BJ's Restaurants, Inc.
Q1 2015 Earnings Call Transcript

Published: 25 Apr 2015

[Operator:]

Good day and welcome to the BJ's Restaurants Incorporated first quarter 2015 results conference call. Today's conference is being recorded. At this time, I would like to turn the conference over to Mr. Greg Trojan, President and Chief Executive Officer. Please go ahead, sir.

[Gregory Trojan:]

Thank you, operator. Good afternoon, everyone, and welcome to BJ's Restaurants fiscal 2015 first quarter investor conference call and webcast. I'm Greg Trojan, BJ's Chief Executive Officer. And joining me on the call today is Greg Levin, our Chief Financial Officer. We also have Greg Lynds, our Chief Development Officer; and Kevin Mayer, our Chief Marketing Officer on hand for Q&A. After the market closed today, we released our financial results for the first quarter of fiscal 2015, which ended on Tuesday, March 31, 2015. You can view the full text of our earnings release on our website at www.bjsrestaurants.com. Our agenda today will start with Rana Schirmer, our Director of SEC Reporting, providing our standard cautionary disclosure with respect to forward-looking statements. I will then provide an update on our business and current initiatives. And then Greg Levin, our Chief Financial Officer, will provide a recap of the quarter and some commentary regarding the remainder of fiscal 2015. After that, we'll open it up to questions. So Rana, please go ahead.

[Rana Schirmer:]

Thanks, Greg. Our comments on the conference call today will contain forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. Forward-looking statements involve known and unknown risks, uncertainties and other factors that may cause the actual results, performance or achievements of the company to be materially different from any future results, performance or achievements expressed or implied by forward-looking statements. Investors are cautioned that forward-looking statements are not guarantees of future performance, and that undue reliance should not be placed on such statements. Our forward-looking statements speak only as of today's date, April 23, 2015. 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.

[Gregory Trojan:]

Thanks, Rana. Our record Q1 results again demonstrate the progress we are making against our strategic plan in terms of driving topline sales, while continuing to improve our operating margins. Comp sales of 3.2% represented our best comp sales performance since Q2 of fiscal 2012, and were once again driven by a positive traffic gain of 1.5%, which outpace the industry by approximately 200 basis points. We also achieved the Q1 comparable restaurant sales and traffic growth, despite lapping the significant value menu introductions of last year, which were supported by higher than normal media spend. Lapping our value introductions of last year contributed to continued guest check growth, which approximated 1.7% for the quarter, building on the similar growth we saw in Q4 of 2014. In February, we introduced our thin crust Tavern-Cut Pizza category, which replaced our hand-tossed pizza line. The new Tavern-Cut Pizza is simpler and faster to prepare than the hand-tossed product it replaced, and is being very well received by our guests. We also introduced three new limited time-only flavors for our renowned deep dish pizza category, spicy Hawaiian chicken, cajun andouille sausage, and the prime veggie. These new products combined with marketing support, drilled a healthy increase in our pizza mix in the first quarter. This led to some guest check headwind, as we carried around 3% pure menu pricing in the quarter, while our average check was up about 1.7%, but it's consistent with our value strategy. We continue to improve the everyday affordability of BJ's, with as best we can tell average check growing at about two-thirds the pace of the casual dining industry. Besides the introduction and promotion of our new Tavern-Cut Pizza, our restaurant teams continue to do an excellent job, identifying efficiencies in almost every aspect of our operating model. Specifically, Project Q continues to refine our backup house kitchen processes, as we are able to improve overall labor by 70 basis points in the first quarter compared to last year. More recently, we began rolling out some additional changes to our kitchen processes that we believe will lower kitchen waste, and therefore help improve our theoretical variance and thus cost of sales. Effort from Project Q, but as important is our goal to reduce operating and occupancy costs. While Greg Levin will go into more detail, operating and occupancy costs as a percent of sales for the first quarter were 20.7% compared to 21.9% last year. This 120 basis point improvement is a result of cost containment initiatives and leverage from our 3.2% increase in comp restaurant sales. During the quarter we opened two new restaurants, Nanuet, New York and Slidell, Louisiana. And just last week we opened our third new restaurant this year in Albuquerque, New Mexico. While we continue to refine our new restaurant prototype, overall we're very pleased with the look, feel and performance of our new restaurants. As we've mentioned before, our new restaurants cost about $1 million less than the prior prototype, and we believe we'll generate an even better return on invested capital. In fact, one of the things we monitor is how quickly a restaurant achieves mature margins. We are seeing our new restaurants open with sales volumes on par with restaurants still using the prior prototype in those same regions. However, our new restaurants are achieving mature margins faster, as we were seeing less food waste and re-fires and improved labor productivity. And this is because of the smaller restaurant footprint and some is due to the work on the menu size and initiatives around Project Q. Our new prototype is truly a case of where spending less is delivering a better product, and the importance of this is significant, given we're only a little over a-third of our way to our stated potential for 425 domestic BJ's restaurants. Although, we still have opportunities to pursue, I am pleased that offering improved value and furthering our menu innovation seems to be contributing drivers to better topline momentum and traffic. Our ongoing complexity reduction work is more than offsetting the structural labor and other increases in our cost structure to improve margin performance. And our new unit pipeline is in excellent shape, as we are on track to successfully launch 15 new BJ's this year. The majority of which further diversify our base outside our California and Texas markets, and leverage our newer hubs in Florida and the Mid-Atlantic, while costing us on average $1 million less than our prior prototype. Greg Levin will provide more detailed insight into our thoughts on the remainder of the year, but I will conclude my remarks with a few high-level thoughts regarding 2015. First, we are pleased with our strong start of the year. I believe the combination of our ability to grow average check, coming off our price investments of a year ago, and our ongoing progress in driving efficiencies will allow us to continue to make progress on our quest to improve restaurant level margins, as we move through 2015 and beyond. The question as always is, what kind of topline momentum will there be to drive those improvements? In line with the industry, sales came down from the very strong comps of the first five to six weeks of the year. We feel that January and early February mid-single digit comps were a function of favorable tax return timing, weather and to a lesser extent lower gas prices. More recently we saw some weather issues in March and the shift of Eastern and spring break in April, which together have made it difficult to discern a clear trend. Our early April comp sales are slightly positive, but we believe the calendar shifts regarding a good part of the slowdown, as our post-Easter flip-flop momentum has improved. In the second half of the current quarter, we will leverage our strength in the better-for-you items category, with new additions to our very popular lineup. We'll also continue our success in the burger category with some exciting new additions there as well. Also, besides having new and exciting items, our next national menu launch at the end of May will further consolidate the number of menu items down to approximately 136 items, on about a 150 items in the current menu and 184 items when we started this Project Q process. As a result, we are methodically pruning our menu to keep it current and fresh, while providing our guests with some strong new items to sample and enjoy, all the while making it possible for our kitchen teams to deliver more consistent fabulous food quality. As you can see, we're sticking to the plan we laid out and began implementing almost two years ago. We believe that focusing on fundamental value in terms of pricing, food quality and innovation, along with our efforts to aggressively manage our cost structure and drive further investment in new restaurant growth is serving us well, and will drive value gains for our shareholders. As such, given the continued choppiness of the retail sales environment, our focus on our efficiency and cost containment programs will continue to be a meaningful part of our earnings growth this year. Greg will now take you through more of the specifics regarding Q1, and talk a bit more about our 2015 outlook. Greg?

