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BJ's Restaurants, Inc. (NASDAQ:BJRI)
Q4 2018 Earnings Conference Call
Feb. 21, 2019, 5:00 p.m. ET

Contents:

  • Prepared Remarks
  • Questions and Answers
  • Call Participants

Prepared Remarks:

Operator

Good day, everyone, and welcome to the BJ's Restaurants, Incorporated Fourth Quarter 2018 Earnings Release conference call. Today's conference call is being recorded. At this time, I would like to turn the conference over to Greg Trojan, Chief Executive Officer. Please go ahead, sir.

Greg Trojan -- Chief Executive Officer

Thank you, operator. Good afternoon, everyone, and welcome to BJ's Restaurants Fiscal 2018 fourth quarter investor conference call and webcast. I'm Greg Trojan, BJ's Chief Executive Officer, and joining me on the call today is Greg Levin, our President and Chief Financial Officer. We also have Greg Lynds, our Chief Development Officer, and Kevin Mayer, our Chief Marketing Officer on hand for Q&A.

After the market closed today, we released our financial results for the fourth quarter of Fiscal 2018 – which ended on Tuesday, January 1, 2019. You can view the full text of our earnings release on our website at www.bjsrestaurants.com. Our agenda today will start with Rana Schirmer, our Director of SEC Reporting, providing our standard cautionary disclosure with respect to forward-looking statements. I will then provide an update on our business and current initiatives, and then Greg Levin will provide a recap of the quarter, and some commentary regarding Fiscal 2019, then after that, we'll open it up to questions. So, Rana, go ahead, please.

Rana Schirmer -- Director of SEC/External Reporting

Thanks, Greg. Our comments on the conference call today will contain forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. Forward-looking statements involve known and unknown risks, uncertainties, and other factors that may cause the actual results, performance, or achievements of the company to be materially different from any future results, performance or achievements expressed or implied by forward-looking statements. Investors are cautioned that forward-looking statements are not guarantees of future performance, and that undue reliance should not be placed on such statements. Our forward-looking statements begin as of todays date: February 21, 2019. We undertake no obligation to publicly update or revise any forward-looking statements, or to make any other forward-looking statements, whether as a result of new information, future events, or otherwise, unless required to do so by the Securities clause. Investors are referred to the full discussion of risks and uncertainties associated with forward-looking statements contained in the company filings with the Securities and Exchange Commission.

Greg Trojan -- Chief Executive Officer

Thanks, Rana. Our continued sales, and market share gains in Q4 fueled solid margin growth, and strong overall financial performance, and capped an outstanding year for BJ's. Fourth quarter comparable restaurant sales rose 4.5%, and traffic was up 1.1%, topping off a year in which our overall comparable sales growth of 5.3% outpaced the industry -- as measured by Black Box -- by over 400 basis points. Combined with our five new restaurant openings during the year, revenue rose 8.3% in 2018. In addition, our comparable traffic increased 1.6% for the year, outpacing our competitors by approximately 270 basis points, and now we've achieved five consecutive quarters of positive traffic.

When reviewing these strong results, it's important to keep in mind that in 2018, we were lapping a year in which we also outperformed the industry in both sales and traffic. Although 2018 was clearly an outstanding year, it is worth reminding everyone that taking market share is not new news for our concept; in fact, over the past five years, we've outpaced the industry in traffic and sales -- on average -- by approximately 100 bps per year -- again, using Black Box as our industry metric. Furthermore, these gains don't even count for the incremental revenue of our new restaurant openings, as we have opened 59 new restaurants in the past five years, which we expect to contribute nearly $300 million in annual sales this coming year.

We believe our ability to drive share in good and challenging periods reflects favorably on our path to make BJ's the best casual dining concept, by focusing on food quality, value, service, and great guest experiences. The objective of our sales and traffic initiatives is to deliver profitable growth, and for 2018, we drove an approximate 70 basis point increase in restaurant level margins -- a 54% rise in net income per share, adjusted for the excess tax benefit in 2018, and the one-time benefits and expenses in 2017 -- and over 17% growth in adjusted EBITDA.

Our success is the result of applying a consistent strategy over the past several years, by focusing on a set of initiatives we have executed quarter-in and quarter-out. This strategy is predicated on five key elements we talk about every day. They start with providing better value for our guests, executing at a gold-standard level in our restaurants, driving awareness for our still-young brand through efficient marketing, and investing in keeping our concepts contemporary, and last, leveraging our brand, and menu variety across new off-premise sales channels. These fundamentals will continue to drive our business in 2019.

On the value front, we continue to see strong performance of our daily Brewhouse Specials, and happy hour offerings. We have not taken any pricing on these key value leaders, and in fact will be adding slow-roast pork and tri-tip sirloin items to our Brewhouse Specials this year. We will also continue to disproportionately protect our lower price point offerings, and utilize our broad menu to implement our nominal pricing, without sacrificing the fundamental value appeal that guests have come to expect from BJ's.

Our operations execution, as measured by our net promoter score metrics, continues to improve from already-strong levels. One of our priorities this year is to implement improvements to the physical organization of our kitchens, along with some back-of-house labor responsibilities – which we believe will lead to even better quality, speed, and enhanced team member satisfaction. As I've said before, fundamental execution at the restaurant level never gets the credit it deserves in the complicated algorithm of growing sales, but I can tell you it remains one of our top priorities.

