This morning, the 55-unit casual dining chain that specializes in deep-dish pizzas and microbrews announced that it has entered into a private placement agreement that will find it tacking on nearly 3.1 million more shares at $20 a pop. The shares are trading marginally higher than that, but that's how it usually goes with private placements.
BJ's will be using the money to expand, and the more you learn about the eatery, the better your chances of appreciating its need to grow quickly. BJ's has managed to bat a perfect record in terms of comps since going public in 1996. How often do you see a restaurant that can rattle off 40 consecutive quarters of year-over-year growth at the individual unit level? I have always been impressed with Cheesecake Factory
Expanding a concept like that is a no-brainer, especially since all but 20 of the locations are located in California. Opening 11 restaurants this year and another 13 come 2007 may not seem like much, but this was also a company that had just 45 units open at the end of last year.
The company, with no relation to retailer BJ's Warehouse Club
Operating margins have contracted, leading to slower 15% growth in earnings per share, but hope always springs eternal that operating inefficiencies will right themselves as long as patrons keep coming back for more.
Investors seem to agree. The stock has quadrupled over the past five years. However, the company will certainly have to fix those margins. Earnings growth clocked in flat in the third quarter, and analysts expect BJ's to repeat that here in the current quarter. That isn't the kind of bottom-line performance that one would expect from a company trading for more than 40 times next year's earnings estimates.
So, sure, when your following is this faithful, it makes perfect sense to expand as quickly as possible. Let's just hope that BJ's doesn't lose sight of the margin improvements that will be necessary to keep shareholders in the future as happy as its diners and shareholders in the past.
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Longtime Fool contributor Rick Munarriz loves a good casual-dining experience, but lives time zones away from his nearest BJ's. He does own shares in Cheesecake Factory. He is also part of the Rule Breakers newsletter research team, seeking out tomorrow's ultimate growth stocks a day early. T he Fool has a disclosure policy.