BJ's Restaurants, Inc.
Q2 2015 Earnings Call Transcript

Published: 24 Jul 2015

[Operator:]

Please standby, we’re about to begin. Good day and welcome to the BJ's Restaurants Incorporated Second Quarter 2015 Earnings Release Conference Call. Today's conference is being recorded. At this time, I would like to turn the conference over to 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 second 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 on hand for Q&A. After the market close today, we released our financial results for the second quarter of fiscal 2015, which ended on Tuesday, June 30. 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, go ahead please.

[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, July 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 the forward-looking statements contained in the Company's filings with the Securities and Exchange Commission.

[Gregory Trojan:]

Thanks, Rana. Q2 of 2015 was the most profitable quarter in our company’s history. Our net income increased 55% versus last year to $12.4 million driven by operating income growth of 65% versus last year’s Q2. Restaurant level cash flow margins of 20.9% also set a new record and year-to-date; our net income has grown an impressive 74%. Our ability to generate record financial results based on a combination of modest comparable restaurant sales growth, margin improvements and the ongoing expansion of the concept highlights the opportunity to continue to grow earnings and cash flow well into the future. Comparable restaurant sales were positive 0.5% for the quarter marking the fourth consecutive quarter of positive comp restaurant sales and reflect an increase in average guest check offset by lower guest traffic of around 2%. Greg Levin will provide additional detail on comps for the quarter, but overall the quarter was somewhat impacted by calendar shifts such as Easter being earlier in the quarter compared to last year as well as the calendar for high profile sporting events. As most of you know, although our restaurants appeal is far broader than ahead of sports bar, we are a great place for fans to meet and watch their favorite sporting event and as such are sales and traffic can be influenced by shifts in the sporting world’s calendar. The Pacquiao and Mayweather fight on Saturday, May 2 along with the month long World Cup events in June of last year both impacted sales and traffic versus year ago. That said from a traffic perspective, we continue to outperform the industry as measured by both Knapp-Track and Black Box for April and May, but fell behind the industry in June as we lost last year’s World Cup benefit. The industry as a whole although still running negative traffic saw a marked improvement in June versus recent trends as World Cup hurt sales the year ago for many mainstream casual diners. We on the other hand benefited from World Cup driven traffic last year and as such saw a dip in our year-over-year traffic in the month. That said we have outpaced the industry and traffic as measured by both these industry tracking services in 10 out of the past 12 months. As we move past the World Cup dates, our early July sales results are tracking positive in the 1.5% range which we believe is reflective of where the business has been trending on a non-impacted basis. Taking a step back from the quarter, those of you who have followed our company over the past year or two are aware that our strategy has been to drive traffic by improving the overall value proposition of our menu by offering lower price point new menu items while improving our food quality and uniqueness, with some emphasis on the healthy better for you or what we call our enlighten category. These lower price points resulted in a trade down in guest check which roughly offset menu pricing we took in 2014. We have now lapped those significant investments in Guest check and are seeing a healthy rebound in our check as the majority of our pricing is sticking and we are now seeing positive trends in guest check mix based on encouraging customer responses to some of our latest new menu innovations and introductions. Of equal importance, we continue to make good progress on adding more unique [cravable] (ph) differentiated items to our menu. In June we added Salmon and Chicken Keema bowls to our menu along with Enlightened Fire Roasted Barbacoa Chicken and North Beach Mahi and Shrimp entrée. The result our residence of our enlightened category grew about 25% in the month of June and is at its highest level since its inception as over one of every three guest are now ordering an item in this Better For You category. The key to our success here is that our guest are ordering items because they taste with no compromise in flavor boldness and with the satisfaction of knowing they are eating healthier. At the same time we continue to balance our menu with new items on the more indulgent side. In July we introduced the summer soman of Loaded Burgers led by our top selling Hickory Brisket and Bacon Burger along with the limited time Peanut Butter & Jelly Pizookie. We continue to innovate, in this fall the intend to showcase some great new flavors in our appetizer category as well as some interesting and selectable new offerings in our pasta lineup. We have accomplished this menu innovation while at the same time significantly decreasing the overall number of menu offerings from a peak of about 184 items when we started this process to about 139 in our current menu. These results highlight continued success with our overall mission to reduce kitchen complexity and improve food quality through our Project Q initiative. With the results we are generating operationally and financially there is no doubt in my mind that BJ’s growth trajectory is both highly visible and achievable as the fundamental health and appeal of our menu is in really great shape with more to come. And keep in mind our process changes primarily in the back of house in our kitchen along with our cost savings initiatives in the middle of the P&L are fuelling tremendous margin improvement despite some large inflationary pressure in wages particularly in California and the introduction of additional benefit cost emanating from the implementation of the Affordable Care Act. While comp results are important to our overall growth strategy, the larger opportunity for us continues to be new restaurant growth. This is very different than matured casual dining concept whose growth opportunities are behind them. We are now in the prime of our new restaurant opening season opening five new restaurants this quarter with nine more coming on over the remainder of the year. We are excited to have made our debuts in several great new markets including Pittsburgh in the McCandless community, Huntsville, Alabama and we opened next week in Nashville, Tennessee market in Murfreesboro. We continue to be very pleased with the returns from our new 7400 square foot prototype and have seen consistently better operating efficiency and food quality metrics from this new footprint. With our positive momentum on the development front, I am pleased to report that we are announcing today an increase in our total number of 2015 openings from 15 to 16. As you can see, the plan we laid out and began implementing almost two years ago was delivering strong results, growth for our shareholders and a sense of pride and accomplishment among our team members. We believe that focusing on fundamentals in terms of value for your money, food, quality, and innovation combined with our initiatives to aggressively manage our cost structure and driver further investment restaurant growth is serving us well. And will create new value for our shareholders. Our objective is to build the best brand and the best company in casual dining and I believe that if you review our stated strategies initiatives and results and visit and eat at our restaurants that we are making tremendous progress on this front, while establishing a tremendous platform for continued near and long-term growth. I’ll hand it over to Gregory Levin to take you through the quarter in some greater detail and review our outlook for the reminder of the year. So Greg?