Over the last couple of years, we've seen significant growth in key brand tracking measures, like awareness, top-box consideration, and attributes such as quality food for the price, and a place to gather with friends and family. We saw some of our largest gains in these categories in the back half of 2018. For 2019, our marketing team will look to capitalize on our sales and brand momentum by driving more new trials, strengthen our position in less-established markets, and continue to increase frequency of visit, and dollar spend of our core guest segments. We will continue to apply our media optimization strategies, and overlay with newer test-and-learn tactics, as we continue to improve our awareness building spend, especially in the video, digital targeting, and social channels.

Additionally, our successful 2018 relaunch of our loyalty program drove significant new member acquisition, and improved visit frequency. We now have hundreds of thousands of new BJ's fans to build engagement with, and to surprise and delight with personalized offers, and incentives through more sophisticated email segmentation. Keeping our concepts fresh and contemporary has always been one of the keys to our long-term success. Our on-trend menu items, contemporary facilities, and leading-edge technology have enabled us to continually raise the bar in casual dining.

We are excited about our 2019 new menu pipeline. We started the year by introducing zucchini noodles to our already tremendously successful Enlightened menu category, and they're doing great. Our new Moroccan chicken entrée is also providing more on-trend Mediterranean flavor to our Better for You offerings. In March, we'll be adding a tri-tip sirloin entrée to our successful slow roast lineup, as well as salad and sandwich offerings -- which will add even more delicious slow-roast quality and value to our everyday menu.

As we mentioned on our previous call, we've been busy adding more slow-roast oven capacity to our restaurants – both to accommodate these new products, and to keep up with the demand for our successful prime rib, pork chop, and fresh-roasted turkey items, which launched in mid-2017.

Although our menu is the most visible way we keep our concept fresh, we also continue to invest in our restaurants to keep them in like new, first class condition. We'll also utilize technology to improve the convenience and quality of our guest and team member experiences. We'll be testing several new technology applications this year around ordering, payment, and pickup and delivery. Lastly, even as we continue to lap the introduction of third-party deliver partnerships, we are seeing continued growth in the adoption of our delivery products, and growth in takeout sales, as well. Our overall off-premise sales for the quarter set an all-time high, as they represented about 9.5% of revenue, and -- in 2019, to date -- we're trending above that level. We remained underpenetrated, versus the industry, in off-premise, particularly in large party occasions, and – as such – we'll further improve our large party offerings and order technology in 2019 to take better advantage of this growing sales opportunity.

As we ably demonstrated in 2018, sustaining the momentum of the sales-building initiatives will be key to offsetting the ongoing labor pressures we expect to continue for the foreseeable future. As we mentioned on our last earnings call, check growth is somewhere between 2.5-3%, while maintaining current guest traffic levels should allow us the ability to manage our profit margins, given the current environment. We believe our continued balance of product mix and promotion will enable us to achieve check growth again in 2019, while continuing to protect the important value proposition that is core to our concept.

In addition, the white space for BJ's to significantly further expand our platform of successful restaurants is a critical advantage for us. The most obvious reason is the top-line growth, and subsequent scale and margin leverage that this expansion affords us. Less obvious, but equally important, though -- particularly in a time where competition for great people has never been more intense, our growth -- along with our overall operating philosophy, and strong culture -- have positioned BJ's as an employer of choice in the industry. We're pleased to be increasing our plan in 2019 openings to seven to nine new restaurants this year.

Before turning the call over to Greg for more detailed commentary, I'd like to reference another advantage we enjoy -- particularly as many are concerned that we may see an economic slow-down sometime in the next 12-24 months -- and that is the strength of our balance sheet. In 2018, our adjusted EBITDA was approximately $143 million, which provided the financial wherewithal to continue to open new restaurants, invest in our sales and hospitality initiatives, and return capital to our shareholders. In addition, we reduced our debt levels by over $68 million in 2018, so we're well positioned to continue to utilize our balance sheet's strength to optimize further shareholder returns. I'm confident that the plans, and initiatives we have in place will permit us to successfully execute our sound fundamental strategy, and gain share in the casual dining space.

Lastly, I'd like to acknowledge and thank our over 22,000 team members, who make all our plans, and visions for a great guest experience a reality each and every day. I'm as optimistic as ever about the growing strength of our brand, and our ability to convert our brand strength, learnings, and loyal commitment to our team members from coast-to-coast to building new value for our shareholders. So let me now turn the call over to our President and CFO, Greg Levin.

Greg Levin -- President, Chief Financial Officer

Thanks, Greg. As we noted in today's press release, we had another very productive quarter, with comparable restaurant sales up 4.5%, and restaurant level margins of 17.2% -- which is up 50 basis points. As Greg just mentioned, we generated adjusted EBITDA of $143.3 million for the year, an increase of approximately 15% -- and that's an increase on total revenues of just over 8%. While it may sound repetitive, the strength of our 2018 financial performance is a testament to the BJ's brand, and our ability to drive sales and efficiencies throughout the organization, based on well-defined strategic initiatives -- which are executed at a very high level across our platform by our over 22,000 team members.

