BJ's Restaurants Inc (BJRI) 2004 Q2 法說會逐字稿

Good afternoon, everyone, and welcome to the Chicago Pizza & Brewery Second Quarter 2004 Results Conference Call.

At this time, all lines have been placed on a listen-only mode, and the floor will be open for questions and comments following the presentation.

I would like to turn the floor over to your host, Rob Curran, Vice President of Investor Relations. Sir, the floor is yours.

Thank you.

Good afternoon, everyone. We'd like to welcome you to our Second Quarter 2004 Conference Call, which we're broadcasting live over the Internet.

On the call today, we have Paul Motenko, our Chairman and co-CEO, Jerry Hennessey, our President and co-CEO, and Lou Mucci, our Chief Financial Officer.

Chicago Pizza & Brewery released our results after the close of the Market today, and interested parties can view a copy of our results 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'll make sure to forward a copy to you.

Our agenda for the call will be as follows: first, Paul will provide a summary financial and operational review covering Chicago Pizza & Brewery's results for the second quarter ended June 27, 2004. After that, Lou will provide some additional financial details on the quarter, and Paul will follow that up with comments on current issues and trends, and will review 2004 guidance. Lastly, we will be available for a q-and-a session.

Before we begin, I'd 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 statements, 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 the SEC.

With that, I would like to now turn the call over to Paul

Thanks, Rob.

Our revenues for the second quarter were approximately $29.3m, a 15.4% increase over the second quarter of 2003. This increase was primarily driven by five new locations, which have opened since May 2003, as well a 4.4% improvement in same-store sales.

Comp store sales increases in the second quarter were primarily driven by an increase in customer counts, and slightly greater than 3% of menu pricing. Some of our best performing comparable restaurants in the quarter were in Valencia, California, Chandler, Arizona, Irvine, California, West Covina, California, and Burbank, California.

At the end of the second quarter, six stores were in operation, which have not yet entered the comp base, including three stores in Texas, which had aggregate sales which met our expectations during the period, and three locations in California, which had collective sales above our expectations during the period.

Average weekly sales for all stores during the second quarter were approximately $75,000 versus $64,400 in the second quarter of 2003. To provide additional details for financial modeling purposes, we note that our eleven small format restaurants, which we define as our seven pizza and grill units in California, our three Oregon units, and our 5,500 square foot Colorado restaurant, contributed slightly more -- excuse me -- than $5m to the second quarter 2004 revenues. The remaining $24.3m was generated from 20 full-sized brewery and brewhouse restaurants, including one new restaurant we opened late in the second quarter in Laguna Hills, California.

During the second quarter of 2004, the average weekly sales for the large format brewery and brewhouse restaurants were approximately $97,900 versus $97,300 in the second quarter of 2003.

Net income was $1.4m, or 7 cents diluted earnings per share as compared to net income of $1.1m, or 5 cents diluted earnings per share for the same period of 2003.

At this point, I'd like to turn the call over to our CFO, Lou Mucci, to discuss our quarterly financial results in more detail.

Thanks, Paul.

As Paul mentioned, total revenues for Chicago Pizza & Brewery for the second quarter increased 15.4% to approximately $29.3m from $25.4m in the prior year's comparable quarter. The increase is primarily the result of the opening of five new locations, and they are as follows: Addison, Texas, opened in May 2003; Cerritos, California, opened in July 2003; San Jose, California, opened in October 2003; and this year we opened Willowbrook, Texas, in January of 2004; and recently, we opened Laguna Hills, California, which was in our second quarter for one week's worth of sales.

In addition, the Company posted a same-restaurant sales increase of 4.4% in the second quarter. The comp store increase is primarily due to an approximately 2% menu increase taken at the end of November 2003, and a partial period of 1.5% menu increase, which was rolled out to the stores back in May of 2003, combined with our increased customer traffic.

