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Restaurateur BJ’s Restaurants Inc.’s (BJRI - Analyst Report) third-quarter 2013 earnings of 13 cents per share missed the Zacks Consensus Estimate of 17 cents by 23.5% as well as the year-ago level by 45.8%. Lower-than-expected top line and margin shortfall led to the year-over-year decline in earnings.

Inside the Headline Numbers

Revenues in the reported quarter grew 7.4% year over year to $188.2 million, which lagged the Zacks Consensus Estimate of $195.0 million. While an 11% increase in operating weeks led to the year-over-year revenue growth, we believe lower comparable store sales resulted in the revenue miss. 

A 2.2% decline in comparable restaurant sales in the quarter compared unfavorably with an increase of 2.3% in the prior-year quarter. As per management, lack of product innovation dented comps and consequently sales. Operating margin was down 320 basis points (bps) year over year to 1.9%, reflecting a spike in the overall cost structure.

Store Update

The company opened 6 restaurants during the third quarter. At quarter-end, the company had 140 units in 15 states.

Out of the 6 restaurant openings planned for the fourth quarter, 3 are already operational. The company’s 2013 developmental pipeline consists of as many as 17 new restaurants. Management now expects to open 17 to 19 new restaurants in 2014. Two-thirds of these new restaurants will be developed under the new prototype, which will cost the company $1 million less than the current prototype.

Over the next five years, BJ’s Restaurants intends to double its presence. BJ’s believes that there is room for at least 425 restaurants in the U.S.

Outlook

Management is set to bring in a new menu beginning November and in the first quarter of 2014, which along with other initiatives will help in repositioning the brand.

Our Take

We remain cautious on BJ’s Restaurants owing to four successive quarters of bottom line decline. Comps and sales performance has been quite disappointing.

However, on a slightly positive note, the company remains on an expansion spree, which should provide it with greater scale and cost efficiency over the long term. Focus on smaller prototypes will likely generate better returns for the company ahead. BJ’s Restaurants currently retains a Zacks Rank #3 (Hold).

Companies from the restaurant sector that are worth a look include Bob Evans Farms, Inc.  (BOBE - Snapshot Report), Cracker Barrel Old Country Store, Inc. (CBRL - Snapshot Report) and Dunkin' Brands Group Inc. (DNKN - Snapshot Report), all carrying a Zacks Rank #2 (Buy).
 

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