Before I get into the quarter, I want to mention that our tax rate in Q4 was 12.6%, which was higher than our estimated rate of around 10%. This increase was due to higher pre-tax income, as well as fewer tax credits than anticipated. The higher tax rate impacted diluted earnings per share by approximately one to two pennies in the quarter. Our 2018 tax rate moved around, due to excess tax benefits, and other credits by quarter, making it very difficult at times to predict the rate and model earnings per share. It is one of the main reasons -- for those that have followed BJ's for a while -- that we tend to evaluate our business around our operating margins, and our EBITDA.

Our total fourth quarter revenues increased 7.4% to $280.5 million, driven by a 4.5% growth in comparable restaurant sales, and a 3% rise in operating weeks. Our comparable restaurant sales was driven by positive guest traffic of 1.1%, and growth in average check, further underscoring the attraction and health of BJ's concept. From a trend perspective, every month in the quarter was solidly positive, and our comparable restaurant sales strength was geographically diverse, and not dependent on one or two major states, or regions.

Looking at margins: our cost of sales was 25.4%, which was 70 basis points lower, compared to last year's fourth quarter. The decline reflects a combination of menu pricing, and lower-than-anticipated commodity costs. Labor of 35.4% for the fourth quarter decreased 40 basis points from a year ago. Our strong comparable restaurant sales enabled us to slightly leverage hourly labor, despite the approximate 4.5% increase in average hourly wages. We also benefited from a reduction in the state unemployment rate in California. These savings were offset by higher management and incentive compensation, based on the strong results delivered by our restaurant management teams.

Operating and occupancy costs increased 60 basis points to 22% from last year's fourth quarter. This rise is a result of our planned increase in marketing expense -- which I noted on our third quarter call in October. As such, marketing expense was approximately $7.6 million, or 2.7% of sales, compared to $5.9 million, or approximately 2.2% of sales in last year's fourth quarter. In addition to the 50 basis point increase in marketing expense, we also incurred a higher fees for delivery, and facilities costs related to our handheld server tablets. From a cost per week perspective, excluding marketing, operating and occupancy costs were approximately $20,700 per operating week – and that's compared to $19,600 last year.

Fourth quarter general administrative expenses were $14.8 million, which was about $1 million higher than last year -- really reflecting increased incentive compensation -- which was slightly offset by lower corporate operating expenses.

I wanna join Greg in applauding our operators for their continued success in efficiently processing the increased guest levels generated during the fourth quarter, and throughout Fiscal 2018. Despite the inflationary pressures we face everyday, we were able to drive positive comparable restaurant sales of 5.3% for the year, while expanding our restaurant level margins by 70 basis points. These results are a testament to the strength and passion of our dedicated restaurant team members, who continue to deliver truly gold standard levels of operating execution, while improving our already-high standards for service and hospitality.

Adjusted EBITDA for Fiscal 2018, as I mentioned was $140.3 – of which $61 million was invested back into the business for new restaurants, maintenance CAPEX, and other capital initiatives to continue building sales. We also continued using our strong cash flow to return at total of $30 million in capital to our shareholders through share repurchases, and dividends. In addition, we repaid $68.5 million of debt this past year, and we entered 2019 with an excellent balance sheet with modest leverage that provides us with continued flexibility for growth, sales building investments, and other shareholder return initiatives. Before we open the call up to questions, let me spend a couple of minutes providing some commentary for Fiscal 2019. All of this commentary is subject to the risks and uncertainties associated with forward-looking statements, as discussed in our filings with the SEC.

As we noted in our press release, we continued to drive positive comparable sales for the first seven weeks of the quarter. However, the rains in California, the polar vortex, and extremely cold weather throughout the Midwest and East coast, and -- more recently, the record snows in the state of Washington a few weeks back -- have temporarily impacted our sales momentum. Additionally, we started off January with a lower level of average check growth than we anticipated, as our strong holiday seasonal sales resulted in higher levels of gift card bounce back promotions, and loyalty redemptions than a year ago. We also added a $5.00 Thank-You bonus to all our loyalty members to start the year, all of which resulted in hotter promotional environment for the first few weeks of the new year than we were planning. Reflecting these factors, our comparable restaurant sales in Q1 to date are in the positive mid-1% range, with positive traffic -- again underscoring the lower average check, as well as the growth in traffic, and the lower-than-average check than we anticipated.

Just to put the weather impact in perspective, Los Angeles has received more rain in the first 45 days of 2019 than it received in the entire year of 2018. Additionally, two weekends ago, the severe snowstorm in the Pacific Northwest resulted in our Washington State and Oregon restaurants comparable sales being down over 40% during the weekend, which -- as we all know -- is our busiest sales days of the week.

It is virtually impossible to try to strip out the effect of weather in our comp sales because it has been so widespread, from the state of Washington, to California, to Ohio, Pennsylvania, and Maryland. However, on non-rainy days in California, and days where the weather is more normal in other areas of the country, we continue to see positive comp sales days in the +2, 3 and 4% range. Also, as many of our holiday bounce back promotions expire toward the end of January, or early February, and the $5.00 loyalty thank-you bonus redemption diminish, we are beginning to see our average check increase, closer to the 2-3% range that we have targeted. Therefore -- even with the weather-related impact -- we believe that our underlying trends continue to support solid comp sales for our business, and that is before the March roll-out of our new slow roast tri-tip sirloin, our large party catering efforts, and the kitchen enhancement systems that will be launched in Q2.

As such, we remain very optimistic about our underlying sales trends; however, given the short term, Q1 comp sales will be weather-challenged. With regard to restaurant operating weeks, I would expect approximately 2,627 weeks in Q1.

