BJ's Restaurants Inc (BJRI) 2005 Q3 法說會逐字稿

Good afternoon, ladies and gentlemen. My name is Rahim, and I will be your conference facilitator today. At this time I would like to welcome everyone to the BJ's Restaurant third quarter 2005 results conference call.

[OPERATOR INSTRUCTIONS] It is now my pleasure to turn the floor over to your host, Mr. Jerry Deitchle, President and CEO. Sir, you may begin your conference.

Thanks, operator, and hello everybody, I'm Jerry Deitchle, of BJ's Restaurants and welcome to our quarterly investor conference call, which we're also broadcasting live over the Internet.

Joining me on the call today is Greg Levin, our new CFO, and Rob Curran, our VP and Treasurer. I think most of you know that Greg Levin joined us last month and we're really delighted to have him on the BJ's management team.

Not only is Greg an outstanding restaurant financial executive, but he's also got a great understanding of the operational side of the restaurant business and we're all looking forward to Greg's contributions as we continue to execute our expansion plan in a very careful and controlled manner and continue to work hard to make the transition from a good restaurant Company that's growing, to a restaurant growth Company.

After the market closed today, we released our financial results for the quarter ended October the 4th, 2005. And if you haven't seen our press release yet today, you can see it on our website, which is www.bjsrestaurants.com.

Our agenda today is going to be as follows. First, I'm going to give a brief business and operational overview for the third quarter of 2005, then Greg is going to briefly review our income statement, our summary balance sheet and our liquidity position at the end of the third quarter. And then after that, we'll be happy to take a few questions. We'd like to wrap up the call in about 45 minutes.

Before we get started, I'm going to go ahead and make our standard cautionary disclosure with respect to forward-looking statements. Let me grab that.

Our comments on the conference call today will contain forward-looking statements, within the meaning of the Private Securities Litigation Reform Act of 1995. Forward-looking statements involve known and unknown risks, uncertainties and other factors that may cause the actual results, performance or achievements of the Company to be materially different from any future results, performance or achievements expressed or implied by forward-looking statements.

Investors are cautioned that forward-looking statements are not guarantees of future performance and that undue reliance should not be placed on such statements. Our forward-looking statements speak only as of today's date. We undertake no obligation to publicly update or revise any forward-looking statements or to make any other forward-looking statements, whether as a result of new information, future events or otherwise, unless required to do so by Securities laws.

Investors are referred to the full discussion of risks and uncertainties associated with forward-looking statements, contained in the Company's filings with the Securities and Exchange Commission.

Now that we've got that out of the way, I'd like to say that I'm just completing my first 9-months in the job here at BJ's. And I'm more convinced than ever about the strong opportunity we have here at BJ's to further expand the BJ's restaurant concept in both existing and new markets and to further leverage our business model as we grow.

We've definitely got a lot of work to do to successfully make the transition from a good restaurant Company that's growing, to a restaurant growth Company. But I believe after my first 9-months on the job, that we're continuing to make solid progress in that respect and I am very, very excited to have the opportunity to lead BJ's at this important time in the development of this business.

As we indicated in our press release today, BJ's reported very solid results for the third quarter ended October the 4th, 2005. Compared to the same quarter of last year, our revenues increased a strong 45%, to 47.6 million. Our net income increased an impressive 92%, to 2.3 million. And our fully diluted net income per share increased a very solid 64%, to $0.10.

Now, our 45% increase in revenues for the quarter was driven by 10 new restaurants that were open during the trailing 12-months, along with our strong 5.5% increase in comparable restaurant sales that successfully hurdled a 2.9% increase for the same quarter of last year.

We were very, very pleased with our comparable sales performance for the quarter, which I think everyone knows was achieved in a very difficult operating environment for consumer spending and for restaurant occasions in general.

Now our 5.5% increase in comparable restaurant sales represents our 36th consecutive quarter of positive comparable sales comparisons since BJ's IPO back in 1996. That's 9 straight years of positive comp sales and I don't know of many public restaurant concepts that are able to say that as of late, again, given the difficult operating environment.

We continue to believe this is a strong testimonial to the sustained popularity of the BJ's concept, which has been in existence in one form or another for over 27 years now. And the good news is most of our comparable sales growth during the quarter consisted of higher guest traffic count, and that's clearly the best measure of our growing and sustained popularity with consumers. And Greg will comment on our comparable sales performance and components a little later in our talk today.

