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BJ's Restaurants (NASDAQ:BJRI)
Q3 2020 Earnings Call
Oct 22, 2020, 5:00 p.m. ET

Contents:

  • Prepared Remarks
  • Questions and Answers
  • Call Participants

Prepared Remarks:


Operator

Good day, and welcome to today's BJ's Restaurants, Inc. third-quarter 2020 earnings release and conference call. Today's conference is being recorded. At this time, I'd like to turn the conference over to Greg Trojan, chief executive officer.

Please go ahead, sir.

Greg Trojan -- Chief Executive Officer

Thank you, operator, and good afternoon, everyone, and welcome to BJ's Restaurants fiscal 2020 third-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 Kevin Mayer, our chief marketing officer, on hand for Q&A.

After the market closed today, we released our financial results for the third quarter of fiscal 2020, which ended Tuesday, September 29. 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'll then provide an update on our business and current initiatives, and then Greg Levin will provide some commentary on the quarter and the current environment.

After that, we'll open it up to questions, and we expect to finish the call in about an hour. So Rana, please go ahead.

Rana Schirmer -- Director of SEC 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 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 speak only as of today's date, October 22, 2020. 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 laws. Investors are referred to the full discussion of risks and uncertainties associated with forward-looking statements contained in the company's filings with the Securities and Exchange Commission.

Greg Trojan -- Chief Executive Officer

Thanks, Rana. Considering all of the challenges presented by the current environment, I'm very pleased with our team's accomplishments this quarter. From the outset of this crisis, we recognize that meeting these unprecedented challenges would require our team's unwavering commitment to BJ's gold standard execution, as well as our ability to foster an environment where our business leaders and operators are empowered to act nimbly and with an entrepreneurial approach in order to combat changing circumstances, literally on a daily basis. This indomitable spirit of our restaurant operators serves as the lynchpin for the progress we have achieved since the start of the pandemic and has driven the meaningful sales growth and generation of positive cash flow in this quarter.

Let me review with you some of our recent initiatives and upcoming expectations. To start, we have focused this tremendous energy around four priorities. First is the safety of our team members and guests. Second, we have worked hard to expand effective dine-in capacity wherever and however possible across our restaurants.

Third, we have leveraged our reduced menu to drive outstanding execution and productivity. And four, we are committed to growing our off-premise sales during this period of tremendous change, which we expect will have a long-term impact on how guest eat at home. We continue to place the safety of our team and guests ahead of all else. We continue to practice social distancing protocols even in places where requirements have relaxed, and are also utilizing video surveillance to conduct a level of contact tracing of team members that exceeds mandated requirements.

Simply said, we have prioritized safety and frankly, sacrificed some short-term revenue as we know it's the right approach, and we will drive confidence in BJ's from our team members and guests that will benefit the business in the long term. A key safety and sales building initiative has been the construction of significant outside dining spaces in approximately half of our restaurants. Many of these timing spaces are in California, where indoor dining rooms were closed in early July and about half remain closed today. This strategy has been a significant sales driver in many locations across our 29-state footprint.

In addition, we have been expanding our dine-in capacity by erecting glass partitions in our dining rooms. We expect to have completed this in roughly half of our restaurants by the end of this week and plan to have a total of approximately 170 restaurants finished by mid-November. We are also investing in heaters and breathable panels for our popular outdoor dining spaces to extend the length of the outdoor dining season as long as possible, particularly in places like California, Texas, Florida, Arizona and Nevada. All of these efforts have paid off as we set a new COVID era weekly sales record in late September, despite having over two-thirds of our California indoor dining rooms still closed at the time.

Since then, we have continued to improve and set new COVID era weekly sales records, thanks in part to some dining room reopenings in California and the easing of restrictions elsewhere, matched with steady and growing demand, along with improved weather and the easing of the fire conditions along the West Coast. Our early decision to limit our menu offerings, first to about 85 items, and since June to about 110 offerings has been a key driver of our ability to provide even higher food quality and consistency in the face of the unpredictable and still challenging labor markets. While adding back some of our guest favorites, particularly our center of the plate entrées, has been an important sales driver, we remain highly disciplined, yet flexible in regard to balancing our menu diversity with operational complexity. Together with the investments we made last year with our gold standard kitchen system initiative, both have resulted in what we think is the best and most consistent quality food we have ever served, and our guests recognize this and agree with our recent Direct Connect Net Promoter Score food and taste scores reaching all-time highs.

The streamline operations have also enabled our managers to be more agile and dealing with the increased labor volatility of today's environment. Lastly, we are focused on maintaining and building on our sales gains in takeout and delivery, even as we see the recovery in dine-in occasions. Our off-premise sales levels have consistently been in the $23,000 to $25,000 per week range, even as we started reopening in-restaurant dining in early May. This is nearly two and a half times pre-COVID level of sales.

The consistency of these sales reinforces that we are improving the guest experience in this channel and confirms our view of the highly incremental nature of these new occasions versus dine-in. It provides a great platform for even more sales in the months and years to come. Specifically, we have significantly improved our game in this area by tapping into our technology platforms to enable easier ordering, text-based updates and arrival notifications, along with in-restaurant improvements to physical layouts and process reengineering. With all of our progress in these channels, our goal is to keep pushing on these fronts until we are able to deliver the most convenient takeout experience possible.

Much of this improvement in guest experience has been fueled by the increase in digital ordering, which now represents 80% of our off-premise transactions. That said, taking advantage of the typical large parking areas around our restaurants, along with mobile communication is an exciting opportunity to become even better in the off-premise channel. We have also made important additions to our off-premise menu to adapt to a COVID world. Most recently, we have introduced individually portioned group meals to our catering lineup.