Quarter-over-quarter, revenue gains were partially offset by the closure of BJ's Portland, Oregon, restaurant during June 2003, and the sale of three Pietro's Restaurants, which was completed March 15, 2004 in our first quarter. Those four units contributed approximately $900,000 to second quarter of 2003 revenues.

Looking at cost of sales, which includes food, beverage, and paper, it increased to $7.6m from $6.7m during the comparable quarter of 2003. As a percentage of revenue, cost of sales decreased to 26.0% for the current quarter from 26.5% for the comparable prior quarter, a decrease of 50 basis points.

Sequentially, from the first quarter of 2004, cost of sales increased 40 basis points, primarily from food costs, particularly beef, cheese, and chicken. The decrease in cost of sales year-over-year is primarily a result of menu price increases taken in 2003 and continued monitoring of costs, especially in our Texas markets where we have reduced our purchase costs through improved vendor pricing.

We continue to anticipate higher per unit purchase cost when we enter new markets. Although we continue to monitor and control expenses, in newer markets like Texas and Northern California, we haven't yet achieved the critical mass necessary to get food costs at least similar to those we anticipate in Southern California, or are experiencing in Southern California. We have a solid base of stores and better purchasing power in Southern California.

Looking at labor and benefits, the costs were 10.2m in the quarter versus $9m in the second quarter of 2003, a 60 basis point improvement as a percentage of sales at 34.7% versus 35.3% year-over-year. The improvement in labor is primarily a result of increased restaurant development in tip-credit states, as well as a 4.4% comp sales leverage over our store management labor.

Occupancy costs increased to approximately 2.2m during the second quarter from 1.9m during the comparable quarter of 2003. As a percentage of sales, occupancy costs increased 30 basis points to 7.6% from 7.3% quarter-over-quarter. The increase in absolute dollars reflects five additional restaurants opened year-over-year, offset by the closure of the lower volume BJ's Restaurant, and the sale of three Pietro's Restaurants.

Operating expenses increased to $3.2m during the quarter versus $2.9m in a year-ago quarter. As a percentage of sales, operating expenses increased 60 basis points to 10.8% for the current quarter from 11.6 -- I'm sorry -- from 11.4% from the comparable prior quarter, primarily due to leveraging our comp store sales increases and continued expense-containment initiatives.

G&A expenses were stable at approximately $2.2m during both the second quarter of 2004 and a comparable quarter of 2003. As a percentage of revenue, G&A expenses decreased approximately 130 basis points to 7.5% for the current quarter from 8.8% for the comparable prior year. This decrease is primarily the result of our sales leverage and our increase in sales.

Depreciation and amortization increased to approximately $1.2m during the quarter from $1m during the comparable quarter of 2003 due to our investment in five new restaurants opened since May 2003, including two which are ground leases, which result in higher leasehold cost improvements.

Pre-opening expenses, restaurants' opening expenses increased to $770,000 during the quarter and $291,000 during the comparable quarter of 2003. The Company opened one restaurant in the second quarter of 2004 in Laguna Hills, California, versus one restaurant opened in the second quarter of 2003 in Addison, Texas. However, a significant percentage of our pre-opening expenses for our most recent opened restaurant in Summerlin, Nevada were included in the second quarter of 2004 as Summerlin opened on June 30, three days into our third quarter.

As noted, our pre-opening costs will fluctuate from quarter to quarter, depending on the number of restaurants opened, the size, the concept of the restaurant being opened, and the complexity of the staff being hired, and training processes. We budget pre-opening expenses between 300,000 to 400,000 per unit, with units opening in Southern California typically experiencing lower pre-opening costs due to less travel and lodging costs, as well as the potential for a portion of management and staff to transfer from existing Company restaurants in the same market.

Net interest income was slightly improved at $121,000 during the quarter, from $96,000 during the comparable quarter of 2003. Net other income decreased to $29,000 from 129,000 -- I'm sorry, from $120,000 during the year-ago period, which is primarily the result of decreased license fees from the Hawaii unit, a decrease in gaming income as a result of sale of our Pietro's Restaurant.