[Gregory Levin:]

All right. Thanks, Greg. Revenues for the 2015 second quarter increased approximately 5.8% year-over-year to $232 million while net income and diluted net income per share increased to $12.4 million and $0.47 respectively. Both of which are record results for BJ’s and mark year-over-year gains of 55% and 68% respectably for these metrics. As reflected by our Q2 EPS outperformance and as Greg Trojan noted, we continue to make solid progress on our well defined strategic initiatives. Specifically we are succeeding and creating more efficient organization while leveraging our industry leading guest traffic levels. At the same time, we are executing on our long-term expansion program and driving comp sales gains. As a result, we ended the second quarter with four wall margins of 20.9% which are the strongest in the company’s history. Included in the restaurant level margins is 2.3% of marketing spend which many other companies include in G&A. Therefore excluding marketing spend our four fall restaurant level margins for Q2 were 23.2% which we believe are among the highest across the entire casual dining sector. Consistent with Q1 and a strategic plan for growth that we communicated over 18 months ago, our emphasis on improving return on invested capital resulted in continued leverage in G&A as well as in depreciation and amortization. Leading to 64.5% raise in income from operations to $17.6 million or 7.6% of revenue, an impressive increase compared to 4.9% last year. The increase in second quarter revenues reflects an approximate 6.5% increase in total operating weeks and a 0.8% decline in average weekly sales. Comparable restaurant sales rose 0.5% during the quarter and that’s compared with the decline of 1.7% in last year’s second quarter. As indicated on our first quarter conference call, sales started out slightly positive in early April and then improved into a more consistent pattern of positive 1% to 2%. This positive 1% to 2% pattern was pretty consistent for most of the quarter, though, as Greg noted we are negatively impacted by a few soft sales days related to the Pacquiao and Mayweather Saturday night fight during that first week of May, and then June, we lost the U.S. and Mexico Men’s World Cup soccer games which added some lift to last year’s Q2 sales. Excluding these nine specific impacted days related to those events, our second quarter comparable restaurant sales would have been plus 1%. So those nine days impacted our sales by about 50 basis points during the quarter. Furthermore, those nine days had an impact of reducing our second quarter guest counts by approximately 100 basis points as well. Q2 cost of sales of 24.6% was about 30 basis points lower than anticipated due to lower commodity cost continued benefit from our menu mix. In fact our commodity basket in the second quarter was down slightly year-over-year primarily due to lower cheese and sea food cost. Labor during the second quarter was 34% that’s a reduction of a 100 basis points from last year’s second quarter. The decrease is the result of improved hourly labor productivity largely due to our project Q initiatives along with leverage from our comparable restaurant sales increases as well as lowered workers compensation and some benefit cost. Operating and occupancy cost were 20.5% of sales for the second quarter that’s a decrease of 80 basis points from last year. Included in operating occupancy cost is approximately $5.3 million of marketing spend, which as I noted earlier in my review of restaurant operating margins, equates to 2.3% of sales. By comparison, marketing spend in last year's second quarter was $4.8 million or 2.2% of sales. Excluding marketing, our weekly operating and occupancy costs in the second quarter averaged approximately $20,500 compared to $21,500 for the same quarter last year. Over the last four quarters, our operating occupancy cost have averaged somewhere in the neighborhood of about $20,500 excluding these marketing costs. To put this in context at our February 2014 Analyst Day, we defined our strategies to reduce operating occupancy costs, excluding marketing, by $1,000 a week. Our goal is to pick up about 100 basis points in this line item. When we began this initiative, we had just finished fiscal 2013 averaging $22,400 per week, excluding marketing; in fiscal 2014, we averaged $20,800 and for the first six months of this year, we have averaged about $20,500 per week. As such, our overall operating and occupancy cost have gone from 22.4% of sales in fiscal 2013 to 20.6% for the first six months of this year through a combination of cost savings initiatives and leverage from positive comparable restaurant sales. Our G&A was $13.6 million in the second quarter, representing 5.9% of sales, and was a tad lighter than expectations and that is primarily due to lower than anticipated personnel expenses. Depreciation and amortization was approximately $14.5 million or 6.3% of sales, and averaged a little over $7,000 for restaurant week, which is in line with our most recent G&A trends. More importantly, depreciation and amortization per restaurant operating week, up of $7,000, was down slightly compared with last year's second quarter, and highlights our progress against our goal to increase return on invested capital by working the numerator through margin expansion while more efficiently deploying capital. Pre-opening was $2.1 million, which primarily represents cost for the five restaurants we opened during the quarter, plus opening cost for restaurants that are opening later this year. Our tax rate was about 28.8% for the quarter, slightly above our targeted rate of about 28.5% for the year, and that delta is really due to WOTC credits during the quarter. In terms of capital allocation, we continue to use our strong cash flow from operations to execute on our national expansions plans while opportunistically repurchasing shares. Total capital expenditure for the first six months of this year were approximately $40 million and we continue to budget growth capital expenditures for fiscal 2015 of approximately $100 million which now includes construction of 16 new restaurants this year as well as maintenance CapEx and other sales building initiatives. As we said before, also included is gross cost is approximately $2 million for the construction of our new Brewpub location in Temple, Texas which opened in late June and are now supplying all of our Texas locations with BJ's proprietary award winning handcrafted beer. We also continued our program of returning capital to shareholders, allocating approximately $40 million towards the purchase of 831,000 shares of our common stock in the second quarter. Since the authorization of our initial share repurchase program in April 2014, we have repurchased and retired approximately 3.8 million shares of BJ's stock for approximately $147 million. Based on our strong cash flow from operations, our EBITDA in fact is just north of $60 million in the first half of 2015 which puts us on track for fiscal 2015 EBITDA in the $120 million as a result