And in just a matter of weeks, they are accounting for over 20% of our catering sales. These, together with other sales-building initiatives, including our expanded family feast and bundle offerings have been big contributors to our overall off premise growth. Taken together, these efforts have driven consistent sales increases, but we have also been making investments in initiatives, which will benefit us in a post COVID reality. Aside from continued investment in off-premise, early last month, we began testing our beer subscription service in a group of Northern California restaurants.

We've learned a lot in a few short weeks since launch. With the most encouraging data point being the high level of engagement of members once they sign up. The level of activity around the member benefits is a great indication of future word of mouth subscriber increases, minimization of subscriber defections and ultimately, the program's ability to drive in-restaurant frequency. I'm also happy to report we have restarted our new restaurant openings, and we just began operations in Orange Village, Ohio this week.

We have also resumed construction on two restaurants we paused earlier in the year in Merrillville, Indiana and Lansing, Michigan, both of which will add to our very successful Midwest core. It's great to be growing our footprint once again, and we will remain -- and while we will remain prudent, both financially and operationally, BJ's remains a preferred tenant for developers, and we anticipate many solid real estate opportunities in the years ahead. While I'm pleased with our progress on many fronts, we realize the road to post COVID normalcy will not be a straight line. I do know, however, that when we get there, our guests will be back in our restaurants in full force.

The will and desire to dine out, enjoying food in a social setting is one of life's real joys. We see a future where we at least gain back our previous in-restaurant dining volumes while augmenting these sales with an increased off-premise business, positioning BJ's as an even more powerful force in the casual dining restaurant industry. But none of our current progress or promise for the future is remotely possible without the engagement and incredible dedication of our restaurant team members across the country and our excellent support teams here in Huntington Beach, their ability to take on more challenges than ever and still move our business forward is truly inspiring. And I cannot be more thankful for their perseverance and dedication.

I'll now turn it over to Greg to provide some more commentary on our financial results. So Greg?

Greg Levin -- President and Chief Financial Officer

Thank you, Greg. As Greg pointed out, the creativity and commitment from our team members to drive sales and take care of our guests resulted in improving sales and allowed us to leverage our business and return to positive adjusted EBITDA of approximately $6.6 million for the quarter. We were able to do this despite dining rooms being closed in California through most of Q3 and with continued dining capacity limitations across all of our restaurants. Total revenues for the quarter were $198.9 million, and we reported a net loss of $6.6 million and diluted net loss per share of $0.30 on a GAAP basis.

Our third-quarter results included $1.9 million gain related to the sale-leaseback of our property in Sugar Land, Texas and the restructuring of three other restaurant leases, as well as a $2.3 million gain related to a settlement of credit card providers over interchange fees and the settlement related to the repairs of our server handheld tablets. A detailed reconciliations related to these items is included in today's press release. Our revenues of $198.9 million included a $2.7 million of incremental loyalty point expiration revenue compared to the third quarter of 2019. This incremental revenue is a result of our decision at the beginning of the pandemic when dining rooms were closed to extend the expiration of our loyalty points for all of our guests until later in the year when our guests could use our loyalty points.

As a result, we stopped loyalty point expirations beginning in March and renewed loyalty point expirations in the third quarter. Without getting into all the details related to the loyalty points, the bottom line is accounting standards update 2016-10 requires us to defer revenue for loyalty transactions until those points are redeemed or expired. The additional $2.7 million loyalty point expirations benefited our Q3 restaurant level margins by approximately 120 basis points. Our weekly sales average improved through the quarter from $64,000 in July to $78,000 in September.

Comp sales declined 30.2% for the quarter. As Greg mentioned, our weekly sales improvements are the direct result of our hardware to expand effective dining capacity wherever possible through glass providers and temporary patios, easing capacity regulations in some areas of the country and maintaining our off-premise sales in the $23,000 to $25,000 range. Since a large portion of our sales increases in financial results are capacity specific, my commentary on Q3 and on Q4 to date reflects where we are in the ever-changing national state and local restrictions and regulations regarding dining room limitations. Please remember this commentary is subject to the risks and uncertainties associated with forward-looking statements as discussed in our filings with SEC.

From an overall cost and margin perspective, the significant decrease in sales deleveraged the fixed cost in our business, primarily around occupancy and operating costs, G&A and depreciation and amortization. Looking at some of these metrics, cost of sales in the quarter came in at 24.6%, about 110 basis points lower than a year ago, driven primarily by lower produce costs, specifically avocados, along with menu pricing and less promotional activity compared to last year. Cost of sales also benefited by approximately 30 basis points from the additional revenue in the quarter related to the loyalty point expiration. On a sequential basis, cost of sales was 40 basis points lower than Q2, which again reflects the additional revenue in the quarter related to the loyalty point expiration.

As we look toward the balance of October and the rest of the quarter, I'm expecting cost of sales to be in the low 25% range as we've seen an uptick in commodity costs, especially in [Inaudible] some of our proceeds. Labor came in at 37.5% and benefited by approximately 50 basis points from the revenue related to the loyalty point expiration. So said differently, labor would be approximately 38% of sales that we excluded the revenue from the loyalty points. We continue to leverage hourly labor by driving sales in the off-premise channel, coupled with the benefits from our smaller menu.

These savings were offset by deleveraging from the lower sales volumes of our fixed manager labor, benefits and restaurant-level equity compensation. Our operating occupancy costs were 28.4% for the quarter includes 1.4% of sales for margin. Overall, operating and occupancy costs averaged about $21,000 per restaurant operating week for Q3, representing a decrease of about 14% compared to last year. Included in operating occupancy costs was over $700,000 of operating expenses for temporary patios and approximately $240,000 related to personal protective equipment and additional cleaning supplies necessary for the safety of our team members and our guests.

