Scuttlebutt at BJ's Brewhouse Increases My Conviction

Daniel is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.

After writing an article last weekend about the success of BJ's Restaurants' (NASDAQ: BJRI) "casual-plus" strategy, I couldn't help but to travel to Colorado Springs to perform some good ole' fashioned research (a great excuse for a good meal). BJ's delicious food and renowned home-brewed beer didn't disappoint. I couldn't decide which was more fantastic, the incredible interior design, or the outstanding food. To those who have been to BJ's before, my raving review is probably no surprise. But to those who are not fortunate enough to live in California, Texas, or some of the other West or Midwest states that are home to a BJ's location, I'm attempting to paint a very important picture for you: when it comes to value, BJ's doesn't mess around.

Scuttlebutt Will Never Die

First, let's revive the most fun an entertaining investment term ever used: scuttlebutt. What is scuttlebutt? It was first popularized in the investment community by Philip Fisher. Fisher claims that scuttlebutt is doing research or finding useful information on potential investments through nontraditional means. Earnings calls, SEC filings, and the like, therefore, don't count. Some good examples of Fisher's scuttlebutt would be talking to suppliers or customers.

Peter Lynch, however, brought scuttlebutt down to a level that every individual investor can utilize on a daily basis. He claimed, "Every time you shop in a store, eat a hamburger, or buy new sunglasses you're getting valuable input." It never hurts to keep an open mind wherever you go. Who knows when or where you'll discover a great investment or see an investment in a new light.

Chilli's or BJ's

So my scuttlebutt revealed that BJ's really is a high-end restaurant--so what? There are plenty of nice restaurants. Well, here is the catch: BJ's is able to offer this value for the same price as typical casual restaurants like Chili's. In fact, the average check per customer at BJ's is just $13.50, only $0.50 more than Brinker International's (NYSE: EAT) Chili's and $1.00 less than Texas Roadhouse (NASDAQ: TXRH).

The value BJ's offers makes the choice between typical casual dining and BJ's "casual plus" experience terribly easy. As soon as you walk into BJ's and see the slate floors, rich wood finishes, marble table tops, limestone arches, linen napkins, and (in some cases) an on-site brewery, you don't expect to pay just a few cents more than Chili's and a dollar less than Texas Roadhouse.

With tough competition from "fast casual" concepts like Panera Bread (NASDAQ: PNRA) and specialty restaurants like Buffalo Wild Wings (NASDAQ: BWLD), casual dining restaurants are going to have to up their offerings, and it seems like BJ's is one of the only restaurants that has been able to step up to the plate. BJ's "more value for the same price" value proposition has been a stellar marketing tool for other companies for centuries, and that shouldn't change any time soon.

No Debt, High Margins

How can BJ's manage to pull off a "more value for the same price" value proposition while other casual dining restaurants can't? Two reasons: (a) BJ's carries no debt, and (b) its sales mix is heavily weighted with high-margin deep-dish pizza and beer.

To stay competitive enough, successful restaurants have made eliminating debt and expanding without debt a priority. Minimizing expenses on liabilities allows more cash to be reinvested in the business. BJ's and other successful restaurants like Panera Bread and Buffalo Wild Wings have taken full advantage of this competitive edge, keeping their long-term debt and short-term debt at zero. Texas Roadhouse has manged to at least keep its long-term debt at zero, but it still carries short-term debt. Brinker, on the other hand, carries a large amount of long-term debt and short-term debt.

Finally, BJ's pizza and beer, with 80% profit margins, allow BJ's to generate more cash per dollar of sales compared to many beef-heavy peers. This means BJ's has more money to spend on pleasing its customers–from the design of its restaurants to the taste of its food.

As you can see in the chart below, BJ's debt free, high margin strategy has paid off handsomely, helping BJ's keep up with hot stocks like Panera Bread and Buffalo Wild Wings.

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BJRI EPS Diluted TTM data by YCharts

The Bottom Line

Some good ole' fashioned scuttlebutt not only confirmed my ideas surrounding the success of BJ's "casual plus" concept, but it increased my conviction regarding their offerings. As pressure increases in the ultra competitive food services business, BJ's "more value for the same price" value proposition will not only help the company stand its ground, but it will also help it continue its expansion from its now 130 locations to its goal of over 400. I don't see why BJ's can't steal market share from other casual diners, it's a better experience for the same price. After a decline of over 26% during the last two months, BJ's stock is ripe for buying.

DanielSparks has no positions in the stocks mentioned above. The Motley Fool owns shares of BJ's Restaurants, Buffalo Wild Wings, and Panera Bread. Motley Fool newsletter services recommend BJ's Restaurants, Buffalo Wild Wings, and Panera Bread. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. Is this post wrong? Click here. Think you can do better? Join us and write your own!

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