During my first 9-months on the job, I've really been spending most of my time and attention on the front side of our business. I wanted to make sure that we have the right initiatives in place to protect and enhance the competitiveness of the BJ's restaurant concept and its overall consumer appeal, particularly with respect to our menu offerings, our service and our facilities.

The great consumer growth concepts are sales builders, first and foremost, and our sales trends have been very, very solid for the last 9-months, with our comparable sales running up 4.4% on a fiscal year-to-date basis.

Just commenting on our menu development, during the past several months, our culinary team, led by our chef, Ray Martin, has been working on several flavor and presentation enhancements to many of our current menu offerings.

Our next regularly scheduled menu change will be rolled out in November and is going to feature several great upgrades, including, among other things, a new Angus beef hamburger program that's going to take our already good burgers and make them really great burgers.

And for our Pizookie lovers, we're also going to be introducing a new cookies and cream Pizookie that's going to be using Oreo cookie dough that is absolutely spectacular. At least that's what my waistline is telling me lately.

So, the good news is, thanks to our improved purchasing power and supply chain capabilities led by John Allegretto, our new Chief Supply Chain Officer, we believe that the vast majority of our planned menu upgrades can be achieved with little to no cost increase to the business on a net-net basis.

So, in connection with our upcoming menu change that will be effective, we'll start mid-November and finish up at the end of November, we'll be taking an approximate 1% menu price increase to help offset expected higher costs for energy and related items in our restaurant brewing operations that we're currently experiencing and that are probably going to continue to impact our business for the next several months.

As always, we're going to continue to evaluate our operating profit margins. We'll consider other menu and pricing changes that might be appropriate in the circumstances in connection with our future menu changes and updates.

Just commenting on our comparable sales, a few of our best performing restaurants in our core market of California, for the third quarter, were our wonderful restaurant in Burbank, California, up 12%. Our great restaurant in Cerritos, California up 10%. A great restaurant in Irvine, California up 9%. And our restaurant in Cupertino, California was up 8% for the quarter.

As we mentioned in our press release today, the 9 comparable restaurants outside of our home state of California, achieved a very strong 7.1% increase in comp sales, which we think is very encouraging.

And just to mention a few of those as I look down the list here. Our Addison, Texas restaurant, our sales were up about 9% for the quarter. And our Chandler, Arizona restaurant had strong sales, up 13% for the quarter.

Our average weekly sales for the third quarter were approximately 87,800, up a strong 13% compared to the same quarter of last year. And I think that this impressive increase is attributable not only to our comp sales increases, but also to the strong sales volumes from most of the new restaurants that we’ve opened during the past 18 months, that aren't yet in our comp base.

As we noted in our press release last week, we were very pleased to open 3 BJ's Restaurants during the month of October. We opened on in San Bruno, California on October the 7th and that was followed by 2 openings on October the 18th. One of those was in San Mateo, California and the other one was in Sugar Land, Texas, which is a suburb of Houston.

Now, for a little Company like BJ's, opening two restaurants on the same day in different parts of the country was a first for our business and in my mind represents a strong testament to the growing strength and capacity of our restaurant development operating and support infrastructures.

We continue to be very pleased with our initial sales volumes for all 3 restaurants that we opened in October. As we continue to grow, we're learning that BJ's can be successful not only in trade areas and markets that have higher than average household incomes, which is really where most of the BJ's restaurants were historically opened, but the concept can also be successful in markets with average household incomes.

And I don't know of many varied-menu casual dining concepts that have that flexibility to appeal to all household income levels for everyday use. And I think BJ's appears to be one of the few concepts with that broad appeal.

As long as we continue to focus on offering a high-quality, premium casual dining experience that is differentiated from the experience delivered by our mass market casual dining competitors, and as long as the perceived value of the BJ's dining experience is higher than what we're asking our guests to pay, then I believe that's going to give us the ability to continue to gain market share as we continue to execute our growth plan across the country.

That's the very essence of BJ's competitive positioning as a premium casual dining concept, and every initiative that we have launched over the past 9-months is really set to play to the strengths of our premium casual dining positioning.

We did successfully open 9 new restaurants during 2005. We've wrapped up our openings for the year and we've achieved our stated goal that was stated at the beginning of the year to open 8 or more restaurants.