[Gregory Levin:]

Thanks, Greg. Revenues for the 2015 first quarter increased approximately 9.4% year-over-year to $225.1 million, while our net income and diluted net income per share increased to $9.6 million and $0.36, respectively, both of which are record first quarter levels. As reflected in our earnings per share outperformance in Q1 and as Greg Trojan noted, we continue to make solid progress on our initiatives to create a more efficient organization, while leveraging our industry-leading guest traffic levels, long-term expansion program and driving modest comp sales gains. Our efforts to create a more efficient organization also resulted in restaurant level margins of 18.9% compared to 17.1% last year, a 180 basis points increase over the prior year. In addition, our emphasis on improving return on invested capital resulted in continued leverage in G&A as well as in depreciation and amortization, leading to income from operations of $13.1 million or 5.8% of revenue compared to 2.8% last year. The 9.4% increase in first quarter revenues reflects an approximate 7.1% increase in total operating weeks and a 2.1% increase in our average weekly sales. Our comparable restaurant sales increased 3.2% during the quarter compared with a decrease of 2.9% in last year's first quarter. While we do not report monthly comparable restaurant sales, as Greg Trojan mentioned, our trends were similar to what we have seen reported by our peers, and what has been publicly reported by Knapp-Track and Black Box. That is January, came out of the gate very strong for us in the industry, before comparable restaurant sales slowed in February and March. Without getting into too much detail, I would say that all of January, February and March were all positive for us. The 3.2% increase in comparable restaurant sales for the first quarter reflects a 1.5% increase in traffic and a higher average check of approximately 1.7%. In the first quarter, as we mentioned, we had about 3% in menu pricing. However, our average check only increased by approximately 1.7%, and that's due to our investments both in the value in 2014, and as Greg Trojan mentioned, some of the menu mix shift toward pizza in the first quarter. Cost of sales of 25% was about 30 basis points to 50 basis points lower than our expectations, and reflect greater than expected benefit from our menu mix, combined with lower than anticipated commodity cost pressures. Labor during the first quarter was 35.4%, a reduction of 70 basis points from last year's first quarter. And this decrease is a result of improved hourly productivity, as Greg mentioned, and that's largely due to our Project Q initiative along with the leverage from our 3.2% increase in comparable restaurant sales. And that was slightly offset by higher benefit cost for hourly medical insurance from the Affordable Care Act. More importantly, this leverage occurred despite the increase in our home state's minimum wage increase in the back half of fiscal 2014. Our operating occupancy costs were 20.7% of sales for the first quarter, a decrease of a 120 basis points from last year. Included in operating occupancy cost is approximately $4.8 million of marketing spend, which equates to 2.1% of sales. By comparison, marketing spend in last year's first quarter was $5.2 million or 2.5% of sales. Excluding marketing, our weekly operating occupancy costs in the first quarter averaged approximately $20,500 per week and as compared to $20,900 per week for the same quarter last year. This decline of about 2% puts us in line with our averages over the last couple of quarters. More importantly, at our February 2014 Analyst Day, we laid out a plan to reduce operating occupancy costs, excluding marketing, by at least $1,000 a week. Our goal was to pick up about a 100 basis points in this line. To give you some context, we finished fiscal 2013 averaging $22,400 per week, again, that's excluding marketing; in fiscal 2014, we averaged about $20,800; and as I just mentioned, we finished Q1 of 2015, this first quarter, at $20,500. As such, our overall operating and occupancy cost have gone some 22.4% of sales, and that was in 2013, to 20.7% in the most recent quarter. And this is mostly for a combination of the cost savings initiative we have implemented, and more recently the leverage from positive comparable restaurant sales. Our G&A was $13.5 million for the first quarter, representing 6% of sales, and that was in line with our expectations. Our depreciation and amortization was approximately $14.4 million or 6.4% of sales, and averaged a little over $7,000 for restaurant week, which is in line with our most recent depreciation and amortization trends. More importantly, depreciation and amortization per restaurant operating week, up of $7,000, was down slightly compared with last year's first quarter, and highlights the progress against our goal to increase return on invested capital by working the numerator through margin expansion by more efficiently deploying capital. Pre-opening was $1.2 million, which primarily represents the cost for the two restaurants we opened during the quarter, plus opening cost for restaurants that are going to be opening here in the second and third quarters. Our tax rate was 27.1% for the quarter, slightly below our targeted rate of about 28% for the year, and that was due to some additional WOTC tax credits. In terms of capital allocation, we continue to use our strong cash flow from operations to execute on our national expansions plans by opportunistically repurchasing shares. Total capital expenditure for the first quarter was approximately $16 million, and we still anticipate our growth capital expenditures for fiscal 2015 to be approximately $100 million, and that's covering the construction of at least 15 new restaurants as well as maintenance CapEx and other sales building initiatives. Also included in the gross cost is approximately $2 million for the construction of our new Temple brewery brewpub locations, which by July 1 will be supplying all of our Texas locations with BJ's proprietary beer. We also continued our program of returning capital to shareholders, allocating approximately $6.8 million towards the purchase of 133,000 shares of our common stock in the first quarter. Since the authorization of our initial share repurchase program in April 2014, we have repurchased and retired approximately 3 million shares