Our temporary patios averaged more than $15,000 per restaurant week or $21 million in revenue for the quarter, making $700,000 plus in incremental expense, a very high return on investment initiative. Following our sales trends, our restaurant-level operating margin also improved sequentially throughout the quarter, and we finished Q3 with restaurant level margins at 9.5% on a GAAP basis. Adjusting for the $2.7 million benefit from the loyalty point expirations, our restaurant level margins for the third quarter were around 8.3%. G&A for the quarter came in at $15.3 million.

On a trend basis, G&A was up approximately $800,000 compared to Q2, primarily due to additional noncash equity compensation granted to our restaurant support center team members related to the salary reductions they incurred earlier in the year. During the quarter, we continued strengthening our financial position by entering into a sale-leaseback transaction for our Sugar Land, Texas location and restructured several other leases with Four Corners Property Trust. As a result of this transaction, we received proceeds of approximately $8 million and recorded a net gain on the sale-leaseback transaction of $1.9 million. Additionally, next week, we expect to close on another sales retail transaction with Four Corners Property Trust for our recently opened Orange Village location.

We expect additional proceeds from this transaction of approximately $3.8 million. Our return to positive EBITDA, coupled with our sale-leaseback transactions, allowed us to pay down on our line of credit by $40 million during the quarter. As a result, we finished Q3 with approximately $65 million of cash on our balance sheet and another $90 million of availability on our line of credit. This gives us access to over $155 million of capital to manage, protect and grow our business, should it be needed.

Now shifting forward to today, our operating initiatives are continuing to benefit our business, with average weekly sales in October, averaging more than $83,000 per week, which is more than a $5,000 week improvement from September. Historically, our Q4 sales trends tend to improve from October into December as we move toward the holidays. However, given the uncertainty around the recent rise in COVID cases around the country, the use of heater warmed patios in winter and drop down flaps where feasible, the ongoing restrictions of many communities regarding large parties during the upcoming holiday season and capacity limitations or restrictions for malls and brick-and-mortar retailers and also in relation to the upcoming elections, we believe those building models should err on the side of conservatism for the fourth quarter and probably Q1 2021, with a base level of approximately $80,000 per lease in restaurant sales. At our current weekly sales level, I would expect us to generate cash inclusive of restaurant level manager bonus, rent, interest expense and maintenance capex in the range of $750,000 to $1 million a week.

Our capex for the fourth quarter is expected to be around $8 million to $9 million, which includes completing glass dividers in our restaurants, as well as some capex by our 2021 new restaurants and other sales and productivity initiatives. We continue to have the flexibility to pull back on these cash expenditures based on the operating environment as significant amount of these expenditures are discretionary and variable. At this time, I usually provide some preliminary commentary regarding the next fiscal year. As in the past, we are currently finalizing our financial plan, which we'll be presenting to our board for approval in December.

However, as you can imagine, planning for next year has presented challenges unlike ever before. So while we do not have yet an approved plan, let me provide you with some of management's preliminary expectations. First, as I mentioned, we believe the colder weather and recent upticks in COVID cases around the country will keep dining room capacities limited and moderate our average weekly sales until we reach some level of immunity to vaccination and improved therapeutics. Most of the information we have seen indicate that that will be in the spring time.

Therefore, as we think about next year, we expect sales in the first half of 2021 to be similar to what we are currently experiencing in that $80,000 a week range subject to capacity and other limits, curfews, weathers, etc. We also are hopeful that we -- as we get into the second half of next year, we should be able to get back to 100% capacity with sales more fully recovering, given our differentiation, value and the safety measures we implemented across our platform. While we have not completed our new restaurant capex plan for fiscal 2021, we intend to open up at least two restaurants in the second quarter of next year in Merrillville, Indiana, and Lansing, Michigan. Our development pipeline is in excellent shape, and our team is lining up for new sites for 2021.

As we noted in our press release today, we currently plan to modestly increase our new restaurant openings next year. The hard work and problem-solving creativity of our team members remain key competitive advantages today and will be drivers of our future success as we reconnect with our loyal guests and introduce new guests our fantastic food and beverages, whether that's in our dining room or outdoor seating areas or in the comfort of their homes with our takeout and delivery services. Our leading-edge investments in technology have enabled us to provide our guests with digital check-in, digital menus and digital payment options and other contactless optionality with tremendous adoption that have not reduced the service levels BJ's provides to our guest. From a balance sheet and income statement perspective, we have taken appropriate measures to further straighten liquidity as we entered the pandemic already suggesting one of the industry's strongest balance sheet.

For these reasons, we remain confident that the BJ's is poised to take advantage of the opportunity to prosper in the casual dining industry for years to come and deliver shareholder returns [Inaudible] industry leadership, brand strength and incredible team. With that, operator will open it up to questions.

Questions & Answers:


Operator

Great. Thank you. [Operator instructions] And we'll take our first question from David Tarantino from Baird.

David Tarantino -- Robert W. Baird -- Analyst

Hi. Good afternoon. First, a clarification on the October trends. Greg Levin, I was wondering if you could share with us what your average weekly sales for the comparable period was last year, so that we can get a sense for what the year-over-year change is.

Greg Levin -- President and Chief Financial Officer

I'm trying to tell you, from a comp sales perspective, we're down in the kind of 20% range or so. So if you kind of take the $83,000 and multiply that, I just don't have October's WSA sitting in front of me. I could tell you, for last year's fourth quarter, we averaged $108,000 weekly sales average. So that's kind of how we're thinking about it from that -- from the quarter perspective is around that $108,000, but generally, looking at where we are today we think comp sales -- weekly sales average is tend to spend more time right now, and we think that's going to be in kind of that low $80,000 range.

David Tarantino -- Robert W. Baird -- Analyst

Got it. And I guess the follow-up to that, is that primarily based on your outlook? Or you're already seeing signs that you're going to level off or settle in as we get further into the quarter? I guess I'm trying to parse out whether you're just taking a kind of prudently conservative view on what might happen as we get into the cold weather months and some of the factors you mentioned? Or if you're already starting to see kind of a moderation or slowing trend?

