BJ's Restaurants Inc (BJRI) 2005 Q1 法說會逐字稿

Good afternoon ladies and gentlemen, and welcome to BJ’s Restaurants, Inc. First Quarter 2005 Results Conference. At this time all parties have been placed on a listen-only mode and we will open the floor for questions following the presentation. At this time it is my pleasure to turn the floor over to your host Jerry Deitchle. Please go ahead sir.

Thank you, operator and good afternoon everybody. I’m Jerry Deitchle of BJ’s Restaurants and welcome to our quarterly investor conference call which we are also broadcasting live over the internet. Joining me today is Lou Mucci, our Chief Financial Officer and Rob Curran, our Vice President of Investor Relations.

Today as you know our company released financial results for the quarter ended April 3, 2005 after the close of market. If you haven’t seen our press release yet, you can view it on the main page of our website which is located at www.bjsrestaurants.com or you can also call Rob at our offices here at 714-848-3747 extension 260 after our call today if you would like to be added to our press release distribution list. Our agenda for the call today will be as follows, first I’m going to provide a brief business and operational overview for the first quarter of 2005, then Lou will briefly review our income statement for the quarter and he will be followed by Rob who will cover our summary balance sheet and our liquidity position. Then we will be happy to take a few questions and we’d like to complete the call in about 45 minutes. So before we start I’d like Rob to take a minute and review our disclosure on forward-looking statements. Rob?

Sure. Certain information contained on today’s 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. Now, I would like to turn the call back to Jerry.

Thanks Rob. But before we cover the results for the first quarter I would like to just take a minute and say that my first three months on the job here at BJ's have solidly confirmed my belief that we have got a strong opportunity, a very strong opportunity to expand the BJ's Concept in both are existing and new market and to further leverage business model as we grow. We clearly have a lot of work to do to successfully make the transition from a restaurant company that is growing to a restaurant growth Company but it is the type of work that is tremendously fun and rewarding and I very excited to be on board here at BJ.

Now to get to the results of the first quarter, as we indicated in our press release today BJ's has reported very strong results for the first quarter ended April 3, 2005 and compared to same quarter last year our revenues increased a strong 29% to 37.4 million and our net incoming goes to 1.7 million or 8 cents per diluted share. After taking into consideration the approximate 1 million over 5 cents per share after tax being related to the sale of the three Pietro's restaurants in the same quarter last year, our net income increased a solid 21% for the quarter.

Getting to our revenue increase, a 29% increase on revenues for the quarter was driven by 7 new restaurants that were opened during entailing 12 months coupled with a very solid 2.8% increase in comparable restaurant sales for the quarter. I think all of us was very pleased with our top of the sale performance for two reasons; first we were rolling over a very difficult comparison in same quarter last year that when comparable sale increased 7.7%. Secondly, California experienced new record rainfall allowance during the quarter that just ended that impacted guest traffic in general and we got over two-thirds of our restaurants located here in California. So, in light of those factors we were all very pleased with our 2.8% increase in comparable sales for the quarter.

The company took in approximate seven tenths of a percent effective menu price increase at the end of January to help offset the anticipated cost pressures and again as has been the Company's past practice we will continue to evaluate our operating margins and to consider additional menu pricing opportunities as we moved throughout the remainder of 2005. With respect to comparable sales a few of our best performing restaurants in our core market of California after the first quarter on that particular measure where our wonderful restaurant in [inaudible] California was up 10% for the quarter, our highest volume restaurant in our company and greater California of 5%, Huntington Beach, California of 5%, and the Valencia, California up about 4% and we are also very happy to report positive comparable sales for our non-California restaurants, just to mention a few our Addison Texas restaurant up 3%, restaurant in Boulder, Colorado up 3%, and our restaurant in Chandler, Arizona up about 2%. The BJ's concept clearly continues to build its reputation and popularity in both existing and new markets.

As we noted in our press release today our average weekly sales for the quarter increased about an 11% after adjusting for 3 more volume Pietro's Restaurants that we sold during the same quarter last year. We believe this impressive increase is primarily attributable to a strong sales volumes from our new restaurants that we’ve opened during the past 12 months that have yet to enter the comp base. In particular, our newer restaurants in San Bernardino, Fresno and Folsom California connectively averaged over $125,000 to weaken sales during the first quarter and achieved some of the strongest sales volumes in our company. Additionally, our two new openings so far this fiscal year in Moreno Valley, California, Corona California continue to achieve very strong weekly sales volumes well in excess of our company average in our initial expectations. As we noted in our press release that we opened our 38 restaurant in Roseville, California yesterday. Roseville is a suburb at Sacramento and we experienced a near record sales day from our first day of opening. We believe all of these solid sales trends are indicative of the strong popularity and flexibility of the BJ's concept. As we continue to grow, we’re clearly learning that BJ's can be very successful not only in trade areas and markets with higher than average household incomes where we historically opened may of our restaurants, but the BJ's concept can be also very successful in marketing trade areas with average household incomes. I’ve been in the business for almost 30 years and I can't think of very many varied menu casual dining concepts that have strong appeal to all household income levels for everyday use and BJ's clearly is one of those few. As long as we continue to offer a high quality dining experience where the proceed value of that experience is much higher than what we ask our guests to pay, I believe, we’re going to continue to have a strong opportunity to profitably gain market share as we continue to execute our growth plan.

