BJ's Restaurants Downgraded

We have downgraded our recommendation on BJ's Restaurants Inc. (BJRI - Analyst Report) to Underperform from Neutral based on a host of factors. These include lower-than-expected revenue and earnings in the third quarter, decelerating growth in comps and margins, dearth of promotional activities compared with its larger peers, lower visibility for commodity cost outlook and macroeconomic uncertainties.

BJ’s Restaurants’ third-quarter 2012 adjusted earnings of 24 cents per share were 4 cents short of the Zacks Consensus Estimate and in line with the year-ago level. Although revenues grew 16% year over year, it missed the Zacks Consensus Estimate. Despite double-digit growth in the top line, the bottom line failed to match up to expectations due to higher costs.

The slowdown in the company’s same-store sales growth is a cause of concern. Margins too came under pressure in the reported quarter. In the third quarter of 2012, the company registered same-store sales growth of 2.3% compared with growth of 6.5% witnessed in the year-ago quarter and 4.4% in the prior quarter. Management believes that BJ’s Restaurants lacks a wider operational base and scale as well as advertising strength compared to its more capitalized mass market peers.

Though we believe that 2013 commodity costs will be higher year over year, BJ’s is yet to provide a clear inflation outlook for the next year as it is still in the process of negotiating the price of many key commodities. However, management anticipates the cost of agro-based commodity basket to increase around 4% in 2013.

The sales performance in the fourth quarter of 2012 will likely be lukewarm. High television viewership of the national political debates prior to the presidential election in November as well as the sudden spike in California gasoline prices at the beginning of October is likely to have subdued comps in October 2012. The impact of Superstorm Sandy will also mar the fourth quarter due to store closures for quite a few days.

Estimate Revisions

Over the last 30 days, all 19 analysts slashed fourth quarter earnings estimates for BJ's Restaurants. The Zacks Consensus Estimate also fell 8 cents to 27 cents over that period. BJ's Restaurants currently carries a Zacks #4 Rank, which translates into a short-term ‘Sell’ rating. One of its peers Yum! Brands Inc. (YUM - Analyst Report) currently holds a Zacks #3 Rank, which translates into a short-term ‘Hold’ rating.