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On Aug 10, Zacks Investment Research downgraded restaurant company BJ's Restaurants Inc. (BJRI - Analyst Report) to a Zacks Rank #5 (Strong Sell) on lower-than-expected second-quarter 2013 earnings, underperformance in the core-Californian market and consistent slowdown in comps and margins.

Why the Downgrade?

BJ's Restaurants, which reported its second-quarter 2013 earnings on Jul 31, missed the Zacks Consensus Estimate on both counts (earnings and sales). Its adjusted earnings per share skid 3.2% hurt by flat comps and margin shortfall.

The company has been witnessing a slowdown in comps since the last two quarters mainly due to a prolonged honeymoon effect at new stores, which is cannibalizing sales at older stores in the market. After registering just 0.4% growth in comps in the first quarter of 2013, comps were flat in the second quarter.

During the first three weeks of July, comps were in the negative 1% to 2% range, indicating a clear downward trend in sales at established restaurants early in the third quarter. We believe that there is still some time before the honeymoon effect at new units comes to an end.

More than two-thirds of BJ’s Restaurants are located in areas, which had been hit hard by the recession. One such market is the company’s home court -- California. Although, the core California market has started reporting improved same-store sales, it will still take some time to perform at par with the other better-performing markets.

The restaurant chain is also facing a tough time on the margins front which is significantly hurting the bottom line. Management believes that BJ’s lacks a wider operational scale as well as advertising strength compared to its major mass market peers.

To boost sales, management invested heavily in marketing initiatives in the second quarter of 2013, which failed to trigger comps. Going forward, we believe, it might become difficult for management to weather a decline in guest traffic and underperformance at its home-turf California through cost savings.

Other Stocks to Consider

Other players in the restaurant industry, which look attractive at current levels, include The Wendy’s Co. (WEN - Analyst Report), Domino’s Pizza Inc. (DPZ - Analyst Report) and Burger King Worldwide Inc. (BKW - Analyst Report), all carrying a Zacks Rank #2 (Buy).
 

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