our Board of Directors authorized an additional $50 million increase to our share repurchase plan. This leaves us with approximately $53 million remaining under our authorized share repurchase plan. With regard to liquidity, we ended the second quarter with approximately $25 million of cash and $75 million of funded debt on our line of credit, which is in effect till 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. Before we open the call up to questions, let me spend a couple of minutes providing some commentary on our outlook for the remainder of 2015. All of this commentary is subject to the risks and uncertainties associated with forward-looking statements, as discussed in our filings with the SEC. As Greg Trojan mentioned, July comp restaurant sales are pacing in the 1.5% range which is consistent with our normal trend outside of some of the larger macro events that we experienced in Q2 related to the Pacquiao, Mayweather fight and comping against last year’s Men’s World Cup schedule. We currently have in Q3 menu pricing in the mid 2% range and I would expect that same amount of pricing in Q4 as well. While overall we remain optimistic about the advantages we have created for BJ’s and our shareholders through our operating cost and management disciplines, we remain highly optimistic on comp growth until we see clear evidence that with clean comparisons at the consumer is truly back. However, as reflected by our record Q2 results for modest 0.5% comp we have built tremendous leverage in the BJ business model which really positions us for even stronger bottom line growth should we see sustainable upside in consumer spending. Additionally as we head into the second half of this year, we will be comping against positive guest traffic through both Q3 and Q4 and specifically in Q4, we will have some calendar shifts that will negatively impact comp sales. In Q4, however we move through the Saturday night and Christmas Eve and Christmas Day moved to a Thursday and Friday respectively. Both of these events may impact our comp sales in Q4 of 50 basis points or more. Therefore, from a modeling perspective, I would continue to leave toward conservatism in building top line forecasts. Moving past comps for the third quarter, I would expect approximately 2,165 restaurants operating weeks marking an approximate 10.5% increase from the 1,961 weeks in last year's Q3. Also we continue to move into new markets and I would expect us to continue to see a negative 100 to 150 basis point spread between our comp sales and AUVs. This has been pretty consistent over the last couple of years as most of our restaurants are being opened outside of California where we can have some of our largest and biggest sales restaurants. Moving onto the rest of the P&L I would expect us to incur some minor efficiency offsets related to continued restaurant growth. As I mentioned we will be increasing our restaurant weeks by over 10% for the second half of this year and this will put some pressure on margins. However, because of the progress we have made both in project queue and the new prototype we expect to dragging our business from our new restaurants should be significantly less than it might have been in couple of years back. As such I would expect our cost of sales to be in the upper 24% range in Q3 and as of today we have about 75% of our commodities locked for the second half of the year and we expect our overall commodity basket will increase less than 1% in this back half of the year, while we have made some tremendous progress in labor, I would expect labor to be around 35% in the third quarter as a result of seasonally lower weekly sales average and inefficiencies from the five restaurants we just opened in June and the six restaurants we expect to open in the third quarter. We didn’t expect labor to come down into the upper 34% range in the fourth quarter as our weekly sales averages increased allowing for better overall labor leverage. Well our overall progress in labor has been impressive we still have some work to achieve our goal of labor being the mid to upper 34% range on a full-year basis assuming reasonable comp sales. As such we continue to work through our labor productivity initiatives, which we believe over time will help us achieve this target. We are also targeting total operating occupancy cost to be in the low to mid 21% in the third quarter again this will be higher than the second quarter primarily due to seasonality with some utility rates and less leverage due to lower weekly sales averages compared to the second quarter and included in this total will be approximately 2.2% to 2.5% of marketing spend which is consistent with the levels of marketing spend last year. Our G&A expenses for the third quarter should be in the $14.2 million to $14.5 million range as we still expect total G&A for fiscal 2015 in absolute dollar terms to be around $55 million. I’m anticipating higher G&A primarily related to additional management and training as the majority of our new restaurant development is in newer markets and newer markets generally have higher recruiting and supervisory costs and then get leveraged over time as we add additional restaurants into those markets. Along with the higher management training cost, I would expect increased travel related to the increased number of new restaurants as well. Pre-opening cost to be in the range of $2.7 million to $3.2 million for the third quarter and that is based on six restaurant opening and as we noted in today’s press release we have increased our restaurant openings from 15 to 16 this year. Therefore for those of you building your models, please remember to add approximately $450,000 or so of additional preopening in Q4 as we now expect three restaurants to be opened in the fourth quarter as opposed to two. I’m expecting our tax rates in the third quarter to be in the 29% range as I’m currently expecting our full-year effective tax rate to be in the mid-28% range for fiscal 2015. This assumed for WOTC credits for 2015 or not reinstated, I know there has been a lot of debt on that right now but currently they are not reinstated so I mentioned in our first quarter call, the WOTC credits that are realizing right now are related to fiscal 2014. And absent the WOTC credits going forward I would anticipate an increase in our tax rate of about 100 basis points. As the waiting of recent repurchases begins to be reflected, I anticipate our diluted shares outstanding will be around $26.5 million or so for the year, which compares to just $29 million when we embarked in our share repurchase program and again we still have $53 million available under our current share repurchase authorization. Before I open the call up to questions, I want to reiterate our recent accomplishments which we believe position us well for continued growth. For those that follow BJ’s we shared our three year plan at our February 2014 Analyst Day which we predicated on three major initiatives

[Operator:]

Thank you. [Operator Instructions] And we’ll go first to Jeff Farmer with Wells Fargo.

