BJ's Restaurants Inc (BJRI) 2003 Q3 法說會逐字稿

Good afternoon and welcome to the Chicago Pizza & Brewery third quarter earnings release conference call. (OPERATOR INSTRUCTIONS) At this time, I would like to turn the floor over to your host, Mr. Rob Curran, Vice President of Investor Relations. Sir, you may begin.

Good afternoon. We would like to welcome you to our third quarter 2003 conference call, which is being broadcast live over the Internet. On the call today we have Paul Motenko, Chairman and co-CEO, Jerry Hennessey, President and co-CEO, and Doug Mitchell, our Chief Financial Officer.

The Company released earnings after the close of the market today, and a copy of our results can be viewed on the main page of our website which is located at www.bjsbrewhouse.com. If anyone would like a copy or would like to be added to our distribution list, please call my office at 714-848-3747, extension 260, and we will forward a copy to you.

Our agenda for the call will be as follows. First Paul will provide a financial and operational review covering Chicago Pizza & Brewery's results for the third quarter ended September 28th 2003. After that Doug will provide additional financial details on the quarter, and Paul will follow that up with comments on current business trends, and provide an update on fiscal 2003 guidance. Lastly, we will be available for a Q&A session.

Before we begin, I would like to point out that certain information contained on this conference call may be considered forward-looking in nature and is subject to various risks and uncertainties. Should one or more of these risks or uncertainties materialize, or underlying assumptions prove to be incorrect, actual results may vary from those anticipated.

All forward-looking statements made today on this conference call speak only as of today's date. We do not undertake any obligation to update any forward-looking statement, and we refer investors and listeners to the full discussion of risks and uncertainties associated with forward-looking statements contained in our periodic filings with SEC.

I would now like to turn the call over to Paul.

Thank you, Rob. As reported our revenues for the third quarter were 26.7 million, an increase of 40.5 percent over the third quarter of 2002. The increase was driven by seven new locations which have opened since August 2002, as well as a 3.2 percent improvement in total same store sales. Comp store sales increases were primarily due to increased customer accounts, and an approximately 125 percent menu price increase we implemented during May, 2003.

Seven stores were in operation during the period, which had not entered the comp base, including three stores in Texas which had on-plan sales during the period, and four locations in California, which trended above plan during the period. Average weekly sales for all stores during the third quarter were approximately 67,100 versus 55,500 in the third quarter of 2002.

To provide additional details for financial modeling purposes, we note that our six Oregon stores, which include three Pietro's, contributed $2 million to the third quarter 2003 revenues. And our seven BJ's Pizza & Grill locations contributed $3.4 million in revenue during the third quarter of 2003, which is typically the strongest quarter of the year for those units.

The remaining $21.3 million was generated from 18 full-sized brewery and brewhouse restaurants, including one new restaurant we opened in the third quarter in Cerrito, California. Average weekly sales for the full-sized brewery and brewhouse restaurants were approximately $92,800 in the third quarter of 2003 versus $90,700 in the third quarter of 2002. Net income was $968,000 in the third quarter, or 5 cents per share diluted, versus $414,000, or 2 cents per share diluted.

At this point, I would like to turn it over to Doug to discuss our quarterly financial results in more detail.

Thanks, Paul. As previously noted, total revenues for the third quarter increased over 40 percent to $26.7 million from $19 million in the prior year's comparable quarter. This increase is primarily the result of the opening of seven new locations, including Westlake California in August 2002; Oxnard, California in September 2002; Louisville, Texas in November 2002; Cupertino, California in December of 2002; Clear Lake, Texas in January 2003; Addison, Texas in May 2003; and Cerritos, California in July 2003.

In addition, the Company posted a same restaurant sales increase of 3.2 percent in the quarter comprised of an increase of 3.4 percent at BJ's Restaurants, and flat comps at the three Pietro's locations. The comp store increase is primarily due to increased customer accounts and the menu price increase of 1.5 percent, which rolled out to the stores during the second quarter of 2003.

Quarter over quarter revenue gains were partially offset by the closure of our Pietro's Portland, Oregon restaurant on Lombard Street on December 31st, 2002 and our BJ's Oregon restaurant on Stark Street on June 15th, 2003.

Cost of sales which includes food, beverages and paper, increased to $7.1 million from $4.7 million during the comparable quarter of 2002. As a percentage of revenues, cost of sales increased to 26.6 percent for the current quarter from 24.8 percent for the comparable prior year quarter, an increase of 180 basis points. Sequentially, from the second quarter of 2003, cost of sales rose 10 basis points.