Moving on to the rest of the P&L, as Greg Trojan noted, in March, we will introduce our new slow roast tri-tip sirloin to our guests. Much like when we rolled out slow roast in 2017, we expect to incur training costs in both cost of sales and labor, until we become efficient with this product. As such, I see our cost of sales in the mid- to upper-25% range in Q1, and then gradually coming down as we proceed throughout the year, and this is barring no major change in our commodity basket, which -- right now, we've locked in about 60% of our commodities for Fiscal 2019.

With regard to labor, we absorbed another increase in California minimum wage, as well as additional minimum wage pressures in other states. Besides some state minimum wages, we also expect wage pressures across the restaurant business, both for hourly positions, and managers. Therefore, based on the latest trends, I'm anticipating upper pressure on hourly and management wages in the 5% range. Additionally, in the first half of this year, we will have the investments in labor for the slow roasted tri-tip sirloin in Q1 -- which I just mentioned -- and in Q2, we'll be rolling out our new kitchen systems to all of our restaurants.

As Greg Trojan mentioned, and in the press release, the new kitchen systems are primarily intended to improve efficiencies related to prep, walk-in, storage organization, food safety and sanitation, and cook line organization -- as opposed to reducing labor hours. To get this implemented in our restaurants, I'm expecting each restaurant to invest about 125 hours of training; I would then expect some additional learning curves for these new systems over the following several weeks, taking us through the end of Q2 2019. Therefore, specifically for the first quarter, and based on where sales are to date, I expect labor to be in the mid-36% range, or so. Please remember that as -- in the past, we see some of our highest labor costs as percent of sales in the first quarter of each year, primarily due to higher payroll taxes and benefits that occur at the beginning of each year, and last until we reach many of the state caps, or limits later in the year. Of course, labor as a percent of sales is highly correlated to weekly sales averages, and comparable restaurant sales growth, so labor as a percent of sales will be impacted by these factors, and because of the short-term weather challenges I reviewed a moment ago.

Beginning this year, all companies will have to adopt the Accounting Standards Update 2016-2, which is Topic 842 for Leases. This new accounting standard will require us to make a one-time cumulative adjustment to retain earnings for approximately $29 million of sale-leaseback gains that we were amortizing in occupancy and operating costs over the existing lease term. As such, this new accounting standard will increase our occupancy and operating costs by about $2 million a year -- or approximately $0.08 in diluted earnings per share. Therefore, we are targeting total 2019 occupancy and operating costs to be in the mid- to upper-21%, to around 22% -- of which 20-30 basis points will be related to the new accounting standard.

Additionally, included in total occupancy and operating costs will be approximately 2-2.5% of marketing spend for all of 2019, which is pretty consistent with the level of marketing spend in 2018. For Q1, I would expect operating/occupancy costs to be in the kind of low to mid-21% range, and -- like labor -- operating/occupancy costs as a percent of sales is highly correlated to weekly sales averages, and comparable restaurant sales.

We expect G&A to be around $65 million in 2019, and that'll include equity compensation, and incentive compensation. I'd expect G&A to be in the mid- to upper-$16 million range in Q1 -- which is a little higher than other quarters -- and that's primarily due to higher payroll taxes, and equity compensation at the beginning of the year.

First quarter pre-opening costs should be in the $400,000.00 range, and that's based on one restaurant opening at the end of Q1, and some expenses for up to two to three restaurant openings in the first half of this year, and -- overall -- we continue to target opening costs per restaurant to be around $425,000.00. Our tax rates should be in the 12% range for Fiscal 2019, and that's excluding any significant discrete items. This compares with our 2018 rate of only 2.3% -- which was significantly lower than our effective rate, due to the large excess tax benefits related to the stock option exercises this past year. I anticipate our diluted shares outstanding to be around $22 million; our CAPEX for 2019 should be in the range of $80-85 million, and that's for the development of seven to nine new restaurants. Maintenance capital expenditures, other sales and productivity initiatives, and a new human capital management system -- there at the RFC -- to support our growth, and that's before any tenant approval allowances or sale-leaseback proceeds we may receive.

We anticipate funding our 2019 capital expenditure plan from our balance sheet, cash flow from operations, our line of credit, landlord allowances, and sale-leaseback proceeds.

Lastly, I just want to say that we had a great 2018, and -- despite the short-term weather challenges -- we expect another great year in 2019, as we remain confident that our initiatives to drive sales, productivity, and efficiency, combined with a balanced approach to new restaurant growth, and disciplined management of our capital structure is a proven formula for sustained long-term financial growth, and the appreciation of shareholder value. That concludes our formal remarks; operator, please open the line up for questions.

Questions and Answers:

Operator

Thank you. At this time, if you would like to ask a question, please press * followed by the number 1 on your telephone keypad. If you're calling from a speakerphone, please make sure your mute function is off to ensure your signal can reach our equipment. Again, *1 to ask a question. We'll go first to David Tarantino from Baird; your line is open.

David Tarantino -- Baird -- Associate Director of Research, Senior Restaurant Analyst

Hi, good afternoon. My first question is really on how you're thinking about the comp outlook. I know you've had a lot of weather issues so far in Q1, but just -- as you look at the balance of the year, and what you have in the pipeline -- I think last time, you mentioned that it would take about a 3% comp, or a little north of that to throw a hole in the margin -- structure flat, including maybe some of these training costs, but I guess -- first of all, has that relationship changed?