of BJ's stock for approximately $107 million. This leaves us with approximately $43 million remaining under our current authorized share repurchase plan. With regard to liquidity, we ended the first quarter with approximately $26 million of cash and $38.6 million of funded debt on our line of credit, which is in effect until September 2019. Our line of credit is for $150 million, and provides us the flexibility to continue our national expansion program, while returning capital to shareholders through our share repurchase plan. Now, before we open the call up to questions, let me spend a couple of minutes providing some commentary on our 2015 outlook. All of this commentary is subject to risks and uncertainties associated with forward-looking statements, as discussed in our filings with the SEC. As Greg Trojan mentioned, April started off a little soft. April is always the toughest month to get a read on the business due to shift of the Easter holiday and related spring breaks. In looking at our trends, we got a little boost the last week of March from an earlier spring break Ester holiday. And then as lapped 2014's mid-April spring break timeframe, we experienced softer comparable sales. Overall, as Greg Trojan mentioned, comp sales in Q2-to-date are slightly positive, and in the past few days we have seen sales normalize in the 1% to 2% range, as we move further away from the spring break and Easter calendar. We currently have approximately upper 2% of menu pricing in Q2, and now we expect about the same amount of pricing in Q3. However, based on the latest trends, we continue to see only about 1.5% of absolute guest check increase, based on the menu items guests are ordering. While overall we remain optimistic about the advantages we have created for ourselves through our operating, cost and management disciplines, we remain slightly guarded regarding the consumer, until we see clear evidence when clean comparisons that the consumer is back and that early-April softness is really timing of the Easter and spring break holidays. Additionally, this year we will be lapping the World Cup Soccer Tournament, and while we are not a sports bar that relies on the external sporting calendar for our business, our restaurants with their large televisions in bar area do provide great sports viewing for our guests. In fact, last year, our guest traffic was positive, as we had a very successful graduation and Father's Day season along with the benefit from the World Cup. Therefore, from a modeling perspective, I would continue to suggest conservatism in building sales forecasts. While this week is looking better, and I believe more normalized as we get further from Easter and spring break, it is still somewhat early to discern a distinct trend in comparable restaurant sales. Moving past comps for the second quarter, I would expect approximately 2,075 restaurants operating weeks that's going to be marking an approximate 6.5% increase from the 1,948 operating weeks in last year's Q2. While our long-term increase in annual capacity target of 10% have not changed, as evidenced by the 15-new restaurants we plan to open this year, our annual increase in operating weeks this year will be slightly less due to less carryover weeks from the class of 2014 restaurants. I would expect our cost of sales to be around 25%. As of today, we have 60% of our commodities locked for the year, and we expect the overall commodity baskets will increase somewhat in 0.5% to 1% range. I would expect labor to be in the upper 34% range in the second quarter, as the benefits from Project Q help offset some of the cost related to the Affordable Care Act, California minimum wage and other employee-related cots. Additionally, Q2 is our seasonally our highest weekly sales average of the year. And therefore, with the high weekly sales average, we should be able to achieve greater leverage in labor this quarter as compared to the rest of the year. However, we will still have some work to achieve our overall goal of labor being in the upper 34% range on a full year basis, assuming reasonable comps. As such, we continue to work through our labor productivity initiatives, which we believe over time will help us achieve our target. We are targeting total occupancy and operating cost to be around 21% or so in the second quarter. And included in this total will be approximately 2.2% of marketing spend, which is consistent with the levels of marketing spend in the second quarter of fiscal 2014. Our G&A expense for the second quarter should be in $13.7 million to $14 million range, as we still expect total G&A for fiscal 2015 in absolute dollar terms to be approximately $55 million. Pre-opening cost should range in the $2.5 million to $2.7 million, and that's for the second quarter, and that's based on five restaurant openings, plus some pre-opening cost for the brewery brewpub locations in Texas. As we reviewed previously and as disclosed in our filings, changes to the Texas Alcoholic Beverage Commission laws have allowed us for the construction of these brewpub locations, which will allow us to more efficiently produce our beer for our Texas restaurants. These two small Texas brewpubs will begin producing all of our beer starting in the third quarter, and this should ultimately lead to lower beer cost, once we work through the opening expenses and get fully ramped up. As such, we are estimating about $300,000 in pre-opening related to these brewpubs in Q2 and Q3. I am expecting our tax rate in the second quarter to be in the 28% range, as I am expecting a little bit less WOTC tax credits this quarter than what we realized in Q1. As such, I am still expecting our full year tax rate to be around 28% for fiscal 2015. However, this does assumes that the WOTC credits for 2015 are reinstated. Currently, the WOTC credits right now that we are realizing are related to fiscal 2014. And we only recognize those WOTC credits as we apply upon conformation from the government. I anticipate our diluted shares outstanding will be around $27 million for the year, and again we still have $43 million available under our current share repurchase authorizations. Before, I open the call up for questions I do want to reiterate our accomplishments to date. For those that have followed BJ's, we laid out a three year plan at our Analyst Day in February 2014. That plan was predicated on three major initiatives

