Why BJ's Restaurants, Inc. Shareholders Are Hungry for Activists to Step In

BJ's Restaurants offers a variety of exclusive craft brews. Photo: BJ's Restaurants

It's fine to boast a restaurant concept with mouthwatering growth prospects, but BJ's Restaurants, (NASDAQ: BJRI  ) has found putting all the pieces together to deliver that growth is a tall order.

To be sure, shares of BJ's Restaurants jumped nearly 22% Thursday after the company announced three different activist investor firms intend to nominate a total of 10 representatives for election to its board of directors at the upcoming 2014 annual meeting.

First, as collective owners of roughly 12.4% of BJ's outstanding shares, PW Partners Atlas Fund II and Luxor Capital are teaming up to bring five candidates to the table. Separately, five more nominees will come from 0.48% owner Clinton Relational Opportunity Master Fund.

But BJ's remained resistant, insisting it "has always been committed to engagement with its shareholders, including regarding corporate governance matters. The Board remains highly focused on creating the optimal conditions to generate long-term value and will continue to take actions that support the interests of all shareholders."

Why now?
So why are activist investors descending on BJ's restaurants now? Or, perhaps, more importantly, why are shareholders rejoicing?

It seems the market has simply lost its appetite for the pizza-making brewpub reporting one disappointing quarter after another. In fact, it's hard to remember the last time BJ's actually gave shareholders reason to rejoice.

Two weeks ago, for example, shares fell more than 10% after BJ's reported an 8.1% year-over-year increase in fourth-quarter 2013 revenue, to $199.8 million. But the bulk of that growth came from 17 new restaurants opened in 2013, including six in Q4 alone. Unfortunately, BJ's comparable restaurant sales in all of 2013 fell 1.1%, capped by an even larger 2.7% decrease in the fourth quarter.

Meanwhile, its significantly larger beer-and-wings cousin, Buffalo Wild Wings  (NASDAQ: BWLD  ) , had just managed to grow revenue 12% year over year -- a performance driven not only by new restaurant openings, but also by B-Wild's respective 5.2% and 3.1% same-store sales increases at company-owned and franchised restaurants. Of course, Buffalo Wild Wings shares also plunged the following day as a result of its cautious forward outlook, but the stock has since rebounded nicely as investors take solace knowing diners are still coming back in droves.

BJ's still holds promise
However, that's not to say BJ's Restaurants is a broken business -- that is, after all, why activist investors think they can assert their influence to right BJ's wrongs.

Remember, BJ's not only puts its own delicious spin on a variety of classic foods like deep dish pizza, but also takes pride in offering thirsty patrons a slew of handcrafted, award-winning beers of its own creation on tap. Buffalo Wild Wings tried something similar last summer with its quasi-exclusive "Game Changer Ale," but even then it was only a single beer created with the help of Craft Brew Alliance subsidiary Redhook Brewery.

That didn't stop me from personally sampling Game Changer Ale -- several times -- at my local Buffalo Wild Wings, partly because it's just too much fun to for any beer-drinking, wing-eating, sports-loving consumer to avoid. But I also don't have a BJ's Restaurant nearby to try out, either; nearly three-quarters of its 147 locations are found in California (64), Texas (29), and Florida (15). In addition, remember BJ's wants nearly triple its domestic presence to 425 locations over the long-term, leaving years of growth ahead.

Traffic doesn't seem to be an enormous problem, either. As CEO Greg Trojan pointed out during the Q4 conference call, while foot traffic fell 2.3% in Q4 from last year, it continues to outperform the broader casual dining industry's declines. Still, there's admittedly room for improvement in product mix and pricing pressures, which effectively offset BJ's decent traffic trends with a 0.4% decrease in average check price. But this early in the game, I have no problem with the company toying with its pricing, menu, and restaurant efficiencies to figure out what works as they continue to grow.

In any case, whether it comes with the help of activist investors or not, I still think BJ's restaurants should be able to reward patient long-term investors from here.

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