And then -- second: what's your degree of confidence in getting to that level, given the comparisons, and everything you have in your initiative pipeline?

Greg Levin -- Chief Financial Officer

Well, I'll take a couple of those questions, there -- and then maybe Greg Trojan'll add on, as well. I don't think there is a change, in regards to the fact of -- looking somewheres in that 2.5-3% range to kind of hold margin. We said that -- kind of specifically -- in the formal remarks there, Dave, and I don't think anything really changes on that, from that perspective. Frankly, as we look at the start of this year, and we still had a tough quarter last year -- going over 4% comps -- we're pleased to see positive traffic right now. We would have liked to have seen -- I think -- a little bit higher of average check to start the year, which -- we're starting to see a little bit -- to help us get from the margin perspective, but I feel -- myself personally -- feel good about the initiatives we have in place.

I think the consumer backdrop still remains very strong, and solid from that perspective, and I think -- we've always said that that's an important factor toward our comp sales, last year and going forward -- is some of the consumer perspective there, and I think our initiatives, and things we're doing on the menu to help move the mix in the right direction, and other things makes this optimistic that -- I think we can be in the average check range of 2.5+ that we talked about.

Greg Trojan -- Chief Executive Officer

And I would just say -- I think we have a lot of momentum from '18; we were very pleased with the fourth quarter, and December finished, and we like where we are from a product pipeline. We're still very bullish around off-premise, so I think a lot of things that drove such a fantastic year last year continue to be in place, as Greg said -- against the backdrop of -- everybody's wondering, beyond 12 -- maybe 15-18 months -- what the economy's gonna look like, but all indications are -- with this level of full employment, and real income growth -- that the consumer's in fundamentally a very good position, and that's the most important backdrop to sales momentum, are those macro factors, and we think what we're doing is going to add to that.

So, look, we don't know -- as we often say, we don't have a crystal ball, but there's a lot of reasons to continue to feel good about 2019.

David Tarantino -- Baird -- Associate Director of Research, Senior Restaurant Analyst

That's great, and -- then one follow-up on your commentary around -- sort of uncertain -- maybe economic factor up on looking out a couple years. I guess: how do you think about your unit growth when you look at 2020, or 2021, are you thinking that seven to nine is the right pace, or are you thinking you might want to go faster, or slower, given your commentary there?

Greg Trojan -- Chief Executive Officer

Look, we don't -- obviously, we don't make those pace -- ultimate decision until quite late into the year, and -- but absent changes in the environment, we look toward -- and Greg Lynds is in the room here -- is preparing to open more restaurants, not fewer. Given that we've scaled back over our pace of several years ago, we're not trying to get back onto a 15, 16 or 17 restaurant opening pace all in one fell swoop, but we know that we're capable of opening that kind of rate of restaurants, when we think the environment is right for that. We're going to remain optimistic, and flexible, but we're working toward a pace that -- like I said -- tends to be more than we're doing this year, than last.

David Tarantino -- Baird -- Associate Director of Research, Senior Restaurant Analyst

Great, thank you very much.

Greg Trojan -- Chief Executive Officer

You're welcome.

Operator

And next, we'll go to Will Slabaugh from Stephens.

Hugh Gooding -- Stephens, Inc. -- Research Associate

Yeah, thanks for taking my questions -- and this is Hugh on for Will this afternoon. First: as we think about your initiatives for 2019, how much of it should we consider to be you going deeper into what is proven to work, versus some of the new initiatives you touched on that the consumer hasn't seen yet?

Greg Trojan -- Chief Executive Officer

I think it is leveraging the success; I don't think -- we're not here pronouncing any wild new forays. I think we've been showing good, consistent results in traffic, and topline growth -- which is the most important thing. Following a fundamental value strategy, and menu strategy, and new channel strategy -- it wasn't just last year, and that's what I try to reinforce in my remarks is that we've been consistent, in regards to those strategic pillars for a number of years, now.

So I do think it's fair to characterize them as going deeper on things that have been working well for us, rather than a shift in strategy -- if that's your question.

Hugh Gooding -- Stephens, Inc. -- Research Associate

Yeah, got it -- thanks. And then -- on the off-premise business, could you just give us your updated thoughts on delivery, and if there's been any change in your thinking around its incrementality, or profitability?

Greg Trojan -- Chief Executive Officer

Yeah, sure -- I think "No" is the quick answer there. We still believe it's highly, highly incremental. We're seeing no evidence that -- across our portfolio of restaurants -- that we're seeing any relationship between higher delivery sales, and impact on premise, and we -- in terms of profitability, as we as an industry talk about -- the marginal economics are less attractive than someone coming in, and joining us in-restaurant, but -- nonetheless -- as long as we continue to be convinced -- and I think we will continue to be convinced -- that this is an incremental occasion, the marginal economics are still quite attractive -- very attractive. So at the end of the day, as we say internally here, we're counting dollars, not percentages, and incremental dollars help us leverage a lot of our fixed infrastructure costs already invested in the business, and in our G&A here, and we think it's a great way to keep growing our business.

Greg Levin -- Chief Financial Officer

Yeah, and Hugh, I think one of the important comments we made before is, we really started on the delivery partnership, but -- frankly, zero delivery in our business. Our off-premise sales at that time were around 5% or so, and it was almost entirely take-out, so -- as we've gone from 5% or so to 9.5% -- that's been primarily through delivery, and our take-out's maintained kind of a flat-ish number as a percent of overall sales.

