BJ's Restaurants - Opportunity or Trap?

By Chad Henage - June 19, 2012 | Tickers: BJRI, BWLD, CMG | 0 Comments

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BJ's Restaurants (NASDAQ: BJRI) is usually just the type of company that I look for. It's easy to understand, the company has a predictable growth path, and it's easy to follow. BJ's runs BJ's Restaurant & Brewery, BJ's Pizza & Grill, and BJ's Grill. With only 118 restaurants it will be decades before the company will even approach its saturation point. This all sounds great right? The question is, does BJ's live up to the hype or are there better opportunities out there?

The company recently reported earnings, which should give us some insight into what to expect from this up and coming restaurateur. On the surface all of the numbers look pretty good. The company grew revenues by 16%, comparable sales were up 3.3%, and diluted EPS grew by 20%. If there is anything to worry about it's, why did the company only open two new restaurants during the quarter? With 116 restaurants before this, two new restaurants only represents 1.7% growth in new stores. However, one quarter doesn't tell us much about the whole year.

In the next few quarters, the company expects to open five, six, and three new restaurants, respectively. This would give the company new store growth of 13.8% annually, which sounds much better. When you combine new store growth with same store sales growth in the single digits, the company should be able to achieve the 21% growth in EPS that analysts expect in the future. Comparable sales have been BJ's strong suit, as this was the ninth consecutive quarter of comparable sales growth. What else is BJ's doing to strengthen its sales growth in the future?

The company has three major events in 2012 that should help speed up same-store sales growth. First, the company updated its menu in May to include new entrees and other items. Since customers are always looking for new items to try, this should be a positive for the company's second quarter results. Second, the company already tested BJ's first television advertising in California. Considering that 59 of the company's 118 restaurants are in California, this makes a lot of sense. This should increase brand awareness and give a boost to next quarter's results as well. Last, the company is planning to introduce a “state-of-the-art” loyalty program in July. Any loyalty program is a good thing for restaurants, as it increases the chance of customers returning for future visits. Of course, these are all positives for BJ's, but how does the company compare to other restaurant chains?

There are two specific metrics that BJ's could improve dramatically not only to make the stock more attractive, but also to compete more effectively. The first was the company's pre-tax margin seemed a little low for a restaurant of the type that BJ's runs. I've watched Buffalo Wild Wings (NASDAQ: BWLD) and Chipotle (NYSE: CMG) for a while, and I knew that both companies had higher margins. I also looked at how much net income BJ's generates versus these other two competitors. Look at the comparison: 

You can see that BJ's not only has a lower margin, but they also make significantly less net income per employee. Granted, BJ's is much smaller than either of these chains, but to bring in 88% less net income per employee versus a primary competitor is an astounding difference. This isn't a problem today, but both of these figures must improve over time. As BJ's gets larger and can spread its fixed costs across a larger store base, investors should watch for this improvement as a roadmap to future success.

What should investors expect from BJ's restaurants in the future? The company is expected to grow EPS over the next few years by over 21%. The stock market seems to be valuing BJ's using the rear view mirror. The stock sells for a forward P/E ratio of nearly 32, which would seem to indicate a higher growth rate. While BJ's has a lot of room to grow, the company is taking a slow and steady approach. With revenues expected to grow in the 15% to 16% range in the next few years, I don't believe that a forward P/E ratio of over 30 makes a lot of sense. Buffalo Wild Wings sells for about 24.6 times forward earnings, and is growing at nearly the same pace as BJ's. Considering that Buffalo Wild Wings also has a higher pre-tax margin and more net income per employee, the company seems the better investment. Given the alternatives, I would wait for a pullback to acquire BJ's shares at a more attractive entry point.

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