[Operator:]

[Operator Instructions] And we'll go first to Brian Bittner with Oppenheimer.

[Mike Tamas:]

This is Mike Tamas on for Brian. You guys talked about, I think last quarter, low to mid-18% of restaurant margins for the full year. I was just wondering is there was any sort of update to that? It just seems like with what happened in the first quarter and so far the guidance for the second quarter that that could prove conservative. So is there anything I'm missing there or can you just kind of walk us through those dynamics?

[Gregory Levin:]

Mike, I don't think there is any change in the way we're looking at our business. That continued to be predicated on comparable restaurant sales. I would tend to tell you that Q2, and for people that have honestly followed us, Q2 is ours strongest quarter. So I would expect our restaurant level margins in Q2 to reach into the 19% range just on all the things we worked in that regard. But as we go in to Q3 and Q4 not really knowing where topline sales are going to be, we're still taking the view that this year margins will still be in that kind of mid-to-upper 18% range with our three year target in the 19% range. Again, depending on where comp sales go that could come sooner or it could be right in line with our current estimate and current target.

[Mike Tamas:]

And just one more. It's sort of related regarding Project Q, other cost savings initiatives and your overall efficiency initiatives. What inning would you say that you're in with those? If you can just kind of update us there.

[Gregory Trojan:]

We don't think about it Mike as a start and stop. I think it's been important and impressive from our team is it's becoming a constant way of doing business. And look the cost pressures in a business like ours are not going as subside, right. There is going to be more labor pressure, more utility costs, and our anticipation and mindset is we've got to always be out there looking for ways to get better. And we have a major advantage, and that is we're still a young company, and we're building a lot of scale to take advantage to drive those costs down. So I hesitate to put an inning on it because we view it as an ongoing significant weapon that we need to have that we're going to still maintain or continue to maintain value and keep our pricing at a reasonable level.

[Operator:]

We'll move next to John Glass with Morgan Stanley.

[Courtney OBrien:]

It's Courtney on for John. Just a couple of questions about your comp trends. I think you had mentioned that they were positive in January, February, and March. But just curious on what the traffic trends were sequentially? And then also what your exit rate was in April for that?

[Gregory Levin:]

Yes, without getting into too much specifics there, traffic in March bumped a little bit negative. More so due to the first couple of weeks of March were, I don't have it, you have to look at it specifically, but I think that first couple of weeks of March without weather impacted us pretty hard. I mean, one that you have to think about with BJ's is to some degree we're dominated by two states, California and Texas. And that North Texas area in the Dallas and up into Oklahoma hit us pretty hard for about two weeks in regards to comp sales. I think as we came out of that we start seeing a little bit better traffic trends coming through, but really got hit hard for those two weeks in that standpoint. And frankly, as I said this on this call that you probably look at my transcripts in the past, Courtney, March and April with the way Easter flips around makes it really challenging, while a lot of schools continue to keep their spring breaks where they are, you see a lot of families take vacations that maybe had younger kids not in school based on when Easter falls. And so we got a little bit of benefit in the last week of March with Easter falling a little bit earlier this year, and that brought guest traffic back up. Not enough to make up for some of the weather hit in the middle of March. And then this April, getting into it, as I mentioned again a little bit of flip flop there as we've seen ourselves now get over April's last year or get over Easter last year, which are kind of I think around April 20 or April 19, we're starting to see more normalized trends in that 1% to 2% range. And as I mentioned on the call, if you think about kind of 1.5% effective average check, it kind of tells you that guest traffic is kind of flattish right now. And I would expect it to probably go up from there.

