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On Sep 28, Zacks Investment Research downgraded restaurant company BJ's Restaurants Inc. (BJRI - Analyst Report) to a Zacks Rank #5 (Strong Sell) on sluggish earnings and same-store sales performance in the recent times.

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. Comps growth has also been moderating. After registering just 0.4% growth in comps in the first quarter of 2013, comps were flat in the second quarter.

More than two-thirds of BJ’s Restaurants are located in areas, which were 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 for California to perform at par with the better-performing markets. Further, the region is facing greater competitive pressure as the gradual recovery of the economy has inspired several other operators to embark on expansion initiatives, thereby increasing competition for BJ's Restaurants.

While the cost of the commodity basket increased less than 1% year over year in the second quarter, management expects the same to grow in the low 2% range for the rest of 2013. Management also expects higher marketing spends for the remainder of 2013. A certain amount of inflationary pressure on workers compensation and higher FUTA taxes are also likely. These increased expenses will likely hurt bottom line.

The restaurant chain is 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.

Other Stocks to Consider

Other players in the restaurant industry, which look attractive at current levels, include CEC Entertainment Inc. , 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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