BJ's Restaurants (BJRI) Q2 2021 Earnings Call Transcript

BJ's Restaurants (BJRI -1.03%)
Q2 2021 Earnings Call
Jul 29, 2021, 5:00 p.m. ET

Contents:

• Prepared Remarks
• Questions and Answers
• Call Participants

Prepared Remarks:

Operator

Good day, and welcome to the BJ's Restaurants, Inc. second-quarter 2021 earnings release and conference call. Today's conference call is being recorded. And 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, and good afternoon, everyone, and welcome to BJ's Restaurants fiscal 2021 second-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 and incoming CEO; and Tom Houdek, our VP of strategy and financial planning and analysis and incoming CFO. 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 second quarter of fiscal 2021, which ended on Tuesday, June 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. Both Greg and I will then provide an update on our business and current initiatives, and then Tom will provide some commentary on the quarter in current environment.

After that, we'll open it up to questions. So Rana, please go ahead.

Rana Schirmer -- Director, 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, July 29, 2021. 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?

Greg Trojan -- Chief Executive Officer

Thanks, Rana. It's been an incredible experience leading BJ's for almost nine years. And oh, my, it ever gone quickly. As the old adage goes, time flies when you're having fun.

And fun for me is defined by the ability to grow and evolve our business in many ways. I remember when I first came to BJ's in 2012, meeting some of you in person and on calls early on, I made mention of the fact that I was attracted to BJ's for a number of reasons, all of which are as relevant today as ever. First and foremost, I was attracted by the strength of the concept. The original founding group of BJ's then succeeded by Jerry Hennessey and Paul Motenko, and further reiterated and involved by Jerry Deitchle, each contributed in their own ways to create a truly compelling and unique concept as evidenced by the industry-leading traffic and sales volumes in the casual dining space.

I was also drawn by the strength of BJ's management team. Our operations leadership, along with our senior leadership team at our restaurant support center, is made up of a majority of folks who are part of BJ's before I even arrived on the scene. This longevity and depth of experience, but most importantly, the talent level of our team is an important competitive advantage and one we probably don't talk enough about. And the dedication, resilience, and focus of our restaurant-level teams at all levels from dishwasher to general manager has been a stalwart of our success throughout the years and never been on display more than through the pandemic challenge past year and a half.

So a great concept together with a first-class team is a combination that's hard to beat. But when you add to that a brand that because of its eclectic menu and timeless design can continue to evolve without losing the core of its essence, along with a long runway for organic growth, I think you really have something. It's been my great honor to be entrusted by our stakeholders, through our board of directors with the responsibility to lead this brand and this team over the past nine years. If I were a younger person, I'd look at the same brand assets and be even more excited about BJ's prospects than I was even nine years ago.

I'm delighted to be handing over the reins to someone as knowledgeable, passionate, and capable as Greg Levin. As many of you know, Greg and I worked together for a time well before BJ's at California Pizza Kitchen, when he was a star up incomer on the finance team. It's been a thrill to see him develop as a leader through his dedication and fueled by his love for this business and the people that make BJ's what it is today. I look forward to helping Greg and the team in any way I can in my continuing role as a board member.

I'll let Greg go through the current results, but I'll kick off with an observation I repeated many times during the pandemic and that I believe is being proven out as we emerge and recover. The resilience of the dine-in restaurant business, and I believe a particular strength of the BJ's brand, confirmed by our recent research, centers around the basic human need to socialize with friends and family. We provide an oasis from the ordinary around the fundamentals of food and drink. It's a strong business model that certainly has been tested like never before over the last 18 months.

But we are seeing the strength of those human needs demonstrated by the enthusiastic return guests to our restaurants. Last but not least, I'd like to thank the 1,000s of team members who make all of this happen in our restaurants each and every day. They're the ones who take our ideas and passion to grow our business and make it a reality. So with that, I'll turn it over to Greg.

Greg Levin -- President and Chief Financial Officer

Thanks, Greg. Before I move into my remarks on the quarter and our initiatives, I want to take a moment to thank Greg Trojan for his nearly nine years leading BJ's growth and progress as a concept and personally for being a great mentor to me. During Greg's tenure, we expanded from 127 restaurants to 212, while setting our pathway for continued national expansion with a goal to more than double our current platform. We also initiated Project Q and a host of efficiency initiatives while bringing innovation to our menu with offerings such as our healthy enlightened menu, our loaded burgers, and more recently, our highly successful, slow-roasted protein platform.

During Greg's tenure, we emerged as leaders in developing and implementing a mobile app for casual dining. And to this day, we may be the only national chain using handheld server tablets in our restaurants to improve the guest dining experience. Greg will remain a guiding light as a BJ's board member. With so much growth potential, I'm excited and look forward to building on this platform with the entire BJ's team.

Switching to our recent performance. I am very pleased to report that the positive momentum in our business continued throughout the second quarter of 2021. Driven by both improving dining room seating capacity, key markets, and guests eager to return to our restaurants, our sales are continuing their steady recovery. The quarter began with weekly sales per restaurant averaging 102,000 in April as indoor dining restrictions remain in place with less than half of our locations received up to a 100% capacity.

In May, our weekly sales average rose to 106,000 as certain states loosened restrictions, and we had Mother's Day and the start of graduation season. In June, our sales accelerated even further with our weekly sales average increasing to 110,000 as the remaining dining room seating restrictions were removed, including our California restaurants on June 15, and we had the benefit of Father's Day as well. Our sales are also improving on a comparable restaurant basis. Compared to 2019 levels, we improved by 9 percentage points from negative 17% in March to negative 7.6% in April and May.