Now speaking of our growth plan, we successfully opened three outstanding restaurants so far this fiscal year Moreno Valley, Corona, and Roseville all located in California. And we currently expect to open two more restaurants during the second quarter, one in Tucson, Arizona in early June and one in Rancho Cucamonga, California in late June. During the last half of this fiscal year, we currently expect to open three or four restaurants either two or three in the third quarter and one or two in the fourth quarter. We always want to remind our investors that it is very difficult to precisely predict the timing of our new restaurants openings by quarter as to the restaurant construction and pre-opening processes are subject to many factors outside of our control. Now having said that we remain highly confident that we will be able to achieve our stated goal of opening eight or more restaurants during fiscal 2005.

Looking ahead past 2005, our development pipeline is in excellent shape and we already have two signed leases and 15 signed letters of intent in hand to potential 2006 and 2007 openings. Based on the current status of our development pipeline, our management team remains very confident that we can achieve a 20-25% increase in revenues during 2006 through a combination of absolute unit growth and operating week growth. We’re committed to additional development in our existing core market in California where we believe there is room for at least 15-20 additional restaurants overtime. We currently only have one restaurant open in each of Nevada, Arizona and Colorado, so we have plenty of room to develop additional restaurants in those states. We’ve only got 5 restaurants currently open in Texas and we are committed to further growing and leveraging our competitive position in that state as well. Additionally, we’re currently evaluating potential locations in Florida and in the Mid-West depending on the timing of site of availability could become a part of our development plan as early as late 2006 or 2007.

With respect to our five restaurants in Texas, which is my home state, we continue to be very pleased with our overall results in Texas. We are still in the process of introducing the BJ’s concept and brand in Texas and we’re still building up our reputation for quality and value. Now that takes time for any brand, particularly in Texas, as we are playing on the home court of a couple of our competitors in the varied menu casual dining segment. Now while we don’t provide sales volumes for specific restaurants for obvious competitive reasons, we can say that our average weekly sales in our five Texas restaurants continue to meet our expectations and continue to build positive momentum. In fact, our newest restaurant in Plano, Texas is actually currently achieving average weekly sales volumes in excess of our companywide average, which I believe, is very encouraging. So we are very committed to moving forward and developing Texas in a very sensible and profitable manner.

While we will cover our income statement in more detail in a few minutes, we were generally pleased with our overall operating margin performance for the quarter, although I believe we have clear opportunities for improvement overtime. I think that one way to judge the performance of our baseline operations is to measure our operating income margin before restaurant pre-opening cost. As the timing of our restaurant openings and the incurrence of the related pre-opening cost can significantly influence our quarterly results and can obscure the margin performance of our baseline operation. So after adjusting for pre-opening costs and the gain on the same quarter of the prior year related to the Pietro's disposal, our operating income margin before those items increased to 8.7% of revenues compared to 6.8% for the same quarter last year.

Additionally, our restaurant operating cash flow margins increased to 20.2% of sales compared to 19.5% for the same quarter last year and again while these are very favorable trends we have opportunities to do even better overtime and during the last couple of months I have personally spent most of my time trying to more fully understand the details of the BJ's business model and the current status of all of our key systems, our processes, and the people that make up our restaurant operations and our support infrastructure. What I have seen so far has left my expectations and actually I have had many upside surprises in terms of the strength and talent of our team in several aspects of our business. During the next month our management team will move ahead to more clearly define a business plan that will include the following seven components, that I just want to briefly review with you at this time.

First of all we want to continue to protect, enhance, and continue to evolve the BJ's concept and we want make sure that consumers continued to love our food, our service, our ambience, and our overall value as we continued to execute our growth plan. Secondly, we got to continue to build talent at all levels of our organization, and we can only grow BJ's as fast as we can recruit, train, and retain the very best people who will operate our restaurants correctly and to support our restaurants with the effective tools, systems, and processes. Our restaurant business model is a talent driven model and we are going to be making some strategic investments in this critical pipeline of profitable growth. Thirdly we are going to protect and enhance our operating profit margins and we are going to focus on building or acquiring tool sets that will give us the opportunity to improve overtime our productivity, our efficiency, the economies of scale, and leverage in every aspect of our business model because we want to keep our menu prices as low as we can for our guests and at the same time protect and enhance our operating profit margins overtime. So, by investing in these particular tool sets that will give us the best opportunity to do so and I do believe we have opportunities to better control our food and labor cost going forward, to leverage our supply team, and to leverage support infrastructure while actually improving overall quality and execution.