The effective tax rate was 32.7% for the quarter versus 31 point -- I'm sorry, versus 35.1% rate in the second quarter of 2003. Our tax rate for the six months ended June 27th, 2004, was 33.5%, which is what we currently estimate our effective tax rate for the full year of 2004 will approximate, and for the future interim periods of this year.

Turning to the balance sheet, we ended the second quarter with approximately $24m in cash and short-term investments, or approximately $1.17 per diluted share and no funded debt. Share over equity was $75.6m at June 27, 2004, or $3.68 per diluted share.

Total capital expenditures for the quarter ended June 27, 2004, were approximately $6.1m and were primarily related to the development of Laguna Hills, California, Summerlin, Nevada, as well as portions of development costs for our Fresno, San Bernardino, Folsom, Roseville, and Rancho Cucamonga stores to be opened.

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

Thanks, Lou.

I'd like to mention a few current items and reiterate our expectations for 2004. During the second quarter, the Company owned their -- opened our second restaurant of the year in Laguna Hills, California, which is right here in Orange County. This restaurant is a conversion of the former Brewery Restaurant where we have seen some solid initial results, resulting in our new numbers during the first month the restaurant was opened that have been above Company-wide average weekly sales.

Additionally, we have been pleased with the strong initial turnouts of our opening in Summerlin, Nevada, which we believe helps validate the growing strength of the BJ's brand. Importantly, this new Summerlin restaurant is our smaller store prototype at approximately 7,800 square feet, but we anticipate that operational efficiencies, while still having a format capable of producing revenue volumes in excess of Company averages.

In terms of current business trends during the first four weeks of the third quarter, our year-over-year comparable store sales results remain in line with our full-year expectations of 3% to 4%. We note that our internal same-store sales expectations accounts for a reduction in same-store sales during the second half of 2004 compared to the first half of 2004 in which we achieved a 5.8% same-store sales increase, which was over plan. Same-store sales are projected to be lower in the second half of 2004, largely as a result of annualizing menu price increases of approximately 1-1/2% from 2003 and 2% from November, 2003.

We have examined our competitive pricing structure on beverages and made some minor adjustments to our alcohol and soda pricing. We did not change our prices for our hand-crafted beers. Based on our historical percentages of alcohol sales, the increase in bar pricing would equate to approximately 20 basis points, and including soda, we expect beverage pricing to effectively increase menu pricing approximately 1% in the second half of 2004.

While food costs continue to remain challenging, at this point we do not foresee raising menu prices on food in the near term. We will continue to monitor the costs in the competitive environment, and evaluate our menu pricing and do our new menu rollout anticipated during the October/November period.

On the new restaurant development funds, we anticipate opening a Brewhouse Restaurant in Fresno, California, during August and one in San Bernardino in late September, which we believe should be very early in the fourth quarter. We currently project to open a Brewhouse Restaurant in Folsom, California, towards the middle of the fourth quarter, which would give us six restaurants opened during 2004.

We anticipate our next restaurant opening after Folsom would be in East Plano, Texas. However, we cannot project yet whether this restaurant will have a late 2004 or early 2005 opening.

In addition, we currently have leases signed for restaurants that we project will open in 2005 in Roseville, Rancho Cucamonga, Marino Valley and San Bruno, California, as well as Tucson, Arizona, and Sugarland, Texas.

Overall, we anticipate at least eight new restaurant openings in 2005, where we continue to project at least 20% annual unit growth.

As we noted in the press release, we maintain our 2004 projections for revenue between $124m and $128m, with 2004 diluted earnings per share estimated between 30 and 33 cents, which includes the approximate 5 cent after-tax one-time gain from the sale of Pietro's, which we put back in the first quarter.

These expectations are based on opening six to seven new BJ's Restaurants and same-store sales -- and same-store revenue growth of 3% to 4%. The Company will have one additional week in fiscal 2004, a 53-week year versus the standard 52-week year, which we reflect in the guidance issued above.