The momentum continued in June, and we improved to negative 3.8% for the reasons I just outlined. In July, our sales are trending even stronger at positive 1.6% of 2019 levels on a comparable restaurant basis, which includes headwind from lapping a free Paczki Day promotion in the first part of July of 2019. The strength of our comparable restaurant sales in July reflects dining room sales that have now recovered to about 90% of 2019 levels and off-premise sales, which remain more than double pre-COVID levels. In terms of dayparts, our afternoon and dinner time sales are higher than 2019 levels, while late-night remains challenged.

Geographically, we have some very strong markets, including Southern California, Arizona, and Ohio that are delivering comparable sales quite a bit higher than our average. Several other markets like Northern California and the Pacific Northwest remain well under our average, driven by key local employers that have yet to bring workers back to offices. Off-premise sales remain at more than double pre-COVID levels even as dining room sales recover, and that supports our expectation that guests will continue enjoying the convenience of takeout and delivery going forward. Given the strong demand for the BJ's concept, our No.

1 focus in the past quarter and going forward is to increase restaurant staffing. The demand from our guests for that differentiated, higher-quality dining experience that we provide at BJ's is clearly evident as sales continue to outpace our current staffing levels. We added nearly 3,000 key members in Q2, an increase of more than 15% from where the quarter began, though our restaurant staffing today is still only in the high 80% range of pre-COVID levels. In our restaurants, where staffing is most challenged, we are limiting the tables we sit in the near term as we are uncompromising and delivering a best-in-class experience to each guest we serve.

We believe our approach is the right long-term strategy to meet and exceed the expectations of our loyal guests and keep them coming back. This is underscored in our Net Promoter Scores, which were at the highest level on record during the first half despite the challenging staffing levels. Additionally, where our restaurants are fully staffed, we are delivering meaningfully stronger comp sales, which provides us confidence in the future sales benefit as we continue to add and train more team members. From an initiative standpoint, we continue to be excited by the traction from our new Beer Club subscription services.

As we discussed on the last call, we launched our Beer club to the majority of our California restaurants in March of this year. As a reminder, our Beer Club is a subscription program where members pay $30 for every two months for unique and exclusive beers from our award-winning brewery team plus additional food and beverage benefits designed to drive incremental visits and spend in our restaurants. Membership sign-ups are trending well, and we remain very encouraged by the guest's interest and engagement with the program, as well as its ability to drive visits and profit. Through the end of this year, we will continue to concentrate on California.

However, looking forward, key states, including Texas and Florida, recently adopted permanent legislation allowing alcohol to go increasing the markets where we can offer our Beer Club. With nice incremental sales and encouraging reviews, we continue to test slow roast, our virtual brand in approximately 30 restaurants in California and Texas. Our next phase of testing will be iterating on the menu to ensure we have the best brand and offerings. And again, we want to build our staffing levels closer to pre-COVID ranges before expanding on this exciting opportunity.

As I said earlier, we know that fully staffed restaurants are delivering meaningfully stronger comps, and therefore, our No. 1 focus will be restaurant-level staffing. Additionally, as Greg Trojan mentioned, this past year, we have been enhancing our guest research and also our innovation capability. Our expanded guest research has helped us identify most valuable guests and their needs and wants from BJ's and will be a key lens from which to focus our menu innovation, marketing, and hospitality initiatives going forward.

While our innovation team is a cross-functional team from key areas in our restaurant support center and select test restaurants that are continually testing and innovating around better ways to improve guest experience. Combining our guest research with quick prototyping, innovation, and testing, so we can learn even faster and provide better solutions for our guests will be a powerful driver of BJ's performance going forward. Before I pass it over to Tom, no discussion of our growth prospects would be complete without addressing our vast opportunity related to new restaurant openings. We opened our two 2021 openings in the second quarter in Merrillville, Indiana, and Lansing, Michigan.

Early sales have exceeded our high expectations, which is fantastic as we continue expanding into new markets. We're also scheduled to reopen our Richmond, Virginia restaurant in a few weeks after temporarily closing it during the pandemic and recently completing a limited remodel there. As we look beyond 2021, we are seeking to increase our new restaurant openings, so that we achieve a minimum of 5% plus increase in operating weeks over the longer term. This level of new restaurant expansion, combined with driving positive comparable restaurant sales positions, BJ's to grow revenues in the high single digits or more range for many, many years.

For 2022, we are currently targeting eight to 10 new restaurants as we have built a solid pipeline for next year. We remain incredibly optimistic about the opportunity for many more new locations as we continue on our path to at least 425 domestic restaurants. Finally, I'd like to take a moment to acknowledge my appreciation for every one of our team members as they are the backbone of our rebound and will be the driving force for many successes going forward. Throughout Greg's tenure at BJ, he fostered a culture that values collaboration, inclusion, diversity, and celebrating each team member's contributions and accomplishments.

This well-established ethos will not change as we transition to our new leadership structure. Tom and I are firmly committed to fostering the ongoing growth of BJ's culture, and we will continue to prioritize integrity, collaboration, innovation, and the delivery of our gold standard of operational excellence. This will allow BJ's to continue delivering memorable dining experience for our guests, successfully grow the BJ's concept and brand and build value for shareholders. Now let me turn it over to Tom, our current Vice President of Strategy and Financial Planning and Analysis and incoming CFO, to provide a more detailed update from the quarter and current trends.

Tom?

Tom Houdek -- Vice President, Strategy and Financial Planning and Analysis

Thanks, Greg, and good afternoon, everyone. Before I begin, I wanted to take a moment to share my excitement for being named as BJ's next CFO. Greg Levin is a true leader and mentor, and I couldn't ask for a better leadership team to continue partnering with in my new role. And to all of our analysts and investors participating on or listening to this call, I look forward to spending more time with you in the coming months.

Now onto the details of the quarter and some forward-looking views. Please remember that this commentary is subject to the risks and uncertainties associated with forward-looking statements as discussed in our filings with the SEC. As Greg just outlined, our sales improved sequentially and meaningfully throughout the quarter, which we believe was driven by both capacity and demand. On the capacity side, we began April with more than 70% of our dining rooms still operating with some form of dining room capacity limitations.

