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Restaurateur BJ’s Restaurants Inc.’s (BJRI - Analyst Report) second-quarter 2013 earnings of 31 cents per share missed the Zacks Consensus Estimate as well as the year-ago level by a penny. Soft top line and margin shortfall led to year-over-year decline in revenues.

Inside the Headline Numbers

Revenues in the reported quarter grew 10.0% year over year to $198.5 million, which lagged the Zacks Consensus Estimate of $203.0 million. While an 11% increase in operating weeks led to a year-over-year expansion in revenues, we believe, flat comparable store sales led to the revenue miss.  

The flat comparable restaurant sales in the quarter compared unfavorably with an increase of 4.4% in the prior-year quarter. Despite a 2% benefit from menu pricing and favorable mix in incident rate, comps suffered in the quarter due to a 3% decrease in guest traffic. Per management, a prolonged honeymoon effect at new stores remained an overhang on comps in the first three weeks of July.

California, the home court and the prime market of BJ’s Restaurants, continued to remain sluggish in the quarter due to higher sales tax and state income tax in the state. Further, many other locations also posed challenges in the reported quarter.

Operating margin was down 90 basis points (bps) year over year to 5.9%, reflecting a spike in the overall cost structure, partially compensated by a decline in cost of sales and flat labor expenses.

Store Update

The company opened 4 restaurants during the second quarter. At quarter-end, the company had 134 units in 15 states.

During the quarter, the company shifted one of its small format "Pizza and Grill" restaurants in Eugene, Ore. to a new site in Eugene, where it can house a larger-format "Brewhouse" restaurant. BJ’s plans to unveil 7 restaurants during the third quarter, two of which are already open. The company’s 2013 developmental pipeline consists of as many as 17 new restaurants.

Going into 2014 and 2015, management expects to achieve a low double-digit capacity expansion per year with restaurant operating weeks expected to be in the range of 11% to 13%. BJ’s believes that there is room for at least 425 restaurants in the U.S.

Our Take

Although BJ’s has been recording sales growth, continuous decline in the bottom line for three successive quarters owing to margin pressure keeps us cautious. Comps performance has been quite disappointing. Going forward, we believe, it might get difficult for management to weather a decline in guest traffic and underperformance at its home-turf California through cost savings.

However, on a positive note, the company remains on an expansion spree, which will provide it with greater scale and cost efficiency, going forward. BJ’s Restaurants currently retains a Zacks Rank #3 (Hold). Some restaurant companies that are worth a look at the current level are Red Robin Gourmet Burgers Inc. (RRGB - Analyst Report), Burger King Worldwide Inc. (BKW - Analyst Report) and Famous Dave's of America Inc. (DAVE - Snapshot Report) all of which carry a Zacks Rank #2 (Buy).
 

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