Last week, we'd like to note that shareholders approved our corporate name change from Chicago Pizza & Brewery, Inc., to BJ's Restaurants, Inc., and our ticker symbol will be changing from CHGO to BJRI. We have filed documentation for this change, and anticipate the change will take place during August, 2004. A press release will be issued when the change becomes effective.

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

Thank you. The floor is now open for questions. If you do have a question or a comment, please press star 1 on your phones at this time.

Once again everyone, if you do have a question or a comment, please press star 1 on your touchtone phones at this time.

Please hold while we poll for questions.

Thank you. The first question comes from Mike Smith from Oppenheimer.

Well, good afternoon, Paul

Hi, Mike.

Just a couple of questions. One, the improvement that you had in the cost of goods sold the second quarter considering the break in the cheese prices. Shouldwe presume that what we would expect to see could be an improvement in the third and fourth quarters if that lasts?

Well, as you may have noted, even though -- excuse me -- even though food cost was over in the second quarter compared to the prior year, it was higher than the first quarter, and we would expect that there's still some pressures in the third quarter. Although cheese has come down, you know, beef is still very high. Poultry is very high, although we're contracted on chicken breasts through the end of the year. But there are still a lot of pressures. We do not necessarily expect to see improvement in that area in the third quarter certainly over the second quarter.

Hey, Mike, it's Rob. One thing I'll add to it is we rolled over a year of pricing in May of a point and a half, although we are adding some on the beverage side of about a point.

And secondly, it seems like a pretty good quarter in terms of G&A leverage that you got, actually the G&A control that you have. What do you kind of budget expect for G&A going forward?

We're sticking with what we said last quarter, which is somewhere in the mid-$9m range for the year, say,9.5 or 9.6.

Okay, so it sounds like it's going to stay pretty steady.

Yeah.

Thank you.

Thanks, Mike. Next question please.

Thank you. The next question comes from Eric Wold.

Hey, good afternoon. Two quick modeling questions before I get to a longer one. Can you give the number of operating weeks in the quarter and then kind of expectations of tax rate for the end of the year?

Sure, I can give you the operating weeks. It was 391 in this quarter versus 396 in the year-ago quarter. Remember, we sold the three Pietro's units, which is the reason it's down.

Lou, you want to take the tax rate?

Yeah, I think looking at the tax rate as it continues through 2004, you know, we don't have another Pietro's on the line. I wish we did. That's a nice gain. We're looking at 33.5% I think for that purpose.

Okay, and two questions, one you're talking about obviously, you're getting a little bit better with the cost of sales in the Texas region as you've built up efficiency there. Maybe talk a little about where you are, maybe not in exact numbers, but kind of relative to where you are there and in Northern California versus Southern California? And eventually, kind of how many restaurants do you need to get it kind of down? I don't know if you'll ever get it down to where Southern California is, but kind of how long it takes to get down to that level and where you feel more comfortable getting cost of sales the next year or two?

There are two issues, Eric. One is purchasing power in the markets. The other is our product mix, and let me take the product mix issue first. That's a more permanent difference in Southern California because of the foundation in the Company as, you know, a pizza restaurant goingback 25 years. Ourpizza percentage of our product mix is typically higher than it is in the new markets. For instance, you take among all the restaurants, pizza can be as much as 28% or so. In some of the new markets, pizza is as low as 18%. So that has an impact on food cost because pizzais certainly on a -- from a percentage basis, is our most profitable menu item other than hand-crafted beers. So there might be some structural difference between new markets in Southern California, at least for the foreseeable future.

In terms of our purchasing power, we're making some pretty good progress. Currently in Texas, we're looking at 1% to 1-1/2% higher than Southern California, and Northern California is about 2-1/2% higher than Southern California. But that's a pretty significant improvement over what it had been in the past. We're opening -- we're planning to open our next unit in Texas towards the end of the year, and that'll bring us to fivein Texas. We have always felt that five or six units in a market will hopefully bring our purchasing power into a line with Southern California. And we would expect that to happen in Northern California. We have only two units, but we're expecting pretty significant growth in Northern California over the next year or so. We're looking within the next year to make some additional strides in both of those markets.