I think it might be a different question if you were asking us this, and we were starting from a point of 20 or 25% of our sales already being off-premise, and you might end up having a little bit of cannibalization from take-out to deliver, where -- I think where we're starting from -- it's a little bit more of an incremental growth aspect of it, versus maybe a different type of concept.

Hugh Gooding -- Stephens, Inc. -- Research Associate

No, that makes sense. Appreciate you taking the questions.

Greg Levin -- Chief Financial Officer

You're welcome.

Operator

And next, we'll go to Jeffrey Bernstein from Barclays. Your line is open.

Jeffrey Bernstein -- Barclays -- Analyst

Great, thank you very much. Two questions -- one in terms of labor, specifically -- and I think the inflation is well understood, and you mentioned 5% inflation for '19 -- but I'm wondering if you can give some color -- if you're finding difficulties staffing, regardless of the costs? We're hearing more, and more, where people are literally unable to staff certain restaurants, or maybe not get the quality of people they're looking for, or maybe the turnover's ramping up. I'm just trying to get a feel -- especially in your California market -- how you're dealing with the labor pressures, and if they've become more significant? And then I had one follow-up.

Greg Levin -- Chief Financial Officer

Jeff, frankly -- you kind of basically stated it there. I don't think we're seeing anything that's that different from other restaurants. Luckily -- I don't know if "luckily" is the right word -- but all of our restaurants are staffed. We feel good about it from that standpoint; I think -- as Greg Trojan mentioned -- a comment about opening new restaurants, and having that growth vehicle -- that really helps us around management, from that perspective.

But when you think about the 5% wage rate inflation that I mentioned, or even what we've seen last year, a lot of that's due to supply and demand. If it was just purely minimum wage, our wage rate inflation would be -- basically -- 60% less, or so, when we kind of analyzed that. So I think the entire industry is being challenged to find right people; it's one of the reasons that we're looking at our kitchen systems that we mentioned on the call here today. It's not about taking labor out, and I know everybody wants to kind of come up, and figure ways to take labor out, and we'll always look at that -- and become more efficient -- but it also has ways to set up our restaurants to make it easier to work in our kitchens -- and make it more productive, and efficient that way, so that we can hold on to people.

Generally speaking, we do a pretty good job holding on to hourly team members; we're a busy restaurant, and people like that. If you're a server in the front, you're getting good tips, from that perspective -- so that's always been a benefit for us, but across the board, it is challenging -- in the labor environment -- and one of the things, as I'm kind of going on here about different areas of your question is -- one of the areas that comes into that wage rate actually being up about 5% is related to overtime. I think a lot of restaurants are putting in more overtime than they like, and you end up paying a higher wage rate there, so we're hoping it's one of these we put in place here will help reduce overtime, and keep wage inflation lined up, but -- across the board, it continues to be a challenge.

Greg Trojan -- Chief Executive Officer

And the only quick thing I'd add, Jeff, is that we are encouraged -- if you will -- by the fact that our overall turnover rates were actually down a little bit, versus '17. We've always run better than industry averages, from both a manager and an hourly perspective -- but that being said, it's still just a dogfight out there, and I think -- as Greg mentioned -- we're focusing on retaining more people, particularly the great people that we have, and -- the kitchen initiative as an example is as much, "How do we make it a better place to work in our kitchens, as better organized, and make it easier for our teams to execute?" than we are in terms of, "Let's cut hours, and make it harder on our people."

That's the last thing we want to do here -- so thinking differently about staffing, and making -- giving us a competitive advantage of attracting people is a high priority.

Jeffrey Bernstein -- Barclays -- Analyst

Understood. And separately, can you provide any color, or commentary on what you're saying from a category perspective, in terms of the broader environment? Needless to say, we see lots of promotional activity, in terms of marketing, and whatnot -- but I'm just wondering what you're seeing by market -- whether it leaves you inclined to promote more value, or whether you're comfortable going with the premium route, because you think maybe the discounting is easing? Any color on the landscape would be great, thank you.

Greg Trojan -- Chief Executive Officer

Yeah, thanks. I wouldn't observe any difference. I think every conference, or conversation we have, the question comes up of, "Boy, there's a lot of discounting out there," and there's just -- I don't think there's been a sea change, in any regard. I think, if anything, you're seeing -- in a healthier economic environment -- folks pulling back on the depth of discounting is probably about the same frequency, but I think if you really analyze the depth of the discount, I think -- if anything, that's pulled back a little bit, but -- having said that -- our strategy remains pretty much the same, in terms of the advantage.

And one of the keys -- people ask me, "Why are you guys doing as well, from a traffic perspective?" Is the balance on value that we've created, and one of the things I pointed out in my remarks earlier is -- we are not taking price on some of these value leadership promotions that we're really -- franchise nights, and our Brewhouse Specials, and our happy hour price points, for instance -- because we'd rather invest in those kind of value elements than run another promotional program, or run deeper discounts to compete, and we're gonna continue to -- with the breadth of our menu -- be able to drive check where people wanna spend those extra dollars on great value, and quality, but being present in all day parts with very compelling everyday value, and price points is really central to our strategy, when it comes to being competitive on value.

