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Higher Revs Drive Earnings Beat at BJ's Restaurants

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Restaurateur BJ’s Restaurants Inc.’s (BJRI - Free Report) first-quarter 2014 adjusted earnings of 20 cents per share were down 31.0% year over year due to higher cost and expenses. However, earnings beat the Zacks Consensus Estimate by 8 cents, which, in our view, was due to better-than-expected top line.

Behind the Headlines

Revenues in the reported quarter grew 9.1% year over year to $205.8 million, reflecting about 13% increase in total operating weeks, partially offset by a decline of about 3.3% in weekly sales average. Revenues beat the Zacks Consensus Estimate of $205.0 million by 0.4%.

Comparable restaurant sales declined 2.9% versus an increase of 0.4% in the prior-year quarter and a decline of 2.7% in the previous quarter. The significant decline reflects a 2.2% reduction in guest traffic which reflects a shortened holiday shopping season and the impact of a severe winter.

Restaurant level margin was 17.1%, up from 15.1% in the prior quarter. The company remains committed to its target of the restaurant level margin of 19.0%, primarily driven by the cost savings initiative focused on the non-strategic restaurant operating cost and support.

The company’s cost of sales was 24.9%, up 40 basis points (bps) year over year, primarily due to commodity cost increases and changes in menu mix. Labor expenses was 36.1%, which was up 110 bps year over year, a result of the deleveraging from lower sales on both hourly labor and fixed management wages.

Store Update

In the first quarter of 2014, BJ's opened two restaurants in Gainesville, VA and Little Rock, AR. The restaurateur plans to open three restaurants in the second quarter, of which one has already been opened in Katy, TX. Based on the timing of the 11 restaurant openings this year, the company expects total restaurant operating weeks will grow approximately 11% in 2014.

More importantly, several of the company’s openings in 2014 will be based on its new 7,400 square-foot prototype. This is expected to cost approximately $1.0 million less than the current prototype while maintaining the same level of productivity. This will allow it to increase returns on invested capital. The company currently anticipates opening at least 15 restaurants in fiscal 2015, all of which will feature the new prototype design.

Our Take

We are encouraged by BJ’s Restaurants’ aggressive expansion initiatives to drive comps growth. However, as the company continues to open stores in new markets, we expect increased pre-opening expenses. Though management strives to handle the cost pressure through marketing and operational initiatives as well as prudent menu price adjustments, there is still some uncertainty around it.

Further, higher taxes in California and the sluggishly recovering economy will limit discretionary spending. Additionally, we remain cautious about the high competition in the U.S.

BJ’s Restaurants currently has a Zacks Rank #3 (Hold). Some better-ranked stocks in the restaurant industry include The Wendy's Company (WEN), Burger King Worldwide, Inc. and Buffalo Wild Wings Inc. . While Wendy’s sports a Zacks Rank #1 (Strong Buy), Burger King and Buffalo Wild carry a Zacks Rank #2 (Buy).

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