Greg Trojan -- Chief Executive Officer

David, it's Greg. We haven't seen a moderation yet. It's really the latter as we look forward -- it's just been interesting throughout the last -- large part of the pandemic is we've seen, just in general, a flatter sales curve and not nearly the usual level of impact of holiday and back-to-school, and all of those sectors are muted as a result of people's behaviors have changed and really been much more consistent in that regard. So a bit of it is the expectation that that will continue to be the case, and we won't see the same level of holiday increase as usual.

But like I said, we haven't seen a pullback in terms of behavior and sales levels as of yet.

Greg Levin -- President and Chief Financial Officer

I think Dave also, Greg made really this point. We're not seeing the same sales patterns that we see historically. As we mentioned on the call, September was our highest weekly sales average during Q3. And usually September is our lowest weekly sales average during Q3.

So it's really much more of a flat line sales pattern based on capacity.

David Tarantino -- Robert W. Baird -- Analyst

Yeah. OK. Understood. And then can you maybe comment on the markets that are further along, I guess, the recovery curve or the reopening curve like Florida and Texas relative to what you're seeing across the system? I know California has been challenged by dining areas being closed.

So perhaps can you comment on what you're seeing in Texas and Florida relative to California?

Greg Levin -- President and Chief Financial Officer

Well, without getting into comp sales by every single location or geography, the more capacity restrictions are eased, the better comp sales we see. I guess that's probably the best way to say it. So California is more of a lagger per se on comp sales. We must have had high weekly sales averages in a state like Texas or a state like Florida, that's been open longer.

And that's -- really, it just how it plays out. It's very much a capacity-driven weekly sales average.

David Tarantino -- Robert W. Baird -- Analyst

Great. Thanks a lot.

Greg Trojan -- Chief Executive Officer

Welcome.

Operator

And we'll take our next question from James Rutherford from Stephens, Inc.

James Rutherford -- Stephens Inc. -- Analyst

Hey. Thanks for taking the question. I have a question around the patios and the capacity indoors. I'm just trying to balance the negative impact of gradually losing a portion of those weekly sales from patios, which I think you mentioned were over $15,000 per week as we head into the winter, to balance that with the increasing capacity that will come from the partition.

So I guess the two questions related to that would be how much are you capacity constrained today versus restrained by just kind of consumer demand? And then the second part to that is, how much additional capacity do you think you'll get across your system as you switch from no dividers to having dividers in the restaurant? Thank you.

Greg Levin -- President and Chief Financial Officer

Let me try and handle some of these questions here, James. I'm sure Greg will jump in here. So we think by adding the dividers -- the glass dividers into our restaurants that we can pickup somewhere in the neighborhood of 12 to 14 tables, which generally is going to be somewhere in the kind of 10 percentage range. At the same time, I would say our makeshift patios are kind of about the same amount as well.

So if we can get the glass dividers in there, and we're able to use them, by the way, which means states opening their dining rooms or local areas opening the dining room, the two would offset. The one thing I would say, though, as Greg Trojan mentioned earlier as well, is a majority of our makeshift patios are here in California. There are obviously some other warmer weather states like Texas. So even as we go into the winter time, we're trying to analyze patio usage from historical periods and prior years.

There's not as much of a drop off as you might think. There is a little bit of a drop off. But that $15,000 that I talked about shouldn't go down zero based on what we've seen historically.

Greg Trojan -- Chief Executive Officer

Yeah. I'm just going to say, there's slightly a little bit of a pickup in southern states like Texas and Arizona, where it's too hot to eat outside in a good part of Q3. So there's a little more of a balancing than you might think there. But the dividers will help.

The dividers will help as well.

James Rutherford -- Stephens Inc. -- Analyst

OK. That's very helpful. And my second question is on a theme we've seen among casual diners, and it's this ability to run just more efficient restaurant for a variety of factors. I'm just curious if you all think there's a potential, maybe in the second half of 2021, when you do get back to pre-COVID unit volumes to run at higher margins? Or if the menu will kind of get back to a more normalized state and kind of operations return to normal, it's business as usual? So just curious your thoughts there and there's a lot of puts and takes, but what you expect?

Greg Trojan -- Chief Executive Officer

I mean a lot of that depends upon variables around labor pressures and rates and food costs or such big drivers. You would expect as a part of a post COVID softening economy for a while, labor rates should be more moderate than they are even today. And I don't -- we don't have a crystal ball on food costs. But the point that others are highlighting that are very valid is the increase in the off-premise mix helps from a margin perspective, both from a food cost perspective, by the way, given the food mix, but also from a labor perspective.

And we talk about mostly from a quality perspective, the improvement that we've seen in the reduction in menu items and overall complexity. It also is helping from a labor content perspective, particularly in prep hours and other process improvements in the kitchen. And we don't intend to go backwards on that. So off-premise and more efficient menu, I think are helpful items here to stay.

James Rutherford -- Stephens Inc. -- Analyst

Thank you, Greg.

Greg Trojan -- Chief Executive Officer

You're welcome.

Operator

We will take our next question from Jeffrey Bernstein from Barclays.

Jeffrey Bernstein -- Barclays -- Analyst

Great. Thank you very much. Two questions. The first one, just on the unit growth you talked about in your prepared remarks.

And I know in the release, you talked about being committed to the long-term national expansion and the 425 units we've heard before. And I think you mentioned the pipeline in excellent shape. With that said, I was surprised, I guess, when you say there's a modest increase in '21 openings. I know in 2020, we're only talking about two.