Fourthly, we want to execute our restaurant growth plan on time, on budget, and achieve our ROI targets, our growth again will be carefully controlled. We don't want to outrun our logistical headlights and our ability to correctly execute the concept. Fifth, we want to continue to minimize the risk of doing business, everybody in the restaurant business faces common risk related to liability issues, employment practice issues, and other risk that are common to our industry but we really want to focus on further minimizing those risks within our operational control to better protect the integrity of both the BJ's brand and our financial results. Six, we want to continue to optimize our brewery operations. Of our five critical pipelines for growth I believe the brewery capacity pipeline is a very important one and all of our planning for growth was absolutely ensured that we continue to have the flexibility and the capacity to support our new restaurants with high quality differentiated hand crafted beers that protect both our brand identity as well as our restaurant economics. And then finally number seven of our plan, we want to continue to become an even better corporate citizen in the communities that support our restaurants and help us to be successful.

So that concludes my comments at this point and I am going to turn the call over to our CFO Lou Mucci and he will discuss our quarterly financial results in more detail. Lou?

Thanks Jerry. As Jerry mentioned total revenues for BJ's restaurants for the first quarter increased 29% to approximately $37.4 million from $29 million in the prior year's comparable quarter. This increase is primarily resolved by opening up seven new locations. They include Laguna Hills, California opened during the second quarter of 2004, Summerlin, Nevada and Fresno, California opened during the third quarter of 2004. San Bernardino and Folsom, California and Plano, Texas opened during the fourth quarter of 2004 and more recently Moreno Valley opened during the first quarter of 2005.

In addition the company posted a comparable restaurant sales increase of 2.8% during the first quarter as noted by Jerry. The comparable restaurants sales increase is primarily due to increase in menu prices combined with increased customer traffic. Menu price increases include an approximately 0.7% effective menu price increase taken at the end of January 2005 as well as an approximately 1% in pricing taken in 2004. We increased beverage price to approximately 0.5% during the second quarter of last year and early in the fourth quarter of 2004 we raised the price of most of our hand crafted beers which we estimate the effect overall on menu pricing of about 5/10th of 1%. Revenue gains quarter-over-quarter were partially offset by the sale of the three Pietro's restaurants which we sold during the first quarter of 2004. Those three restaurants and the BJ's pizza and grill and [inaudible] which we closed in the first -- at the end of the year contributed approximately $875,000 to the first quarter of 2004 revenues.

Looking at costs of sales, costs of sales which includes food, beverage, and paper increase to $9.8 million during the 13 week standard April 3, 2005 from 7.4 million during the comparable 13 week period of 2004, an increase of $2.4 million or 32.4 million or 32.4%. As a percentage of revenue, cost of sales increased to 26.3% for the current 13 week period from 25.6% to the prior year's comparable 13 week period. This increase was primarily a result of increased prices for meat, cheese, sea food, and general grocery item which was partially offset by reduction in poultry prices versus the comparable period. Additionally, in our new restaurants, our costs of sales will typically be higher for the first 3-6 months of operation versus our mature restaurant as management team become accustomed to predicting, managing, and servicing sales volumes typically experience in our new restaurants. During, the 13 week ended April 3, 2005, we have three restaurants that were operating in the first 90 days of service versus only one restaurant in the prior year’s comparable period. In addition, as a reminder, we anticipate experiencing higher per unit purchase costs when we enter our new market. Although we continue to mitigate expenses to the best of our abilities and newer markets we haven’t yet achieved a critical mass necessary to get food costs at a rate similar to those we experienced in Southern California where we have a solid base of restaurants and improve purchasing power.

Labor and benefit costs were $13.4 million in the quarter versus $10.6 million in the first quarter of 2004, a 70 basis point decrease as a percentage of sales at 35.8% versus 36.5% quarter-over-quarter. The decrease in labor as a percentage of sales was primarily a result of increased menu pricing and to continue monitoring of our restaurant labor. Hourly labor, particularly our kitchen labor, increased slightly quarter-over-quarter due in part to the increased restaurant development versus the comparable quarter. Labor in our new restaurants tripled [inaudible] during the first 90 days after a restaurant is opened. As we noted in cost of sales, we had three restaurants in the first 90-days stage at some point in the first quarter of 2005 versus only one restaurant in the first quarter of 2004.