Jeffrey Bernstein -- Barclays -- Analyst

 Understood, thank you so much.

Greg Trojan -- Chief Executive Officer

Thank you.

Greg Levin -- Chief Financial Officer

You're welcome.

Operator

And next we'll go to Chris O'Cull from Stifel. Your line is open.

Christopher O'Cull -- Stifel -- Analyst

Thanks -- good afternoon, guys. Greg, I was just trying to do some quick math, and it looks like you expect the first quarter restaurant margin to be down maybe 150 basis points year-over-year. How -- maybe I'm wrong, but I think that's the math -- but how much of that relates to softer comps sales, versus some of the start-up costs you were mentioning with rolling out new menu items, and some of the other operational changes?

Greg Levin -- Chief Financial Officer

Yeah, about 100 basis points, to maybe about a 120 is really the softer comp sales in there. I mean, in any normal environment -- and Chris, you've been doing this for a long time, and unfortunately, I've been doing it for a long time -- we would be ecstatic with 1.5% comp sales, and driving positive traffic in there, as well. But as we've talked -- and I think we've been pretty consistent about it -- and sometimes I don't like to mention it as much, you need a little bit of average check in there, especially with the labor environment we just discussed a moment ago, so when we tend to look at what we're seeing right now, the comp sales is probably the bigger driver of it. The lesser amount is the rollout of the first party initiatives around the tri-tip.

I'm just expecting some waste there, in them learning how to cook it. That's not gonna be as much, and -- again -- your 100-150, I think as I give the guidance, I'm hoping that's gonna be on the lower side of those type of things. It depends on how you guys run through comp sales, and other things for the second half of this quarter.

Christopher O'Cull -- Stifel -- Analyst

Okay, and then just -- in terms of growing the check average, Greg, -- can you maybe describe the catering, or large party sales opportunity you think you have, and then maybe some more specifics around the plans you have to drive around catering sales?

Greg Trojan -- Chief Executive Officer

Sure, a lot of it -- Chris -- revolves around just making it easier, and to understand we've got -- and we have had, and did some work last year on improving the product offerings, and the variety, and the combinations, and we just don't think we're all the way there, in terms of making it simple to understand, and use language that Mom or Dad -- trying to feed the team, or making the office person-really simple to understand what they can order to feed x number of people.

And a little bit -- our breadth of menu is such an advantage, but it also works a little bit to our disadvantage, and it becomes a little more complex to figure out, "What are the best combinations, and things to order?" And we're just trying to do some good work -- both on the menu, but also from an ordering mechanics and communication perspective that -- at the end of the day, just make it easier, because we think we have -- frankly -- some screaming values in the large party offerings, but I think we haven't done as good a job -- yet -- of communicating those offerings, and that value yet, and that's what we're working on.

Christopher O'Cull -- Stifel -- Analyst

Great, thank you, guys.

Greg Trojan -- Chief Executive Officer

Sure.

Operator

And next, we'll go to Matthew Difrisco, from Guggenheim Securities. Your line is open.

Matthew Christopher -- Guggenheim Securities -- Analyst

So, this is Matt Christopher; I'm in for Matt. I just had a question on the 20-basis point average weekly sales gap during the quarter; was that one-time, or can we kind of expect that as a going-forward gap? The historical range was closer to 100 basis points, or so.

Greg Levin -- Chief Financial Officer

Yeah, I think that gap -- obviously -- has narrowed, because we just don't have as many new restaurants coming into the comp base as we would have had two/three years ago, Matt. So I think you're ultimately going to see a closer gap between comp sales, and weekly sales average -- so I would tend to think that that that number -- 20 basis points, or so -- is probably more realistic, on a go-forward basis.

Matthew Christopher -- Guggenheim Securities -- Analyst

Okay, and is it worth commenting on Easter? Do you have an expectation how that could potentially affect the comp -- a benefit, or an impact with a later --?

Greg Levin -- Chief Financial Officer

Yeah, Easter's generally a slower weekend for us, so we'll pick up that Easter weekend, which should be a little bit better. You do end up -- though -- putting Spring Break a little bit later, and those Spring Break weeks are generally good for us, so I don't think it's gonna have that much of a material impact on our business, overall. If anything, it's probably -- maybe 10-20 bps -- probably more favorable in Q1, just because you pick up that Saturday and Sunday.

Matthew Christopher -- Guggenheim Securities -- Analyst

Okay, and then -- did you give pricing for the fourth quarter?

Greg Levin -- Chief Financial Officer

No, we talked -- the general way we looked at fourth quarter is -- again 4.5% comp sales; we did 1.1% traffic -- so your difference there of about 3.4, or so is kinda your average check, or your check load -- a little bit higher than what we expect. That's due to little bit less discounting than what we've seen over prior years.

Matthew Christopher -- Guggenheim Securities -- Analyst

And then my last one would be on the depreciation -- we have seen the unit growth come down. Should we expect -- maybe -- a little more leverage on the depreciation line in 2019, too?

Greg Levin -- Chief Financial Officer

No, your depreciation -- frankly -- is more of a cost per week, is the way I would think about it. If we could drive comp sales to 5% or 6%, depreciation as a percent of sales will go down, but -- generally speaking -- depreciation's a fixed cost, and I think we're averaging somewheres in the $6,700.00-6,800.00 per week, so you could probably take that times the number of weeks I mentioned on the call, and that's kinda gonna be your depreciation number.