So maybe you're talking about three or four openings next year. I know it hasn't been finalized yet. But looking back, that compares to what used to be 15 a year back in the day. So with the confidence that you have that the consumers want to eat out of BJ's and similarly the pandemic silver lining of a bump and really good real estate availability, I'm just wondering why that wouldn't accelerate more significantly in maybe there's a reason or so besides the idea of quality of a quantity, which you've talked about before? But any other thoughts in terms of why that number wouldn't accelerate with good real estate and more favorable labor and just seemingly continued recovery.

Greg Levin -- President and Chief Financial Officer

Jeff, it's Greg Levin. It's a great question, and it's interesting. I would tell you right now, deal flow is picking up. I would see more opportunities out there.

But frankly, the quality of the sites that we're seeing right now are not that greater sites. We're not seeing what we've considered kind of the A sites available yet. We believe the A sites will be coming, but we think they're more on the horizon of six to 18 months away. The other thing that we're seeing right now as well is as companies across many different industries start zooming construction and other things, there's a backlog of construction and actually, labor costs, lumber, steel and some of those things haven't quite come down yet.

So we're taking a little bit maybe of a prudent approach here, just in regards that we think that there's going to be some great sites coming aboard and coming into our pipeline. And while our pipeline is pretty full, we're also looking at what's going to be coming that just is probably, as I said, six to 18 months away. We also haven't seen necessarily like changes in the rental rates for what would consider A locations. Definitely, B and C landlords are coming to us with opportunities, lower rents and those type of things.

But we're not going to get up on making sure we pick AAA locations.

Greg Trojan -- Chief Executive Officer

We do think, Jeff, that there is going to be a great opportunity here sooner rather than later. But the exact timing of that, look, we're still working through that as we're putting together our plan. And overall, we're going to be prudent about we can't go from two to 12 in a year. We don't think we can open restaurants with the proper bench strength and quality that really, really is important here.

But we are excited about the near-term opportunity to reaccelerate. But the -- how much of that's in the next 12 months or not, we're working through.

Jeffrey Bernstein -- Barclays -- Analyst

Got it. But it sounds like there's no other inhibitor. So maybe if you're talking about six to 18 months, maybe we're talking about 2022, but there would be any reason to believe that that year wouldn't see a significant jump in absolute number of openings, if that really became available, is that fair?

Greg Trojan -- Chief Executive Officer

I think that's a good way to think about it.

Jeffrey Bernstein -- Barclays -- Analyst

Great. And then my follow-up is just on the restaurant margin. I know last quarter, you gave some color just because there was so much noise month to month, but you talked about how in June the restaurant margin was at 13% with the comp on 30%. Now we look at the full third quarter, the restaurant margin may be in the low 8% range, ex the loyalty point, that you talked about, but the comp was very similar in terms of down 30%.

So just wondering kind of as we think about restaurant margins going forward and now you're talking about a comp maybe a down 20%, how should we think about that over the next number of quarters, I think the question came up earlier about peers doing more with less, but just trying to get a sense for maybe what's swinging the numbers would seem to be much improved in June and maybe eased a little bit in the third quarter. Thanks.

Greg Levin -- President and Chief Financial Officer

Yeah. A couple of things there. Jeff, it's a great question from a comparison standpoint. There's the patios and patios that came onboard.

We reintroduced the manager bonus program, and we're very happy to be issuing funds to all of our managers out there that we didn't have in the second quarter as we're battling through just the early parts of the pandemic from that standpoint. And then as you do open up dining rooms, you do add labor. So our hourly labor, I even mentioned this in the third quarter -- in the second-quarter call, stepped up to the third quarter, and it stepped up here -- or it stepped up in June versus the other month even as the sales averages went up. And then here in this quarter as well, we saw hourly labor increase as we increased our dining rooms from that standpoint.

We're still running a good 200-plus basis points better on our labor, some of this because of the smaller menu, talked about and some saving this in the kitchen. And then we're also getting it because as we drive that off-premise business and leveraging that. But really, it's a combination of those three things. One is a step-up in hourly labor.

Now the dinings are open is the patio cost coming on board that we didn't have before, so that's got incremental cost there. And then it's some of the managers incentive comp there. The one end of these [Inaudible] as we set these patios and got things going in July, July was a pretty inefficient month for us to put those up. And now we got this one, we saw a nice step-up in our margins at the restaurant level throughout the quarter.

Greg Trojan -- Chief Executive Officer

And we you realize this, we're just really pleased to be generating cash flow. If it comes at a lower margin, but we're producing more dollars and able to contribute cash flow to our enterprise and back in investing in the business and our people, we're a lot happier even at a lower percentage margin to be able to do all those things than have less dollars at higher margin. It sounds obvious, but that is how we're running the business today.

Jeffrey Bernstein -- Barclays -- Analyst

I gotcha. So I mean, obviously, looking month-to-month, it's hard to do. But you said July was pretty inefficient. It sounds like June was a better one.

So maybe September to close out the quarter, is there more of a comparable double-digit type restaurant margin with a comp down 20%?

Greg Levin -- President and Chief Financial Officer

Well, I think as we just -- as you said, kind of low-income group talking about right here, and we finished at $74,000. So if I had think about stepping up from that standpoint, I think we picked up probably 200 or 300 basis points as we move from the mid-70s into kind of the low 80s on that restaurant level margin.

Jeffrey Bernstein -- Barclays -- Analyst

Gotcha. Thank you.

Operator

And we'll take our next question from Brian Bittner from Oppenheimer.

Brian Bittner -- Oppenheimer and Company -- Analyst

Thanks. Good afternoon, guys. Just trying to tie a bow on the margin question here. So basically, at $80,000 to $84,000 sales per week on average, do you think you'll be -- you do underlying margin trends of like 200 to 300 basis points, are you saying above the third-quarter levels is what you're saying? So something around that kind of 10%, 11% margin profile for the restaurant level at this kind of $80,000 to $85,000 weekly sales?

Greg Levin -- President and Chief Financial Officer

Yeah. I think that's reasonable.