Occupancy cost increased to approximately 2.5 million during the first quarter from 2.2 million during the comparable quarter of 2004. As a percentage of sale, occupancy cost decreased 90 basis points to 6.8% from 7.7% quarter-over-quarter. The increase in obsolete dollars reflects 7 additional restaurants opened year-over-year offset by the sale of our three Pietro's restaurants and the closing of our Seal Beach Pizza & Grill. The decrease as a percentage of sales is a partial result of an increase in ground lease transaction which results in monthly lease payments below historical rent level. Operating expenses increased to $4.1 million during the first quarter versus $3.1 million in a year ago quarter. As a percentage of sales, operating expenses increased 20 basis points to 10.9% for the current quarter versus 10.7% for the comparable prior year’s quarter primarily due to higher levels of supplies and increased credit card fees. We noticed that operating expenses declined 20 basis points sequentially from the fourth quarter of 2004 due partially to a leverage from increased menu pricing, higher average weekly sales combined with our continuing focus on expense containment.

General and administrative expenses in the first quarter of 2005 increased to $2.9 million from $2.5 million during the comparable quarter of 2004. As a percentage of revenues general and administrative expenses decreased 90 basis points to 7.8% for the current quarter from 8.7% for the comparable prior year's quarter.

This decrease was primarily due to sales leverage additionally we have one-time severance payment related to two employees during the first quarter of 2004.

Depreciation and amortization increased to $1.4 million during the first quarter of 2005 from 1 million -- from [1.2 million] in the comparable quarter of 2004. The increased in total dollars was due to the investment in seven new restaurants opened over the past 12 months. Depreciation declined 20 basis point to 3.8% of revenues in a current quarter versus a year ago period primarily due to sales leverage.

Looking at the pre-opening expenses, restaurant opening expenses increased to $966,000 during the first quarter from $239,000 during the comparable quarter of 2004. While the company opened one restaurant in the first quarter of each year and the current year the quarter included a significant amount of pre-opening expenses for two restaurants which were opened early in the second quarter of 2005. And these were Corona and Roseville, California. Our opening expenses will continue to fluctuate from quarter-to-quarter depending on number of restaurants opened, the size and the concept for the restaurant being opened, and the complexity of our staff hiring and training process. We budget pre-opening expenses between 350,000 to 400,000 per restaurant with restaurants opening in Southern California typically experiencing lower pre-opening costs due to less travel and lodging costs as well as the potential for a higher portion of our managers and staff to transfer from existing company restaurants in the same market.

Net interest income was basically flat quarter-over-quarter at $101,000 during the first quarter of 2005 versus $103,000 during the comparable quarter of 2004. Though we have lowered balance of cash and investment entering the quarter we received approximately $40 million in mid March as a result of an equity offering of 2.75 million shares and we witnessed slightly higher interest rate in the current quarter. Net other income was $50,000 in the first quarter of 2005 versus net other income of $85,000 in the year ago period, primarily the result of a loss of [$3 million] from the sale of our Pietro's restaurants in the first quarter of 2004.

Looking at taxes, the effective tax rate for the quarter was 32% versus 34% rate in first quarter of 2004. Our effective tax rate increased through the additional utilization of FICA tip credit as tax impact of the Pietro's sale in the first quarter of 2004. We currently continue to estimate our effective tax rate for fiscal 2005 will approximately be 32%. As we previously mentioned, the company's result in the first quarter of last year benefited from March 15th sale of Pietro's restaurant. The $2.2 million sale resulted in a $1.7 million pre-tax gain or a $1 million net or a 5% per diluted share impact. Now, I‘d like to turn the program over to Rob and he will discuss some of the balance sheet and cash flow items.

Thanks. We ended the first quarter 2005 with approximately 52 million in cash and short-term investments or approximately $2.43 per diluted share. We have no funded debt and shareholder equity was 121 million at April 3, 2005 or approximately $5.67 per diluted share. As Lou touched on during March 2005 the company completed a private placement of common stock which was placed with three large institutional investors. The transaction involved the sale of 2.75 million shares of common at a purchase price of $15.50 per share, that brought in $40.4 million to the company. We believe that this equity price further strengthens our balance sheet and provides us with additional financial resources and the flexibility to execute our growth plan during the next several years.

Total capital expenditures fro the quarter ended April 3, 2005 were approximately 10.3 million and were primarily related to the development of our Moreno Valley restaurant and for construction on restaurants in progress. Particularly Corono and Roseville which have opened in the second quarter as well as Rancho Cucamonga, California; Tucson, Arizona; and Sugarland, Texas, as well as other restaurants which we anticipate they open in 2005 and 2006. For the full 52 weeks fiscal 2005 year we estimate our capital expenditures to be between 25 million and 27 million. The breakdown on this is as follows. Approximately 18 million for 2005 new restaurant development, approximately 3 million for maintenance CapEx on existing restaurants as well as IT projects, and between 4 and 6 million in constructions and progress for 2006 restaurants or take into account the timing of landlord contributions. I’d now like to now turn the call back to Jerry.