We're pleased to reiterate our plans to open as many as 11 restaurants during 2006. Signed leases or letters of intent are currently in-hand for all of our expected 2006 openings and we've already got several signed letters of intent already in hand for potential 2007 openings.

Greg Lynds, our Chief Development Officer, and his team, continue to do a hell of an outstanding job in managing our real estate construction pipeline for which we strive to maintain at least 18-months of specific forward visibility at all times. And Greg and his team have been able to accomplish that and will continue to accomplish that.

Our primary growth goal is to achieve a 20 to 25% compounded annual increase in productive capacity during the next three years or so. And we measure productive capacity in terms of total restaurant operating weeks. So based on the current status of our development pipeline, we remain very confident that we can achieve this goal.

Also based on the current status of our development pipeline, it appears that we're going to be able to more evenly spread our planned 2006 openings over the entire year of 2006. So, when modeling out our planned 2006 openings, we'd like to recommend that analysts and investors contemplate enough preopening costs in their financial models for as many as 3 openings during the first quarter of next year, about 2 in the second quarter, 3 in the third quarter and 3 in the fourth quarter.

Now having said that, we always remind our investors that it's very difficult to precisely predict the timing of our new restaurant openings, as the restaurant construction and preopening processes are subject to many factors outside of our control. But based on the status of our pipeline and how we see things as of this moment, that's probably the best way to model it out quarterly. And we'll update you if any changes occur, on our next quarterly conference call.

We're very confident that our operating infrastructure has the capacity to execute these planned openings with good quality and we intend to continue to execute our growth plan in a very careful and controlled manner.

Maintaining consistency and four-wall operating execution and financial performance as we grow, is absolutely critical, absolutely critical to our future success. And that's one of the most significant challenges that all restaurant growth companies face as they expand, and we are clearly focused on maintaining our consistency.

Of our planned 11 openings in 2006, about 5 will be in our home state of California, where consumer awareness of BJ's has historically been the strongest and where our sales volumes have historically been the highest.

The remaining 6 restaurants for 2006 will more likely be fill-in locations in 4 other states; Texas, Colorado, Nevada and Arizona, where BJ's already has a presence. We're committed to additional development in our existing core market of California, where we believe there's room for at least 15 to 20 additional restaurants over time.

We currently only have 1 restaurant open in each of Nevada and Colorado, and only 3 in Arizona, so we've got plenty of room to fill in additional restaurants in those states. We've only got 6 restaurants currently open in Texas.

We're committed to further growing and leveraging our competitive position in that state. Additionally, we continue to evaluate potential locations in Florida and the Midwest that, depending on the time of site availability, could become a part of our development plans as early as 2007.

Greg is going to cover our third quarter income statement in more detail in just a couple of minutes, but I'd like to say that we were very pleased with the 130 basis point increase in our consolidated operating margin, quarter-over-quarter.

Having said that, we clearly have opportunities to better leverage our controllable labor costs in many of our mature restaurants going forward. We're working very hard to test and prepare for rollout, early next year, a more robust labor scheduling and analysis toolset to help us better leverage our hours in labor. And I'll talk about that in more detail in just a second.

Additionally, we're working hard to fully staff the authorized management positions for all of our restaurants, as full management staffing facilitates the correct and productive operational execution of our restaurants.

We're now approximately 98% staffed to our authorized [pars] for management in our restaurants at this time. Which is a much higher staffing percentage than we were a year ago. We're intentionally recruiting a more experienced and qualified cadre of restaurant and kitchen managers and are paying a little more for that talent.

But we strongly believe that one of the most important decisions that we make in our business is the development and selection of the general manager and kitchen manager for each of our restaurants. And we want to make sure that we have some of America's very best restaurant operators in those positions as we continue to grow.

Talent usually follows talent in the restaurant business. We've got sufficient capital, we've got sufficient high-quality sites available to us for new restaurants, but we can only grow as fast as we have the managerial talent available to correctly execute our high-volume, more complex restaurants.

So, that's our principle challenge in our business model going forward and we want to make sure that we're allocating additional resources to make sure that we have the talent, a strong pipeline in place from a managerial perspective to match up with our real estate and our capital pipelines.