Brian Bittner -- Oppenheimer and Company -- Analyst

OK. And then I just wanted to ask about the weekly sales on average. You talked about weekly volumes being what they are in that $84,000 range. And you talked about those continuing, not just for the rest of this quarter, but really trying to help us think about that for the first half of next year.

And I understand why the weekly sales wouldn't improve for the rest of 4Q, there's just colder weather or a lot dynamics. But just curious, why this is the right volume to think about for the first half of next year? Is it simply because you believe the environment across your portfolio right now is kind of the new steady state for the next several quarters. It seems like sales levels have been constantly improving every month. So I'm just wondering about your commentary related to the first half of next year.

Greg Trojan -- Chief Executive Officer

Well, at some level, we believe we're going to need improvements in capacity, which there is room in our system as more states -- in a more COVID-stable environment, call it, not we're in vaccine, but is there room for more of our restaurants to be at 50% or six-foot social distancing kind of levels of requirements. There is some upside to that, if you think that's going to happen, which probably isn't baked into our steady-state number here. So you could argue we're being conservative on that front. But we're not going to go from low to mid-80s to $110,000 until we're in a very different place from a dine-in COVID immunity perspective.

And that's really -- we don't have any more of a crystal ball than you guys do. But thank you for asking the questions because we can give you a little more color of how we're thinking about it. And really, what I said is basically is we think we're -- until we're in a step function different place from a COVID perspective. We're probably in the ZIP code we are in today.

There's probably a little more upside than downside you could argue but who knows what the fall and winter is going to bring here. So we're in that band. And so hopefully, it's not too long in the distant future here that a vaccine and therapeutics really start to make a difference.

Greg Levin -- President and Chief Financial Officer

Yeah. Brian, we haven't seen any states eased their regulations over the last three or four weeks. We started seeing happening toward the later July and August, and then it's been kind of a steady state. In fact, if anything, that's probably brought back a little bit, a couple of curfews and things like that that don't really impact us.

Greg Trojan -- Chief Executive Officer

Well, interesting, what's opening is California, right? So California is improving, by and large, we're seeing a few pockets. But everyone else has been kind of status quo, a step backwards here and there. So that's really what we're saying. We don't think that changes significantly until there's -- we're in a different COVID world.

Brian Bittner -- Oppenheimer and Company -- Analyst

No. Thanks for putting all that color behind it. We obviously appreciate it. Thanks.

Operator

We'll take our next question from Sharon Zackfia from William Blair.

Sharon Zackfia -- William Blair & Company -- Analyst

Hi. Good afternoon. I guess congratulations on pivoting so much and kind of thinking outside of the box. But within all of that, I think it's just confusing is to kind of understand what percent of your capacity is actually available right now proceeding.

I don't know if you have a blended average through the system. And maybe if you could give us kind of some points in time like where that was in July versus where it is now, I think that could help us.

Greg Levin -- President and Chief Financial Officer

Yeah. Sharon, I don't know if we've got it by the periods in front of us. I would tell you right now, we're probably in the kind of low 60s or probably about 60%, 65%. When I think about capacity.

With social distancing and the make shift patios. I think there's an opportunity for us to get into the mid-70s or so when we get the glass dividers and we get other areas of California opened up, but -- and that's really [Inaudible] probably kind of the last area unless different states start to ease from 25% capacity to 50% capacity, etc.

Sharon Zackfia -- William Blair & Company -- Analyst

That's helpful.

Greg Trojan -- Chief Executive Officer

So Sharon said it another way, we're in mid-60s with a lot of states or some jurisdictions still being in 25% land or other restrictions. And that's pre dividers, right, but it includes patio. And in a world where patio stays about the same, and we add dividers, you get into mid-70s, call it, 75% round number there without -- again, without any more easing of restrictions and even California openings. So if that give you a little more specific understanding.

So dividers could add another -- even future dividers, we don't have in our plan today, another 5% or 6% some additions of easing capacities, etc., or restrictions can get you from mid-60s today to 80, if all those things came through.

Sharon Zackfia -- William Blair & Company -- Analyst

That's helpful. I guess one other question. I know you guys have always had really high-volume weeks around the holidays. How -- Greg, could you give us a perspective of kind of what the average weekly volume typically is around those holidays around Christmas and New Year and how you think the month of December in essence plays out? I mean do you think it's kind of better volumes pre-Christmas? And then you see year-over-year softness around the holiday? I just -- I don't know how to think about the month of December.

Greg Levin -- President and Chief Financial Officer

Well, I still think in regards to our weekly sales average that it's going to be what we talked about today. I think it's more of a capacity issue in regards to WSA, which get the weekly sales average net sampling. When I think about like P12 and some of those, other ones, I mean, P12 in the holiday time, we'll go into the 120 range and so forth, but an even higher with the large parties of things we have from that standpoint. So I know what tends to happen here and is everybody focuses on comp sales.

We're tending to focus on running our business really on a weekly sales average. And based on that weekly sales average, how we can optimize our business. And we're not as focused on the comp sales per se in regards to how it plays out. So I think that's tending the way I think about the business.

And as you said earlier, Sharon, unless there's a huge change in capacity in our restaurants, when I look at savings, the most capacity we have is today. And right now, I'd say we're kind of in the mid- to low 80s, that tends to see how I think it will play out in the fourth quarter.

Sharon Zackfia -- William Blair & Company -- Analyst

Thank you.

Operator

We'll take our next question from Nick Setyan from Wedbush Securities.

Nick Setyan -- Wedbush Securities -- Analyst

Thank you. Just a bigger picture kind of question on the competition. Are you already seeing kind of a tangible weekly sales in comparison to supply of the competition? Or is it more on the horizon, like you said around your AAA locations, etc.?

Greg Trojan -- Chief Executive Officer

We were having trouble hearing you in the back end of that. Sorry.

