When BJ's Restaurants (NASDAQ:BJRI) last reported earnings, there were a handful of areas the company was highlighting as key focus points. Last quarter, the results were positive, with sales and earnings both coming in positive. Earnings in particular far exceeded expectations.
Here we are today, and the fourth quarter's results are out. The highlights:
- Comparable sales grew 1.3% in Q4, following 0.3% in the third quarter.
- Total revenue increased 7.1% in the quarter; 9.1% for the full year.
- Q4 net income jumped to $8.2 million, up from $500,000 last year.
- Earnings per share increased a huge 33% for the full year.
While the numbers aren't exactly blowouts, they do mark a second consecutive quarter of improvement in sales and earnings, and the all-important comparable sales metric. Let's take a closer look at the keys behind these improvements.
Project Q: lower restaurant costs moving the needle
Two of the biggest hindrances to BJ's results have been tied to the restaurant's menu. Not only was the food lineup losing appeal to visitors, but it was also making for slower food prep and higher costs in the kitchen. Over the past year, the company has gradually tested new items and streamlined its menu, with two goals in mind: improving customer appeal, and helping improve kitchen efficiency and costs.
So far, it looks as if "Project Q" is starting to work, as restaurant-level operating margin increased 330 basis points versus the year-ago period, to $18.4% in the quarter. While it's only two quarters' results, the early indication is a real positive. We'll see whether the company can build on that momentum.
New lower-cost format paying off so far
The company's newest restaurant format should have new locations more quickly contributing to the bottom line. This new format costs about $1 million less to build and open than the prior format, and management says the early data -- five of the past six locations are in the new format -- indicates strong appeal with visitors. The company has plans to open "at least 15" locations in 2015, and having a lower-cost format will help make that goal a reality.
Looking even further ahead, CEO Greg Trojan reiterated a target of 425 locations long-term. Reducing the capital needed to reach that target by almost $300 million is a significant step forward, as long as customer appeal remains high, and operating costs low.
Share buybacks continue
BJ's continues to repurchase shares, and frankly, I'm not crazy about this initiative. To start, it's been largely driven by private equity investors such as Luxor Capital, which bought a 6% stake in the company and used that as leverage to get a position on the board. It has since used that influence to lobby for an aggressive share buyback program.
While shareholders stand to benefit by increased ownership -- the company has bought back 8% of its shares since early 2014 -- I think the company and investors would probably be better suited by using excess capital today to open more locations, and not buying back stock. The real driver of returns for BJ's investors will ultimately be growth over the next decade, not share buybacks. The company retains about $50 million on its current buyback program.
Shares are up about 8% in after-hours trading, so it's looking as if someone is happy with this report. Quite frankly, the comps growth is still quite low, but the company's ability to significantly increase profits as it works to improve customer appeal is a very good sign. As I said, the real key for BJ's remains its ability to improve comps, and that's going to happen only by appealing to more customers and getting them to return more often.
As management works through that process, reducing costs and increasing margins are great signs that the company is executing on its initiatives. Only time will tell whether that trend continues. In the meantime, patient investors should benefit from the next 267 locations the company plans to open.