The increase that we have seen in cost of sales is primarily a result of an increase in collected commodity costs, primarily achieve cheese and beef. Additionally, we have experienced higher per unit purchase costs due to conducting business in new markets, notably Texas. In newer markets we haven't yet achieved the critical mass necessary to get food costs at rates similar to those experienced in Southern California, where we have a solid base of stores with improved economies of scale and purchasing power.

As a result of higher commodity costs, we are currently in the process of evaluating and implementing a menu price increase, which we anticipate will be in the range of 2 percent.

Labor and benefit costs were $9.4 million in the quarter versus $6.9 million in the third quarter of 2002, a 110 basis points improvement as a percentage of sales at 35.1 percent versus 36.2 percent over (technical difficulty) year, and a 20 percent point improvement sequentially from 35.3 percent in the second quarter of 2003. The decrease in labor is primarily the result of management directed productivity improvements at the restaurant level, as well as the presence of more restaurants in tip credit states.

Occupancy costs increased to approximately $2 million during the quarter from $1.4 million during the comparable quarter of 2002. As the percentage of sales, occupancy costs increased 10 basis points to 7.6 percent from the 7.5 percent quarter over quarter. While the increase in absolute dollars reflects seven additional restaurants open year-over-year, offset by the closure of two lower volume restaurants, occupancy costs as a percentage of sales were relatively stable.

Operating expenses increased to $3.2 million during the quarter versus $2.3 million in the year ago quarter. As a percentage of sales, operating expenses decreased 30 basis points to 11.8 percent for the current quarter from 12.1 percent for the comparable prior year quarter. Operating expenses increased 40 basis points sequentially from the second quarter of 2003. The year-over-year decline was aided by a number of computer supplies purchased in the second prior year quarter in connection with the July 2002 system conversion, while the sequential increase is primarily due to increased utility and supplies costs.

General and administrative expenses increased to $2.2 million during the quarter from $2 million during the comparable quarter of 2002. As a percentage of revenues, G&A expenses decreased 230 basis points to 8.2 percent for the current quarter from 10.5 percent for the comparable prior year quarter, and declined 60 basis points sequentially from the second quarter of 2003. This increase is primarily due to sales leverage.

Depreciation and amortization increased to approximately $1 million during the quarter from $657,000 during the comparable quarter of 2002 due to our investment in seven new restaurants since August 2002. Restaurant opening expenses decreased to $526,000 during the quarter from the $700,000 during the comparable quarter of 2002.

The Company opened one restaurant in the current quarter versus two restaurants in the comparable quarter of 2002. Although the majority of the preopening expenses for our San Jose location, which opened on October 1st, 2003, were included in the third quarter of 2003.

Our opening costs will fluctuate from quarter to quarter depending upon the number of restaurant openings, the size and content of restaurants being opened, and the complexity of the staff hiring and training process.

We have been pleased with the improvements made in 2003 to streamline our store opening process and the resulting improvement in opening expenses. We budget preopening expenses between 300,000 and 400,000 per unit, with units opening in Southern California typically experiencing lower preopening costs due to less travel and lodging costs, as well as the potential for a portion of managers and staff to transfer from existing Company restaurants in the same market.

Net interest income decreased to $84,000 during the quarter from $154,000 during the comparable quarter of 2002. The overall decrease in net interest income is primarily due to lower levels of cash to invest after the opening of seven new stores, and lower interest rates year-over-year.

The tax rate was 34.8 percent for the quarter versus a 33.5 percent rate in the third quarter of 2002. We continue to estimate our effective tax rate for the remainder of fiscal 2003 and future periods at 35 percent.

Turning to the balance sheet, we entered the quarter with approximately $27.3 million in cash and short-term investments. Strike that. Turning to the balance sheet, we ended the quarter with approximately 27.3 million in cash and short-term investments, or approximately $1.33 per share, and no fund to debt.

Shareholders equity was $70 million at September 28, 2003, or $3.40 per share. Total capital expenditures for the quarter ended September 28, 2003 were $4.3 million, and were primarily related to the developments of our Cerritos and San Jose, California restaurants. Based on our current expansion plans, we anticipate the Company should be able to finance Capex requirements for fiscal 2003 through operating cash flow and cash and investments on hand.

I would now like to turn the call back over to Paul.

Thanks, Doug. Now let's talk about current business trends and expectations for the remainder of 2003. The Company opened our second northern California location in San Jose on October 1. And we have been very pleased with the results to date, as the initial revenues have been greater than our expectations. Despite being one of our smaller brewhouse locations at approximately 7,300 square feet, during the initial opening period we experienced average weekly sales volumes that compare with some of our most successful restaurant openings.

In terms of our current business trends, during period 10 our year-over-year comparable store sales results were at levels above what the Company experienced during the third quarter of 2003. On the new restaurant development front, our Chief Development Officer, Greg Lynds joined us from Garden Restaurants during July. And we have been very pleased with what he has accomplished in just a short period of time.