Nick Setyan -- Wedbush Securities -- Analyst

So is it more on the horizon? Are you already starting to see competition go away? Or is it more on the horizon?

Greg Trojan -- Chief Executive Officer

I don't know. We're seeing fewer seats out there, no question. You're seeing it. I don't think you're reading about it maybe as much because it's more focused around independence and smaller mom-and-pops, etc., but it's meaningful and noticeable in terms of fewer seats and even in the number of seats saying, look, we're not reopening here.

So I haven't seen any exact numbers on it, but as we talk about each of our markets, every week on our calls, we're seeing that happen. It's not a -- we think this may happen next year. It's a reality today.

Nick Setyan -- Wedbush Securities -- Analyst

Got it. And then one of the questions that's pretty topical now is delivery, as it becomes a bigger mix versus -- or the cost of delivery as it becomes a bigger mix versus the efficiencies around labor and potentially food cost from a smaller menu, let's say, a year from now or two years from now, how do you think the net result of that plays out? I mean do we still think that we're going to have significantly lower labor and food cost versus the incremental delivery fees if off-premise and delivery ends up stabilizing at a much higher level?

Greg Trojan -- Chief Executive Officer

Look, I think it's a persistent, even pre-COVID question and my response remains the same in a lot of ways. And I mentioned it at the -- particularly at the tail end of my script here is we are in the dollars business, right? So what I really think is going to happen is we're going to come back. And whenever we're in a more normal time, whenever that is, we're going to have just as many dine-in dollars and occasions that we did going into this, hopefully and probably more. And we're also going to have more delivery and more takeout business.

Now the takeout business for lots of reasons is a high -- from talking about margin mix is largely a higher-margin business. Delivery is a lower-margin business, but still very, very incrementally profitable. So when you start adding the sales dollars that could result in that arithmetic, you're looking at average weekly sales significantly greater than when we went into all of this. And that is going to flow and leverage the fixed cost expense structure in our business that will create not just more dollars, but most likely overall higher blended margins even though delivery has always been, and I continue to -- don't see it changing, it's going to be lower on a percentage basis, we're going to love the total margin implications of the higher sales volumes overall.

And that's what we are focused on. And we welcome those dollars. We're working hard. We love delivery.

Greg Levin -- President and Chief Financial Officer

Frankly, we -- yeah, there is going to be the lower margins there. But what we saw in pandemic early on, there were few off-premise, that incremental dollars and delivery on labor is very profitable. Yeah, you don't have to pay for it in the delivery commission, but it really helps with the overall economics within the four walls of the restaurant.

Nick Setyan -- Wedbush Securities -- Analyst

Understood. And then just last question, the beer subscription test, is that successful enough so that you can actually roll it out to more markets now? And if so, what's the timing around it?

Greg Trojan -- Chief Executive Officer

Yeah. No, we're only a few weeks into that test. We're very encouraged there. So we haven't made any rollout decisions at this point.

But we'll be keeping a close eye on it through the remainder of this year and be looking at that early next year in terms of timing. But we've been optimistic and think we're really well-positioned given the expertise and history that we have in craft brewing. So it's something that we're excited about.

Nick Setyan -- Wedbush Securities -- Analyst

Thank you very much.

Operator

And we'll take our next question from Jeff Farmer from Gordon Haskett.

Jeff Farmer -- Gordon Haskett -- Analyst

Great. Thank you. Hopefully, a couple of quick follow-ups. So from what you guys have seen how does the consumer respond to that increase in outdoor capacity versus an increase in indoor capacity?

Greg Trojan -- Chief Executive Officer

Jeff it is -- it exceeded my expectations. I think collectively, we moved quickly, particularly here in California when the shutdown of dining rooms came quite suddenly, as you probably know and remember in early July. And people -- I think it's actually going to -- there's going to be an element that's going to continue to be part of casual dining and our business beyond COVID, like people really enjoy that experience. Again, it exceeded our expectations.

We get excited thinking about some of the larger holiday periods and special event days and weekends, like whether it's Mother's Day or Father's Day, Valentine's Day, where we basically do run out of capacity as a concept. And that we may be able to add to those kind of occasions for a long time to come because we've learned a lot about executed and it's more than just putting up a tent. We've figured out how to put music there and theme, a lot of the place, the sense of place, etc. So yeah, we've been very pleasantly surprised by the level of engagement.

Again, I referenced it earlier, it's like it shows you how much people want to go out in some way. I mean honestly, there are sometimes, and I've been out in our restaurants during like the heat waves on the West Coast. And I'm like, I want to kiss these people that are out during -- under tents with no air conditioning, and it's 110. It shows you people want to be out in dining and the force and the attraction of that occasion has in people's hearts and minds.

Jeff Farmer -- Gordon Haskett -- Analyst

No. That's helpful. But I was actually almost asking from the opposite perspective because peers have sort of repeatedly mentioned that consumers will quickly fill up increases in outdoor capacity. But as increases in indoor capacity are made, they're a little bit more reluctant because they don't want to be the 60th, 70th percentile in terms of being in that restaurant.

So there's a little bit more reluctance. So the question really is in terms of thinking about moving forward and overall capacity that you can put back into these restaurants, it sounds like a lot of it is going to come from indoor. That was really the question whether or not you believe that --

Greg Trojan -- Chief Executive Officer

I hear you, sorry. Yeah. We've been pretty conservative about the whole distancing factor in all of this. So I don't really have a good answer for you.

We haven't really seen a relative difference. We -- I can tell you, even in states where we've had -- California is the best example where we've opened up indoor dining. It has increased sales, where it's like immediate, where we have a lot -- plenty of people that are -- that want to dine in doors. So we really haven't seen what you're talking about.

It makes some level of sense, frankly. But at our levels of capacity, we haven't -- and blended capacity, I can't say that we've seen it.

