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BJ's Restaurants, Inc.: Slow and Steady Wins the Race?

By James Sullivan - Mar 4, 2016 at 11:01AM

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BJ's Restaurants is cheap on a historical basis, has recently undergone positive changes, and is an investment that I'm excited to hold for a decade or more.


BJ's Restaurants (BJRI -4.07%) is taking a methodical approach to expansion and its stock trades only slightly above where it did five years ago. Lessons learned and improvements made to the business over the past half-decade along with a favorable valuation should make this stock a winner going forward.

A look at the past five years
Revenue for BJ's Restaurants in 2010 was $514 million, net income was $23 million, and earnings per share came in at $0.82. Five years later and the business has shown marked improvement. Annual revenue has climbed to $920 million, net income has nearly doubled to $45 million while EPS has risen 111%, reflecting the effect of share repurchases.

While EPS has more than doubled, the share price has risen by less than 20%. Based on this alone, BJ's Restaurants is a more compelling investment than it was five years ago. Its five-year average P/E of 42.6 is in nosebleed territory compared to its forward P/E of 19.1, which is only slightly above that of the S&P 500's 16.6. Multiple contraction is often the sign of a weakening business, but in this case BJ's is a qualitatively better-positioned business than it was five years ago.

The company has undergone a number of initiatives that have increased the profitability of individual restaurants and made it cheaper to build new ones. Restaurant-level cash flow margins for FY 2015 came in at 19.9%, up from 17.9% in FY 2014. CEO Greg Trojan, in the Q4 2015 earnings call, said that they have reduced the total number of items on their menu by about 25% and made a number of process improvements. The capital required for new restaurants, because of a smaller footprint and more efficient layout has been reduced by about 20%.

Still a growth story
Figuring out how to make new restaurants cheaper to build and operate is more valuable the earlier a company is in its growth cycle. BJ's currently operates only 172 locations and is targeting at least 425 nationally. Had the company continued to aggressively grow rather than fix the restaurant level issues expansion would have been more costly. New locations would have been opened at a cost around 20% more than they now can be.

BJRI is comprised of only 40% of the total restaurants that it expects to have as a mature company. Saving on construction costs for more than 250 new locations will provide an additional tailwind for the business. The company will be able to either expand more quickly, be more profitable, or some combination of the two.


Slow and steady
BJ's is not an investment that is going to yield multibagger returns over a few short years. Management is planning to open 18 or 19 restaurants in FY 2016. Even if an average of 30 new restaurants are opened yearly starting in 2017 it would still take nearly eight years to reach the goal of 425. This is not a bad thing for a patient investor.

BJ's current market capitalization is around $1.1 billion, which means that it can double or triple in size and still be comparable to where some of its competitors are now. Management has shown a willingness to repurchase shares, which can further enhance returns. Since 2014, when the first repurchase authorization was approved, the company has retired $196 million of stock at an average price of $39.90 per share. Doing so has reduced the number of shares outstanding from 29 million at the end of 2013 to 25.2 million. 

A 10-year plan that includes opening 20-plus new restaurants annually, modest comparable store sales increases (1.7% from 2014 to 2015), repurchasing shares, and the potential introduction of a dividend as it approaches 425 restaurants will not be the lead story on a financial news network. However, it can be lucrative for a patient long-term investor who tracks the business, doesn't worry too much about the share price, and lets compounding work its magic.

This is a moment where valuation and qualitative business factors are both pointing toward a potential buying opportunity. I recommend taking a deeper look at this slow and steady growth story and seeing if BJ's deserves a place in your portfolio.

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