I've been aware of BJ'sRestaurants
The company, which operates 44 pizza and pasta restaurant/breweries, reported its third-quarter numbers Thursday and they didn't disappoint, with revenue gains of 45% on a same-store sales increase of 5.5%. This outstanding sales growth comes on the heels of 25% and 36% increases in revenue in the last two fiscal years. As tasty as the sales result was, this quarter's earnings per share grew even more, up 64% vs. last year at $0.10 per diluted share.
Naturally, all of this excellent performance comes with a sky-high valuation in the form of a trailing P/E of 73. In addition, because the company is small and expanding fairly rapidly, it has negative free cash flow. That doesn't make BJ's a bad company; Starbucks
Restaurant companies with negative free cash flow, however, do pose special analytical problems for investors. Specifically, investors must determine how much it costs the company to build each restaurant, whether revenues are likely to outweigh these costs, and what the company's underlying free cash flow will look like once the expansion plans inevitably slow down. Not all companies provide this detail about their capital expenditures, but fortunately, BJ's Restaurants does in its annual report. For 2004, the company spent $24.2 million on opening new facilities and about $1.5 million on maintaining existing restaurants. So, about 94% of BJ's capital expenditures were for new restaurants, which is not surprising given that most of its restaurants are less than five years old.
In the case of BJ's, the expansion looks to be well-controlled and profitable, though I expect that the ratio of maintenance capital expenditures to expansion capital expenditures will increase a bit over the years as the earlier locations show more wear. Nothing to worry about on that front. Still, at current levels, its shares are too pricey for me. Keep in mind, however, that small caps like BJ's have very volatile stock prices, and I'll be ready to pounce the next time the price pendulum drops to the lower end of the range. BJ's will offer an intriguing investment opportunity sooner or later. We just need to be patient.
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