BJ’s RESTAURANTS – (BJRI) – DOWN ONLY 10% FROM PRE-PANDEMIC LEVEL – WHAT TO DO?

We published an analysis on October 22nd, showing almost all the publicly held restaurant companies, comparing their current valuations to those before the pandemic. That chart is provided below, with prices updated to midday on 11/17. Based on the 2/15/20 (pre-pandemic) estimate of 2020 earnings, and today’s estimate of 2021 earnings, it appears that BJ’s Restaurants (BJRI) is substantially overvalued, which suggests that BJ’s is somehow in a much better fundamental position coming out of the pandemic than going in.

Let’s take a more complete fundamental look at BJRI. Back on February 15th, BJRI  was selling at about $41/share, with earnings expected in calendar 2020 in the area of $2.40/share. Trailing EPS, for calendar 2019, had been $2.20/share. This fairly mature, well managed billion dollar company, operating 209 large box casual dining units averaging over $5M of revenues annually, had experienced several years of relatively flat operating results. Comp sales had been as follows, flattening in calendar 2019, after a relatively strong 2018 that followed a weak 2017:

The table below, from Bloomberg LP, shows the historical  EPS trend, as well as the current 2021 consensus EPS estimate, obviously still restrained from working through the pandemic burden.

The operating earnings were actually down over the period, as shown in the following table, but stock buybacks ($460M since 2014) allowed for earnings per share to increase between 2016 and 2019.  The long term debt increased modestly during the period, from about $100M to $140M, allowing for modest unit expansion as well as shrinkage of the share count.

In the early years of its growth, from the 1990s  to 2006, BJRI was a spectacular winner, but the last ten years it has traded essentially in a range from $30 to $70, with a brief dip in March of this year to under $10/share.

The steady cash generation over the long term allowed BJRI to enter the pandemic in relatively strong financial shape, with trailing Adjusted EBITDA of $129M in calendar 2019, down slightly from $140M in 2018.  The historically consistent cash generation attracted, in Covid-19  panicked late April of this year,  Act III Holdings (controlled by Panera’s legendary CEO, Ron Shaich) and T.Rowe Price advised investors, who invested $70M, at $20/share. In addition to the 3.5M shares of common stock, the new investors received a warrant to purchase 875k shares at $27.00 per share and one directorship. It is worth noting that, at $20/share, the Enterprise Value was less than $600M, something like 5x the Adjusted EBITDA in 2018 and 2019, so Shaich’s interest was understandable, and courageous under the circumstances. This vote of presumably long term confidence by Shaich and company  has no doubt been instrumental in allowing BJRI stock to approximately double from 4/30 when the deal was announced. This price performance is much better than almost all other company operated casual dining operators have experienced.

The above background brings us to the current situation, and an evaluation of  today’s Enterprises Value in relationship to reasonable expectations of future performance. BJ’s has predictably suffered this year  from the same circumstances as other casual diners. Management has reacted, in their own fashion, similarly to companies such as Darden, Bloomin’ Brands, Chuy’s, Chili’s and others. Starting with at only about 10% of the historical $108k average weekly volume from off-premise sales, they have built outdoor patios, encouraged curbside pickup and delivery, slimmed down the menu to reduce labor, partitioned indoor dining areas, enhanced digital ordering  (now 80% of off-premise activity), introduced group meals (now 20% within the catering effort), and  most recently introduced a beer subscription service. The third quarter, with comps down 30.2%, a $12.7M loss from operations, an 8.3% store level Adjusted EBITDA margin (vs.13.5% YTY) and a $6.6M positive Adjusted Corporate EBITDA was a huge improvement from Q2 when comps were down 57.2%. (The details of the disastrous Q2 operating results are not important at this point.)

The most important thing now is the current level of average sales per store, the current margins and the possibility that further improvement is in the cards. Average sales per restaurant rebounded steadily through Q3, from $64k in July to $78k in September. Most importantly, according to management on the Q3 call, average sales in October were above $83k per week, but not expected to increase much in the remainder of Q4’20 or Q1’21. There are too many patios that will be affected by colder weather, social distancing that will limit revenues during the holidays, the national tendency to roll back Covid-19 easing,  and 62 out of 209 stores in California, perhaps the state most aggressively locking down again. Margins, management indicated, could improve by a couple of points to 10-11% of sales at the store level, with sales per store in the $80-85k area (still down almost 20% from pre-pandemic levels) but visibility beyond that is too difficult at this time.

BJRI common stock was trading before Covid-19 with an Enterprise Value of 10-11x the run rate of EBITDA, not especially high, but far from a bargain for a chain that could be considered fairly mature. The Enterprise Value today, with 22M shares outstanding, a $38 stock price, and $65M of long term debt net of cash,  is about $900M.  That  level is only about 7x the  $129M of calendar 2019 Adjusted EBITDA, but it is impossible to know when, or if, the Company can do that again. There are a host of management initiatives, but the degree and timing of success is uncertain. The price level at which Shaich and Co. entered this situation should work out well for them because this too (the Covid) will pass. (Parenthetically: Shaich and Co. are not locked in. A double’s not bad.) For new investors at the current level, the reward risk ratio over the next several years is not nearly as attractive.

Roger Lipton