Perfect, and then thinking about the Nevada, , the Summerlin opening. That's the first new market you've been in for a little bit. Maybe comment on how the opening there went in the new market versus kind of what you saw when you first went to Northern California, or first went to Texas, andif one is any different in terms of demographics or in patterns there.

And then secondly on that same point, when we're likely to see the next brand new market from you guys, if it's an '05 event or more like an '06 event?

Well, Texas and Summerlin, Nevada, we've always considered that to some extent a suburb of Los Angeles, certainly in terms of operational efficiency. It's a little more efficient certainly than Texas. We're using the same distributor in Summerlin as we do in Southern California, so that helps in terms of food costs.

But in terms of the opening itself, a tremendous number of people that live in the Las Vegas area that are from California, so we have a fair amount of name recognition. The opening looked and felt very similar to our openings in California, and we're hoping that situation continues as we operate the restaurants, but you know, we're pretty pleased with the way the opening went in terms of demand for our restaurant and the name recognition. And we hope we've been -- oh, we were surprised when we opened the Northern California restaurants at how much -- how strong those restaurants opened and continue to operate. So we're hoping that the Nevada restaurant follows that same pattern as Northern California.

I have now forgotten the first part of your question or the other part of your question.

New markets.

Oh, yeah, what other new markets. We're really looking in 2005 to fill out existing markets as we look towards 2006, potential newmarkets. We'relooking in the Midwest, the Southeast, and a variety of different markets, and kind of looking optimistically at where we can find the A-Class sites to start flagging the footholds in new major metropolitan areas.

Okay, thanks a lot, guys.

Thanks, Eric.

Thank you. The next question comes from Dean Haskell, JMP Securities.

Good afternoon, gentlemen. Congratulations on a great second quarter.

Thank you.

Lou, why is the tax rate dropping this year as opposed to last year?

Well, part of that is the effective tax rate of the tip credit.

Okay.

We're getting some of those benefits there. And also I think that just looking at the taxes and tidying up some of that, you know, we've done some more tax planning, and we actually have two people helping us. Well, we have two different firms looking at that. And I think we're just moving along and doing a little bit better planning.

But I think that, as I said, we're looking at about a 33.5 for the rest of the year.

Okay, you talked about occupancy being up 30 basis points, but you didn't really explain why.

Well, that mainly relates to you know, [chem] costs, they're increasing and insurance has increased as well. And a couple of Oregon restaurants have slightly higher rent occupancy costs than the 7.3% that we had historically incurred or, you know, what we had the prior period but --

Is that ground leases typically?

No, the ground leases typically would be lower rents.

Right.

But a couple of our long ground lease restaurants had real high -- our objective in terms of occupancy is to keep it at 8% or below, and we're feel very successful in doing that. And 7.6% is still well within our criteria of occupancy for our units. So we feel pretty comfortable there, but there's always pressure in terms of utility costs and other things, and certainly insurance that impact our occupancy.

Right. I would have thought with the ground leases coming on, it would have been lower, but instead it was up. So more insurance and utilities than last year relatively speaking.

And I understand, right, that you're going to have three units open in the third quarter?

No, we would have two units open in the third quarter, and at least one in the fourth.

Well, you've opened Summerlin.

Correct.

Then Fresno and San Bernardino would be the first week of the fourth quarter.

Oh, okay, so San Bernardino, so it's two and two then, so it's two and one. That's only five new restaurants. If you go one, one, two, one, that's not six or seven restaurants for the '04 year.

You know, well, let's just -- you know, identify them. We've got Fresno coming up next week. We have San Bernardino in the first week of the fourth quarter. We have Folsom, which will be in the fourth quarter, and then we have East Plano, Texas, which will be either in the fourth quarter or the first quarter of next year.