Thanks Rob. To quickly recap before we take a few questions. The BJ's clearly achieved strong financial results for the first quarter of 2005 and our current outlook for the remainder of the year remains very optimistic. We’re solidly on track to open 8 or more restaurants for this year and our development pipeline for 2006 is filling up very nicely at this point. With only 38 BJ's restaurants opened as of today the vast majority of our growth is still ahead of us. Based on what we know today, we believe there is clearly room for at least 300 BJ's restaurants domestically and I believe that our challenge will continue to be carefully bill and balance the five pipelines that are necessary for profitable growth. The capital pipeline, which we primed last month, the real estate pipeline which is in excellent shape for the next couple of years, the talent pipeline which is in great shape and which will require continued focus to enable us to grow and operate all of our restaurants correctly, the brewing capacity pipeline which is also in excellent shape, and finally, the infrastructure support pipeline which is also in good shape. I think we are all excited as we’ve ever been about growing our concepts and brand going forward. I’m excited to be leading the company and now I think operator we are ready for a few questions.

Thank you. At this time if you do have a question you may press "*" "1" on your key pad. If at any point your question has been answered you may remove yourself from the queue by pressing "#". Once again to ask a question please press "*" "1" on the keypad at this time. Please hold while I poll for any questions. Thank you. Our first question comes from Brian Moore of Fiddler (phonetic)

Good afternoon. Congratulations on a good quarter.

Thanks [Brian].

My first question relates to your alcohol -- alcohol side of your business in light of Anheuser's earning release today. In their comments regarding margin pressure from higher commodity costs and lower beer sales due to the increased competition from wines and beers, I’m hoping you could comment, number one, on your expectations for margins trends on that side of your business. Secondly, perhaps speak to what you believe the percentage and [optical] mix of alcohol is for your concept; and then third and finally, what the Anheuser release might mean for any longer term distribution strategy you have related to your handcrafted beers?

Well, I don’t think any of us here have had a chance to review the Anheuser press release. So we are at a bit of a disadvantage as to what they may have said. I can tell you that in our business, our handcrafted beer sales represent about 11% of our sales and the margins in that part of our business are quite attractive. But given the fact that it is based on watering grain, we don’t have excessive marketing and distribution costs like some of the big breweries would have. We did take about 0.5% effective price increase on our handcrafted beers, I believe, last October to hopefully compensate for any potential raw materials or commodity or freight issues that we might have seen at that time in terms of that side of our business. But I believe, -- we continue to believe it’s really healthy; we haven’t seen any change in consumption patterns or handcrafted beers continue to be as popular as they have been. That part of our business is important to restaurant economics. I think that there’s a bit of pricing elasticity in terms of that particular product line and our particular restaurants due to its very specialized nature, and distinctive nature. I believe we continue to be confident about the ability of that part of our restaurant economics to continue to keep pace with our growth. Rob, would you like add anything do that?

No, I'd just say that, you know, I think our handcrafted beer is probably our highest margin item that -- in the company with the exception of maybe some of our alcoholic beverages which are higher priced. But in the middle of last year we really focused on a bar menu and we actually lifted our alcohol percentage I think in the current quarter over the last year, primarily due to liquor and wine. So I think we ran about 21% in a quarter versus our average is around 20.

I think we are generally satisfied with the overall percentage of our alcoholic beverage mix as a percentage of our total sales including handcrafted beers. I thank, that we have optimal blend of that component in our margins. We don't want to be known as a brew hub. We are a great family restaurant that offers superior handcrafted beers that’s really our fundamental positioning as we put the concept out to more markets and that’s where we like to be.

Okay. Thank you. That’s helpful. Just one more question if I may, related to building [town] at all levels then strategic investments in staffing. Mucci you could perhaps elaborate on what that might mean for staffing levels at the unit level and perhaps also in terms of compensation structural incentives to managers and servers and/or additional training program evolution, if you could perhaps talk about what you need to do to get to those point where you are satisfied and confident that you can open 12 or more units per year, what that might mean?

Yeah, this Jerry speaking, based on my initial assessment of our manpower pipeline, I believe that we have central processes in place to accommodate our planned growth going forward. So in terms of the appropriate amount of recruiting and training resources and in terms of our overall compensation and benefit plan I believe that there are adequate to support our planned growth for the foreseeable future given a philosophy of a restaurant company which is growing. Now if we want to make the transition to a restaurant growth company, if we want to take the concept nationally, if our plan is to become a major league national player with BJ's brand which is exactly what our intention is and overtime we want to add additional strategic investments in entire manpower pipeline to be able to improve the quality of our recruit. So to assess the [number] a bit better, to compensate them and incentivize them to where we can compete for the very best talent that if wants to be in a premium casual dining segment. All of those plans will be formulated during the next six months as we set our strategic initiatives. So I guess in summary what I would say is that basic processes and systems are on place to accommodate our growth overtime as the concept evolves, as we grow into a much larger national business enterprise, we would also want to evolve that critical pipeline.

