BJ Restaurants Earnings: Good results, Maintain Buy
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Recently, BJ's Restaurants Inc (NASDAQ: BJRI) reported financial results for the second quarter of fiscal 2012. BJRI reported 2Q EPS of $0.32 excluding certain items, which was in-line with the consensus estimates. However, the most encouraging number was the 4.4% increase in same store sales on top of a 6.9% increase for the same quarter last year, beating the consensus estimate of 3.1% by a fair margin. The 4.4% increase in SSS represented BJ’s tenth consecutive quarter of increases on that metric and should calm fears that sales are sliding towards mediocrity. Other highlights of the Q2 results included an 18% YoY increase in revenue, the opening of five new restaurants and a 14% increase in the total restaurant operating weeks. We maintain our buy rating on the stock.
Earnings in-line despite strong investments
We believe the company will continue to post good results as the company continues to invest in improving the BJ’s experience and widening the gap between its casual dining peers to gain market share. Despite strong investments and cost pressures, the company has been able to match the EPS consensus. Cost headwinds in 2Q included food cost inflation, menu preferences shifting slightly toward higher cost steak & seafood items, hourly wage pressure, incremental labor pressure from the effort required to roll-out new menu items, higher marketing costs (1.4% of sales vs. 1.1% in 2Q11) and costs related to TV test/travel & training. A 3.2% price & sales leverage from better than expected SSS offset cost pressures in virtually every cost line.
Development outlook robust
Development activity remains encouraging as the company remains on track for 16 new units in 2012. BJ’s pipeline is strong with more new units expected in ’13. It has more than five units in just four states; thus there is a lot of white space to grow. With less than a 1% share in an approximately $100 billion casual dining segment, we believe BJ’s is at one fourth of its ultimate unit potential. As BJ's gets larger, it can spread its fixed costs across a larger store base and significantly improve its profit margin of just 7.27%.
Visible SSS growth drivers
BJRI’s rolled out its new loyalty program system-wide this month and believes it will have a substantial impact on how it connects with its guests; it could prove to be equally effective as Panera Bread’s (NASDAQ: PNRA) loyalty program that added about 150 bps to traffic in its first year. BJ’s three week TV test in Sacto drove SSS lift & team will explore another test in different markets in 2H. The company does not provide specific SSS or EPS guidance, but we believe the company will continue to post mid-single digit SSS growth in the second half of the year, driven by 3% pricing, higher marketing expenditure, the loyalty program and the beer tap retrofit.
BJ’s signature deep dish pizza, handcrafted beer and other alcoholic beverages constitute about 35%-40% of its sales and have 80%+ gross margins. Thus, the company’s favorable sales mix will provide a unique advantage over its peers with respect to the prevailing cost pressures. BJ’s forward P/E of 25.06x somewhat reflects its segment-leading growth rate and top-tier operations, but we acknowledge the fact that double-digit new unit growth and solid same-store sales trends are very rare in the sector with just Buffalo Wild Wings (NASDAQ: BWLD) and Chipotle Mexican Grill (NYSE: CMG) being the only other restaurant chains with double-digit unit growth in FY12. With the stock now trading below 40 after trading in higher-forties for most part of the last 12 months, we believe there is a buying opportunity.
TheAnalystBlog has no positions in the stocks mentioned above. The Motley Fool owns shares of BJ's Restaurants, Buffalo Wild Wings, Chipotle Mexican Grill, and Panera Bread. Motley Fool newsletter services recommend Buffalo Wild Wings, Chipotle Mexican Grill, 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.If you have questions about this post or the Fool’s blog network, click here for information.