In late June, our last remaining markets with capacity restrictions fully reopened, and we're once again allowed to fill every seat in each of our restaurants, though staffing is now the governor for us, operating at our true full capacity. On the demand side, guests are clearly eager to dine out again. COVID cases declined throughout the quarter as vaccination rates increased, giving more guest comfort dining out. Anecdotally, we are seeing more regulars returning to our dining rooms and bars, which is fantastic.

On a more macro level, household balance sheets are stronger than ever, and guests, in general, have more to spend on experiential dining, such as BJ's. Total revenues for Q2 were $290.3 million, and we reported net income of $6.4 million and diluted net income per share of $0.26 on a GAAP basis. The higher level of sales during the quarter allowed us to productively leverage certain variable and fixed costs in our business, resulting in restaurant-level operating margins of 14.8%, which improved by 330 basis points from Q1. Adjusted EBITDA also improved to $27.7 million and 9.6% of sales in our second quarter, marking a more than 100% increase from $12.7 million in the first quarter.

Inflation of key restaurant costs, including food and labor, ticked up as the second quarter progressed. We took approximately 2.5% in pricing in recent weeks, which is below the current inflationary environment as we regularly do to help offset inflationary elements of our cost structure. We will be watching labor and commodity inflation levels as we move through the second half but believe our conservative approach to pricing during the pandemic to maintain our value leadership position will allow for additional pricing if the environment warrants. Cost of sales came in at 26% for the quarter, up 90 basis points from our first quarter.

The increase was driven by higher commodity costs across our market basket and higher incidence of our slow-roasted proteins during the celebratory season. Labor came in at 35.9% in the second quarter, which was 70 basis points better than our first quarter as leverage from higher sales outpaced rising labor costs. While it remains difficult to compare labor to last year, our 35.9% labor is only 10 basis points higher than Q2 of 2019, when our weekly sales average was 7% higher at $113,000 versus $106,000 this quarter. Our labor productivity is a result of adjustments we made last year to create a smaller yet still very broad menu, changes in management staffing levels based on weekly sales results, the continued strength of our off-premise sales, and the leverage we are getting from the continued increase in weekly sales.

Our progress adding new team members resulted in approximately 20 basis points impact to labor due to the extra training required over the -- over a more normalized 2019 hiring and training levels. As Greg noted, we will continue to add even more team members to restaurants in the coming months, which we expect to have an incremental sales benefit. Operating and occupancy costs were 23.3% of sales for the second quarter, an improvement of 350 basis points from the first quarter as sales growth leverage more than offset the increases in variable elements. Our Q2 operating and occupancy costs include 1.2% of sales for marketing.

Also included in operating occupancy cost was $1.5 million of operating expenses for temporary patios, which we continue to get solid returns on and which generated over $5 million in revenues for the quarter. However, given how we can now fully seat in our dining rooms, we removed many temporary patios by the end of Q2. G&A for the quarter was $17.0 million. We are still targeting G&A of around $67 million for 2021, which includes more than $6 million for incentive compensation compared to less than $500,000 booked in 2020 due to the impacts of COVID on the business.

As always, depending on results, the $6 million of incentive compensation may vary. Our G&A budget also includes approximately $7.1 million related to equity compensation, which is about in line with 2020. Turning to the balance sheet. Our improving sales and resulting cash flow allowed us to repay an additional $35 million of debt in the second quarter, reducing our debt balance to $81.8 million.

In fact, our cash flow generation in the second quarter has now put us in a positive net cash position with our cash balance of $88 million, more than offsetting the amount of debt outstanding at quarter-end. We also repaid an additional $10 million of debt subsequent to the close of our second quarter. We are beginning to use our strong liquidity to drive growth, with construction started on two new restaurants we intend to open in early 2022 and another location where we will break ground in the coming weeks, as well as further investment in our sales-driving initiatives. We are very pleased with the strength of our balance sheet and will remain consistent in our approach of prioritizing growth-driving investments to build new restaurants and improve our existing restaurants.

We anticipate next year, we will be in a position to determine the appropriate balance of investment and return of capital to shareholders. Shifting to today, we are very pleased with the continued improvement in our comparable restaurant sales versus 2019. We remain steady -- we remained steady in the positive low single digits throughout July, finishing the month at a positive 1.6%. In fact, our July weekly sales average reached the highest level ever for the month.

While we continue to monitor the COVID landscape, including the delta variant, we remain optimistic in our ability to continue to grow sales into Q3 and the rest of this year. Our weekly sales average has returned to a more regular seasonal trend since capacity limitations were lifted in June. As a reminder, Q2 is historically our highest sales quarter, driven by big weekends for Mother's Day, Father's Day, and a lift for graduation celebrations. Q3 tends to be our lowest sales quarter as vacations and back-to-school season impact the regular schedules of our guests, a trend we expect to see again in August and September.

For reference, our weekly sales in 2019 averaged approximately 113,000 in Q2 and 104,000 in Q3. Our sales goal for the second half is to build on our comparable restaurant sales versus 2019 and continue to set weekly sales records. With regard to the middle of the P&L, we are working with our supply chain partners to maintain ample supply of critical ingredients and have agreed to some higher near-term prices on certain commodities in order to avoid shortages. We expect these commodity headwinds to hold our cost of sales in the 26% area for the second half, consistent with Q2 and taking into account our recent pricing round.

We will have a better understanding of how much of this inflation is permanent versus transitory in the coming quarters, and we'll evaluate further actions to help offset any continued effects as needed. Thankfully, with our broad menu, we have the opportunity to shift our menu mix at times based on different promotional activities, which we can also use to help mitigate inflationary pressures. Currently, we have about 45% of our food commodities locked for the remainder of this year. From a labor perspective, while we increased our hourly team member count by 15% in Q2, we remain understaffed in many of our restaurants.