[Jeffrey D. Farmer:]

Thanks and good afternoon. You did touch on Greg but over the trailing four quarters, it looks like you reduced labor cost as a percent of sales like something close to 90 basis points. So really the question is what’s the opportunity over the next four quarters essentially what anything - on the labor side in terms of reducing cost.

[Gregory Levin:]

Yes, Jeff, this is Greg Levin. We get to ask question lot about earnings not standpoint and I don’t know the exact answer for that. Obviously we are not in the first one, two or three innings or further along than that. We still have a couple other initiatives that we’re working through right now that I think can provide us some upside going forward. We don’t necessarily have a magic basis points that we’re going out; I think ultimately we think about our margins and keeping our margins into that 19% to 20% range. We ultimately got to get labor back down into that kind of mid-to-low 34% range. And you just kind of line that up with a 25% food cost in that 34% range labor and consistently in an operating occupancy cost, starting to be in that 21% overall. That starts to be very consistent into that kind of 19% to 20% range and that ultimately I think it’s a target that we’re going after and there is going to be pushes and falls. I’m sure one of the questions out there will be around minimum wage and like I think our peers out there will continue to look at what is going on from a macro standpoint and accordingly will adjust pricing efficiency and so on to handle that and even today we have locations that are in higher cost areas from a minimum wage standpoint and we have menus to take care of that and like our peers we will continue with more localized pricing and other things to offset that to continue work on labor from a right percent of sales perspective to make sure we are taking care of our guests.

[Jeffrey D. Farmer:]

That’s helpful and just one more. I mean you gave us a lot of color on same-store sales, you called out July, you pointed to the Halloween and Christmas calendar day shifts but you also mentioned this ultimately your comparisons are 300 basis points more challenging than the back half of 2015 than they were in the front half of 2015, so even with little bit of color that you gave us again on July and Halloween and Christmas notably how should we thinking about same-store sales trends on a two year basis as we move into the back half of the year?

[Gregory Trojan:]

Well it is always hard for us to predict where comparable restaurant sales go and I think we have always talked about the fact that shooting par in this course is more or less holding on the guest traffic and right now if you kind of do the math guest traffic is little bit on the negative side and getting to your pricing. And I think as we go into the back half of this year, we won’t have the menu mix drag on our business and I think that helps provide a little bit of cover for lack of better term in regards to generating some positive comp sales but I think some of this - going up against some of the higher numbers in regards to positive guest traffic from last year might make it more challenging to keep guest traffic right at flat maybe slightly down like we have seen right now which put comp sales probably in a lower position and maybe the mid two pricing that we have right now.

[Jeffrey D. Farmer:]

Okay. Thank you, Greg.

[Operator:]

We will go next to Matt DiFrisco with Guggenheim.

[Matthew J. DiFrisco:]

Thank you. Pricing, can you just be more specific and then I have a question just as far as the detail in that comp, you have given it historically. So I’m just curious on what you had for pricing and what was mixed in 2Q?

[Gregory Trojan:]

Pricing was somewhere around upper twos or so in Q2 overall right now it is right in the middle of the two things, right at 2.4, 2.5 that menu method you saw that came out in May I think held our point eight of food on there and 1.1 pricing from last year dropped off, so that is a net kind of 30, 20, 30 basis points there. So I think we went from kind of 2.7, 2.8 to 2.5-ish.

[Matthew J. DiFrisco:]

Okay.

[Gregory Trojan:]

The mix is pretty neutral in the quarter; we are seeing some early positive moves on mix earlier on with the newer menu items in July.

[Matthew J. DiFrisco:]

So then was I guess the rest was all traffic then was together was negative, 1.2 or so I’m sorry 2.2?

[Gregory Trojan:]

Yes somewhere it is in the negative two range and again we pull out just those nine specific days helped us a lot last year in that regard as we are rolling out our new menu and taking some I guess deflation from a pricing standpoint, you pull out those nine days and 100 basis points from that you get traffic negative 1.2 or so from the quarter standpoint.

[Matthew J. DiFrisco:]

And then you have obviously improved to get to one, you are still better than negative, you are probably between somewhere negative one and zero right now to get to about 1.5 is what is embedded in there?

[Gregory Trojan:]

Somewhere in that range yes.

[Matthew J. DiFrisco:]

And then is it correct to assume that from your comments that mix could mix turn positive with this menu in the second half of the year?

[Gregory Trojan:]

But mix can, I mean as we started to think about some of the items that we mentioned on the call appetizers coming on board with some other positive dishes, we are testing some of those things, your appetizers if we get more people buying appetizers obviously that increases your incident rate which if you put that as part of mix that would be beneficial for us, if they are training around on appetizers the new ones coming on aren’t necessarily higher priced appetizers but they are not designed to be lower priced appetizers, in general tend to be kind of medium price for us but not necessarily center of the plate signature entrees. So I don’t think ultimately appetizers are going to help us little better.

[Gregory Trojan:]

Yes burgers could help a little bit but I think ultimately where I am thinking about this is we shouldn’t have a drag from mix, let’s say mix should be neutral to positive.

[Matthew J. DiFrisco:]

Excellent, okay and then last question in the fourth quarter how should we think about pricing progressing into the fourth quarter and through into 2016, obviously you had a lot of peers talking - questioned also about this as far as the inflationary pressure certainly with California, some people are taking specific city based price increases, if you are sitting 2.4 in the third quarter, are we beginning at 2.4 are we going up or you just going to sort of with pricing and whatever rolls off in the fourth quarter is going to bring you down in the lower twos?

