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COMPANY OVERVIEW Per: (2017 10-K; Oppenheimer 2017 Consumer Conference Slide Show)
As of February 26, 2018, BJ’s owned and operated 197 restaurants located in 26 states in from the West Coast across the South and up the East Coast. Each restaurant is operated under one of four banners: either as BJ’s Pizza and Grill, a BJ’s Grill, A BJ’s Restaurant and Brewery, or a BJ’s Restaurant and Brewhouse, the last of which represents the current primary expansion vehicle.
For the year ending January 2, 2018, the Company generated $1.031.8B in revenue from its restaurant sales.
Menu & Day-Parts:
Over the years, BJ’s has expanded the concept from its beginnings as a small pizzeria to a full service high energy Casual Dining concept with a broad menu that features BJ’s award-winning signature Deep Dish Pizza, proprietary Craft Beers, as well as freshly prepared appetizers, salads, soups, pastas and other entrees, sandwiches and desserts (including its trade marked Pizookies – ice cream topped confections baked and served in 6-inch ceramic quiche dishes). BJ’s strives to distinguish itself from competitors by constantly evolving its menu to keep it fresh, to address changing guest preferences, and to maintain its position as a “Casual Plus” concept.
In recent years, BJ’s has introduced a “Snacks and Small Bites” menu – lower calorie and healthy offerings. In 2016 it introduced over twenty new menu items ranging from Spicy Peanut Chicken with Soba Noodles to Grilled Cheese Sandwiches.
About 40% of BJ’s freshly brewed and non-pasteurized craft beers (25K barrels in 2017) are brewed in ten BJ restaurants equipped with on-premises breweries. The remaining 60% (36K barrels) is brewed by qualified independent third-party brewers. In addition, BJ’s offers 30 “guest” domestic and imported craft beers on tap as well as wine and spirits. BJ’s proprietary beers account for 8% of sales (with guest beers and additional 3%), while all alcoholic beverages constitute 21% of sales. Menu entrees range in price from $6.95 to $23.50, while the average check was a modest $14.50 in 2017, including alcohol.
The dinner daypart is the largest at 49% of sales, followed by lunch at 25%, while 26% of sales occur in the off-peak periods (14% 2:30pm-5pm and 12% 9pm-close).
The Company envisions the chain can grow to more than 425 units nationwide. All its units are leased and are in urban and suburban shopping, entertainment, lifestyle and retail strip centers. Given its relatively wide but thinly penetrated footprint, the Company seeks trade areas with the potential to cluster multiple units in “hub and spoke” patterns to accommodate the craft beers with their limited travel range. In 2017 the Company upgraded their development strategies to the “Interstate Cluster Strategy” (to focus on I-10, I-75 & I-95), no doubt to allow better market efficiencies and improve supply lines.
UNIT LEVEL ECONOMICS
The Company’s legacy units average about 8.5K square feet, seating about 267 at 71 tables. The units require a net cash investment of $4.5M (net of average tenant allowance of $0.5M). At maturity (3-5 years) they generate $5.5M-$6.5M on average and EBITDA’s of $1.0M – $1. 3M (or 19% – 20% margins) and cash on cash returns of 25% – 30%. It is rolling out a new, smaller 7,400 square foot prototype (Proto 7000), suitable for less dense markets outside its California origins. The new units seat 225 and have a more contemporary appearance, including a bar design featuring, among other design elements, an expansive, attractive and inviting beer tap array. The first new “Proto 7000” opened in North Olmsted, OH December 12, 2016. Additionally, BJ’s Restaurants has also developed an R&D test store “Proto 2010” that is approximately 6,000 interior square feet. Though definitive results are not yet in, the Company expects at maturity the productivity of the new prototype to be similar to legacy units (25-30% cash on cash return, AUV $4.5 – $5.0, EBITDA margin 20-21% and net cash investment $3.6M (net of tenant allowance of $0.4M). The proforma initial investment and cash returns for the new smaller and legacy prototypes do not include preopening expense of $0.4M to $0.5M, respectively. The Company slowed its growth trajectory in 2017, opening ten locations, down from the seventeen opened in 2016, and only 5-6 are planned in 2018.
The Company’s long-term vision is:
- To attain its 425+ unit potential at about a 10% annual pace, with low single digit comps driving the top line at a low double-digit rate.
- Aim for restaurant level margins of at least 20% and to leverage S&G expense. In other words, its future will not be much different than the past 5 years summarized in the Operating Metrics section below. As such, the Company’s strategy to build sales through traffic and check growth, improve the menu (higher quality, healthier, dietetic), introduce technology (mobile, online, POS), streamline operations (“Project Q” store efficiency tweaks), enhance marketing (social media, online, loyalty) and work on off-premise business (delivery is offered in 149 of the chain’s locations and grew delivery to 7% of sales. This is a collection of initiatives that add up to basic blocking and tackling.
- Quest to be the best all time Casual Dining concept ever. In order to achieve this part of BJ’s Vision 2017 needed to be a transformational year. The Company started the year with wide-spread changes intended to drive traffic and sales and distance itself from competitors and many of the disorders effecting the Casual Dining sector. BJ’s did not want to be like the crowd, not in menu offerings, not in customer experience, not in anything.
