BJ's Restaurants (BJRI) owns and operates casual dining restaurants under three brand names: BJ’s Restaurant and Brewery, BJ’s Restaurant and Brewhouse, and BJ’s Pizza & Grill. With 147 restaurants in the U.S., the different brands serve a broad menu that goes from deep-dish pizzas, salads, sandwiches, soups, steaks and burgers, to pastas, entrees, desserts and its own hand-crafted beers. The diversity of their offering makes it appealing for customers, and combined with moderate price and good quality service, BJ’s Restaurants are regarded as a good option both for dining occasions and everyday lunch and dinner.
Most restaurateurs are facing the higher costs and expenses, and their earnings affected. A mixed performance is being delivered by BJ and despite the fact that earnings declined significantly from the year-ago quarter, revenues were up year over year. Guest traffic has reduced, and comps declined 2.7%. It seems the company’s management is striving to handle these pressures by adjusting prices through new marketing initiatives, but the results are still uncertain.
Well What’s on for BJ’s?
BJ's Restaurants (BJRI) was regarded as a promising stock for years and between 2004 and 2011, traded at an average forward P/E of 37 times. Operating income had an impressive increase of 41% during 2011, but fell 2% during 2012, and 4% during 2013. Management attributed these falls to different elements, such as the seasonality, intense price competition from mature casual dining chains, or pressure on comps from longer honeymoon periods.
In order to deal with this fall in earnings, the management has implemented loyalty programs, and created a Beer Master program, as well as tried out new marketing moves and discount coupons. These measures have yet to yield results, but the marketing spends have indeed increased and will affect BJ’s margins.
The restaurant industry is constantly testing firms with its intense competition, switching costs and customers’ preferences. Expansion is indeed a good way of increasing revenue, but the costs of new assets and capital spending is also something to take into account. BJ’s had, as of December 2013, 147 restaurants, but it seems the company is planning on opening 425 more restaurants in the U.S. This appears to be a pretty big expansion plan for BJ’s. Despite the adjustment of the restaurant prototype, which will be costing approximately $1.0 million less than the current one while maintaining productivity levels, the pre-opening expenses will play a significant role on the company’s balance sheet. Nevertheless, this will definitely allow the company to increase returns on invested capital, and while EPS in full year 2013 were down 24%, revenues grew 9.4%.
Is this expansion plan program the right move for BJ’s current standing? Well, given the comparable restaurant sales decline of 2.7% which reflects a 2.3% reduction in guest traffic, we might have to take a closer look into this expansion plan.
Watch the Market!
Exploring new markets always involves some risks. More than two-thirds of BJ’s Restaurants are located in recession-hit areas, severely beaten by the crisis, such as California, Arizona, Nevada, Colorado, Oregon and Washington. These markets are yet to return to their previous levels. In the meantime discretionary spending is being limited by higher sales tax as well as higher gasoline prices, compared to other markets in the U.S. In addition to these constraints, the increased competition QSRs are posing will be undermining the guest traffic.
We should not forget general macroeconomic pressures and switching supply costs have an impact on every company in the restaurant industry. Not only will aggregated commodity basket increase approximately in the range of 1.0% to 2.0% during 2014, but also the marketing costs are expected to have a negative effect on margins. BJ’s management will have to be prudent, making menu adjustments while striving to handle the pressure of higher costs.
Slow Moves, Uncertain Results
Comps are slowing down, and after a flat year-over-year comps in the second quarter, comps have declined 2.2% in the third quarter. Analysts say the lack of product innovation and absence of promotional offers are having a negative impact on same-store sales. Nevertheless, some improvement initiatives have been implemented, such as new kitchen equipment to improve capacity and speed, as well as some technological additions such as LED lights to reduce energy costs. The menu is being simplified and streamlined, dropping several menu items and adding promotional items like hand tossed pizza or low-price $6.95 burger. This new menu will debut at the beginning of March, so the results are yet to be seen.
Most analysts agree when saying the company is currently in a difficult position. The innovation and restructuring conducted might not be strong enough to overcome the recent setbacks, and the expansion plans seem to be over-the-top. We are still on hold to see how BJ’s performance turns out. For the meantime, this stock is looking bearish.
Disclosure: Damian Illia holds no position in any stocks mentioned.