We're currently projecting to open at least six units in 2004, including Willowbrook, Texas, which we anticipate will open in late January. In addition, we have signed leases for locations in Summerlin, Nevada, as well as Rancho Cucamonga in San Bernardino, California.

We continue to work to finalize leases for our remaining class of 2004 restaurants, and remain comfortable that we will achieve our 2004 store unit growth goals. We have previously stated our 2003 projections, which include full year expectations for revenue growth in the 30 to 40 percent range, and earnings per share between 21 cents and 23 cents.

As noted during our second quarter conference call, two factors that we believe that would affect our earnings results would be the opening dates of our Willowbrook restaurant and the duration of higher commodity prices, specifically cheese. With our expectation the cheese prices remain at high levels for the duration of year. As well as our experience of greater costs on selected commodities, we anticipate our 2003 revenue results should be slightly above the midpoint of our guidance range, while we project earnings should be at the low end of our guidance range.

This concludes our formal remarks. So at this time, we will open the call up to questions.

(OPERATOR INSTRUCTIONS) Dennis Joe (ph) with Sidoti & Company.

I was wondering if you could give us the comp performance by month in the third quarter?

Yes, you know, why don't I give you some basic guidance here. During July we were in the 3 to 4 percent range. August, we were in the 4 to 5 percent range. September, we were in the 2 to 3 percent range.

And period 10 October is trending higher than the aggregate average of the three months?

Correct.

And then do you have any idea what the spread of the 2004 openings would look like, if it will be more front end loaded?

No. It will probably be more back-end loaded. We anticipate two units in the first half of the year, and the remaining units in units in the second half of year.

And then could you talk about the progress about the new preopening and training system? Exactly how has the turnover been at the new restaurants and also for the entire system?

We have in the past year revamped our preopening and training systems to be more efficient, and at the same time hopefully more effective. There's no question about that it has become more efficient as we have seen preopening costs reduced substantially in our most recent openings. And it also has had the impact of reducing our turnover. And we have found -- we have experienced in the last few restaurants a fairly significant reduction in turnover within the first several months of operation. So we're pleased on both fronts with our new preopening and training systems.

Could you quantify exactly with the turnover is looking like at the new restaurants, and also the entire system?

For the entire system at the staff level our turnover is about 100 percent, and at the management level, it is in the mid-20s.

And then just one last question. Has there been any improvement at the Chandler, Arizona unit?

Yes. In fact that unit is comped up for the first time since it's gotten the comp store base recently. And we have seen a fairly steady pattern of improvement in terms of revenue growth, more specifically in terms of revenue relative to the prior year.

Eric Wold, Merriman Curhan Ford.

Just a couple of questions. First of all can you give the number of operating weeks during the quarter?

Sure. We had 399 store weeks in the quarter versus 343 in the prior year's quarter.

What additional guidance can you give on the menu price increase in terms of how it might be structured comparable to the 1.5 percent increase taken in Q2? Is it going to most likely this quarter or next quarter, and then the same menu items, different menu items?

We expect it to happen this month. And the one area that we haven't raise prices in a couple of years has been pizza, and we will be increasing pizza prices on this particular menu price increase. Other than pizza, it is pretty much across the board, as it has been in prior increases. But the most significant issue is that we're increasing our pizza prices with that.

Two last questions. On your alcohol percentages have you seen any changes in terms of consumption trends, in terms of the percentage of alcohol at the newer units, San Jose, Cerritos versus maybe some of the ones that opened up in the latter part of last year, or has it been basically about the same?

I think the most significant issue is that our Texas units seem to be a bit higher in terms of alcohol than our other units, but not any trend in terms of time period, but just in terms of region.

And the last question, obviously purchasing power has been an issue with the restaurants in Texas. With the one you announced in Summerlin, will that be able to join in either with the units in Chandler or the units in Texas, or would it be kind of purchasing on its own?

We're hoping that most of the purchasing will be tied into Southern California. Obviously, there are some items that will be local, but a great deal of them we're hoping to have the same purchasing situation as Southern California.

So you think that one might have less of an initial impact than the first one you had in Texas?

Yes.

Tony Brenner with Roth Capital Partners.

Paul, your store expansion plans have changed a couple of times over the past two years since they weren't exercised. Recently you had been talking about 6 to 8 stores next year. Today you are talking about at least 6 stores next year. In the past it had been mentioned that you would eventually ramp up to 10 to 12 stores per year. You've added more resources to the real estate program. I wondering if you're able to, would you open more than 6 to 8 stores in 2004? And is an eventual ramp up to 10 to 12 a year still realistic? And how long might it take to get to that pace?

