BJRI Down to Underperform

On Mar 28, we downgraded our recommendation on BJ's Restaurants Inc. ( BJRI - Analyst Report ) from Neutral to Underperform based on sluggish same-store sales performance in the past few quarters and choppy sales environment expected ahead.

Why the Downgrade?

BJ’s Restaurants’ comps growth has been sluggish in the past few quarters. In both the third and fourth quarter of 2012, the company’s same-store sales growth of 2.3% and 3.0%, respectively slowed down from prior year level of 6.5% and 5.1%. Even in the first seven weeks of first quarter 2013, comparable restaurant sales were negative 0.5% in contrast to positive 4% for the same period last year.

With higher payroll taxes, delayed tax refund and increased gasoline prices, the sales environment is expected to remain choppy going forward as consumer spending is low. The chain is also suffering on the margins front. Management believes that BJ’s Restaurants lacks a wider operational trail and scale as well as advertising strength compared with its major mass market peers.

BJ's Restaurants also incurs the highest labor cost as a percentage of sales in the first quarter of each year primarily due to higher payroll taxes and benefits, which have an adverse impact on its margins.

Further, after expanding steadily in its existing markets in California and Texas, the company is considering other potential new markets for entry in 2013. We believe that penetration into new markets will involve some risk for BJ’s Restaurants. There will be an attendant headwind of higher pre-opening costs in these areas compared with matured trade areas, in which the company already has support infrastructure.

Other Stocks to Consider

Some other restaurant industry stocks with a favorable Zacks Rank include Red Robin Gourmet Burgers Inc. ( RRGB - Analyst Report ) , Burger King Worldwide Inc. ( BKW - Snapshot Report ) and Cracker Barrel Old Country Store Inc. ( CBRL - Snapshot Report ) While Red Robin holds a Zacks Rank #1 (Strong Buy), Burger King and Cracker Barrel carry a Zacks Rank #2 (Buy).