BJ's Restaurants (NASDAQ:BJRI) is not the most well-known of publicly traded, full-service restaurants out there. With California being home to 62 of the company's 165 locations, the national roll-out is still in the early innings. This appeals to me as an investor who sees a lot of promise in the concept and many years of growth ahead. With a market capitalization of just around $1 billion and a forward P/E under 24, it has great potential to be a market-beating stock for the next decade plus. There will always be concerns when investing in restaurants, but I think BJ's has a trump card that should give it staying power: beer.
What makes a chain restaurant special?
Restaurants are some of the most brutally competitive businesses out there. Just think about the turnover that you've seen in your town or city in the last five years. The most successful properties find some niche that allows them to thrive. That might be a supreme focus on hospitality, food quality that can't be found anywhere in the surrounding area, or a differentiated set of products.
Focusing only on larger chain restaurants, there seem to be a dozen or so that just chug along. I won't name names, but you know which they are. They don't seem to be going anywhere, but don't give the consumer a pressing motive to visit. On the other hand, there are concepts such as Buffalo Wild Wings, which has basically become a sports bar "category killer." The viewing experience for watching sports is excellent, the beer selection is wide, and the prices are fair. The stock price reflects this success.
BJ's has a couple of tools at its disposal to become more like Buffalo Wild Wings and mimic its market-beating ways.
Moats full of beer
BJ's has recently made efforts to streamline its menu, which was a bit unwieldy, and provide healthier food options to go along with its deep-dish pizza and burgers. While a good, concise menu is important for success, BJ's true differentiating factor is its beer. Some of its restaurants brew beer directly on premises, while others receive shipments from brewery operations that service multiple restaurants.
More important than the fact that they produce their own beers -- over 10 on tap at every location -- is that these are quality brews. Earlier this month, BJ's received gold medals for two of its beers at the Great American Craft Beer Festival. Out of 6,647 beer entries, only 91 gold medals were awarded. Two of these were taken home by this publicly traded chain restaurant.
Many people are likely to have a small brewery in their town or area that produces a special beer that they enjoy. They are also sentenced to uncertainty or homogeneity when they travel. BJ's has the potential to create a middle ground for beer lovers when they are in unknown locales. A solid selection of great beers always on tap along with seasonal and specialty beers that are rotating all the time can make BJ's the destination of choice for these consumers.
Another revenue stream?
There is one more potential avenue for revenue growth that beer provides the company. Selling its award-winning beers directly to retailers and building the brand out beyond just restaurants could potentially add an entirely new stream of revenue to the business. While management may opt not to do this as it may cannibalize sales in the restaurants, it is nevertheless an interesting avenue to consider.
BJ's appears to have figured out how to improve the menu. At a fraction of the size of many of its competitors, its stock has a great deal of upside. The food is important, but its award-winning beers are the company's secret sauce. If management can capitalize on these gold medals -- and the 14 others the company has won since 1996 -- I believe we're looking at a market-beating stock and a potential multi-bagger over the next 10-20 years.