[Courtney OBrien:]

And then just on your new prototype. I think you'd mentioned that you're achieving mature restaurant margins faster. How much faster are you getting there? And where do you see the ultimate target margin for those stores relative to your larger prototype?

[Gregory Levin:]

Couple of things here on that one, Courtney. First of all, our first new restaurant in the prototype opened in August of last year. And we've always talked about the fact that restaurants achieve mature margins somewhere -- I shouldn't say, achieve mature margins, and I use this football term a lot, they moved the football down the field to about 20 yard line in the first six months and then it takes another six months, another full six months to get the football over the end zone. So it kind of takes a year class to really hit that type of mature margins that we'd like to see. So one is we don't have a restaurant that's been open for a full year. But I would tell you that generally we're seeing anywhere from 100 to 200 basis points improvement in the ramp up of our newer restaurants ahead of schedule. So maybe instead of that six months it takes to move the football down to the 20 yard line, they were seeing in three to four months and we just don't know where they're going to settle in internally, and it's something that we talked about from the very beginning. We expect those restaurants to achieve sales volumes consistent with prior restaurants. And frankly achieve margins consistent with prior restaurants. So we've always talked about a 20% restaurant level cash flow margin and that's still what our targets are.

[Operator:]

We'll move next to Jeffrey Bernstein with Barclays.

[Tracy Zionkowski:]

This is Tracy on for Jeff. My question was around the cost savings as well. Can you just kind of talk about what those initiatives are going forward and maybe bucket your biggest opportunities that are coming up? And then is there any chance there might be upside to your 19% to 20% long-term guide just because of the brew hubs lowering some costs there, the Project Q initiatives and then, maybe, the smaller footprints of the new prototypes?

[Gregory Trojan:]

Let me start with a global answer, because we don't have enough time to go through the long list, and I guess our major point would be -- there's the old adage that the restaurant businesses in a nickel and dime kind of business, and that's really true. You know even if you look backwards on the cost initiatives that are resulted in the kind of efficiency gains, here is not one, two or three big ideas that are driving those. It's accumulation of amazing number of productive ideas. As we've said before, most of which are come from our restaurants not come from us here at our restaurants, not come from us here at our restaurant support center. And it's really more about the mindset then and rewarding and cultivating this culture than it is around, you're going to find a big idea around the corner. Having said that, I think the continuing bigger idea though is how do we get simpler and drive a better guest experience. And how do we eliminate unnecessary complexity particularly as it emanates from our menu and our kitchen operations, which we really think are the nerve center of our business. And so the biggest idea, if there is one big idea, is a focus around getting simpler even with our menu and recipes. And we think simpler recipes work better, are more consistent, and kind of it's sitting with the taste profile of our guest these days and all that's working together. But it's really around that complexity reduction.

[Gregory Levin:]

And then Tracy, your second question about margins a little bit there. The hesitation I always have on margins is we're spending this time on the call talking about Project Q and the comp initiatives. And why those are extremely important for us, is as Greg Trojan mentioned, they are part of our DNA going forward, ultimately margins come through based on comp sales. And depending on where comp sales are in the future and how those play out that's going to be the ultimate driver of getting your margins above, let's call, the 19% or above the 20% in that regard. So we don't know where those are going to be. I think the entire industry was slapping themselves on their back with January coming out, and maybe we were kind of one of the conservative companies going, hey, you know what, don't take January as a trend yet, we're getting tax rate refunds earlier and other things. And so I think there's always the ability to outperform the industry and drive more guest traffic, which we are doing at BJ's. And a positive 1.5% guest traffic that we just drove in Q1 is an amazing number there. And having that with menu mix going forward if that leads to some significant comp sales above 2%, 3% or 4%, I think you can see margins expand at a greater rate in certain of those quarters.

[Operator:]

We'll go to the next caller and that is Will Slabaugh with Stephen.

[Will Slabaugh:]

I had a question on menu mix. And sort of as you come off of this pizza promotion that you have now and then as you lap over the value introduction from last year, do you expect the mix to be more sort of a flattish number as you work through 2015 or how do you look at that internally?

[Gregory Levin:]

Will, we do actually. You know right now, we were getting all those specifics of our menu mix, but if you and I walking are through our restaurants together and we decide to share a pizza, that's probably going to be a lower average check if both you and I walk-in and each decided to have a sandwich or some type of entree. So I would think as we get a little bit further into June and we rollout our new menu, which is kind of coming out at the end of May, June time, plus some of the other items that we've got lined up for later this year that are menu mix ultimately will start to flatten out and you might see a little bit more expansion on the average check than where we are today.

[Will Slabaugh:]

And then on the other side of things for sales on the traffic side, just given the tougher compare that you're up against as the year progresses, are you expecting traffic growth to remain positive throughout the year in your guidance?

