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BJ's Restaurants Rides on Unit Expansion, Costs Woes Linger

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BJ's Restaurants' (BJRI - Free Report) is focused on unit expansion, menu innovation and digitalization to drive growth. These efforts helped the company to report better-than-expected third-quarter earnings, after missing estimates in the preceding quarter. However, increased expenses remain a concern.

Let us delve deeper into factors that suggest that investors should hold on to the stock for the time being.

Catalysts Driving Growth

BJ’s Restaurants implemented several sales-building initiatives, which have contributed positively to the company’s performance over the last few quarters. BJ’s Restaurants’ extensive focus on refining and streamlining its menu is the key driver for improved traffic.

The restaurant developed a robust pipeline of new menu items, focusing on its EnLIGHTened menu category, featuring its new super food options. Moving ahead, the company plans to introduce new flavors and improve the quality of its menu items. Notably, BJ’s Restaurants’ higher-priced menu items continue to be popular and management believes that these items would boost guest check in the near term. In fact, the company expects to offset some of the labor pressure through prudent menu pricing and design.
In the third quarter of 2019, off-premise sales grew more than 20%. Further, BJ’s Restaurants expects this channel to grow at least 50% over the next several years. Also, the company anticipates to open its last two restaurants of fiscal 2019 in the fourth quarter. This will enable the company to achieve the goal of opening seven restaurants this fiscal year.

Meanwhile, BJ’s Restaurants — a Zacks Rank #3 (Hold) company — is investing heavily in technology-driven initiatives like digital ordering to boost sales. The company’s app and digital platforms are allowing it to offer promotions more effectively and efficiently.

Additionally, the company’s loyalty guest database continues to grow, with a steady increase in transactions. It has been witnessing double-digit increases in loyalty sign up and similar increases in reward redemptions. Other productivity improvement initiatives such as a centralized call center to capture more online orders are expected to boost the top line, going ahead. The company continues to drive awareness in key markets through greater and more targeted marketing.

Concerns

BJ’s Restaurants is continuously shouldering increased expenses, which have been detrimental to margins of late. Higher pre-opening costs, marketing expenses and costs related to sales-boosting initiatives are also weighing on the company’s margins. Particularly, slow roasting ovens and handheld tablets are adding to the restaurants’ costs. It is also facing high general and administrative expenses.

In third-quarter 2019, labor costs — as a percentage of sales — increased 80 basis points (bps) to 37.5%. Occupancy and operating costs (as a percentage of sales) were 23.3%, up 70 bps year over year.

The company’s shares have declined 20% so far this year against the industry’s 16.7% rally. This decline can be attributed to high costs and intense competition.

Key Picks

Some better-ranked stocks in the same space include Chuy's Holdings, Inc. (CHUY - Free Report) , Cracker Barrel Old Country Store, Inc. (CBRL - Free Report) and Dunkin' Brands Group, Inc. (DNKN - Free Report) . While Chuy’s and Cracker sport a Zacks Rank #1 (Strong Buy), Dunkin’ carries a Zacks Rank #2 (Buy). You can see the complete list of today’s Zacks #1 Rank stocks here.

Chuy, Cracker Barrel and Dunkin’ have an impressive long-term earnings growth rate of 17.5%, 10% and 9.8%, respectively.

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