Jeff Farmer -- Gordon Haskett -- Analyst

That's helpful. And then just one final question for Greg Levin. You guys did touch on it. But in terms of the cost benefits you're seeing from streamlining that menu, are there any sort of harder numbers or percentages you can put around what type of cost benefit you see on either the cost of goods sold line and cost of sales line or the labor line as it relates to running with that smaller menu?

Greg Levin -- President and Chief Financial Officer

Jeff, it's hard right now. I mean as I mentioned -- we had mentioned last quarter as well, we're seeing a couple of hundred basis points better on hourly labor right now. And the reason I'd say right now is you've got the kitchen and you've got the dining room. Ad our dining rooms open, you're going to add labor to take care of that guests within the dining room, assuming a new guest come in, and they're not just transferring in from the patio into the dining room restaurant side of things.

And when I look at our labor today, we're getting some of the biggest thing in the server side of things because, frankly, we're doing 25,000 in takeout right now, as part of that. So that's given that additional leverage there. In the kitchen, we are seeing, I would say, still some nice incremental improvement, somewhere in the 50 to 100 basis points in there. But as our restaurants get busier and bring people back in, I do think hourly labor steps up a little bit.

I do think overall, though, we're going to get some nice benefits in hourly labor when all this is done and we're running our restaurants probably, we just don't see prep that we did in the past and so forth and maintaining our off-premise. But I think our business is a little bit in a step function right now. And as we increase capacity, you'll see that number go up a little bit, and then you'll leverage it against management, labor and some of the other fixed costs.

Jeff Farmer -- Gordon Haskett -- Analyst

All right. Thank you. Appreciate that.

Operator

And we'll take our last question from Todd Brooks with CL King & Associates.

Todd Brooks -- C.L. King and Associates -- Analyst

Hey. Thanks for squeezing me in. Just two quick questions. One, can we talk about with the improvement in average weekly sales that you saw across the quarter, what's happening in kind of the either bar event part of the business or the later night part of the business as we're starting to get some live sports back on TV? And is that an avenue that you could see further improvement in the fourth quarter?

Greg Trojan -- Chief Executive Officer

Yeah. Todd, we still are not seeing -- it probably sounds obvious, but there are still significant restrictions and in most places, literally the bars themselves are off limits. We're seating socially distancing tables, etc. But sports has helped and the opening of these dinning rooms have helped.

But we're still probably seeing somewhere in the neighborhood of an opportunity when you look at our business pre COVID of $11,000, maybe $12,000 a week of that late night business that will come back, just to give you some dimension to it. Now that's come good ways back from the start of COVID when it was double that at least. So we're happy to see some of that recovery happen. But there's a lot of that and just general alcohol sales to look forward to beyond just late night because of the mix in our business being more off-premise, we're not selling the same amount of alcohol in total.

What's interesting though, don't confuse that with when people are in our restaurant and even off-premise, our alcohol incidence is up nicely in both elements of our business, it's on an absolute basis, much lower off-premise, right? So it holds up to us selling less alcohol. But people are drinking more when they're in the restaurant. And they're drinking more when they're ordering out, which is good to see, at least in my mind. But that's upside.

As that dine-in business continues to recover, we're going to see some really nice tailwinds, both in terms of overall alcohol sales and late night here that our teams have done a great job of battling against, but we need some more late night traffic to make all that happen and dine-in traffic.

Greg Levin -- President and Chief Financial Officer

Yeah. Absolutely. Yeah. It actually makes us really optimistic when I think about each of our business.

I mean we're doing 80-plus thousand weekly sales, which is greater than many casual dining [Inaudible] with capacity restrictions, and frankly, without one of our dayparts. So as that day part comes back with things, I think we've got some real ability to move BJ's to some of our highest [Inaudible] with that coming back and then having that off-premise business.

Todd Brooks -- C.L. King and Associates -- Analyst

That's great. And then just a final question. With the return to generating positive cash flow in the quarter, just maybe this is a Greg Levin question, how are you thinking about the right amount of cash to keep on the balance sheet versus continuing to pay down the debt balances?

Greg Levin -- President and Chief Financial Officer

Yeah. It's a good question, Todd. And what we tend to do is what makes it sometimes little furthermore difficult. It's kind of chunky our cash flow, meaning we've got to spend a lot of money for new restaurants being built.

And then if you don't have restaurants been built, you can then save that money and kind of move from that standpoint. In general, finishing at the $60 million, $65 million that we're at right now, that's a pretty high number for us. And I think you'll tend to see that number go down throughout the quarter. I think we'd rather not have quite as much on the balance sheet.

We'd rather pay down some more of our line of credit. The reason we have some of that sitting here right now is we're going to have some capex numbers and things like that coming up, and we just finished our Orange Village restaurant, getting glass dividers and some of the other things. But in general, as things have normalized, I don't think we want to have that much cash on the balance sheet. Hi, everyone, thank you for joining us today.

We're around if you have any questions.

Todd Brooks -- C.L. King and Associates -- Analyst

OK. Great. Thank you, both.

Greg Trojan -- Chief Executive Officer

Thank you, everyone.

Operator

[Operator signoff]

Duration: 81 minutes

Call participants:

Greg Trojan -- Chief Executive Officer

Rana Schirmer -- Director of SEC Reporting

Greg Levin -- President and Chief Financial Officer

David Tarantino -- Robert W. Baird -- Analyst

James Rutherford -- Stephens Inc. -- Analyst

Jeffrey Bernstein -- Barclays -- Analyst

Brian Bittner -- Oppenheimer and Company -- Analyst

Sharon Zackfia -- William Blair & Company -- Analyst

Nick Setyan -- Wedbush Securities -- Analyst

Jeff Farmer -- Gordon Haskett -- Analyst

Todd Brooks -- C.L. King and Associates -- Analyst

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