Plenty of restaurant chains have struggled in recent months on concerns about a "restaurant recession." Lower food prices seem to be convincing diners to visit the grocery store instead of their local eateries, and accelerated expansion in recent years may have created a glut in restaurants, pressuring comparable sales.
BJ's Restaurants (BJRI +3.46%) was among this chorus when it reported third-quarter earnings in October, blaming a slide in comparable sales and weak performance on distractions from the election and the Olympics. This time around, comparable sales fell again, dropping 2.2%, but earnings per share (EPS) jumped surprisingly. Fourth-quarter results were reported Thursday.
Image source: BJ's Restaurants.
BJ's Restaurants: The raw numbers
| Metric | Q4 2016 | Q4 2015 | Year-Over-Year Change (14 Weeks vs. 13 Weeks) | Year-Over-Year Change (Adjusted for Extra Week) |
|---|---|---|---|---|
| Sales | $265.3 million | $233.1 million | 13.8% | 5.6% |
| Net income from continuing operations | $12.9 million | $10.9 million | 18.3% | 9.8% |
| Adjusted EPS | $0.55 | $0.43 | 27.9% | 18.7% |
Source: BJ's Restaurants.
What happened with BJ's Restaurants this quarter?
As you can see from the chart above, the company benefited from an extra week in the fiscal calendar. Without that extra week, growth was more muted, especially on the top line. Although an impressive increase in earnings per share seemed to point to strong operating performance, a closer look at the results reveals that's not the case.
- Pressured by declining comparable sales, operating expenses grew faster than revenue in the quarter, as operating income increased 6.1%. Without the extra week in the calendar, however, operating income would have fallen by 1.5%.
- Restaurant-level operating margin fell from 19.9% to 18.7%.
- Instead of an improved performance at the restaurant level, the bottom line benefited from a lower tax rate, which fell from 29.2% to 21%, though it was not immediately clear why.
- Due to an aggressive share-buyback program, shares outstanding fell 8.9% from the quarter a year earlier, further lifting earnings per share.
What management had to say
CEO Greg Trojan acknowledged the headwinds in the quarter, noting a "challenging industrywide operating environment," but said the company "outpaced the industry in terms of traffic and comparable sales.
Trojan also discussed several initiatives the company is taking to increase sales in 2017. It's added slow-roasting ovens in its restaurants to expand and diversify its menu. The company's also equipping its servers with handheld tablets to improve service, a step many of its peers have taken. BJ's is also testing delivery through a third party, leveraging its app and online ordering system, and it plans to have more daily specials showcasing its most popular menu items.
Looking forward
BJ's did not provide guidance for 2017, but said it planned to open only 10 restaurants this year after adding 17 last year. The slowdown in expansion is a consequence of industry headwinds and declining same-store sales. However, Trojan underscored his confidence in the company's long-term growth path, saying, again, that BJ's sees room for 425 of its casual-dining restaurants, more than double the 189 it has today.
Still, slower expansion and headwinds from declining comparable sales mean that 2017 will be a year of investing in the business for BJ's, rather than growth. Though aggressive share buybacks will likely continue, any underlying earnings growth will be modest, at best.