Okay, thank you very much.

Okay.

Thank you. Our next question is coming from Mike Smith of Oppenheimer.

Well, good afternoon.

Well Mike, how're you doing?

I am doing pretty good. How are you?

We're doing great out here in sunny Southern California.

Well I suppose you didn’t miss [inaudible]. But anyway, I was wondering what you were really telling us that you were optimizing the Brewery operations, can you tell us a bit kind of a [several] part of BJ's are you going to continue to build breweries as whole of Brewhouse or is there a shift going out here?

I don't think there is a shift going on here. I think that there is a natural evolution and how we view that part of our business and in terms of our ultimate productive capacity is I think it's clear from what I’ve seen in the business and I think some of the [inaudible] maybe that have been around the business longer than I have is that there are even better economics related to the brewing of handcrafted beers if your able to increase capacities and build maybe slightly larger brewing facilities. Whether these men adjust themselves in those states and attach to those restaurants that, you know, where you can brew many more thousands of barrels in a particular location and not have certain constraints as we do in California where I believe our limitation is 5000 barrels per restaurant, then I think those are opportunities that I think make a heck a lot of economics sense to our brand and supporting our growth going forward. It really helps on both ends. Not only does it reduce the level of investment at the restaurant level and in terms of growing capacity which your able to consolidate your investment in mini breweries perhaps they might be in Nevada, perhaps they might be in Colorado, or in other states where the regulations related to brewing our limitations are little more flexible and it just helps the overall economics of brewing beer which is important part of our concept as you know so, I think it's a natural evolution and it's something that we have a couple of opportunities in front of us that were currently in evaluation stage to see if it makes any sense to go to that direction so, that’s what I really meant by further optimizing our brewery capacity.

Great, because Texas is a little bit different and what you are used to out there?

It is, we have the contract brew in Texas because of the tide house regulations in that particular state, and one of our strategies in terms of optimizing brewing capacity may very well be a more expanded strategic relationship with a contract brewer provider that will help us and help off matter owning internal brewing resources as we take the concept into some future states where you run into that issue. There aren’t that many of them but we want to have total flexibility to enter any state and offer our handcrafted beers plus to the extent that we could develop a strategic contract brewing relationship there would be points of leverage on economies a scale, purchasing distribution with our own internal brewing operation. So those are some of the things that I think we are going to pursue over the next year.

And my last question the offering that you had earlier in the year, does that give too sort of a self funded or is there another offering perpetually out there a year and half to two years from there?

Well, I think it is safe to say that based on our current growth plans I think we’ve primed the capital pipeline for the foreseeable future, again based on our current growth plans, so I think we are in excellent shape for the foreseeable future, we raised the appropriate amount of capital, its equity if not debt, it makes a lot of sense to go this way. This capital gives us total flexibility to take advantage of any site that’s offered to us that makes sense for BJ's Restaurant whether it’s a ground lease, or built to suite with a very simple purchase. Net capital not only will support absolute growth going forward but it gives us all of that flexibility to never turn down a site that makes sense for BJ so I think we’re in excellent shape, would you guys agree Lou and Rob?

Yeah, absolutely. I mean I think we had a little more interest out there in the marketplace and we took what we felt was the best transaction size for our development plans and for our existing shareholders.

I think from my side too it this really helps when I have great lengths looking at different sites and he comes in and he says yeah, there might be a purchase or something, it gives us so much more flexibility and ease in dealing with the owner of the property or the landlord so it is a great position to be in.

And. No, I guess that was my last question. [Inaudible] 20-25% operating weeks that is what I wrote down during your presentation, think I’ve heard that somewhere before.

I think we’re feeling very comfortable about that particular range of potential growth.

Thank you, guys.

Okay.

And sir our next question comes from Jonathan Waite of Key McDonald.

Hey, good afternoon.

Jonathan, how are you?

Good. I had a question on these new stores. They’re running some pretty great volumes. I am wondering how labor percentages are running there. I know you talked about how when you have a new store they kind of run inefficiently, but given these great volumes on, I wonder how labor percentages are running, and then follow up to that is how should we think about the labor line as restaurant weeks, restaurant week growth accelerate in the remaining quarters of the year.

I can speak to labor in the new restaurants. I think that the performance of BJ’s Restaurants in their first 90 days of operations is really not distinguishable from any other premium or upscale casual dining concept that opens up with extraordinarily high volumes and your managing food, the honeymoon phase, and want to make sure that you are appropriately staffed and protecting the concept to make sure your executing as best as you possibly can. Like many other premium and upscale casual dining concepts we have a 90 day plan where we phase our labor goals to targeting levels over a 90 day period, everything else being equal and as far as I know, over the past 7 restaurants all of our labor is tracking along those 90 day plans. So, I think we are in excellent shape, it’s something that we very carefully manage. With respect to food costs and the openings, typically, we get to those -- the targeted levels a lot easier than you can and earlier than you can with labor. Labor’s a little sticky because you just want to be very, very careful about your execution, but as far as I can tell, we are on track to hit our 90-day a margin goals on balance; some will be a little earlier, some might be little later but on balance, I think we are on target. And as far as operating weeks, I am not sure I clearly understood your question John.