Just one little accounting note on the subject of labor. I think we've mentioned this before. We'll mention it again. At BJ's, historically, they've accounted for the cost of their restaurant manager training program and restaurant level labor, instead of classifying it as an infrastructure or G&A expense, which we believe is the more prevalent practice in our industry, and we clearly have many more managers in training today than we had last year, in order to support the plan ramp-up and our new restaurant openings.

We're probably going to reclassify this cost in the future to G&A, but for now, the year-over-year increase in the number of manager trainees we have onboard, certainly is one component of the increase in quarter-over-quarter labor costs as a percentage of sales. Now Greg will comment on this in more detail in a couple of minutes.

On the other side of the equation, we continue to very nicely leverage our occupancy, our G&A and our depreciation costs with higher sales volumes during the third quarter and we clearly expect that leveraging to continue, going forward.

As we noted on our last conference call, our management team has recently commenced several key initiatives that are intended to improve the quality of the BJ's dining experience, improve the quality and depth of our restaurant management talent base and provide more modern robust toolsets for our restaurant managers to help them run more productive and efficient restaurants.

These initiatives should be gradually phased in during the next 12 to 24 months and I'd like to give you the latest updates on 4 of these very important initiatives.

First, we are continuing our work on our theoretical food cost system to help our restaurant operators' better track and control food and beverage waste in yields. We expect to have this system ready for initial testing during the first quarter of 2006. Now this is one of the most complicated new toolsets that we plan to introduce, and therefore, it's going to require some very careful design and testing, given the complexity of our menu and our beverage offerings.

We currently expect to have this system ready for rollout by the middle of 2006.

Next, as I previously mentioned, we're working on a web-based labor scheduler and productivity analyzer that should help our restaurant managers to better control and monitor the deployment of labor hours, overtime hours and better manage our pay rates and productivity on a shiftly basis.

We've got this new system and a live test in one of our restaurants right now, provided that our further testing proves to be successful, we currently expect to begin a gradual Company-wide rollout of this labor toolset during the first quarter of 2006.

Next, we're working on a Kitchen Display System, or KDS, to replace our kitchen printers on our cook lines and to automate the timing of the firing of different food items on the cook line to improve overall food quality, and our ticket times. We now have a KDS and live test at one of our restaurants. Initial results are very, very encouraging. Provided that our further testing proves to be successful, we currently expect to begin a gradual Company-wide rollout of this toolset during the first quarter of 2006.

And to wrap-up, we're also working on an automated front desk seating and table management system that should improve our ability to accurately [improve] wait times and to improve our overall seating efficiency and table turns during peak meal periods. We've just received the beta software for this system. We're commencing initial testing in our IT lab here at the corporate office and we currently expect to install the software in a restaurant for live testing in the first quarter of 2006.

So, as you can see, we're making progress on all of these key productivity and efficiency initiatives. Most of these initiatives are designed to evolve certain of our operating methods to run our restaurants faster at peak meal periods, without rushing our guests, while improving food quality and service quality at the same time.

I strongly believe that in many of our restaurants, at peak meal periods, we're being offered more business than we can process with our existing operational systems and toolsets, and sometimes we create artificial waits, because our service flows and our methods are not really designed to run our restaurants as productively as they could be. And all of these initiatives and toolsets should help us to significantly improve our throughput.

Again, while we're unable to precisely predict the amount and timing of any specific operational margin benefit from each initiative, we're very confident that the initiatives will provide us with the best opportunity to gain additional leverage of our four-wall restaurant operating margins over time.

Other leading restaurant companies have proven the viability of these tools and methods in their operations, so our principle challenge really is to just take these methods and tools and adapt them with BJ's concept. We'll continue to keep you posted on our progress.

Now I'm going to turn the call over to Greg Levin, and he's going to go over our quarterly financial results in more detail. Greg, it's all yours.

Thanks, Jerry. As Jerry previously noted, total revenues for BJ's Restaurants for the third fiscal quarter of 2005, increased 45%, to approximately 47.6 million, from 32.9 million in the prior year’s comparable quarter.

This increase is primarily the result of 28% more operating weeks this quarter than last year for the same period, and a 5.5% increase in same-store sales. The 5.5% increase in same-store sales, excludes the 2 extra days in the quarter, which contributed about $705,000 in additional revenues.

These 2 additional days compared to the same quarter as last year, is a result of changing our fiscal period end to Tuesday from Sunday, which was a change that we had previous announced. This was completed to improve our operational efficiencies in the restaurants, by removing certain administrative duties by our managers from the weekend, when our restaurants are the busiest, to the earlier part of the week.

