BJ’s Restaurants Inc. (BJRI) operates and owns a chain of high-end casual dining restaurants in the U.S., specialized in signature deep-dish pizzas, salads, sandwiches and burgers, accompanied by its famous hand-crafted beers. It operates as BJ's Restaurant & Brewery, as well as BJ's Pizza & Grill brands, located all across the U.S., in California, Texas, Arizona, Oregon, Colorado, Nevada, Florida, Ohio, Oklahoma, Kentucky, Indiana, Louisiana and Washington.
Results for fourth quarter 2013 earnings and revenue were in line with the analysts’ estimations, although earnings declined significantly year over year because of increased costs and expenses. Moreover, Comps declined 2.7% versus an increase of 3.0% in the prior-year quarter. Still, revenue rose 8.1% to $199.8 million. Many restaurants have blamed the weather for shortfall and sluggish performance. However, this may be, management is struggling to handle the cost pressure through marketing and different initiatives, as well as adjusting prices and introducing new products.
Obstacles in the Near Future
BJ's had as of Dec. 31, 2013, 147 restaurants, opening during 2013 17 new units in the Mid-Atlantic region in Virginia and Maryland and planning to open more outlets in these underserved markets over the next several years. A new 7,400 square foot prototype has been developed, costing approximately $1.0 million less than the current prototype, and thus allowing the company to increase returns on invested capital.
Still, the macroeconomic environment has affected BJ’s restaurants; the Californian market has been reporting improved same-store sales just now, being under the weather for quite some time with higher sales tax and state income tax along with higher gasoline prices limiting discretionary spending. Margins are expected to suffer the impact of higher costs, given that during 2014 the company expects overall cost environment for food commodities to remain pressurized due to the domestic uncertainties and demand imbalance. Moreover, the rising commodity, labor and insurance costs, along with marketing and pre-opening costs are likely to increase the pressures on margins during the current year, and hurt the company’s profitability. Therefore, operational initiatives and price menu adjustments are needed in order to sustain benefits.
The company has been recently trying to expand its markets in California and Texas, and considering other potential new markets for entry. Indeed every new expansion is promising for these companies but always carries some risks. Infrastructure costs, pre-opening costs and marketing imply heavy spending for the company. Still, locating the company’s newer restaurants in existing mature and densely populated markets is likely create a positive scenario for the newer restaurants initially. Nevertheless, international presence is limited, and BJ faces strong competition in fast growing emerging markets from other restaurateurs such as Yum! Brands Inc. (YUM), McDonald’s Corp. (MCD) and Krispy Kreme Doughnuts Inc. (KKD).
Recently, BJ has announced its intention to expand through Arkansas, locating in the heart of Shackleford Crossing shopping center, a restaurant that can accommodate 280 guests and serves the popular BJ's menu. Indeed BJ’s Restaurants is one of the few that have been expanding amid a sluggishly recovering economy, and continues its plans to open 425 restaurants.
Looking to drive sales, BJ’s has been developing different initiatives like a guest loyalty program, catering program and focusing on supply chain management in order to increase earnings. New investments in kitchen equipment have been also made, seeking to improve capacity and speed, as well as a re-designed, more streamlined menu, which points towards increasing throughput from the current 70% capacity. Moreover, BJ plans to introduce a mobile "pay at the table" app that allows customers to use their smartphones or tablets to pay their bills. Customers will be able to pay and leave more quickly, increasing customer’s traffic as well as guests’ satisfaction. In this same line, the company has also been planning an option where you can order your food ahead of time using your mobile device.
The company currently carries a Zacks Rank #5 (Strong Sell), having reported rather disappointing fourth-quarter 2013 adjusted earnings of 6 cents per share, down 77.7% year over year. Still BJ has a robust expansion plan on track and is developing several initiatives to compete among this fierce industry. And with revenues growing 9.4% year over year to $775.1 million, guest traffic is stabilizing after the shortened holiday shopping season and the impact of a severe winter.
Analysts are thinking this stock is a strong sell, but results for the next quarter are yet to demonstrate where the company is headed to.
Disclosure: James Miller holds no position in any of the stocks mentioned.