[Gregory Levin:]

We will have another menu, I will hit out in the fall, we haven’t made any final pricing decision. So we are not going to give you any specific numbers at this point. But we are going to look at where all the labor pressures are falling out and as Greg mentioned I think in his remarks we do have an opportunity and have started and we talked about in the past a little bit more regional pricing ability, we were fairly flat across our all of our markets in terms of pricing and we started differentiating our pricing based upon obvious demographics and most importantly our cost structure, so we plan to continue that, if that only makes sense to take pricing where we have more competitive pricing room and the cost structure dictates it. So it is ongoing work as we look at next year and where labor ends up really falling out is going to be a big influence on that.

[Gregory Trojan:]

The only other thing I would add to it is I think relative to our peers or some of our peers in the industry, our fundamental strong value proposition and are just absolute price points for casual, we think do we give us some room over the medium and long term to make the right pricing decisions hopefully with less impact than others. Right. So it could end up being no one is a fan of increased labor cost. So but on a relative basis it could end up benefiting us given where we are on the pricing curve relative to competition.

[Matthew J. DiFrisco:]

Excellent, well. I think we are all waiting to see what happens when you guys start getting back to mid single digit or even low single digit our same-store sales in the environment that you have already done the margin improvement. So congratulations on the margin turnaround.

[Gregory Trojan:]

Thank you.

[Gregory Lynds:]

Thank you.

[Operator:]

We will go next to Brian Bittner with Oppenheimer.

[Michael Tamas:]

Great, thanks. This is Mike Tamas on for Brian. Just a quick clarification on the question, did you say that you are targeting $120 million of EBITDA for this year?

[Gregory Trojan:]

I don’t know if I just really said that was the target but for the first six months of this year we are at $60 million of EBITDA. So if you just kind of doubled it you get to $120 million from that standpoint.

[Gregory Lynds:]

It is more of a run rate than it is here.

[Michael Tamas:]

Okay, okay. Got it thanks. And then the real question was sort of like on labor margins overall, I mean your per unit labor cost were down nearly 4% which is pretty impressive, was there anything sort of one timer in there, can we sort of expect those type of numbers going forward in the next couple of quarters?

[Gregory Trojan:]

Well Mike as I mentioned and I think this is important in the sense that the second quarter for us generally is our best margin quarter, BJ’s is a place that I guess lot of people coming for Father’s Day and Graduation you got Mothers Day in there, it is a very celebratory quarter so to speak and as a result our weekly sales average goes up into the $111,000, $112,000, $113,000 range we get some restaurants that do $160,000 actually even $200,000 sales weeks and you are going to leverage your business from that standpoint. So the 34% I think to some degree is going to be a low, it is going to be the high watermark for fiscal 2015. I do think as you look at our business quarter-over-quarter being comparing Q3 to Q3 of last year and Q4 2015 over Q4 of 2014 from last year, we will get some margin improvement assuming we can maintain relatively modest comps in the 1.5% range that we are seeing right now, I think we still have some opportunity for some improvements there. So there was anything that was specific in Q2 that drove down those labor percentage to 34% but I want to just make sure you are clear that 34% is based on the fact that our weekly sales average in Q2 is some of our highest weekly sales averages.

[Michael Tamas:]

Great, thanks very much guys.

[Operator:]

We will go next to Will Slabaugh with Stephens.

[William E. Slabaugh:]

Yes thanks guys. I wanted to ask what you saw geographically, we have heard a number of other companies mentioned whether in Texas et cetera which may have weighed on patio sales and sales and discounts in general, some curious if that or other factors impacted your sales along with those events that you mentioned.

[Gregory Trojan:]

I think results would be consistent with what you are hearing elsewhere, we think weather certainly a factor. Texas was softer, we’ve mentioned that before California is the both Northern and Southern California have been strong markets and continue to perform the best of all of our markets. Texas have been a bit soft and Florida has been softer relative to California as well which I think it’s more of a function of business, the newness in the markets in Florida and some of our relatively newer restaurants coming into the comp base which are restaurants typically come into the company, a little bit negative. That gives a little color on the dynamics of the major markets.

[Gregory Lynds:]

Just adding onto Greg’s comment there, as a copy with the growth that we have and the amount of new restaurants coming with comp base, we’ve talked about this before because we get a lot of questions in regards to new unit productivity. Our new restaurants come in at the comp base negative, and that’s a drag on us, it’s probably a drag of somewhere in the neighborhood of about 50 to 75 basis points first quarter. We started seeing this really as we moved outside of California, a few years back and it impacts us first when we talked about 2011, or 2013 and in the class of 2011 came in at a comp base negative and we to break that out, the class of 2011 has performed in a positive comp sales perspective from that stand point. The class of 2012 as I came into the comp based back at last year, it came in negative. It’s coping positive and now we’ve got all the 2013 restaurants coming in and those 2013 restaurants ultimately right now are about a 50 basis points drag in our comp sales. And while I don’t like to get so specific that we’re always looking for excuses, trying to carve things out. But if we start to look at our trend basis and we start to think about the nine days in the quarter. that were 50 basis points, got the class of 2013 fits in there worth about 50 basis points. Both comparing ourselves maybe to more mature restaurant companies I’d probably think of our comp sales being colder that 0.5% range which we’re seeing now even with kind of the drag from the class of 13 into July. And that’s going to be with us. As I mentioned, class of 2011 as they cycled through it and they get to about I would say 30 months out of their opening time frame. They come positive and we’re seeing over the class of 2012 and it was 2013 class matures, I expect them to turn over just start to come positive just as the other classes have done as well.

[Matthew J. DiFrisco:]

Got it. That’s helpful. And update if you could on the mobile app, you didn’t mention at this quarter and you’ve given some stat in the past, just curious if you had any numbers around, kind of customer acceptance, you guys have signed up for. And then also any benefits that you may be able to see or speak to at this point, just frequency check average, table turn improvements et cetera.

[Gregory Trojan:]

It’s been we continue to be a bullish on what the app is going to do and me and for the business, it’s still at a very low level. It’s been pretty consistent on a percent of sales basis, it’s still 5%, in terms of overall app usage, and by the way we were proponents of seeing other concepts of spread similar kind of app adoption, we love that StarBucks is doing an order ahead up because that’s such a new concept, if people aren’t used to ordering ahead and actually dining in or even carrying out with the app. So we look forward to more adoption there, because as we said before and we think we have more to gain from a capacity [indiscernible] perspective than most other concepts given the kind of volumes we’re going, right. So we are continuing to add features to the app and working on that and think it will go. But it’s had a lower acceptance rate than we’d like to see because we are just impatient about it. But we continue to get really positive feedback and the folks that are using it, use it quite often. It’s just spreading that word and getting people more comfortable with its use on the phone.

[Matthew J. DiFrisco:]

Got it. Thanks, Greg.

[Gregory Trojan:]

Welcome.

[Operator:]

We’ll go next to Nicole Miller with Piper Jaffray.

[Nicole Miller:]

Thanks, good afternoon. Alcohol sales, what are they as a percent of sales fees and maybe what kind of trends are you seeing in beer, wine and spirits and what is the real long term opportunity?

[Gregory Trojan:]

Alcohol for us has been very consistent since I have been with BJ’s somewhere is in that kind of 22% range of which about 15%, I think I want to say 15% or so that kind of beer the rest is wine and spirits from that standpoint. In regards to rates and things like that they have been I would say overall fairly consistent, we have seen wine grow a little bit, seen a little bit less at beer times, I think some of them may - strength of some of the beers out there now, we think about the industry ends up with the lot of craft beer that are in the 8, 9 alcohol by volume where 15 years ago beer based rate was 32 to 5% beer so to speak. So we tend to see a little bit less than that but nothing that is so significant when I look at our trends that anything has changed. So we will continue to work on that, I think there is opportunity for us to continue to build the BJ’s brand around the beer and now with the Texas brewery opening or Texas brewpub opening there will bring some opportunity down the line maybe with retail whether it is canning bottles et cetera because we may add some capacity for some of that but that is few years off and stuff that we talk about here that I think is an opportunity for the brand but it is not necessarily in our plans in the next 12 to 24 months per se that would make a significant change in our business.

[Nicole Miller:]

Thank you and can we just also please get an update about off premise sales and where that is tracking and how you see the long term opportunity?

[Gregory Trojan:]

Off premise sales for us is somewhere is in the kind of 4% to 5% range fairly consistent it was in the 3%, 3.5% range and then about I would say maybe five years ago we put some emphasis behind it moves it up into the 4% or 5% range one of the areas that we think we got opportunity with off premise sales frankly is the mobile app, it is amazing we are able to place your order on the mobile app, pay on the mobile app and just tick it up and people that we see in our direct connect results that is kind of our daily surveys, I will do it this way, love the off premise side of our business in that regards, so we think there is opportunity to continue to increase that and in fact we are working on some catering and some other things that we are just kind of changing at the menu making little bit easier that we expect to have rolled out here towards the second half of 2015.

[Gregory Levin:]

I think I personally think given the amount of carry take out business the world of fast casuals doing is making it even more common place and is an opportunity for us in casual dining that and giving like Greg said the app and the variety of menu food on our menu were a great option for family and large group seating, so I am actually pretty bullish about the opportunity for that aspect of our business to grow.

[Nicole Miller:]

Thank you very much.

[Operator:]

We will go next to Sam Beres with Robert W. Baird.

[Sam Beres:]

Hi good afternoon. Thanks for taking the question. First Greg Levin in terms of the restaurant level margin for this year, I think you previously mentioned kind of thinking of a mid to high 18% range assuming a specific level of comps, so just wondering if you could provide a little more perspective on your head maybe in terms of where you think you will end up for the year there and kind of what level of comps you are assuming in the back half in terms of that perspective?

[Greg Levin:]

Well couple of things, one is we don’t really comment on comps that give kind of where we are seeing comps right now for menu pricing and some of the mixed terms that we talked about from that standpoint, I do think though that we kind of talked about getting this year into the 18 and next year being our bogey year to get back into the 19. I would expect Q3 and Q4 just restaurant level margins in general probably be back into the 18% ranges or so and that is more predicated on our weekly sales averages coming down. If you look historically our BJ’s Q3 and Q4 are two lowest weekly sales average quarters of the year and as a result margins come down a little bit but because we started this year pretty strong where we started with an 18.9 in Q1 and 20.9 in Q2 I would tend to think that generally speaking we will probably be close to that 19% range or better than it, when you aggregate the full-year fiscal 2015, however I think our goal is to be consistently over 19% each and every quarter and I am not sure where they were yet, that is why I think you will start to see some other operational improvements we have lined up going into next year.

[Sam Beres:]

That is a great perspective, thanks and you guys have been mentioned in terms of where you have seen test metrics trending lately just given continued menu innovation, some of the other drivers and offering such as the mobile app, so maybe you could talk about what you have seen lately in terms of guest metrics and early just your confidence in being able to continue to margin expansion without impacting any of the guest experience. Thanks.

[Gregory Trojan:]

I’m not sure Sam what you mean by guest metrics, you have given fair amount of details on comps and traffic side, we do track feedback from our guest through our loyalty program and we are looking at those every single day and it tracks the fundamental components of the guest experience in our restaurants including food quality and speed and cleanliness of the server et cetera, cleanliness so we continue to form very, very well we keep obviously a very, very close eye on those metrics because we want to make sure particularly as we are pursuing a more efficient restaurant operations that we are not doing that at the expense of the guest experience on quite the contrary we want to see that moving towards the improvement side of things. So we are very, very confident as I said that this is the new food and the improvements we have made in the menu are resonating by what we see selling on each of our restaurants and overall guest experience is improving as well.

[Sam Beres:]

Great that is what I was looking for, thank you.

[Gregory Trojan:]

Thank you.

[Operator:]

We will go next to Chris O'Cull with KeyBanc.

[Christopher O’Cull:]

Thanks good afternoon guys. Greg in the past you have talked about shifting marketing dollars, would you talk a little bit about how the spend is allocation I guess is marketing has changed and maybe what impact you are seeing from it?

[Gregory Trojan:]

We have continued to emphasize a in general shift away from traditional most notably and into digital and our loyalty marketing Chris, so lot of that is continues to be test and learn but I can say that we continue to be very pleased with kind of activity levels we are able to generate when we talk to folks in our loyalty program, so that has become an increasingly valuable weapon if you will both from a surprise and delay perspective and to get more targeted and promotional activity. So that is clearly becoming a bigger part of what we do and then we are emphasizing just general digital we are out there both socially but also through taking video content and using digital distribution to spread our brand as you know we don’t have the kind of density for TV to work consistently much outside certainly our California market, so we are pushing hard on both traditional SEO, traditional SEM side of digital but also some of the new channels in terms of video, video content in particular.

[Christopher O’Cull:]

Okay. And then can you talk a little bit about the opportunity to improve throughput in other than the app and capacity utilization during peak periods, I would think given the performance in California that would be one of your biggest opportunities to grow traffic is to just reduce the wait time period California in particular.

[Gregory Trojan:]

It is not just California by the way; I mean we run lot of ways in Texas and all of our markets. So in general it is one of the biggest opportunities that we have and…

[Christopher O’Cull:]

Outside of the app, what are you doing to improve it?

[Gregory Trojan:]

We are continuing through Project Q and the work that we are doing on the kitchen side is looking at literally every recipe and sub recipe to see how we can attack that speed to the guest without sacrificing quality, so lot of Project Q, we do talk about the quality and efficiency side of it but speed, sped is part of it and I would say fairness we made more progress on fundamental quality in innovation and the efficiency side, we’ve but speed is part of that. And there is still lies an opportunity there, I give you an example have not cracked a code on but if we could take our deep dish pizza from two passes in the oven to one, it would be life changing, right? And so it’s things like that I mean, looking at our kitchen times for every one of these recopies and seeing how we can work on that. And then just the fundamental front of house getting better at the block and tackling of server deployment and making sure we’re turning tables as quickly we can always get better at that kind of and I mean we’re looking at all the signs of that deployment, and seeing if there are things that we can do even with technology to improve speed in the front of the house and that’s in the serve times.

[Christopher O’Cull:]

Pay at the table top tablets, I mean why isn’t that something that you guys are considering I mean the adoption rates are really high, when you have tablets at the table. Why not consider that as a way to speed up the meal duration period.

[Gregory Trojan:]

Well, what we’ve said before is we haven’t ruled it out, we haven’t pursued that aggressively or just haven’t pursued it because of the concerns around first of space on the table top and we have actually have some brand concerns about it, right, but that said we are not saying never and we are looking at it closely the only other thing I would add there is we do believe we have great functionality in our app and eventually the market is going to go to tablet and phones, right. And so our concern there it is to be honestly is from a cost structure perspective as well as are we taking on technology that’s not going to be two or three from now or name your timeframe. The way these transactions are conducted, so we may be a little ahead of our time here but it may be worth being patients in return for not being committed to technology that’s going to be obsolete soon or rather than later. And look I’m not a forecaster, I’m not saying that’s the case but I’m telling how we’re thinking about the pros and cons.

[Christopher O’Cull:]

Thanks, guys.

[Operator:]

We’ll go next to Nick Setyan with Wedbush Securities.

[Nick Setyan:]

Hey, guys. Thanks for taking my question. If I’m not mistaken last year Q3 transactions were positive 70 basis points and given that kind of color you gave on the quarter kind of mix and average track and pricing break down. That kind of implies more or less a flat transaction on a three year basis, is that kind of a correct assumption.

[Gregory Trojan:]

Actually that’s pretty, that’s somewhat reasonable half.

[Nick Setyan:]

I mean the guy has always been to cash which stabilize the business I guess on a two year basis and I mean are we kind of there yet, already and kind of going forward I mean given some of these drivers there even with some of the mix shift on the calendar and so on. But on a two year basis, I mean is that kind of correct assumption are you guys are pretty much at least flat, you guys have already gotten the business there?

[Gregory Levin:]

I think there is a always opportunity for us to improve the business, Nick. But we do look at that three year guest traffic metric either instant of things and as well as comp sales topline and so on. And I think underlying some of those metrics on a two year basis, we are pretty consistent in that regards and what makes us feel good about those obviously we’ve been able to stabilize that but then we’ve been able to get some great leverage out of business based on everything that we put in place. That being said, we continue to work on one the branding and marketing of our business, strive more awareness because BJ’s what we have seen over the years is better awareness at BJ’sthose drive traffic or drives trial which ultimately drives traffic into our restaurants. We continue to work on menu mix and coming up with creative new menu items and I think it can get us may be above kind of the incentive rates and other things to drive comp sales maybe above where they are currently, but I do look at some of the things are you talking about there which we do look at that’s your assumption to analysis is not far off.