We have said -- as we have said consistently, we are in a high-touch business in which the precise execution of every aspect of our operations, including food, service, and hospitality, drives long-term sales growth and brand loyalty. As a result, we believe we can drive even more sales upside by continuing to recruit and train kitchen and front of house team members and restaurant managers, which, in turn, will help offset the additional labor investments. Therefore, we expect labor in the mid- to high 37%, which would be slightly above Q3 of 2019 levels, taking into account the modest labor investment as we continue to hire and train team members and the typical deleveraging from seasonally lower sales in Q3. We expect an increase in labor efficiency once we are past the short-term investment of hiring and training.

For operating occupancy costs, we expect to remain around $24,000 per restaurant operating week average for the balance of the year, consistent with Q2 levels. I anticipate G&A to be in the $17 million to $17.5 million range in Q3, which would be up modestly from Q2 as we continue to ramp up the hiring and training of new restaurant managers, selectively add additional resources to execute our growth initiatives, and return to a more normal level of general business activity, including travel. Additionally, I'm expecting our diluted shares outstanding to be approximately $24.1 million for the third quarter. In summary, we are now generating higher sales on a comparable-restaurant basis compared to 2019 as we address the challenges related to labor, inflation, and supply chain.

We also just delivered our highest sales ever in July, which is a testament to our guests' excitement to return to our high-energy dining rooms and the sustainability of our delivery and takeout sales gains. Adding our gold standard level of food and service execution and the value proposition across our menu, including our daily brewhouse specials, happy hour, and happy hour results in clear differentiation that our guests love and a strong competitive advantage for BJ'S. While there may be still some near-term disruptions as the country and restaurant industry continues its recovery, we remain incredibly optimistic regarding our ability to continue delivering outsized growth, both in the second half and in the years to come. Thank you for your time today, and we will now open the call to your questions.

Operator?

Questions & Answers:

Operator

Thank you. [Operator instructions] And we will go first to Alex Slagle of Jefferies.

Alex Slagle -- Jefferies -- Analyst

Thanks, and congrats to all of you on your respective next adventures. I wanted to follow up on the comments on the staffing levels. I guess, on the fully staffed units are driving meaningfully higher same-store sales. If you could provide any color on sort of what that gap looks like and also how different the guest satisfaction scores are, what you're seeing there?

Greg Levin -- President and Chief Financial Officer

Yeah. Alex, first of all, thank you for your introductory comments there. In regards to the range, it's a pretty significant range, and we've kind of broken it down to tiers. And without getting into specifics, I would tend to tell you that restaurants that are at that 100% level, we can see up to high single and even double-digit comps in there and then some in those restaurants.

So it's a pretty high number from that perspective. And then obviously, at different staffing levels, it comes down. And then because we have, really as we said on the call, really make sure that we're providing the gold standard level of execution even in restaurants that have lower staffing, we are not in the position of basically giving a server of 15 tables or if we're limited with a certain amount of cooks trying to open up all of our tables out there and just not give the right hospitality and execution service to our guests from that standpoint. So because we've been able to do those things, our NPS scores don't have quite the dispersion that you see on the comp sales side of it when all of our tables are open.

Alex Slagle -- Jefferies -- Analyst

OK. Makes sense. Then on the outlook on the third quarter, just trying to think what kind of assumptions generally you're making on volumes and capacity. I mean, I guess, there's a little more uncertainty now just given unknowns, the virus, and potential restrictions.

But any color here would be helpful. And also on the patios, just your ability to be flexible there and reopen if you need to?

Greg Levin -- President and Chief Financial Officer

Yeah. So let me answer a couple of questions since probably, I think, others might have the same thoughts or comments on that. One is we have not seen really any changes in our business right now, despite some of the increases on the delta variant. Even in Southern California, where, at least in the Los Angeles area, where mask mandates have come back into place, we haven't seen a change in the positive comp sales trends of the Los Angeles market in that regards.

And same thing with as we look at other states. We did make the comment. I know, Alex, you're up in the area. The Bay Area, just with people not back in their offices is really, frankly, the softest market for us overall.

And we've seen tech companies continue to push out their opening days in regards to bringing team members back or in their case, employees back. So we expect that area to stay soft. And I think with it like we've always done, we kind of provide you where are the comps are at the time of our earnings, and kind of use that as really just a springboard of how we think about the quarter, I guess. And then -- I'm sorry, your last comment on patios.

While we pull down patios, we do have the flexibility to introduce them, if needed, and we would do that. We would have to obviously work with our landlords and make sure that we got the permission, but our landlords have been very helpful with us or the majority of them have been very helpful with us. They'd like to see us continue growing sales as well.

Alex Slagle -- Jefferies -- Analyst

That's great. Thank you. 

Greg Levin -- President and Chief Financial Officer

You're welcome.

Operator

And we'll go to our next question at this time from Drew North of Baird.

Drew North -- Baird -- Analyst

Great. Thanks for taking the question. I wanted to ask about the pipeline for unit development in the context of the outlook for eight to 10 units next year, which you've had out there. I'm wondering if you could comment on the factors that maybe is holding back that number from being even higher exiting the pandemic? And just does it take time to rebuild the pipeline after pausing a bit? And as a follow-up or related question, I believe the brand has opened as many as 16 to 17 units in year's past.

So could you see the company getting back to that type of growth in the out years?

Greg Levin -- President and Chief Financial Officer

Yes. Again, this is Greg Levin. I'll let Greg Lynds comment and some other comments from that standpoint. But Drew, the -- we have always prided ourselves at BJ's in the fact that we have opened restaurants with high-quality and consistency in that regards.

We, at least in my time here, and for those that follow BJ's have been here a long time. We have not ever put out a press release saying that we're closing 15 of the last 50 restaurants that we've opened over the last couple of years because we decided to grow for growth's sake. We want to make sure there is quality and consistency in that. And when you think about building new restaurants, it's making sure that not only do you have the real estate pipeline, but really, as even Tom said, about our current restaurant sales environment, the governor to that is going to be around team members and really managers.

