BJ’s Restaurants: A Good Long Term Investment
Ashish is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.
BJ’s Restaurant Inc (NASDAQ: BJRI) is set to announce its second quarter earnings after market close on 26th July. Although the company reported below expectation first quarter results, we are optimistic on the second quarter results. We expect above industry same restaurant sales in the second quarter, driven primarily by pricing. The company is trading at a forward P/E of 25.77, which we believe is fair, given it is one of the best long-term growth stories in casual dining. Though these are worrying times for most casual dining concepts, BJ’s is gaining impressive consumer traction. Over the last five years, the Knapp Track has been down 6.5% whereas BJ’s over that same time frame has been up 27.7%. As a result, the company has posted a phenomenal compounded annual revenue growth rate of 18.4% and an even better diluted EPS compounded annual growth rate of 25% over the last five years.
Below Expectation First Quarter Results not a Big Concern: BJ’s first-quarter EPS rose 19%, to $0.30 missing consensus expectations of $0.31 by a penny. We don’t consider this a big concern as the EPS surprise (-$.01 below consensus) was merely a result of a restaurant’s opening being shifted from the second quarter to the last day of the first quarter, causing a higher than expected pre-opening cost. Same restaurant sales rose 3.3%, which were below consensus estimates of 3.9%. While same restaurant sales were not as robust as expected, they were still handsomely above industry averages.
Visible Unit Growth in 2012 and Beyond Compensates for Moderate Same Store Sales: In Q1, the company opened only two restaurants and the company expects to open five, six, and three new restaurants in Q2, Q3, and Q4 respectively. The resultant unit growth of 13.8% in 2012 will compensate for the moderating SSS and provide another year of 20%+ EPS growth.
BJ’s share in domestic casual dining is still less than 1%. Thus, going forward, there is a significant opportunity to continue gaining market share in the estimated $100 billion casual dining segment. Also, with 59 of the company's 118 restaurants in California, there is a huge white space opportunity to grow in other states. We believe the company has an opportunity to grow from 121 locations to at least 300 in a decade, and if it successfully implements its objective of achieving 12% unit growth each year over the long term, this number can easily touch 400 by 2022.
Initiatives for Speeding up Same Store Sales in 2012: It seems like the company is not taking its moderating same restaurant sales lightly. BJ’s updated its menu in May, which reflects a 1% price increase and the addition of new entrees and appetizers. The company introduced "state-of-the-art” guest loyalty program this month to regain customers for the future. The company tested its first television advertising in California (the state with 50% of the total locations). This will increase brand awareness and provide a boost to sales in the second quarter and beyond.
Favorable Sales Mix: The company’s sales mix provides specific gross margin advantages. As per company comments, its signature deep dish pizza, handcrafted beer, and other alcoholic beverages constitute about 35%-40% of its sales. A gross profit margin of more than 80% in these products allows the company to post restaurant level cash flow margins in the 20% plus range.
Apart from BJ’s, the other two restaurant chains with double-digit unit growth expected in 2012 are Chipotle Mexican Grill (NYSE: CMG) and Buffalo Wild Wings (NASDAQ: BWLD). Chipotle has the highest valuation (with a forward P/E of 29x as compared to 26x for BJ and 21x for Buffalo) among the three. BJ’s has the lowest operating margin as well as the lowest profit margin, with operating and profit margins of just 5.13% and 7.27% as compared to 6.31% and 9.34% for BWLD and 9.63% and 15.97% for CMG. Since BJ (with just 118 stores) is much smaller compared to Buffalo (with over 800 stores) and Chipotle (with around 1300 stores), we believe it has the potential to spread its fixed costs across a much larger store count. This could create a huge earnings growth potential over the next five years. I recommend buying the stock from a long term prospective.
TheAnalystBlog has no positions in the stocks mentioned above. The Motley Fool owns shares of BJ's Restaurants, Buffalo Wild Wings, and Chipotle Mexican Grill. Motley Fool newsletter services recommend Buffalo Wild Wings and Chipotle Mexican Grill. 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.If you have questions about this post or the Fool’s blog network, click here for information.