Matthew Christopher -- Guggenheim Securities -- Analyst

Okay, I just saw that the cost per week went down in 4Q, as well, so -- just wasn't sure if that's something I can imply, going forward.

Greg Levin -- Chief Financial Officer

Yeah, I wouldn't -- it's interesting, I didn't -- I gotta pull it up here, as well. How much did it go down? Probably went down from $7,000.00 to $6,700.00, or so?

Matthew Christopher -- Guggenheim Securities -- Analyst

Yes.

Greg Levin -- Chief Financial Officer

Yeah, I mean -- I think that's $6,700.00 -- that's a pretty reasonable number to use. The reason that's been going down over time is really our new prototype has just been lowered to build, but I think the $6,700.00 is what I'm targeting internally.

Matthew Christopher -- Guggenheim Securities -- Analyst

Excellent, thank you, guys.

Greg Levin -- Chief Financial Officer

You're welcome.

Operator

And our last question for today comes from Stephen Anderson from Maxim Group. Your line is open.

Stephen Anderson -- Maxim Group -- Senior Vice President, Equity Research Analyst

Yes, good afternoon. I have a question about one of your day parts that was talking about lunch, and -- so one of the promotions that I've encountered is a promotion of a 20%-off discount for BJ's loyalty members if they pay through the app. I just wanted to track the performance of that, and if that's been successful in getting new members?

Greg Trojan -- Chief Executive Officer

Yeah, we've been very pleased. That's not something we're currently running now, Stephen, but we did for a good part of last year, and we used it to really drive incidence around the mobile app, and get people experiencing -- particularly -- mobile pay, and how wonderful it is to be able to control that part of their experience. So like I said, it's not something that we're looking to have in place day-in and day-out, but it's a great thing to spur trial, and -- what typically happens is, we'll grow incidence -- and it'll come back down a bit -- but we hold on to some of those folks that have discovered the power of -- sometimes ordering ahead, but also paying through the app. So we'll use that going forward, as a good new trial tool.

Stephen Anderson -- Maxim Group -- Senior Vice President, Equity Research Analyst

Thanks, and I've noticed that -- certainly with the first quarter being under pressure from weather, have you seen this -- maybe -- as an opportunity for you to maybe publicize the fact that you have delivery in many of the markets, and maybe something that can cushion the blow from weather in the future?

Greg Trojan -- Chief Executive Officer

Yeah, no -- we've been -- from marketing perspective -- trying to always strike the balance, but have made sure that we're allocating a good part of our marketing dollars to growing off-premise, and creating that awareness, to your point. And it has helped -- you never know what that relationship is, but our off-premise growth rate has not really slowed down, and we're comping bigger, and bigger growth rate numbers, so -- having been a veteran of running pizza delivery services early in my career in Southern California -- rain is good for delivery!

Greg Levin -- Chief Financial Officer

The other thing about that, Stephen -- real quick -- it is interesting. We're driving nice positive traffic, even with the weather, and -- as we said -- comp sales in the mid-1% range. If we can get that average check up a little bit -- which we're starting to see -- even with the weather, we would end up -- actually -- with a pretty solid comp to start Q1, from that perspective. That's what give us a lot of optimism going for the rest of the year is -- despite some of the weather challenges -- we're still driving positive comp traffic. It's just -- maybe our promotion got a little bit hotter than what we expecting on top of the weather, which has kept the average check -- which last year, was more in the 3% range -- to growing where we'd like it to grow, to help offset some of the inflationary pressures.

Greg Trojan -- Chief Executive Officer

I think it's worth noting, because it is an important point on the check is -- one of the things that I think is most different, versus a year ago, is all this momentum that we've built around the loyalty program, and our redemption rates and sign-up rates have all been really good positive factors in our growth from last year, and we didn't -- besides the $5.00 thank-you offer that we distributed to our loyalty folks -- our playbook really wasn't all that different from a discounting perspective, versus a year ago -- but what we hadn't experienced before is a busy holiday season of folks actively redeeming, and participating in our loyalty program, and coming back in with their bounce back offers in January and early February -- on top of the normal promotional activities.

So look, I still think it's great fundamental -- again, delivering great value to our guests -- particularly our most loyal guests -- but to Greg's point -- the combination of that dampened check earlier on in the quarter a bit more than we were expecting, but that's something we'll learn from, frankly.

Stephen Anderson -- Maxim Group -- Senior Vice President, Equity Research Analyst

Thank you.

Operator

And we have no further questions for today, so that does conclude our call for today. Thank you for your participation; you may now disconnect.

Greg Trojan -- Chief Executive Officer

Thank you, everyone.

Greg Levin -- Chief Financial Officer

Thank you, everyone.

Duration: 56 minutes

Call participants:

Greg Trojan -- Chief Executive Officer

Greg Levin -- Chief Financial Officer

Rana Schirmer -- Director of SEC/External Reporting

David Tarantino -- Baird -- Associate Director of Research, Senior Restaurant Analyst

Hugh Gooding -- Stephens, Inc. -- Research Associate

Jeffrey Bernstein -- Barclays -- Analyst

Christopher O'Cull -- Stifel -- Analyst

Matthew Christopher -- Guggenheim Securities -- Analyst

Stephen Anderson -- Maxim Group -- Senior Vice President, Equity Research Analyst

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