So as we exit the pandemic and we build up our manager pipeline, we are not going to sacrifice on our manager pipeline in regards to not having the people that can operate, frankly, $6 million average unit volume restaurants. So for us to get back to where we want to grow our business, we're going to do it in a very deliberate manner that allows that quality and consistency. So as we think going from eight to 10 next year, that's still going to be a lot of investment into our business in regards to hiring managers, making go through our training program, as well as hourly team members and so forth. So when we think about that part of our business, we want to do it, as I said, very deliberately.

And over time, we'll continue to step that number up. So eight to 10 will continue to go -- will continue to increase. And as you noted, we have done 16 restaurants before, and I think our goal would be to getting back there and becoming the ability of driving that 5% plus increase in operating weeks as we continue to build this business. Greg, if you see anything from a pipeline standpoint that you want to add.

Greg Lynds -- Chief Development Officer

Yeah. No, Drew, thanks for the question. I do think our -- on our last conference call, we had mentioned that our pipeline is very strong. We are seeing more B-type sites and C-type sites and the A sites are harder to come by.

I will say, in the last two months or so, we have noticed an increase in deal flow. And we're pretty bullish and confident that over the next 24 to 36 months, there'll even be more A sites available to us. And as you know, we have plenty of white space available, with still a lot of states we haven't penetrated with only 212 restaurants in 29 states today.

Drew North -- Baird -- Analyst

That's all very helpful. I wanted to also circle back on the staffing topic. I was wondering if the challenges there are concentrated in any particular region or market? And just maybe stepping back, what are the company-specific initiatives that you have in place that could help accelerate your ability to fulfill those staffing needs as opposed to needing the labor environment to improve?

Greg Levin -- President and Chief Financial Officer

Yeah. Drew, we tend to see -- there's always going to be pockets that are more challenging than other pockets. They've been that those they -- that way, ever since I've been in this business, as Greg Trojan mentioned that going back to California Pizza Kitchen days. Generally, the Bay Area tends to be a more challenging area.

It always has been even back in the 1990s from that perspective. And then it's just, again, pockets throughout the country versus very specific regions. In regards to incentives, we've gone down the path like many other restaurant companies have in regards to job fairs and other incentives out there. I think the best thing that we tend to look at really is how do we incentivize and reward our current team members.

We don't think it's the right thing to do is to offer bonuses for somebody new joining us when we've had somebody working for us for five, six, seven years. So our general viewpoint is really to make sure we're taking care of our current team members, building on that culture within the four walls of our restaurants. And that in of itself feeds on itself to bring other people into BJ's.

Drew North -- Baird -- Analyst

And last one from me. I was just wondering, and maybe I missed it. Did you share the off-premise, either sales mix or average weekly sales for Q2 and/or July? That'd be helpful.

Tom Houdek -- Vice President, Strategy and Financial Planning and Analysis

Sure. For off-premise in total. So for Q2, our off-premise WSA was 24,000.

Drew North -- Baird -- Analyst

And do you have a perspective on July?

Tom Houdek -- Vice President, Strategy and Financial Planning and Analysis

Yeah. We've seen the off-premise. We're still sitting above 20,000. So yes, we're sitting at somewhere in that kind of low 20,000 area.

Greg Levin -- President and Chief Financial Officer

Yes. So we've come down seasonally, which we'd expect from about 24,000 more dining rooms have opened up to right now in July summers, right around 21,000.

Drew North -- Baird -- Analyst

Very helpful. Thanks, guys.

Operator

And so we'll move to our next question from Nicole Miller of Piper Sandler.

Nicole Miller -- Piper Sandler -- Analyst

Thank you. I also want to say congrats to everyone, it could be happening to better people and just such an awesome team, so excited. In the prepared commentary, you had mentioned doing some guest research and talking about finding the most valuable guests and what are their needs. So I was curious, what did you find out? What do the most valuable guests have in common? Who are they? And what are they looking for?

Greg Levin -- President and Chief Financial Officer

Yeah. So, Nicole, I'm going to let Kevin Mayer, our chief marketing officer, probably handle a good portion of it. But as we've always said at BJ's, we provide this kind of higher quality, energy, dining experience, which is very experiential. And I would -- I'm just going over the fender from Kevin.

It's that whole experience, which is really important. And I'll let kind of Kevin build on that because he's the guy that's really been leading it up inside BJ's.

Kevin Mayer -- Chief Marketing Officer

Yeah. Thanks, Nicole. I guess just from a methodology standpoint, we did a number of different things in our research. One, starting with a -- our most valuable guest survey, which are, guess it came, in some cases, 40 more times a year.

So we could really understand what -- why they had such a magnetism for our brand. We did expand it into a larger segmentation study. And what we just found is that, as Greg was saying, there's an energy that they're attracted to when they walk in the door. There's a consistency of the execution, and there's ultimately the social aspect of the concept that they just love, whether it'd be the team members that are connecting with them.

They have plenty of stories of our team members knowing their drinks when they walk in the door to actually being able to work through them with the menu to the people that come and the fact -- come with and the fact that they can, for any occasion, ultimately come to BJ's. Through the segmentation, we found there's two core guests. And what they have really in common is just a social aspect. They love to come for the energy, for the aspect of sitting back and feeling kind of welcomed and comfortable.

And then there's definitely nuances in terms of demographics and other needs, but a really good start to the research.

Nicole Miller -- Piper Sandler -- Analyst

Awesome. We'll continue to follow up on that. And then just making sure we assign the appropriate level of understanding or -- I mean, risk is definitely too strong of a word, I'm sure, but eight to 10 stores. Next year, if we want to model an over/under, are they -- I'm sure they're obviously all identified, are they all LOIs? Are they all signed leases? First half, back half? Just want to get it right.