Revenue gains for the quarter were partially offset by the closure of the small BJ's Pizza and Grill Restaurant in Seal Beach, California at the end of fiscal 2004. That restaurant contributed about $288,000 to the third quarter of last year.

The 28% increase in operating weeks is a result of 10 new restaurants in the quarter compared to last year. These restaurants are Fresno, California, which opened during the third quarter of 2004, San Bernardino and Folsom, California, and Plano, Texas, which opened in the fourth quarter of 2004, Marino Valley, California, which opened during the first quarter of 2005, Corona, California and Roseville, California, Rancho Cucamonga, California, and Tucson, Arizona, which opened in the second quarter of 2005, and finally, our Mesa, Arizona restaurant which opened in the third quarter of 2005.

Our solid comparable restaurant sale increase of 5.5% is primarily due to increased customer traffic and increases in menu pricing of approximately 1.2%. The menu price increases include an approximate 0.7% effective menu price taken at the end of January '05 and approximately 0.5% from pricing taken in the fourth quarter of '04.

Looking towards the fourth quarter, the 0.05% of menu pricing that was taken in Q4 of 2004 will drop off during this quarter and be replaced with approximately 1% of new menu pricing when we rollout our new menu in late November, as Jerry previously mentioned.

Taking a look at some of the expense categories for the quarter, our cost of food beverage and paper for restaurants increased to 26.7% for the current period, from 26.4% for the prior comparable period.

The increase is primarily a result of higher costs, quarter-over-quarter, in produce, seafood and general grocery items. Additionally, like most restaurant operators, we incurred some fuel surcharges for our food deliveries, of approximately 20 basis points, compared to last year.

These increases were offset by lower costs in poultry and cheese prices compared to the same period of last year.

Additionally, as a reminder, we anticipate experiencing slightly higher food costs when we initially enter new markets. Although we continue to mitigate expenses to the best of our ability, in newer markets we haven't yet achieved the critical mass necessary to get food costs at rates similar to those we experience in California, where we have a solid base of restaurants and improved purchasing power.

Currently at the end of Q3 of 2005, we have 13 restaurants outside of California, which was compared to only 10 restaurants last year. Our new Chief Supply Chain Officer, John Allegretto, is reviewing our current purchasing and distribution arrangements, with a goal of achieving higher economies of scale and greater distribution leverage for the BJ's Restaurants.

I do want to note that our new restaurant cost of sales will typically be higher during the first 90 to 120 days of operations, versus our mature restaurants, as our management teams become accustomed to optimally predicting, managing and servicing sales volumes typically experienced in our new restaurants.

Looking towards the fourth quarter, we have already opened our last 3 restaurants for the year and therefore, we may see some cost of sales margin pressure because of the inefficiencies of these 3 new restaurants.

On the labor front, during the third quarter we saw an increase to 36.8% compared to the 35.9% for the prior year quarter. As Jerry already noted, this increase is principally related to three things; more managers in our MIT program, a higher level of management staffing in our established restaurants, and some inefficiencies in both our new and existing restaurants with respect to the optimal leveraging of hourly labor in connection with our solid sales increases, due principally to a lack of an effective labor management toolset, which we are currently working hard to introduce in the first quarter of 2006.

In the interim, our restaurant sales supervision team is carefully reviewing current labor schedules for every restaurant to improve our guest per labor hour productivity and minimize overtime hours, without sacrificing the quality of our guest service.

Our occupancy cost as a percentage of revenues decreased 110 basis points, to 6.4% for the current quarter, from 7.5% for the prior year quarter. This decrease as a percentage of sales, is the result of sales leverage and in increase in the number of ground lease locations.

Our operating expenses increased to $5.4 million, versus $3.7 million quarter-over-quarter. As a percentage of revenues, operating expenses increased 10 basis points, to 11.4%. This slight increase is primarily related to higher energy costs and higher merchant credit card fees passed through to us by our credit card transaction processor.

We currently expect the increased cost of natural gas and electric services to continue throughout fiscal 2005 and 2006. Restaurant level energy costs represented approximately 2.5% and 2.3% of revenues for the quarter ended October 4, 2005 and September 26, 2004.