Okay, so that is one, one, two, and two. Okay, great.

Right.

I wanted to make sure I got that clear. Well good, congratulations on a great quarter, and let's talk to you next quarter.

Thank you.

Your next question comes from Tony Brenner of World Capital Partners.

Actually, it's one, two, two, one, but that wasn't my question. When the warrants were exercised a little over two years ago, as I recall you had a cash position of $39m or $40m. You've ramped up your store expansion. You've now got $24m in cash and no debt, but the store expansion continues to increase, and you're suggesting that roughly a 20% rate, eight or ten stores next year and at least then presumably [indiscernible]. What I'm wondering is how far will you let that cash position run down before you seriously entertain other forms of financing your expansion, and when do you expect that to occur?

We anticipate some time in 2006 looking at some additional cash. As you mentioned, we have no debt service. We haveplenty of flexibility in terms of how we would handle that. And we would not allow the cash go down too much under $10m or so.

Okay, thanks.

Thank you. The next question comes from Steven Spence from Longbow Research.

Good afternoon. I have a question on your labor line. Since I don't have a long history of looking at your Company, maybe I need a little background here. But it would seem to me that in your newer locations, like in Texas, although you have currently a higher cost of sales, you might have a little lower labor cost. I wondered if that was true.

And then let me follow up on that.

The answer is yes, we have lower labor costs in Texas due to the tip-credit situation.

Okay, so that as your cost of sales comes down then, those stores would have pretty good margins. Is that correct?

That's correct.

So just a follow-up on that, then, I wonder what you're seeing in terms of labor on a geographic basis, arethere areas where you're seeing more pressure than others?

Well, one of the reasons we were excited to go to states outside of California is because most of the country has a tip credit. There are only seven states in the country that do not. California is one of those, so we would anticipate as we move to other parts of the country that have tip credits, that based upon you know, comparable levels of revenue, we would have better unit economics. So your assumptions are correct.

Okay, terrific, thanks very much.

Once again, if anyone does have a question or a comment, please press star 1 on your phones at this time. We have a follow-up question from Mike Smith from Oppenheimer.

Paul, this is kind of a philosophical question, but it came to mind when you answered where you were having your real estate searches. Did you say the Southeast?

Yes.

I'm sorry, yes?

Yeah, that is correct.

Okay, and when you go into a new geographic market, and let's just for the time being speculative that it might be Atlanta, would you go in there with one store, or would you kind of rapidly build up three or four stores just up in that market?

We would definitely try to get multiple stores if humanly possible. Well, that's why we're really focused on metropolitan areas that can support multiple units. And that's why we're looking at several market areas simultaneously to see where we can get particularly one or two A-Class sites, but beyond that, you get a fair number of sites to get the operational efficiency.

And let me ask a different -- well, the same question a different way. How many new markets, new geographic areas might you try to penetrate in a year if you were actually up to the 12 stores per year that you hope to get to?

I would anticipate we'd start out pretty cautiously in eitherthe very end of 2005 or in 2006, probably going into one new market. And then, you know, as the Company grows, we would accelerate the number of new markets to go into. But we want to be very cautious in terms of going into new markets and making sure we can get the efficiencies that are important to our Company, especially during this stage of our development.

Okay, thanks.

Thanks, Mike.

Once again everyone, if you do have a question or a comment, please press star 1 on your phone at this time. Once again, that's star 1 on your touchtone phone.

Gentlemen, we have no further questions at this time.

All right, thanks for participating in the call. We will have a replay available shortly, which will last for 30 days on the Internet and for 3 days on the telephone. Details can be found on our website at www.bjsbrewhouse.com. If you have any further questions, please call us at our offices at 714/848-3747.

This concludes our conference call. Thank you very much.

Thank you everyone. This does include today's teleconference. You may disconnect all lines at this time. Have a wonderful day.