Greg Levin -- President and Chief Financial Officer

Yeah. I think right now, we're somewhere in the kind of three to five on signed leases. I don't have the signed leases in front of me from that standpoint. I think from a timing, it's still pretty much spread out fairly evenly within next year, somewhere it's in the kind of two in the first quarter, somewhere it's around three to four in the second quarter than the back half of next year.

So that's --

Greg Lynds -- Chief Development Officer

Yes. Yes, that's pretty accurate.

Nicole Miller -- Piper Sandler -- Analyst

Great. And I'll sneak in this last one. It's annoying, but I think everyone's tempted now to take these average weekly sales of 2019 and go up 2% on the comp. But I'm a little nervous if I'm not going to get the seasonality right, especially since you mentioned the tapering of the off-premise.

So is there any caution against taking the -- I think it was $104,000 plus 2%. If there's -- I don't know what you would say to that as the last question. And thank you.

Greg Levin -- President and Chief Financial Officer

Nicole, I think that's a reasonable way to think about it. I mean, as we look at our numbers internally, we hope that, obviously, as we bring on more team members and make sure we're doing everything right from that standpoint, that allows our effective capacity to expand that frankly would allow our comp sales to increase. When we talk to our operators and asking where they feel they're operating, they will tell you that they think our capacity today is somewhere is in kind of the 80% range, even though we have all -- technically all the seats open for all of our restaurants. But just when we think about the staffing levels and so forth, we're not necessarily seating or serving all of our -- seating all of our -- or seating our guests in all of our seats in that regards.

So we're always a little cautious from that standpoint as we bring team members on. But I do think given the current environment and assuming there's not major changes related to COVID, I think looking back in 2019 from a comp sales perspective, that's how we're tending to look at it and then how the comp business is moving from there.

Nicole Miller -- Piper Sandler -- Analyst

Thank you so much, and again, congrats.

Greg Levin -- President and Chief Financial Officer

Thank you.

Operator

Thank you. And so we will go next to Sharon Zackfia of William Blair.

Sharon Zackfia -- William Blair & Company -- Analyst

Good afternoon. Thanks for taking my question. This is probably a tough question to answer, but I'm curious on your line of sight to getting fully staffed. Is that something that you're hoping to get to by year-end or even sooner? And then curious whether the back of house or front of house is proving more challenging?

Greg Levin -- President and Chief Financial Officer

Yeah. Sharon, so first of all, it's a great question in that regard because obviously, it's so key to driving sales and giving that gold standard level of execution to our guests. And ideally, we'd like to be fully staffed tomorrow. And we've talked to our team members, and Tom alluded to it a little bit in today's call, and that is we're going to continue to invest and hire those team members.

And what generally happens in our business is you get into Q3, and you get lower sales, weekly sales averages. As Tom mentioned, you go from 114,000, down to 104,000 looking back to 2019. So generally, your operators are going to adjust their staffing levels because of that. That's just what happens as you come off the high watermark of June with the graduations.

We have told our team members that while we need to be productive and efficient, it's more important to make sure you bring on people and you train them, and you get ourselves ready to take on the holiday period from that same or the holiday time frame in November and December. So our goal would be to be fully staffed before we get into the fourth quarter, but it's going to be a challenge out there, especially with still the unemployment levels, the fact that people have, as Tom said, solid balance sheets. They're getting the refund that supposedly are going to end in September. We'll see how that plays out.

But as you said, it's a difficult question, but our goal will be sooner than later. And our goal is not to hold back on Q3 when seasonally weekly sales averages do come down. We'd rather make sure the staffing level is correct and have those team members in there. So we can go into the fourth quarter when our weekly sales averages start to increase again and be ready to go.

Sharon Zackfia -- William Blair & Company -- Analyst

That's really helpful. I know you also mentioned the late-night business is still a bit of a drag but has that started to improve? I mean, did you see an uptick there as the second quarter went on into July?

Greg Levin -- President and Chief Financial Officer

We did. That business has improved. We have talked in the past at late night, somewhere it's between 13,000 and 15,000. It's moving in the better direction.

We're still a good $1,000, a few thousand dollars less than where we want to be there. But it has improved. I think, frankly, the sporting calendar helped a little bit in that regards with NBA playoffs and things like that. And then removing the social distancing made a big difference here.

And Southern California, for the longest time, you couldn't seat at the bars. Now you can't seat at the bars, and we're getting those regular customers coming back both in the midafternoon, which as Tom mentioned or I think I mentioned actually, our sales are higher now in the midafternoon, but we're seeing those regulars come back at late night as well. So it's moving in the right direction. I would tend to say the two areas for us right now would be that late night.

And frankly, the Northern California area, I think are the kind of maybe two bigger areas that are keeping comp sales from even accelerating greater taking staff and putting staffing aside.

Sharon Zackfia -- William Blair & Company -- Analyst

Thank you.

Operator

And we'll move to our next question from Jeffrey Bernstein of Barclays.

Pratik Patel -- Barclays Investment Bank -- Analyst

Thanks. This is Pratik on for Jeff. And I'd also like to congratulate everyone on their new roles. I had a bigger picture question about restaurant margins.

If the current inflationary pressures remain outsized, Greg, now that you're in the CEO seat, how do you think about profitability? Are you willing to take the near-term hit to margins to maintain your value leadership? Or would you consider incremental menu pricing above your historical norm? And on the flip side, are there incremental cost-saving opportunities that are still out there? And if so, where in the PL do you see them coming from? Thanks. 

Greg Levin -- President and Chief Financial Officer

Yes. Look, that's a great question. And I'm going to be working with Greg Trojan and the rest of our board of directors, and frankly, our senior executive team, as we just continue to evolve around Greg Trojan strategies and the things that I would like to do that might be different or just a little bit of a change from that perspective. As we tend to think about your question overall.