- A noteworthy aspect of the Company’s strategy is its approach to marketing. While it concedes brand awareness is low and larger competitors spend 4-5% of sales on marketing, BJ is apparently resolved to limit its marketing spend at about 2%, eschewing TV, choosing instead to rely on social media and internet marketing. They obviously feel that “word of mouth”, these days augmented by social marketing, is the most effective marketing medium.
DIVIDEND POLICY, STOCK REPURCHASES, BALANCE SHEET
Historically, BJ’s has not paid any dividends to our shareholders. However, on October 24, 2017, the Board of Directors authorized and declared a quarterly cash dividend of $0.11, which has since been sustained. This policy will obviously be reviewed the Board of Directors on a regular basis.
BJ’s, from April of 2014 until January 2, 2018, has cumulatively repurchased approximately $357.5 million shares, out of which $66.9M was bought in 2017. As of January 2, 2018, BJ’s had approximately $42.5 million available under the current plan, the remaining balance reduced to $37M at 3/31/18. BJ’s wants to maintain a flexible balance sheet to provide the financial resources necessary to manage the risks and uncertainties of conducting their business operations in a mature segment of the restaurant industry.
The balance sheet, with a debt to equity ratio of 63.2% that has risen due to the substantial stock buyback (which reduces the stated equity), could no doubt be leveraged further. However, BJ’s management has historically had minimal debt and seems intent on managing the balance sheet conservatively, as evidenced by reducing the unit growth rate. There have been no company offerings of stock since the IPO in 1996, to the long-term growth has been financed internally.
RECENT DEVELOPMENTS (Per Q1’18 EPS report and Conference Call)
The first quarter of calendar ’18 was encouraging, providing tangible results from the programs initiated over the last year or so. Comp sales were up 4.2%, including a traffic increase of 0.4%. Net income was sharply higher, even after adjusting for tax effects. The sales increase was assisted by sales of slow roast menu items, the use of handheld server tablets and continued emphasis on off-premise channels. The upgraded Premier Rewards Plus loyalty program was launched systemwide in February, with positive response. The 198th restaurant was opened in Warwick, RI, Hagerstown, MD and Albany, NY will open in Q2, and 2-3 more in H2’18.
Per the conference call on 4/26:
Management indicated that the positive trends in Q1 had continued into Q2. The early Easter holiday hurt Q1 by 30 bp but benefited the start of Q2. Off premises sales grew by 30% in Q1, amounting to 7.5% of sales in the quarter, up from 6.0% YTY. The new loyalty program had a double-digit increase in signups. Daily Brewhouse and Happy Hour Specials were helping, allowing for reduction of discounted pricing. The partnership with DoorDash (others are being used as well)O was promoted by offering mini-pizzas with delivery, as another example of the flexibility and differentiation of BJs product line. New openings in Michigan (Dec’17) and Warwick are indicated to be “exceeding expectations”.
Line by line expense analysis showed CGS down 30bp to 25.1%, Labor up 30 bp to 36.1%, Operating and Occupancy down 30 bp to 20.6% (including marketing at 1.9% of sales). G&A was down 10 bp to 5.4%. That leaves 18.2% store level EBITDA, better by 30 bp YTY. Below the store level EBITDA line, D&A was down 20 bp to 6.3%, preopening expense was down 30 bp to 0.2% (with fewer openings). After a 0.4% loss on asset disposal, income from operations (before interest and taxes) was up 15.9%, at 5.3% of sales, up from 5.0%. After minimal taxes this year and almost 10% fewer shares outstanding, EPS was sharply higher, at $0.70 vs. $0.42.
Guidance going forward included CGS in the low to mid 25s for ’18, labor around 36% for the year with Q2 in the upper 35% range. Operating and Occupancy will be around 21% in Q2, including $6M in marketing. G&A will be $15-15.5M in Q2, $61M for all of ’18. Preopening will be about $1M in Q2 (with two openings and the others to come in ’18). The tax rate will be 11-13% in Q2, consistent with expectations for the year. Shares outstanding will be about the same 21M as currently.
Management talked more about the growth coming from delivery, indicating that there is a bit of cannibalization and check degradation from takeout in total, not apparent from dine-in, and large party takeout is being emphasized as well.
Lastly, management discussed that the tone of business has seemed better, with add-on sales including appetizers and desserts, possibly helped by the handheld ordering tablets. Reference was also made that the stated “price increase” of 3.2% in Q1 might in fact be partly “higher check” due to menu mix rather than pure price, which would also imply that customers are getting a little bit looser with their spending. When questioned by analysts about expansion plans going forward, if business continues to be firm, management replied that the pace could pick up, but to high single digits, not double digit unit growth any time soon.
WITH EARNINGS EXPECTED TODAY, OUR LATEST RESEARCH WRITEUP ON BJ’S RESTAURANTS HAS BEEN SELECTED FOR RE-PUBLICATION AT SEEKING ALPHA, LINK BELOW: