Restaurateur BJ’s Restaurants Inc.’s (BJRI) second-quarter 2014 adjusted earnings of 30 cents per share were down 3.2% year over year due to higher cost and expenses. However, earnings beat the Zacks Consensus Estimate of 24 cents by 25.0%, which we believe was due to improvement in restaurant level margin.
Behind the Headlines
Revenues in the reported quarter grew 10.5% year over year to $219.3 million, reflecting about 13% increase in total operating weeks. However, revenues missed the Zacks Consensus Estimate of $220.0 million by a meager 0.5% possibly due to sluggish comps.
Comparable restaurant sales declined 1.7%, which compared favorably with the prior quarter decline of 2.9% but unfavorably with flat comps in the year-ago quarter. The sluggish comps reflect 70 basis points (bps) decline in average check and 100 basis points decline in traffic. However, these negatives were partially offset in the second half of June due to Father's Day and the football World Cup that helped in improving comps.
Restaurant level margin improved sequentially for the second consecutive quarter and was up 150 bps points sequentially to 18.6%. The company remains committed to its target of achieving restaurant level margin of 19.0%, primarily driven by the cost savings initiative focused on non-strategic restaurant operating cost and support.
The company’s cost of sales ratio was 25.1%, up 70 bps year over year, primarily due to commodity cost increases and unfavorable changes in menu mix. Labor expense was 25.0% of sales, up 80 bps year over year.
Store Update
In the second quarter of 2014, BJ's opened three restaurants in Katy, TX, Orlando, FL and Palm Beach, FL. The restaurateur plans to open another three restaurants in the third and fourth quarter each and achieve its target of 11 restaurant openings and 11.0% increase in operating weeks in 2014.
More importantly, several of the company’s openings in 2014 will be based on its new 7,400 square-foot prototype. This is expected to cost approximately $1.0 million less than the current prototype while maintaining the same level of productivity. This will hopefully allow it to increase returns on invested capital. The company currently anticipates at least 15 restaurant openings in fiscal 2015, all of which will feature the new prototype design.
Third Quarter Guidance
BJ’s Restaurants expects positive guest count to be offset by lower average check in the third quarter, thereby resulting in flat comps during the quarter. Management announced July comps so far have been flat to slightly positive.
BJ’s Restaurants expects cost of sales to be slightly lower than 25.0%. The company continues to expect commodity inflation in the third quarter. Though 75.0% of the commodities are hedged for 2014, the company indicated that a few commodities including ground beef, steaks and cheese that are not hedged are experiencing higher-than-anticipated inflation.
Moreover, the company expects restaurant level margins to decline sequentially in the third quarter as the second quarter had the benefit of Mother's Day, Father's Day and graduation celebrations.
Share Repurchase and Capital Expenditure Update for 2014
The company repurchased 0.3 million shares for $10.0 million in the reported quarter and has $40.0 million available under its current share repurchase authorization.
Excluding proceeds from tenant allowances and sale leaseback transactions of approximately $10 million, the company expects capital expenditure to be $90.0 million in 2014.
Our Take
Though BJ’s revenues marginally missed the Zacks Consensus Estimate, earnings comfortably surpassed the same. We are encouraged by BJ’s Restaurants’ aggressive expansion initiatives to drive comps growth. However, as the company continues to open stores in new markets, we expect increased pre-opening expenses. Though management strives to handle the cost pressure through marketing and operational initiatives as well as prudent menu price adjustments, there is still some uncertainty around it.
Further, higher pay roll taxes in California and the sluggishly recovering economy which would limit discretionary spending remains a headwind. Additionally, we remain cautious about the stiff competition in the U.S.
BJ’s Restaurants currently has a Zacks Rank #3 (Hold). Some better-ranked stocks in the restaurant industry include Chipotle Mexican Grill, Inc. (CMG), Domino's Pizza, Inc. (DPZ) and Noodles & Company (NDLS). While Chipotle Mexican Grill sports a Zacks Rank #1 (Strong Buy), Domino's Pizza and Noodles & Company carry a Zacks Rank #2 (Buy).
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