Our general and administrative expenses in the third quarter of 2005, decreased 90 basis points, to 6.6% of revenues, from 7.5% last year. This decrease is primarily due to our ability to leverage our G&A costs over the increase in sales. On an absolute basis, G&A increased to 3.1 million, from 2.5 million during the third quarter.

This planned increase was the result of additional expenditures associated with the continued infrastructure investment in our business, both field supervision and corporate support. During the remainder of 2005 and during 2006, we expect to continue to add resources in preparation for the planned openings of as many as 11 new restaurants during fiscal 2006.

Depreciation and amortization increased to 1.8 million during the third quarter, from 1.3 million for the comparable quarter last year. The increase in total dollars is primarily due to our investment in 9 new restaurants opened since the end of the third quarter of 2004. Depreciation declined 10 basis points year-over-year, primarily due to the sales leverage.

Our restaurant opening expenses were 900,000 during the third quarter, from 800,000 during the comparable quarter of 2004. This slight increase is primarily due to the timing of opening costs related to 1 restaurant and 3 restaurants in progress during the third quarter of 2005, compared to essentially 2 restaurant openings and 2 restaurants in progress during the third quarter of 2004.

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

We budget pre-opening expenses at approximately $400,000 per restaurant, with restaurants opening in Southern California typically experiencing lower preopening costs, due to less travel and lodging costs. And typically the majority of our preopening costs occur one to two months before a restaurant opens and the month that the restaurant does open.

Looking specifically at the fourth quarter, we opened 3 restaurants in the month of October, 1 of which is in Texas. While some of these costs have already been included in Q3, I would still expect a significant amount of these 3 restaurants' preopening costs to be incurred in Q4 and we will probably see some preopening cost related to our 2006 openings in Q4 as well. As such, I would anticipate approximately 800,000 or so in preopening costs for Q4.

During the third quarter of 2005, our net interest income increased to 369,000 from 110,000 quarter-over-quarter. This increase is primarily due to increased investment after the completion of our March 11, 2005 equity transaction, coupled with higher interest rates.

Our effective tax rate was 32.6% for the third quarter of 2005 and this is compared to 31.3% rate in the third quarter of last year. I would expect our annual effective tax rate to be about 32.5% for fiscal 2005 and that's kind of based on our current estimate of revenues, [apportion] factors, FICA tip credit calculations and net income. But I will remind everyone that these estimates may differ from actual results, which may have an affect on our effective tax rate.

Turning to our balance sheet, as many of you know, we completed an equity transaction in the first quarter of 2005 involving the sale of 2.75 million shares of common stock, which brought in $40.3 million to the Company and strengthened our balance sheet considerably.

As a result of this transaction, we have approximately 52.2 million in cash and short-term investments, or approximately $2.18 per diluted share. We have no funded debt and our shareholders' equity was 127.4 million at October 4th, 2005, which was approximately $5.31 per diluted share.

We believe that this equity placement provides us with additional financial resources and flexibility to execute our growth plans during the next several years.

Our total capital expenditures for the quarter were approximately $7.6 million, and these primarily related to the development of our Mesa, Arizona restaurant and for the construction of our San Bruno and San Mateo, California restaurants, and the Sugar Land, Texas restaurant that just all opened in the month of October.

For all of fiscal 2005, our total estimated CapEx will be in the range of 35 million to 38 million. We are currently preparing our 2006 CapEx plan and will provide an update for that at our next conference call.

Before I turn it back over to Jerry, I would like to make a couple of comments. Primarily, I'm really excited to be here and be part of the BJ's Restaurants team. It's not often you can find an exciting concept just beginning to grow to a national presence, with a solid financial position, a strong management team and really a differentiated product and position out there in the casual dining marketplace. I look forward to many years with the BJ's team, as we grow to a national presence in the restaurant industry.

Jerry?

Thanks, Greg, for that review and thanks again for joining our Company and also thanks to Rob Curran for his continuing contributions to our business.

So, just to wrap-up our comments and then we'll take a few questions, BJ's achieved very solid results for the third quarter on every key measure and our fourth quarter is off to a great start.

Sales trends for both our existing and our new restaurants continue to be very solid, in spite of the challenging operating environment out there and we're going to continue to focus on driving sales. If we maintain our strong sales momentum, then we're going to continue to have the opportunity to drive additional leverage in our business model over time.