[Gregory Levin:]

Well, we don't give specific guidance on comp sales. I have always said, you know, shooting par for this course is holding on the guest traffic and getting your menu mix and menu pricing through. And that's generally how I think about our business going forward.

[Operator:]

And we'll move next to Sam Beres with Robert W. Baird.

[Sam Beres:]

In terms of cost of sales outlook came in obviously lower than expected in Q1 here on a couple of different factors impacting that. So maybe you could just talk about the benefits between menu mix to cost of sales and then also lower commodity cost pressures. Then as well what's kind of driving that inflation up 0.5% to 1% for the full year versus I think the prior outlook was about 1% to 1.5%.

[Gregory Levin:]

It's interesting, when we came out of the gate in January, we were seeing cost of sales pretty similar to what we saw in Q4. And that's why at the time we gave that guidance. In early February we rolled out the pizza, the new Tavern-Cut as well as limited time on the three Deep Dish offers and did a lot of promotion around it. And it helped move that pizza mix and really was significant to helping drive cost of sales down a little bit. We had to take a little bit of menu pricing out at that time, because we knew we're going to be rolling off of 1.6% of menu pricing from last year's February menu. And I think those two things combined brought us down a little bit. And then frankly, commodities came in right now a little bit flat to almost slightly down Q1. So that helped us often going forward a little bit. However, as they go into Q2, Q3 and Q4, and looking at kind of the 0.5% to 1% range, we're seeing poultry is going to be the big one for us. That's the one that is probably the highest cost increase, as well as meats, for us going into the rest of this year and kind of driving us up to the 0.5% to 1%. All three we've locked in for the full year, so I know it's pretty much a given. Meats, though about 70% of our meats are on the monthly or spot market. So that's going to play a little bit of wildcard. We're assuming that's going to continue to go up or stay elevated this year. We currently have about 50% of our commodities locked in. And when I think about our guidance as well for the rest of this year, we're assuming our menu mix is going to normalize a little bit going into Q2 and Q3. And now, that will give us both the benefit of, obviously, I think a little bit higher average ticket by mixing up positively, as I was just talking with Will. But it's probably going to have a little bit of an impact on cost of sales versus maybe where Q1 is where we're getting our benefit. And that's why I think comp sales overall would be right around that 25% range or so.

[Sam Beres:]

Maybe just one more. You are stepping up in terms of the unit development up to five openings here in Q2, or six openings in Q3. And in terms of inefficiencies with the new units, how does that impact your perspective on the ability to drive restaurant level margin, whether it's on labor or other operating?

[Gregory Levin:]

Sam, that's a great question and actually one that we haven't addressed previously. And I always think about it afterwards, so I'm glad you brought it up. Moving from 10 to 11 restaurants in the last year, up to 15 or so this year, we will have some of that inefficiencies in there. And as much as people keep coming back and saying, well, maybe you can get your margins up higher this year to 19% or 19.2% or 19.3%, there will be a little bit more of a drag this year versus last year because of the increase in new restaurants. I do think our new box and the way we've got lined up will continue to help us get our ramp up a little bit further ahead. But I think this year versus 2014, there will be a drag, because of the increase that we're doing. And then once we get back to a stable, let's call a 12% increase in operating weeks, you won't see that drag year-over-year, because you're bringing in just as many new operating weeks in the current year versus the existing years. I don't have in front me what I think that absolute drag is, but I do know that as part of our internal analysis, when we look at our margins going forward, that the amount of new restaurants coming on, they do come on at a lower margins. And so while the entire restaurant business or the entire existing restaurants could be running a 19.5% margin right now, those new restaurants coming on board could be running 14% in there first month. And that's going to bring us down a little bit. And we will see that this year, I think we can manage it, because I think if all the things around Project Q and the other cost initiatives, but it probably will hold back margins a tad this year versus maybe where people were expecting.

[Operator:]

We'll take the next question from Chris O'Cull with KeyBanc.

[Chris OCull:]

Greg, as a follow-up to the menu mix question how confident are you in the menu mix flattening out? Have you guys tested the better-for-you items and burger changes that are planned for this year, and know where the shift is going to come from?

[Gregory Trojan:]

I think, the yes is the answer. We've tested them, but how they performed nationally, when there are out of test conditions is, there is always a bit of a variation there, Chris. But no, we like how they behaved in test. I think Greg was more alluding to we're going to be heading towards less headwind on our guest check over overall. And whether we actually get the flat or not, we can't test early enough, we don't have enough restaurants and time and test predict that mathematically. So that's bit up in there air. But we should versus driving piece a mix start to see some increased momentum on the guest check side. And look we've seen it from where we were last year. We were basically flat for the year, right. So we've made a jump into positive guest check growth of about a 1.5. And it's our expectation we'll see continued improvement there. But any finer prediction then that would be tough to do it at this point.

[Chris OCull:]

If it comes from within the same category, would that be a flat to the check? I mean if you see some shifts from burgers within the category?

[Gregory Trojan:]

If it comes within the category and you're trading up to a more expensive burger it's still going to lift your overall check from that standpoint, I would think.

[Chris OCull:]

So these are going to be more expensive items within the category?

