market and cheese has dropped tremendously into that kind of a $15 per pound range. Our dressings we should be able to get a down a little bit and our oils, but the pressure is really on chicken and our pizza dough, that's why we are probably going to see that 3% range.

[Jonathan Comp:]

Okay great. Thanks.

[Operator:]

Thank you, sir. And our next question comes from the line of Paul Westra with Cowen and Company. Please go ahead.

[Paul Westra:]

Thanks. Hi, good afternoon.

[Greg Levin:]

Hey, Paul.

[Paul Westra:]

Hi Greg. In your prepared remarks, I think you commented on your square footage or operating week growth of around 15% and also your revenue growth at the same figure. You talked about your AUVs also expecting to be down. So I just want to be clear on your, that you expect I guess, total revenue growth to be, is it going to match your operating week growth?

[Greg Levin:]

I think we had the opportunity first to match operating week growth.

[Paul Westra:]

How does that work?

[Greg Levin:]

Well, I guess, I understand together. I think, you are probably looking at a range in regards to our revenues of anywhere from kind of, 13 to 17. It depends on what type of comp number you are going to put in there. Maybe you are trying to absolutely pin me down. You can probably take the 15 to 16 operating weeks. You could say your WSA is going to be down 2 to 3 and there is your kind of 13. May be your WSA won't be down as much.

[Paul Westra:]

Okay. And then with respect to G&A, I know, I can understand the, hopefully, the full bonus accrual comes to play in '09. We always said to be true. Just wanted to, in light of that, to any other G&A leverage perspective, it is obviously through cutting your G&A growth almost to your revenue growth. Any other investments in that number where we would expect a lot of leverage in that lot.

[Greg Levin:]

It's really not. It's more of the fact that while we reversed $1 million we talked about in our third quarter conference call. We also didn't continue to accrue. So our bonuses that we technically didn't take through this year closer to more like a $1.5 million. I think there is nothing else currently going on in G&A, a normal number.

[Jerry Deitchle:]

But I think it's also fair to say, Paul, that if you exclude the performance incentive award accruals on an absolute basis, we have planned for our G&A absolute dollars to increase at a rate less than our capacity growth rate. So there is inherent leverage there if you take out the impact of the performance incentive accruals for both years.

[Paul Westra:]

Okay. And lastly, just following up on crucial marketing, I have talked about a little bit more but did you feel as though you have gotten the IRR, I mean incremental investments. Just I have a question as before about whether you maintained a little aggressive rate or you think you would pull back to normalized rate?

[Greg Lynds:]

Well, I think we are comfortable with about 1% of sales in terms of how we can effectively deploy it. We use principally free standing inserts in the Sunday papers in our trade areas and the newspapers like Los Angeles Times and all the major newspapers you can kind of stick those freestanding inserts in the newspapers by zip codes. So you can target the zip codes around each restaurant, so that you are not flooding the Los Angeles area with lots of FSIs and costs that there isn't a restaurant in the trade area and that's a very effective way for us to do some print advertising. In terms of an ROI on the expenditure, I think the best judge of that would be our comp sales performance versus our peers. And the fact that for those companies like I mentioned in our conference call that have a significant concentration in California, Arizona and Florida like we do and you look at their comp sales performances for the fourth quarter and the full year and you look at all ours. You have to attribute some of our favorable performance through the effectiveness of the extra media investment that we decided to make. Going forward we think 1% again is about the right number for us. The types of media to redeploy, the freestanding inserts and we do some e-commerce advertising and we also do some targeted local restaurant marketing in some trade areas that are significantly under pressure and when we've certainly talked about those in the Inland Empire and Arizona and so forth. We really structure our particular promotions and media buys to have very low breakeven hurdle rates. So that we're not trying to invest marketing dollars with say an inherent 5% or 10% incremental breakeven guest count hurdle rate. We set them much lower than that. So, we believe they're lower risk and they have generated a good return. And I would also say qualitatively that during a recession it is very, very important no matter who you are to communicate with your guests even more. And to make sure that you're at the top of their minds and to make sure that they are remembering you when it comes time to spend their hard earning in casual dining bucks. And I think that that has helped us to outperform our peers that are similarly situated to us.

[Greg Levin:]

The other thing on that Paul, I'm just going to add on the end is, a lot of our marketing last year was done in connection with new services. And you've got to get the word out that you have these new services. If we are having online ordering, you have got to market it out there that people know that they can order from BJ's online. If we're going to introduce lunch specials you've got to get it out there and that we have lunch specials. So, some of our marketing we start thinking about it from an ROI perspective was specifically targeted at the new initiatives that we have done to drive sales, and you will see that going into 2009 as we roll out these initiatives as well to drive, so that we want to get that word of mouth out there that we have these things in place and come to BJ's to try it. So that is another big portion of our marketing spend.

[Paul Westra:]

Great. Thanks.

[Jerry Deitchle:]

We'll take one more question. I know we've run a little over, but I'll be happy to take one more question.

[Operator:]

Our final question comes from the line of Conrad Lyon with Global Hunter Securities. Please go ahead.

[Conrad Lyon:]

Hi. Good afternoon. A quick question, more about California and the government that’s going on here, and marketing Solo Fridays and now threatening to layoff 20,000 people. Have you thought about trying to create a marketing program geared towards these folks, perhaps try to get a menu on a Friday or anything surrounding that?

[Jerry Deitchle:]

What we have thought about is trying to put a little more resource allocation of our media against the early week activities, the Monday through Thursday period, lunch and dinner, particularly here in some of the trade areas where you've seen some heavier unemployment. For the most part on Friday, Saturday, and Sundays, all of our restaurants are on wait. So really where we've really struggled for the most part and where most casual dining companies initially struggled during a recessionary period, has been in the early week, the Monday, Tuesday, Wednesday, Thursday, the lunch and the dinner. It's that extra occasion that in the past when times are a little bit better they might have come to you for, but now when times are a little tougher, they are only going to come on the weekend and sacrifice that early week occasion. So we are going to work a little bit harder, particularly in California on that Monday, Thursday lunch and dinner day part.

[Conrad Lyon:]

Okay, great. Thank you very much.

[Greg Levin:]

You are welcome.

[Jerry Deitchle:]

Thank you. That's all we have for today's call and thank you all for being on the call today.

[Operator:]

Ladies and gentlemen, this concludes the BJ Restaurant's fourth quarter 2008 fiscal results conference call. This conference will be available for replay after 4 o'clock Pacific Standard Time today till February 19th at midnight. You may access the replay system at anytime by dialing 303-590-3030 or 800-406-7325 and entering the access code of 396-9531. Thank you for your participation and you may now disconnect.