One is, as I mentioned earlier, we got to get -- we have to get ourselves fully staffed to drive sales. And everything I have seen in this business over my many years, if you're not driving top-line sales, you're really not going to be able to save your way to success. It doesn't take away being productive and efficient. The Project Q initiative that Greg Trojan put in place today lives on in BJ's and it's a great example of us always going after efficiency within our restaurants, and we'll continue to drive that.

But I think secondarily, looking at that, one of the things that we did, I'm not going to get into specifics here, is we take a look at our restaurants that are driving positive comp sales in both May and June, and we compare them to May and June of 2019. And we have noticed that those restaurants that are driving comp sales are able to manage margins. Some of the restaurants have improved the margins dramatically from that time frame. So there's the ability that as we drive comp sales positively, we can move those margins.

Secondly, one of the things we looked at as well is how is the throughput in our business. And frankly, the throughput in our business on the incremental sales is still just as much as it always was, and that is if we can drive incremental sales, we can generate $0.40 to $0.50 of incremental dollars. Dining room is going to be higher in the $0.50 or $0.47, $0.50 range. Third-party delivery is a little bit less because you pay the commission.

But it really comes back to the fact that as you drive those sales, you drive the throughput and that drives those margins in there. So ultimately, to your question, we're going to do it all. But if I had to air somewhere, I'm going to always air on driving sales, and that probably means making sure we have value for our guests and that we're giving ourselves -- giving our guests great service within our restaurants. I have not seen a restaurant company today eliminate servers and improve their sales.

And everybody that's on this call can think back to seven or eight years ago when the whole talk of the town was putting ziosks and tablets on their tables and doing calculations that servers are now going to go to 10 tables, and that's going to save them $3 million. And they tend to think about that as a dependent variable, meaning I can do that, and it's not going to change sales at top level. So our goal, as Kevin Mayer just mentioned earlier, looking at our guests. It's about the experience within the four walls of our restaurant.

We're going to make sure that we continue to deliver memorable dining experiences at BJ's.

Pratik Patel -- Barclays Investment Bank -- Analyst

That's very helpful. I appreciate it, and congrats again, everyone.

Greg Levin -- President and Chief Financial Officer

Thank you.

Operator

We'll go next to Todd Brooks of C.L. King and Associates.

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

Good afternoon everyone. Thanks for taking my questions. A couple of questions on staffing, along with everybody else. Have you -- did you share -- or would you share kind of number of bodies to fully staffed? I know that -- I think you talked about 20,000 on the last conference call.

And I believe earlier in this call, you said you hired 8, but then again, demand has rebounded sharply. So where do we feel we are as far as additional bodies that we need to hire to get to that fully staffed level that you're targeting?

Greg Levin -- President and Chief Financial Officer

Yes. So I don't know the exact number. I think we said at one time that we are around 23,000 team members. Today, I said our staffing levels is kind of in the mid- to high 80% range.

So I think if you kind of back into it that way. And again, this is just doing the math off of today's earlier formal comments, it puts you in the high teens in that regards.

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

OK. Great. And then as the quarter progressed, you touched on this, Greg. Ease of hiring as far as -- as we've gotten closer to September as some states have terminated the unemployment benefits earlier in the quarter, kind of the pace of bringing new applicants on board.

Can you talk to how that's changed as we've moved into June and July here?

Greg Levin -- President and Chief Financial Officer

It's gotten better. Look, I think there is a couple of things that have played in. And this is nothing original from Greg Levin in this regards. And that is, as Tom mentioned, balance sheets are strong for consumers and for basically people that need to get a job in that regards.

So getting the unemployment benefits, and I'll get back to your comment about some of the other states that have started to eliminate the federal. But they get the unemployment benefits coming through. You still have child care on there. And then, frankly, as a country, we kind of opened up in June, right in the middle of summer, where people have gone, "Hey, I've been stuck inside for the last year.

Do I really want to go out and get a job right in the middle of June? Or can I have a summer before I have to go back and get a job." So I think as we get later into this year, I know unemployment benefits from a federal standpoint will end in September, that things will get easier. That's what I'm saying at knowing -- and then you've got child care that's going to help with people going back to school. So I think all of those forecast a better hiring scenario in the future. But even taking a step back from that, we have heard from our team members that as certain states have eliminated the federal unemployment that they've said it's gotten easier from that perspective.

And I would tell you, going through the summer months, it seems to get easier every single month from that perspective as well.

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

Great. And then a final question if I may. You talked about slow roast, and we're in 30 stores in test now. And obviously, kind of holding at 30 until we get the staffing levels when we want, so probably into the fourth quarter.

Is there any interim kind of early read data that you can share with us since we're going to be paused at these 30 units for a while? And what you are seeing in the incrementality, maybe even as we're moving into the summer season from the slow roast brand as we're getting to a more normalized environment? Thanks.

Greg Lynds -- Chief Development Officer

Sure. Thanks for the question. Yes, we have a lot of optimism, even from the current test with these 30 restaurants out there that have it going. We've seen anywhere in the kind of six or more orders per restaurant per day and solid check.

So it's adding and over a point of comp as we've been testing it. So a lot of things to like about it. And even looking at the overlap between the BJ's guest, which is a key criteria, too, of how this fits in with our normal customers, and it's in the 20% range, which is virtual restaurants go, is what you want to see. So yes, we're optimistic, but still want to make sure that it's the right time to launch it with staffing levels as we've been discussing, but also iterating to make sure that we have the best option possible to when it's ready to roll out.

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

That's great. Very helpful. Thank you.

Operator

And our last question comes from Jon Tower of Wells Fargo.

Jon Tower -- Wells Fargo Securities -- Analyst

Awesome. Great. I have a few if you don't mind. And first, echoing comments from everybody else.

Congratulations, Greg and Tom, on the new moves. Obviously, Greg Trojan, I wish you the best going forward. 