[Gregory Trojan:]

They're going to be across the board actually on different things we're doing. So whether we work on some new items in the brew house burgers or other burgers or the better-for-you, they'll be across the board. We're not necessarily coming back to let's put on a steak at X price and drive it from that standpoint. So we're working within our current categories.

[Chris OCull:]

And then, did you see much benefit in the first quarter from the reduced prep required when you replaced the hand-tossed with Tavern-Cut?

[Gregory Trojan:]

I don't know that one specifically. We've probably got more high fives from our team members in that regard. But I don't know if all of a sudden we're replacing hand-tossed with our Tavern-Cut resulted in 10 hours of less labor. I think it was more to the fact that we're getting a more consistent product that we think is a better product.

[Gregory Levin:]

Chris, it's difficult to ascertain how much would come from that versus our ongoing efforts in efficiency. And a fair amount of it is on the prep side of what we're doing. So we are seeing better prep overall, but it would be impossible to say how much of it's from Tavern-Cut versus hand-tossed, but it is helping.

[Chris OCull:]

And just in terms of the new prototype, you've talked about a $1 million in savings from the previous prototype. What is the average investment for this new prototype? And what is the target volume that you're looking for from these new units? And how many have you opened?

[Gregory Levin:]

The average cost that we've always talked about is about $4 million grows and we were averaging prior to that about $5 million gross. We still try to get a TI in all of our deals. And our TI is anywhere from $500,000 to $1 million. I think we tend to average when we think about target economics about receiving $500,000. So we're bringing our net investments down about $3.5 million versus what costs $4.5 million under the prior prototype in that regards. As far as the sales volumes go, there is really no change, and when I say that, and this is always the hard part, and we talk about this before, we were going to build a new restaurant in California, but the higher cost in California, we will set a target volume for that restaurant with the densities and what we see in California, it's probably be a 120% to 130% of our total overall averaging volumes. If we're going into Texas or Florida or a state that might have more tip credits, we might target the averaging of volumes to be 90% the totally company's averaging of volumes. We generally though always look for about a 20% restaurant level cash flow. That's how we kind of think about it. If you thought about it globally, it still somewhere is in the $5.5 million average in volumes, generating $1.1 million, 20% on $5.5 million, generating about $1.1 million in cash flow. That includes a full load of marketing in there. I know a lot of other restaurant companies put marketing down to G&A. So we're assuming 2% to 2.5% of marketing in that margin of 20%. And therefore, you get a $1.1 million into $3.5 million or so.

[Chris OCull:]

So you're expecting a 30% cash-on-cash return in years two or three?

[Gregory Levin:]

That's correct. Usually year two is where we kind of get to that.

[Operator:]

We'll go to Nick Setyan with Wedbush Securities.

[Nick Setyan:]

A quick question for, Greg Levin, real quick. Greg, I know that you kind of said you have some confidence that as the quarter progresses in Q2 here, we can get the flat traffic to turn positive. Can we maybe talk about some of the drivers there of what's going to get that to turn positive?

[Gregory Trojan:]

Well, just to remember, we had positive traffic for the quarter. So it's not a big shift. We've run recent positive traffic in the last two quarter. So it's just to make sure we're starting from the same starting point there.

[Gregory Levin:]

And then, I got a good point. We ran I think positive 0.7 in Q3 of last year, Q4 we were slightly negative 0.2, so really outperforming industry from that standpoint. We just put up a 1.5% in guest traffic. And if you think about the averaging of volumes that BJ's does, and frankly, at the end of the day, we believe we did most guest per square foot in casual dining. And again, we're doing a $14 average check on smaller box than some of our other peers in that regard. So through the things that we have accomplished over last year with regard to speed and the items in regards to menu innovation and so on, have allowed us to actually, what I would say, kind of come into now three quarters flattish-to-positive guest traffic in that regard. So when I start to think about going into April, May and June, and I do think June becomes a little bit more challenging maybe with World Cup and everything there, but I think we've got a good game plan in regards to the menu that comes out in the May timeframe. We've got some good things around marketing. We continue to learn a lot from our loyalty program. And frankly, with the things we made in regards to our menu around simplification, better products and so on, I think we're executing better, and guest as a result want to come to our restaurant. As you know, Nick, I am always very hesitant in regards to giving what I think comp sales are going to be for BJ's for the year, for the quarter and so on, because it is the most challenging thing. I think we have a better handle on where the cost structures of our business. But comp sales are one of those things that I always say this is where our trends are right now, and you guys can go ahead and kind of model accordingly. But I still kind of feel that way. But I do think the last couple days, as we get away from the Easter timeframe, seem to show that our trends that we saw in other months seem to be kind of coming back, and this is really some of that flip-flopping around Easter and spring break.

[Nick Setyan:]

So I mean from your perspective, I mean given the commentary on where you guys have comps and where kind of you've come from over last year and two and all the accomplishments. So it seems like you're fairly confident at least on the two year trends and so on, you can stabilize transaction trends going forward.

