Another quarter, another steady result from casual eatery/brewpub operator BJ's Restaurants, Inc. (NASDAQ:BJRI). BJ's reported its second-quarter results on July 26, with revenue up 8%, net income up 11%, and earnings per share up 20% when the past year's aggressive share buybacks are factored in. But the company continues to deal with the headwinds challenging the casual sit-down restaurant segment.
Have a seat and let's dig into BJ's earnings release. There are challenges the company must face, but also opportunities it can seize: Here's a closer look.
|Metric||Q2 2016||Q2 2015||Change|
|Earnings per share||$0.6||$0.5||19.5%|
|Comparable sales||(0.2%)||0.5%||(70) BPS|
What happened in the quarter
- Traffic was down 1.6%, the biggest driver behind the negative comps.
- Management said its traffic was 190 basis points better than the industry average during the quarter.
- Texas (BJ's second-largest market) was especially challenging. Remove Texas from the mix, and comps would have been up 1.2%, though traffic would still have been down 0.5%.
- California (BJ's oldest and largest market) reported strong results, with positive comp sales every week in the quarter.
- Weekly sales average was $110,000 per location, down 1.6% due to traffic declines.
- Revenue gains were all driven by new restaurant openings. The company opened three new locations in the quarter, after opening four in Q1.
- Over the past year, BJ's has opened 12 new locations.
- The company finished the quarter with $22.9 million in cash and $91 million in total debt. Cash was down $12 million from the beginning of 2016, while debt was down $9 million.
- The company didn't repurchase any stock in the second quarter, though share buybacks remain on the table. The board of directors approved a $100 million expansion of the current program, authorizing management to repurchase up to $129.9 million in shares.
- Since 2014, the company has spent $220 million to repurchase 5.5 million shares, reducing the share count by 15%.
What management said
CFO Greg Levin, on the very challenging environment in the restaurant business right now, said:
As we began Q3, the industrywide comp-sales slowdown that we experienced in June has continued into July. As [CEO] Greg Trojan mentioned, a variety of headwinds are weakening consumer confidence, causing continued declines in restaurant traffic. Unfortunately, around the upcoming U.S. elections including the recent Republican and Democratic National Conventions, racial divide, public area shootings, and other macro events appear to be challenging the restaurant industry overall. As a result, our sales to date in July are trending at approximately negative 2%, which is comprised of negative traffic of around 2%, which appears to be better than the casual dining industry, and means that overall we have a flat check as we continue to emphasize the value on our menu.
More from Levin, on how the company's lower-cost store format will allow the company to target smaller markets and still generate a strong return:
Investors should keep in mind that our lower-cost prototype and lower operating costs from our operating initiative, along with the fact that most of our newer restaurants are in states that are significantly less expensive to operate in than California, are leading to returns on these new restaurants that are at least meeting and in many cases exceeding our internal target. ... As such, in many cases we are getting into new locations where BJ's net investment could be as low as $2.5 million. In those situations, we may only target average unit volumes of $4 million to $4.5 million, which is basically $80,000 a week to $85,000 a week.
In other words, lower restaurant-opening costs could lead to more expansion opportunities in markets that may not have supported a BJ's restaurant even two years ago.
Levin also emphasized that efficiency and cost-cutting would only get the company so far, and that management won't make short-term cuts that sacrifice long-term brand-building:
[W]e can easily cut back on hospitality programs like menu sampling in our restaurants, or cut our marketing spend to try and drive short-term earnings. However, trying to save your way to success only works for a quarter or two. Our improvement in the business has been predicated on top-line sales growth over the last year and a half, and improvements in productivity and efficiencies in our business.
Therefore, we believe it is important to invest in marketing to build awareness in our brand. We know from our most recent awareness, trial and usage study that when guests discover BJ's, we have a high rate of converting these "triers" into frequent users. We believe this is a prudent investment in our business that complements our restaurant expansion and capital allocation strategies going forward.
As of this writing on July 27 (BJ's reported after market close on July 26), shares are down nearly 8%. This is largely because of the soft comps/traffic, and management's comments that they have seen even weaker traffic so far in the third quarter. It's not just a BJ's-specific thing, but a general downtrend across the casual restaurant industry, though BJ's management has remained adamant that their traffic and comps numbers are better than -- or at least not as bad as -- the industry as a whole.
But for nearly two years now, comps have been relatively paltry for BJ's and across the casual restaurant industry. This is one of the main reasons BJ's shares have fallen almost 27% from their peak in early 2015, even though earnings per share are up 66% over the same time frame.
Management was reticent to offer any guidance on next quarter or the rest of the year, instead focusing on efforts to control costs, improve efficiencies, and to continue marketing efforts designed to build brand loyalty. This, along with aggressive share repurchases, has boosted earnings over recent years, even if the stock price has lagged more recently.