Greg Trojan -- Chief Executive Officer

Thank you. 

Jon Tower -- Wells Fargo Securities -- Analyst

Yeah. So just hoping to dig in a little bit on the labor stuff. I know everybody has been asking about it. But I'm curious, on the one hand, you're going to see elevated costs this third quarter related to recruiting.

I am curious to get your thinking on how long that persists. And then going forward, thinking about how some of the menu changes that you did during the pandemic, and obviously, there's some of the off-premise sales coming through and some staffing changes around it. Now where do you think that can reach maybe as a percentage of sales over the longer term? Do you think that even in the face of higher inflation, you'll be able to see some labor leverage on that line, say, relative to what we saw in 2019 or 2018?

Greg Levin -- President and Chief Financial Officer

Yes, Jon, I do. I think there's a couple of things in here. One is after next year, California reaches $15 minimum wage. So you've got 30% of our restaurants that now are just going to be kind of a CPI versus this kind of bigger bump that we've taken.

And we've kind of proven that we know how to operate our restaurants in a high labor states. And I think about some of the other concepts out there that don't have to deal with some of the California things. Those are coming down the line. And I think there's going to be more challenges, frankly, maybe at other concepts than ours just because of where we are from a structural standpoint, to begin with, in that perspective.

So I think that's one, that's going to be a real benefit for us. Going forward, just having California kind of hit their minimum wages, adjusting it to a CPI perspective. And then when we start to think about the changes in the business of holding that off-premise, driving out weekly sales average and then looking at our business with some of our restaurants that are fully staffed, how they're comping up versus where they were in 2019. And as I said, their margins were in line or better than 2019, just depending where they were on that -- kind of on that matrix and in different markets.

So when I look at that and I think about it, I think we have a good opportunity to be back in line with the historical margins as we kind of work through some of the transitory inflationary pressures in our business right now.

Jon Tower -- Wells Fargo Securities -- Analyst

Great. Thanks. And do you think this -- sorry, near-term pressure on some of these incentives to get people back, do you think that wanes in the fourth quarter? Or do you think it carries over into that period?

Greg Levin -- President and Chief Financial Officer

Well, if we can get ourselves back to the staffing level, I think what you -- what we end up seeing is a decrease in overtime and a decrease in training. And both of those actually have a fairly decent impact on labor margins in our business and get us back to, again, being better from an inflationary standpoint. Even when we look at our labor rates, there's a big difference between labor rates with overtime and labor rates without overtime. So as that can come down because we're fully staffed and then training, which, as Tom said, is somewhere in the 20 bps higher than where it's historically been.

All of those allow us to be more efficient in the restaurants, just from a pure productivity standpoint. So less hours because we got the right people. They've got their -- for lack of a better term, they're sea legs under them. And then we end up eliminating those additional costs around overtime and around training.

Jon Tower -- Wells Fargo Securities -- Analyst

Great. And then just maybe this is a question for Kevin. In terms of the guest research that you've done, are you starting to implement some of the information that you've learned from this study? Or is it still kind of more of a '22 or late '21 type of push? And if so, can you give an example of what you've done?

Kevin Mayer -- Chief Marketing Officer

Yeah. Well, there's always more to learn from our guests. So let's just start there that there is a few other steps in this process yet. We're doing some things with some credit card behavioral data that's going to give us another overlay to really understanding our guests on a daily basis in terms of how they behave with us.

But going back to your question, we're now -- the whole point to this is to, as we understand our guests, is to continue to create more differentiation within the space. What we found is our restaurant is a place that kind of has the energy of a bar, which, of course, a big part of our business is from the bar. And yet we have this kind of comfortable bar environment too that people like to come and hang out with. So as we look at differentiation, we're looking at doubling down at some of the strengths we're doing.

We're looking by department right now, how we can double down on those opportunities. We're applying some of this into the way we do targeted marketing. We're even looking at the way we look at our loyalty guests and other opportunities to continue to drive more frequency and upsell. So kind of across the board, but this is probably, I'll call it, a 12- to 24-month evolution to get us to a point where we're really working on all cylinders with this new information.

Jon Tower -- Wells Fargo Securities -- Analyst

Got it. Thanks. And then lastly, Tom, I just want to clarify. I believe you had said earlier that other op expense at the restaurant level, $24,000 per week.

Is that inclusive of the marketing spend?

Tom Houdek -- Vice President, Strategy and Financial Planning and Analysis

For the balance of the year, I think you're saying, or maybe it's just the third quarter?

Greg Levin -- President and Chief Financial Officer

I think that was just the third quarter, wasn't it?

Tom Houdek -- Vice President, Strategy and Financial Planning and Analysis

Yeah. It should be a good estimate for the balance of the year, but that's correct.

Jon Tower -- Wells Fargo Securities -- Analyst

And that's inclusive of marketing, sorry?

Tom Houdek -- Vice President, Strategy and Financial Planning and Analysis

Correct.

Jon Tower -- Wells Fargo Securities -- Analyst

Awesome. Great. Thanks. Appreciate the time.

Thank you.

Operator

[Operator signoff]

Duration: 62 minutes

Call participants:

Greg Trojan -- Chief Executive Officer

Rana Schirmer -- Director, SEC Reporting

Greg Levin -- President and Chief Financial Officer

Tom Houdek -- Vice President, Strategy and Financial Planning and Analysis

Alex Slagle -- Jefferies -- Analyst

Drew North -- Baird -- Analyst

Greg Lynds -- Chief Development Officer

Nicole Miller -- Piper Sandler -- Analyst

Kevin Mayer -- Chief Marketing Officer

Sharon Zackfia -- William Blair & Company -- Analyst

Pratik Patel -- Barclays Investment Bank -- Analyst

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

Jon Tower -- Wells Fargo Securities -- Analyst

More BJRI analysis

All earnings call transcripts