[Gregory Levin:]

I believe so. I do think we have always talked about the fact that we have outperformed the industry in regards to transaction and guest traffic in that regards. And I think that's where we continue to believe we are positioned. We got a concept that guest really like, and even during the days where we are seeing some comp sales that were negative from that standpoint, our guest traffic outperformed the industry from that standpoint. And that's how we tend to look at it. As much as I want to be positive and we talk about that again, shooting par for the course, is holding on to the guest that we currently have in our restaurants. And I think we've done that better than frankly just about any other casual dining concept out there, and that's ultimately our goal. And then if we can work everything in there by being faster and better, we can get trends to go in the right direction.

[Nick Setyan:]

And in the past we talked about sort of the honeymoon periods and the comparisons from the California locations. And also just kind of with respect to the gap between average weekly sales growth and comp growth, where are we with that? I mean it seems like we kind of improved sequentially with respect to that gap, Q4 to Q1. I mean is that kind of a trend line that should continue and it kind of just go away entirely towards end of this year?

[Gregory Levin:]

I think as we get further away from some of our newer California restaurants, we haven't built one in I think a-year-and-a-half or so, I would expect over time that the difference between comp sales and average weekly sales would close over time. The only caveat to that is we are going into some newer markets. And with the lack of awareness of the BJ's concept in some of these newer markets, we tend to open a little bit slower and then build over time. In fact, without getting caught up in too much specific, I would tell you that, I got to pull it out here, but our class of 2011 restaurants, which were negative a couple of years ago, when comp started going south, put up a solid comp sales in Q1, and they put up solid comp sales in Q4 of last year, so all of that starting to come back. Our class of 2012, as it's gone through its honeymoon has now put up three specific quarters of positive comp sales. So we always expect our newer restaurants, we're going to have a little bit of honeymoon, they go into a newer market, they're probably not going to open up at the highest volumes, but we expect them to drive comp sales as they get away from their honeymoon. So I still think that's consistent with BJ's. And always, as they go into new markets, depending on how many are there, they're probably going to open up a tad softer and that might drive a difference between comps and average weekly sales, but we're not worried about it. They are hitting our targets on an overall basis. There is always restaurants that do better. There is always restaurants that are little less, in that regards. But we feel pretty good about the new restaurants and what we're designing and what's the guest acceptance of them.

[Nick Setyan:]

Now, just last question. You kind of mentioned menu pricing in Q2 high 2% range. Going into Q3, Q4, what does menu pricing look like?

[Gregory Levin:]

Well, we talked about menu pricing in kind of that mid-upper 2% range. It will be that way in Q3 as well. So Q2 and Q3 will be very similar. Q4 we won't know until we kind of get through a little bit of Q3, and start thinking about that November menu timeframe. I believe we put about 1% of menu pricing on in November of last year, so if we don't replace that you get your menu pricing dropping down into kind of mid-upper 1s.

[Operator:]

And we'll now move to the last question, and it comes from Joshua Long with Piper Jaffray.

[Joshua Long:]

I was curious on the development pipeline for the year. It sounds like we're going to be little bit below that 10%-plus operating week target that we had talked about, which is in line with previous conversations. Just curious, as you get visibility into those 12 or 13 units that are under construction now, how should we think about those opening from a timing perspective over kind of 2Q and 3Q and 4Q, more closer to the beginning of the quarter, mid-quarter, late quarter? Just trying to get a sense from kind of an opening timeframe.

[Gregory Levin:]

From a quarter standpoint -- what we did in our press release today, we did line up how the restaurants will be opening. I think it was five, six and two, and you can go right to the release there. If I had to think about it from a quarterly perspective, I'm looking towards Greg Lynds, kind of pull up here.

[Gregory Lynds:]

June is pretty heavy. June is a little heavy, and then the third quarter is kind of evenly spaced.

[Gregory Levin:]

So did you get that, Josh? June will be a little bit heavier in regards to Q2 when we open most of our restaurants, and then more evenly spaced in September. And then our goal always is to get all of our new restaurants opened really before the kind of first week of November, so people can enjoy the holidays.

[Joshua Long:]

And then, kind of just a high level thought may be to round out the call. Any sort of updates you could provide on the loyalty program or some of your technology efforts and how those are being adopted, embraced and used by guests in the restaurant?

[Gregory Trojan:]

I'll answer that. The loyalty program continues to grow. I mean we're very, very pleased with what we're seeing momentum-wise there. And we still see very good responsiveness, when we reach out and use the data in that loyalty program. And we were getting more and more specific and targeted in those offers, but in terms of producing activity and driving traffic we're, like I said, quite pleased with what's happening there. We still see high levels of satisfaction and growth in our app in particular. It's still not at a place where it's frankly driving comp momentum at this point, but we love what the seeds that it's planting. We get very, very positive comments everyday from our direct, what we call, our direct connect feedback from our guests. So those that are adopting are very loyal and frequent. And frankly we like seeing others following in our footsteps and employing some similar technologies out there, because we think it will become more than norm in an expectation, particularly they're paying at the table and mobile pay, et cetera. And we have among others, but among the most to gain, as consumers adopt that kind of behavior because our restaurants are so busy. So increasing those table times and throughput with the help of our guest adopting these technologies faster will help us disproportionately. End of Q&A

[Gregory Levin:]

Bye, everyone.

[Operator:]

And that does conclude today's question-and-answer session, and also concludes today's presentation. We appreciate your participation. You may now disconnect.