So the -- it looks like in the first week you might have grown at about say 10% and --

First quarter you mean?

Yeah, first quarter year-over-year basis including the Pietro's but that's going to accelerate out in the remaining quarters, at least in the second and the third quarters. I am just wondering how we should think about that labor ramp?

I don't think that you are going to see much aberration in the way our labor because you have got restaurants that are going through the 90-day to 120-day opening period and they are improving. We've got a mixture of new restaurants coming in and we are [impatient]. So off the top of my head I don't think we can quantify in terms of number of basis points over the next two quarters what type of a change either way that you could expect. We will work on that and if we think that there is something material over that we think you should be aware of it, certainly you would like to know, but I am not thinking of anything at top of my head. Rob.

No, I think labor will be a lot more -- we certainly hope it will be more normalized quarter-to-quarter this year than we were last year. Our opening schedule is somewhat lumpy. So we opened a restaurant in January at the beginning of last year and then we didn’t open another until June. So if you look at the second quarter of last year, our labor ramp fairly low for us at 34.7% and then we started to ramp up in the back half of the year as we started opening more restaurants, had more managers in this system, had some [inefficiency] which I spoke about. But this year is a little more evenly balanced in terms of restaurant opening so --

Okay, yeah, well that’s it. Yeah, now that does help in. I guess kind of a follow-up question and one of reasons why asked is Jerry, you talked about for taking an enhancing profit margins, I am wondering if there is anything you see that might provide a payoff as far as getting a better margin or if you think that that peak margin for the company could go higher, just wondering what's your thoughts are there?

Well, just to briefly summarize, as I mentioned in my comments, our restaurant level operating cash flow margins for the quarter were like 20.2%; and so a concept with this relatively low number of restaurants with very few points of leverage in its business model yet and with very little economies of scale and its supply chain or any where else it's quite incredible to see operating cash flow of margins for our concept at this stage of maturation curve is strong as they are. Generally it's usually the reverse; young concepts typically don't have the margins; and you have to grow to get some supply chain beverage to other beverage to really get their margins up to this level. So we're in a very enviable position to start with. As I look at what we have embraced within the four walls of our restaurants there are three or four requisite toolsets that we don't have in place yet and I think as we bring these into play over the next year they should clearly help to project our margins. First of all, we don't have a theoretical food cost system which would help our restaurant operators better control waste of yield in the restaurants. So we got to get that identified and put in. Secondly we're evaluating a kitchen display systems or KBS system to help automate the filings of orders in our kitchen and help us track our ticket times and improve overall speed and quality and that would certainly help productivity. Thirdly, we're going to analyze a more robust labor planning and scheduling system that's based more on productivity net rates as opposed to trying to judge labor as you do as analyst in terms of percentage of sale. And we've got to get that into place. Fourthly, we are on the very early stages of rolling out an activity-based analysis system. Most modern restaurant companies don’t really use the internal profit and loss statements so the way to really measure productivity and efficiency. They typically use a series of other metrics, guest per labor hour, costs per guest, and so forth. And then they rate them and try to compare them against similarly situated restaurants the way we drive the productivity and efficiency improvements at the behavior chained level which is what we’re kind of in business here, we are all kind of professional behavior change artist here as we run restaurants and basically these activity-based analysis systems helps to really facilitate behavior changes. And then over the long term we have opportunities to get purchasing economies to scale and supply chain economics overtime. So I think those are the major areas where I can see us being able to protect our margins and my view is our reps take a lot of that benefit protect our margins but wherever possible reps give that back to the guest and reps give it back to the staff in terms of enhancing the overall quality and value the BJ's experienced, protect our margins. What a beautiful position to be in and it all starts with being in great position that we’re in today, thanks to the mix of our handcrafted beers and our pizza and our operating margins. So that’s a quick summary of what I think I’d see, Rob, Lou do you all have anything to add?

No, I think that’s summary is [good].

Okay.

Okay. Thanks.

Okay. But once again we’re not going to get all of those in tomorrow; it's going to take a little time to get these in and hopefully this time next year we can begin to talk about some of the successes of some of these programs.

Okay, thank you.

You’re welcome.

Thank you. Our next question is coming from Graham Tanaka of Tanaka Capital Management.