Our new restaurant development pipeline for 2006 is in excellent shape at this point. Our 2007 development pipeline is already coming together very nicely. Our management team remains highly confident of our ability to continue to execute our national growth plan, while at the same time, working hard to achieve steadily increasing leverage in every aspect of our operations.

We strongly believe that the best years for BJ's are yet to come and we sincerely appreciate your confidence and support. So, that concludes our formal remarks and at this time we're going to open up the call for a few questions. And if we don't have enough time to get to your question on this call, please feel free to call us at our offices and we'll try to help you as much as we can.

So, operator, we'll turn it over to you for some questions.

[OPERATOR INSTRUCTIONS] Mike Smith of Oppenheimer.

It's going pretty well, Jerry. I see it's going well for you, too.

Well, we're pretty happy with the way things are going for our business, compared to some of the other trends experienced by some of our competitors.

I have just a couple of questions. One, these toolsets that you're providing the stores, I understand that they're designed to really improve the experience and all that, but they're also probably designed to improve your margins in your labor and your food costs. When would you expect to see some of the positive results from those new things?

I think we've been saying that over the next 12 to 24 months as we complete their design and testing and get the rollouts underway for each of the key toolsets. We would certainly expect to begin to see some results over the next 12 to 24 months. So that's really our timeframe.

I think we're making very good progress on the design and testing of the initiatives, as I mentioned in the call. We've got a couple of them actually in live tests in our restaurants. We're very, very encouraged with the initial results.

I think it's important to remember, too, that the initiatives that we're putting into place, they're really not Eurekas, per se. These are proven techniques and toolsets that other well-run concepts have either had in their operations for a number of years or have recently introduced with some great success.

All we're trying to do is to take the latest technology, learn from the experiences of others that have gone ahead of us, adapt them to BJ's business model, get them tested and rolled out and get our operators familiar with using them. And I think most of them will begin their rollouts next year and then like I said, over the next 12 to 24 months, we should begin to see the benefits of them working in our business.

The second question I had concerns the kind of deals you're seeing on the real estate front and are you seeing any changes in terms of the required rents and that sort deal?

No, not really. The only thing that we've done a little bit differently here since Greg Lynds has joined us as Chief Development Officer a couple of years ago, is to really go after what's commonly referred to in our industry as the A-sites, the Main and Main sites.

I think in the past, due to capital constraints and other factors, BJ's may have focused on a B-site or maybe a B-site in an A-trade area, maybe trying to go to Main and Second instead of Main and Main. And we believe very strongly, I think, going forward, that we've got to go after that A-site, that Main and Main site.

Clearly, when you look at the unit economics of our concept, the sales, we're able to achieve sales somewhere in the $4 to $4.5 million range, given our targeted operating cash flow margins at 20%. We're clearly able to cover a ground lease for the size of ground that we need to operate a BJ's Restaurant. Those ground leases run anywhere from $100,000 a year to maybe $125,000-$130,000 a year.

That's the current market rate for the parcels, that Main and Main that we're looking for our restaurants. And clearly, if we're able to get that top line in that range and get those 20% operating cash flows, we're able to achieve our 25% fully capitalized return on investment.

So, that's kind of what we're seeing. And we've got all of those leases pretty much mocked up for all of 2006 and all of our letters of intent for 2007 pretty much play into those same metrics.

Kurt [Marler] of RCM.

I was just hoping that you guys could give the restaurant weeks and average weekly sales, broken out by the large and small restaurants. Perhaps you said it earlier and I just missed that.

Historically, the Company really hasn't made a disclosure of what it calls its beach and college restaurants, which I think Rob, we have what, 9 of those, roughly?

Yes, 9 or 10 of the small.

9 or 10 versus the big box. That's something that we might consider doing going forward, but historically, we haven't provided those breakouts and we don't have it currently at hand.

Okay, not currently at hand.

No. Historically we just haven't given that level of detail, but it's something that we might consider going forward. However, all of our development going forward will be in our larger footprint restaurants. So the impact of those 9 or 10 smaller beach and college restaurants is going to continue to diminish over time.

[OPERATOR INSTRUCTIONS]

Well, if there are no further questions, we're going to end our call. Thanks for being on our call today. And we look forward to speaking with you at our offices after the call today or on our next quarterly conference call. Thank you.

This concludes today's BJ's Restaurants third quarter 2005 result conference call. You may now disconnect.