After a tough 2013 and 2014, BJ's Restaurants (BJRI +4.62%) is starting to turn the corner. The company released its financial results for the first quarter on April 23, and showed a strong improvement in a number of important metrics. The highlights:
- Comparable sales up 3.2%
- Net income more than doubled, to $9.7 million
- Restaurant-level operating margins improved to 18.9%
- Operating and labor costs as a percent of sales fell 190 basis points
Let's take a closer look at the details.
Operating improvements paying off
Since last year, BJ's has been implementing a program it calls "Project Q" that's designed to more quickly get higher-quality and more cost-competitive food choices from the kitchen to the table, while also streamlining the menu and reducing the number of ingredients in stock. By simplifying the menu, the food preparations, and cutting the time it takes to get food in front of the customer, BJ's is able to drive costs down and efficiency up.
While 3.2% comps growth isn't exactly fantastic, the company reported 1.3% last quarter, and 0.3% the quarter before that after seeing same-restaurant sales decline for several quarters before. And while it's only a few quarters of growth, and it's not clear how much is being driven by a stronger economy or the company's improvements, the reality is, something's working.
Whether the comps growth is sustained is something that only time will tell, but the financial improvements are certainly the result of the changes management has made. Think about it this way: Last year, the company earned $27.3 million, and $21 million in 2013, and after bringing in $9.7 million in the first quarter this year, is well ahead of the pace from those years.
Share buybacks, expansion plans, and paying for it all
So far this year, the company has opened three new restaurants, and has another 12 under construction that it says will be opened by the end of the year, five of which will be opened in the current quarter. The company's planned store expansion calls for approximately 10% growth, as measured by operating weeks.
Since April 2014, the company has spent $107 million to buy back 3 million shares, reducing the share count around 7%. The math on that looks like an average of less than $35.70 per share, a bargain versus the current share price. I'm still not 100% convinced that the company is doing the best thing with its share buybacks considering that it slowed the pace of expansion, and took on debt to do so.
The company's long-term debt was reduced by $20 million, to $58 million in the quarter, while cash and equivalents only declined about $4.5 million, to $26 million. It's looking like hindsight may force me to change my opinion on this one.
Looking ahead
If there's one thing that investors need to be aware of and concerned about, it's the shifting of consumer sentiment toward "fast-casual" restaurants like Chipotle and Panera Bread and away from casual sit-down eateries. However, it looks like BJ's management has acknowledged this trend, and one of its big initiatives is to have more fast, low-cost items on its menu.
While a few quarters of moderate comps growth aren't yet a trend, the financial improvements are durable and positive signs. As long as the macro trends around consumer preference don't become a bigger problem, and the economy keeps getting better, BJ's looks like it's in a pretty decent place right now.