Yeah. Hi guys. Nice quarter. I just was wondering if you could talk a little bit about -- and you mentioned some of the new states which certainly I guess Florida and the Mid West, and I was wondering why you would not be rolling out to contiguous states for transportation management and travel?

I think that when we look at and analyze the potential for the BJ's concept and we look at the customer demographics that seems to favor our concept we believe that Florida will be an excellent place to make a presence within the next couple of years not only because of those factors of doing business in Florida which are extremely favorable for the most part but Florida will give us a chance to showcase the BJ's brand to everybody that travels to Florida for vacations or for any other purpose, up and down the East Coast and out in the Mid West. So strategically we think it is important to get a very strong position in Florida to begin to build our reputation on the East Coast and the Mid West. Secondly, the demographics in the Mid West, when you look at the supply and demand of restaurants of our caliber, we believe that there is a definite supply-demand imbalance and we believe that those are opportunities that we ought to begin to pursue, and you have got to go out and do your site work well in advance of when you’re going to open up your restaurant from the capital that we have raised, will give us the ability if necessary, you know, to get in front of the curve there and to get some site supply and then be able to get them developed when we need them to keep up with our growth rates. Having said that, as I look down the list of all of our potential sites for the next 2-3 years, I’m happy to say that at least 2/3rds of them are going to be in either established markets or continuous markets as you would say. As we mentioned we’ve only got 5 restaurants in Texas, room for many more. We only have one restaurant in Arizona room for many more. Now we consider those to be somewhat continuous markets. We may have one restaurant currently in Nevada, certainly room for some more over there, we only have one restaurant in Colorado. So I think that our growth will be very balanced and I kind of like the idea that half is not more of our growth over the next 2 or 3 years, we’ll be an established market where we can leverage pre-opening costs, where we can leverage brand awareness, and then if we strategically get a position in Florida, in the Midwest, I think those will provide some great [inaudible] where we can again grow further.

As you do this Jerry, would going to new markets like Florida and the Mid West, would they possibly hold margins down or would you be able to, you mentioned the track, extremely track of economics in Florida, would you be allowed to have the sort of the de novo market start up cost with stable economics at the stall?

The primary difference in terms of margins will be in areas like labor and whether you are in a stiff credit state or you are not you are in a stiff credit state. Even though Florida has recently increased its minimum wage, they do have a strong shift credit with the state which makes them very favorable for restaurant operators and many states in the Midwest also have shift credit. So, I think on balance, I would expect to maintain our margins as we grow in the new markets. I wouldn’t expect to see them dramatically change either way and I think our margins are pretty solid at this moment. What I think will be more critically important as we continue our national expansion we’ll be on the distribution side to make sure that we partner up with distributors outside of the State of California with a single distributor outside of the State of California, if possible they can give us the leverage points that we truly need in our supply chain.

Thank you very much.

You are welcome. Operator we’re kind of up on the hour mark. Can we can we just leave a time for maybe one more question.

I guess, thank you. Our final question is from Brian Reynolds (phonetic) of Solomon (phonetic).

Good afternoon; two quick questions for you. The first question is over the next year or two do you foresee incurring any incremental expenses for Sarbanes-Oxley?

You know, were are in our second year of Sarbanes-Oxley, obviously, and we are right now in the process of talking with our auditors. Last year was a big surprise. Everybody thought that was a small number, it kept growing. The great news was we got a nice clean report. We have plenty of internal controls here. So we actually see that reducing in our across the, all of restaurant people as you know have a lot of issues with leases this year. In fact, one of my good friends Bob Barick (phonetic) entered in conversation quit after the conference call that he couldn't take it any more. Well we are not about ready to do that. We are going to keep fighting our way through it here at the BJ's Restaurant and we think the costs have actually come down for Sarbanes-Oxley going forward.

Okay. And my second question just had to do with the 2.7 million shares that you sold recently, it is my understanding those shares have been registered and are available for sale, is that correct?

Yes, that's correct.

Okay. Given that that it's a large number of shares relative to the float of your stock that kind of creating an overhang and I was wondering if you had looked at any ways of trying to enter an orderly disposition of those shares?

I don't believe that any of the buyers of those shares have any immediately planned -- any immediate plans to sell them. I think these are the buyers of the shares would three institutional investors. They are fundamental investors and hopefully they see the long-term prospects of our business and have bought in at a favorable price. And hopefully they will get a good return on their investment over the long term. I am not aware of any plans on their part to sell the shares. Rob?

Are they - they are not locked up, are they?

No, they are not locked up.

Okay.

But you know, Brian, these were accounts that already had a small position or somewhat large position in the company and we had barely been afloat and think, you know --

Great, thank you.

Thank you

Thank you every one.

Thanks operator.

Thanks you and I would like to turn the floor back to over Jerry Deitchle for any closing comments.

We are done operator, thank you very much. Thanks a lot.

Thank you and the call has concluded. You may disconnect your line and have a great day.