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Ever since crossing over $40 per share in the summer, the share price of BJ's Restaurants (NASDAQ: BJRI ) has been in a downward spiral. On Oct. 24, the beer and restaurant chain reported third-quarter earnings that disappointed the Street. What should be particularly concerning for investors are the additional clues in the earnings report and conference call that signal more trouble might be brewing.
BJ's Restaurants reported revenue of $188.2 million, up 7.4%. Same-store sales dropped 2.2%. Net income was $3.6 million and earnings per share was $0.13, a huge drop over last year when net income and EPS were nearly twice as high. CEO Greg Trojan blamed the economy for the shortfall. He stated, "...the overall sales environment for the casual dining industry continues to be very challenging, and our comparable restaurant sales followed the negative industry trends through the summer months of our third quarter."
The first clue is that Trojan only had two positive things to say; he's pleased with the level of "cost management" and "great service to our guests." Great service to guests should be a given for a chain over 20 years old with over 140 restaurants in 15 states. Investors aren't at the edge of their seats wondering whether BJ's Restaurants is providing "great service." They want great numbers and profits, not great service. The restaurant graveyard is populated with "great service, poor execution" concepts.
The second clue that something isn't going right (aside from the disappointing numbers) was hinted at by Trojan. He described it as "certain capacity constraints, particularly in our restaurant kitchens." Say what? Smells like the menu got too big and the food is taking too long to come out due to the "constraints." The longer the food takes the less table turnover there will be.
The third clue is from the conference call. BJ's Restaurants confessed that it had raised prices by 2%. This means the 2.2% decrease in same-store sales was really a 4.2% decline if you back out menu inflation.
BJ's Restaurants didn't offer much hope going forward. Though its earnings press release talked about getting more efficient in the kitchen and adding new items to drive demand, its conference call told a different tale. CFO Gregory Levin stated, "...we expect the casual dining industry in general to remain challenging through at least the end of this year and most likely into early next year." In other words, expect more disappointing earnings results from BJ's Restaurants.
Another clue is a new prototype of restaurant to be built for $1 million less than the current design. Saving money sounds great over the life of a restaurant if it's doing well. However, $1 million isn't a lot of money and seems like a big risk to take if the old concept was already working. Don't fix what isn't broken, though perhaps the message here is that something is broken.
The last but far from least clue is about expansion. The earnings release stated BJ's Restaurants had 143 restaurants and looks forward to doubling this number of the next five years. Doubling would be 286 restaurants. What happened to the 425 restaurants it talked about in the prior earnings releases? Is this still on? It's impossible to know from this release.
In the previous release BJ's Restaurant stated, "With only 136 restaurants open to date in 15 states, and with estimated room for at least 425 BJ's restaurants domestically..." BJ's Restaurants didn't give a time frame for the 425 restaurant estimate, whereas the "doubling" had a five year target. However, it is troubling that the company went from talking about roughly 280 more restaurants to now only talking about a number half that size.
In BJ's Restaurants' defense, it isn't the only restaurant chain that reported a challenging environment. McDonald's (NYSE: MCD ) and Ruby Tuesday (NYSE: RT ) both blamed the economy for their woes. McDonald's saw an anemic 0.9% growth in same-store sales. Much of McDonald's little growth could be attributed to its reimaging efforts. It described the economy as "ongoing challenging environment."
Almost as if Ruby Tuesday and McDonald's share the same speech writer, Ruby Tuesday blamed its troubles on "challenging economic environment." Same-store sales at Ruby Tuesday plunged 11.4% at company-owned locations and 8.4% at franchisees.
Foolish final thoughts
While BJ's Restaurants is a far cry from a fast-food chain like McDonald's and much different from a chain like Ruby Tuesday, it does show that the economic pain in the food service industry is far-reaching. Going forward, pay close attention to same-store sales and growth plans for BJ's Restaurants, as well as a pickup in the economy. Until all three return to historically positive figures, order only the food and beer at BJ's Restaurants, and let others order the stock.
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