Casual dining and brewpub BJ's Restaurants' (NASDAQ:BJRI) strategy of steady expansion, menu quality, and intense scrutiny on costs and process, continues to yield solid results. The company reported fourth-quarter and full-year 2015 financial results on February 18, and total revenue, comparable sales, and earnings per share all improved.
Here's a closer look at the results, as well as what management had to say about the company's outlook and prospects for 2016 and beyond.
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Casual, sit-down eateries continue to operate in a challenging growth environment. There's more competition today than ever before, as "fast-casual" chains have grown in popularity, and taken share away from their sit-down competitors, which historically have been more expensive and tend to take longer for service.
This has made it a greater challenge to grow sales at existing locations -- which are called comps or comparable sales. Such growth demonstrates a brand's ability to increase prices and traffic, which will grow sales and profits above and beyond opening new locations.
For example, fast-casual chain Panera Bread Co (NASDAQ:PNRA.DL) reported 3.6% comparable-sales growth at company-owned locations in the fourth quarter, and 3% comps growth at those locations for the full year. During the past two years, Panera has increased comp sales by nearly 7% at company-owned locations -- far and above the comps that BJ's has delivered.
BJ's has delivered positive comps in six-consecutive quarters since starting work on its "Project Q" initiative to improve its menu, food quality, prices, and drive down its costs and improve efficiency in operations and how it serves its customers.
What happened in 2015 and Q4
Project Q continues to be a key driver for the company's improved bottom- and top-line results.
- Comps in the quarter were negatively affected by Halloween (Saturday) and Christmas (Friday), reducing business on typically busy weekend days.
- Management says to expect a similar negative impact from Easter in Q1 this year versus falling in Q2 in 2015.
- Restaurant-level cash-flow margins in Q4 were 19.9%, a 150-basis-point improvement from 2014.
- Operating-income margins of 6.8% were 170 basis points better than the year-before period.
- The company repurchased 700,000 shares in Q4, bringing total repurchases since 2014 to 4.9 million shares.
- That makes for a more than 11% reduction in the share count under this program.
- Debt increased $33 million from Q3, to $100 million.
- This amount is similar to the $30 million paid for share repurchases.
- The board increased its share-buyback authorization by $50 million in December, which corresponds with the available credit on the company's revolving debt instrument.
- Opened 14 new restaurants in 2015.
- This includes several in the new, smaller format that has a 15% smaller operating format, and costs about 20% less capital to open than prior formats.
Looking at 2016 and beyond
Despite the seasonality of certain holidays impacting growth in the fourth quarter, and a similar impact from Easter in Q1 of 2016, management is relatively optimistic that BJ's will continue to deliver positive comps. CFO Greg Levin said that comps are up about 1% through the first seven weeks of 2016, and pointed out that this is happening against a pretty tough comps period. Comps were up 3.2% in the first quarter of 2015, so it seems management is happy to see 1% growth against that number.
Levin also pointed out that, on a sequential basis, there could be some erosion of the bottom-line results from the fourth to the first quarter, due to the company taking on a higher amount of labor expenses, such as higher payroll taxes and benefit expenses, that hit early in the year. The company then expects to cap out as the year goes on, as it is able to do things like price increases to help absorb these higher costs. The company is facing higher wages in California, and seeing "upward pressure" on hourly wages for management, as well.
BJ's is also continuing its focus on menu optimization, including focus on recent successes, such as its "EnLIGHTened" entrees, new burger offerings, and some seasonal items. Management also thinks that it can better optimize for some higher-ticket entrees, improving the average check, and boosting margins. Lunch is also an area the company is trying to strengthen, as fast-casual chains have taken a bigger bite out of this day part in recent years across the category.
The plan for 2016 also includes opening 18-19 new restaurants, including expanding its presence in the mid-Atlantic, Southeast, and Ohio Valley markets, where it has had recent success.
Final thoughts: Slow and steady growth
It's become relatively clear at this point that BJ's management plans to continue growing at a moderate pace, while also taking a rigorous approach to managing costs -- both in operations and capital expense for new restaurants -- and optimizing the menu. There's also the share buyback plan that, like it or not, has been partly funded through debt.
Put it all together, and BJ's continues to move forward in a very competitive business. Management made it pretty clear on the call that the very significant improvements in operating margins that the company has attained during the past year will be more difficult to improve on, but it plans to keep chipping away at costs, and taking steps to drive up profits via menu quality and pricing at the same time.
The year 2016 is unlikely to be another year of 78% profit growth, but management is sure that it can keep finding ways to improve. Add in the near double-digit store-count growth planned for this year, and BJ's should still deliver solid, if not spectacular, growth.