Yes. Theoretically we would do more than 6 to 8; however, that is not something we're counting on. We certainly have the issue of the timing of those units, because at this point it is highly unlikely we'll open more than 2 restaurants in the first half of the year.

So it would hurt earnings if you opened in the last half of the year?

Plus certainly stretch our operational capability. We have added resources. Obviously the most significant of those is Greg Lynds. And Greg has been a spectacular job so far in filling the pipeline, but because of the time frame that it takes to develop a new restaurant from identification to opening, we believe Greg's greatest impact will happen in 2005 where our objectives are to do more units then 2004, and most significantly to more evenly spread out those units, and hopefully to start front ending our openings instead of having them back ended.

So the good news for 2004 is we feel very comfortable in achieving our objectives. By 2005, it should be a year where we are in prime shape to not only meet the number of units in terms of the objective, but meet the timing as well. And we do believe that we can get up to the 10 to 12 per year range within the next couple of years.

By front ending, you mean first half of the year? You are talking --?

Optimally, we would love to do 60 percent of our units in the first half of year, 40 percent of our units in the second half of the year. That would be our objective. But at the least, we would like them evenly spread out during the year and not back loaded like it appears they're going to be in 2004 to some extent.

Mike Smith, Oppenheimer.

Tell me a little bit more about this 2 percent price increase. It seems like you're getting up -- what, you're going to be up 3.5 percent year-over-year for the next two quarters?

That is correct. Normally we have done price increases in response to an increase in the minimum wage in California. We didn't have an increase in the minimum wage during 2003. So we held off on a price increase, which we would normally do in January. We held off until the end of May. And that was in response to utility costs and insurance costs and other things that were going on. What with the commodity issue and the cheese prices and beef, etc., we believe that it wouldn't be appropriate to wait another year to raise prices, that we should do it sooner rather than later. And so we are going to implement our price increase within the next short period of time.

And implementing the price increase we do feel we have the room. As I mentioned, we haven't increased pizza prices for a couple of years. So we believe we have some room there. We still realize that value is a huge part of the BJ's concept, and do believe after adjusting the prices, that value is still a big part of what our concept is all about. And we'll retain that value orientation.

What is the average dinner check running now?

Our check average is still $10 a person. We don't distinguish lunch versus dinner, but overall, it is still in the $10 range.

Four of the six to eight stores that you're going to open next year pretty well lined up it appears. Are you looking at any other geography in terms of the other two or three that you might want to open?

Our objective is to fill out existing markets for the next year, and potentially a year or two beyond that and very selectively going into new markets. In Nevada, we don't necessarily even consider a new market. It is somewhat of an extension of Southern California. But for 2004, I would expect the remaining restaurants to be in existing markets. And between 2005 and 2006 being very selective in going into new markets.

One of the exciting things that has happened to us has been the experience in our West Covina, Oxnard and Cerritos restaurants, which are three of the highest volume restaurants in our chain. At the same time, they are three of the lowest income level market areas that we serve. And based upon that experience, it has opened up some opportunities, particularly in Southern California, to look at some sites that we previously had not considered. I think San Bernardino is certainly an example of that.

And based on that, we feel there's more opportunity in our existing markets than we had previously expected. And it gives us great confidence that we can grow over the next few years, primarily in those existing markets.

(OPERATOR INSTRUCTIONS) Travis Misur (ph), Red Ship Research.

A couple of questions here. First, can you go over your expectations again for preopening costs in the fourth quarter?

In the fourth quarter we are going to have about $200,000 in preopening costs, which will relate to San Jose, a few days in the first quarter San Jose was still in a preopening period, and then Willowbrook, which we expect to open towards the end of January. But we are already incurring some preopening costs and will incur more towards the end of this year.

And then have the fires in California had any affect on your business?

No, it did not have any significant effect on our business. We were fortunate not to be directly in areas where the fires were affecting. And I am very grateful for that.

And then last question. The higher food costs, I was wondering if you give us any sort of a breakout as to how much of that is due to higher commodity costs versus decreased purchasing power in your Texas market and newer markets?

I couldn't give you specifics. I think Rob might be able to.

Yes, if you want to call me, we can go through that. Just remember, Texas is three stores out of the 31 or 32 that we have now. So I would the majority is higher commodity costs.

(OPERATOR INSTRUCTIONS) Gentlemen, we're showing no further questions in queue at this time.

Well, I would like to thank everyone for participating in the call. We will have a replay available shortly, which will last for 30 days on the Internet, and for three days on the telephone. Details can be found on our website at www.bjsbrewhouse.com.

If you have any further questions, please call us in our offices at 714-848-3747. This concludes our conference call. Thank you.

Thank you for your participation. You may disconnect your lines at this time.