[Gregory Trojan:]

When does the other way that we look at it is like everyone we pay close attention to what the industry is doing, right. And we want to be leading the industry on traffic and that’s why we call out that we’ve done that 10 out or last 12 periods and June was one of the misses but we think more driven by the calendar and sporting events but aside there is just certain element of what is going on in the industry in macro economy that we control or can’t control, so we want to be taking share at the end of the day and so we do look at on a absolute basis obviously but that relative metric is important to us.

[Nick Setyan:]

Do you guys really talk about I mean it is great to see, I mean you guys are down mid single digits and then low single on to your base and now you are flat, I mean maybe you guys could talk about some specific example of some drivers where we currently see and I guess year-over-year accounts have shipped and so on but I mean are we kind of poised here in your opinion to get the three year transaction front positive even starting in Q4 maybe or early 2016?

[Gregory Trojan:]

We wish we had that crystal ball. I can say there's no one thing that we do to drive traffic, it is the combination of the fundamentals in the restaurant business are serve great food, we made really good progress and are very proud of what we have done from our menu perspective and the distinctness of those items, I think we are getting better in the data would suggest from a hospitality perspective, if marketing is better and important part of what we are doing and our teams are getting more experienced, it is like we are in a people business here and we continued to get better at helping them do their jobs better and executing our restaurants. So we wish we have the arithmetic formula that could tell you exactly what has been driving the improvement one versus the other because then we focus on that item even more but it is a combination of all that results in a guest experience that people say look I want to go back there and we continue to be think we are headed in the right direction on that front.

[Nick Setyan:]

Great, thank you.

[Operator:]

Ladies and gentlemen we have time for one last question; our final question will come from Paul Westra with Stifel.

[Paul Westra:]

Great thank you. Good afternoon. Just couple of clarifications and maybe one more question. On the menu management efforts as far as the quantity of menu items you said down to 139, recall I think your brand new stores opening with menu a little lower than 120 and then you have some legacy stores higher as it still got decent distribution there?

[Gregory Trojan:]

No thank you for asking that Paul and this latest menu go round we sort of equalized everyone, so we are managing a number of permutations of menu and we still do have quite a few permutations for other reasons but everyone is on just about essentially the same, the same menu now and we are looking at and working on the next test iteration to bring that down on a net basis we will add items like we have in the past, we will take out more than we added and test that before we roll that out nationally but thanks for that clarification. Just everyone is on that basically that same food and menu items on the food basis.

[Paul Westra:]

And the trajectory is still down I think from here but not suspect?

[Gregory Trojan:]

Yes look my perspective is we still have room but we got to be careful, I mean we are not going to build sales by taking items off our menu right, so the trick here is like I just mentioned we are going to add a few more and then take off slightly more than we are adding to get there, because there are fans out there of everything that is on menu right now, we hear that every day in our direct connect surveys and people are still asking for the [indiscernible] we took off before even joining BJ’s and so we are very conscious of that but I do think the optimal guest experience that we can provide there is still room that we can get that number down.

[Paul Westra:]

And then just a more follow up on pricing, it sounds like recent new initiative, you have been implementing little more sort of regional pricing safe to say just preparing perhaps to get much more reasonable pricing perhaps in the 16, you get the wide variety of the wage changes throughout the States needs.

[Gregory Trojan:]

Yes I think that is fair, look we can’t get the kind of again we don’t have a magic number there but conceptually we are not going to get to the kind of spreads we think are appropriate all that once because for obvious reasons I think right. So we are getting there a bit out of time and that will be with emphasized somewhat by what is happening in the differential and labor markets right.

[Paul Westra:]

Okay. And maybe last question on the labor market, your overall turnover [indiscernible] incremental pickup of wage rate inflation but is the turnover being impacted as well?

[Gregory Trojan:]

Yes so my summary there would be we have actually held a line on wage it is pretty well and this started in effort last year as we gotten more given our operators more guidance around what competitive wage rates are at the market level and that is something we have been working on that helped us offset some of the pressures where we have to increase wage rates. So year-to-date our wage rate number is has not grown much at all but we don’t expect that to continue frankly, I mean there is increasing wage pressure for all the reasons, you guys know and you have heard about the general economy plus, the number of restaurant openings out there put pressures particularly on the back of house right and so we don’t think that is a sustainable condition for sure, so and in terms of turnover we heard us talk about this consistently through the year as you followed BJ’s long time. We have maintained turnover rates at the manager level and at the hourly team member level that have been pretty significantly below the industry and from latest data that we see we continue to do that but we have seen an uptick in turnover at both levels and it is something we are obviously keeping a close watch on but look we review turnover at the manager level by person and it is a combination of it is certainly competition and new openings and new concepts that are out there on the scene but surprising number I think we surprised you guys how many people that are leaving the industry as more opportunities as the economy improves and people are just I want to try different in my career and I’m going to go and do something very, very different as probably I don’t know I’m same [indiscernible] but I don’t know it surprises if it is 40% or 50% of the turnover we are seeing.

[Paul Westra:]

Okay. It is helpful and then thanks.

[Gregory Levin:]

Thanks Paul.

[Gregory Trojan:]

Thanks Paul. All right. Operator we thank everyone for attending our call and we are on if anybody has got questions, feel free to call the office.

[Gregory Lynds:]

Thank you.

[Operator:]

And Ladies and gentlemen once again that does conclude today’s call. We do appreciate everyone’s participation.