BJ's Restaurants Inc (BJRI) 2005 Q4 法說會逐字稿

Good afternoon. At this time I'd like to welcome everyone to the BJ's Restaurants fourth quarter 2005 results conference call. [OPERATOR INSTRUCTIONS]

It is now my pleasure to turn the floor over to your host, Mr. Jerry Deitchle. Sir, you may begin your conference.

Thanks 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 our call today is Greg Levin, our CFO, and Rob Curran, our Vice President and Treasurer. I think everybody knows that after the market closed today, we released our financial results for the fourth quarter and fiscal year ended January 3rd, 2006. So if you haven't had a chance to see our press release today, you can see it on our website at www.bjsrestaurants.com.

Our agenda for the call today is going to be as follows. First I'll provide a brief business and operational overview for the fourth quarter of 2005. And cover our five-- our primary growth goals for the upcoming year. And then Greg is going to briefly review our consolidated income statement, our summary balance sheet and our liquidity position as of the end of fourth quarter. And then after that we'll be happy to take a few questions. We'd like to complete this call in about 45 minutes. We've got a lot of information to share with you today. We'll get started right after we make our standard cautionary disclosure with respect to forward-looking statements.

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 the Securities Law. Investors are referred to the full discussion of risks and uncertainties associated with forward looking statements contained in our filings with the SEC.

And now that we've got that out of the way, I'd like to say that a few weeks ago, I completed my first year on the job here at BJ's and it's been a great year. When I made my decision to come aboard a year ago, I saw BJ's as a good little restaurant Company that was growing like many other good little restaurant companies that are out there. But I saw something else. I saw what I believe to be a legitimate opportunity to help transform a proven differentiated restaurant concept, with very good sales productivity and very good four wall margins, from a good restaurant company that is growing into a restaurant growth company, which is a very different thing. I think that many restaurant concepts try to make that breakthrough. But very few really make it all the way to the growth company level.

So I concluded that BJ's had strong potential to accomplish that breakthrough, but I also knew from my experience it was probably going to take some time to properly set the stage for that to happen. So when I signed on a year ago, I thought it would take probably from 12 to 24 months to identify, design, test and complete several key initiatives that I thought were necessary for that transition to a growth company to begin to take place. And the good news is I believe we're right on schedule with that time frame. So as I start my second year at our Company, the initiatives that our Management team has agreed to accomplish during the upcoming year should set a much stronger foundation for our profitable growth in fiscal 2007 and beyond. As a 30-year Veteran of the restaurant business and having been part of growing a few of the most highly respected and admired restaurant concepts in our industry, it's particularly encouraging to me to see how BJ's Restaurants continue to perform notwithstanding with all the opportunities we got at hand to do a heck of a lot better.

In my view our restaurant operators are still missing the many the requisite operational tool sets to enable them to fully optimize our productivity and efficiency as well as to maximize the satisfaction of every guest on every visit. And yet in spite of that, our sales and our operating profits continue to perform pretty darn well. The good news is we've got several of those requisite tool sets ready to go. They're planned for gradual implementation during 2006. And I'm really looking forward to seeing how well we begin to execute when everything that should be in place, in an efficiently run restaurant concept is in place is planned by the end of this year. More about that later in our call today. It's truly an exciting time to be associated with BJ's.

As we indicated in our press release today, BJ's reported very strong financial results for the fourth quarter ended January 3. And compared to the same quarter of last year, which had an extra week of operations, by the way, our revenues increased a solid 30% to 49.3 million. Our net income went up 80% to 2.3 million. And our fully diluted net income per share increased the strong 67% to $0.10. We also reported very solid financial results for the full-year of fiscal 2005. Our revenues up increased 38% to 178.2 million. Our net income and our diluted net income per share increased 65 and 44% respectively during the year. After excluding a one-time gain from an asset sale during 2004.

Moving back to our fourth quarter results after considering the effect of the extra operating week in the same quarter of last year, our revenue for the fourth quarter increased by about 42% on an apples-to-apples basis. Now this increase was driven by new restaurant openings. Coupled with the strong 5.3% increase in comparable restaurant sales that successfully hurdled a 1.1% increase for the same quarter last year. Our 5.3% increase in comparable restaurant sales for the quarter represents our 37th consecutive quarter of positive comparable sales comparisons since BJ's IPO back in 1996.

So that means we're entering our tenth-straight year of positive comp sales for the BJ's concept. And I don't know of many other publicly restaurant--publicly held restaurant concepts that can say that as of late given the very challenging operating environment. We believe clearly 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.

Most of our comparable sales growth during the quarter consisted of higher guest traffic counts. And that's clearly the best measure of growing and sustained popularity of any restaurant concept, particularly ours. With respect to comparable sales a few of our best performing restaurants in our core market of California for the fourth quarter were our tremendous restaurant in Cerritos, California, which was up 10% during the quarter. And that's a restaurant where we installed our first kitchen display system during the quarter. Our great restaurant in Arcadia, California, which was at 8-- which was also up about 8%. Laguna Hills, California, up 8%. And Cupertino, California, also up 8% for the quarter.

As we mentioned in our press release today, the nine comparable restaurants outside of our home state of California achieved a strong 7.8% increase in comparable sales during the fourth quarter, which continues to give us great encouragement as to our future growth prospects outside of California. A few of our strong -- stronger performing comparable restaurants outside of California during the fourth quarter were our Addison, Texas restaurant, where sales were up 9% for the quarter. Our Lewisville, Texas restaurant with sales up about 8%, both of those restaurants are in the Dallas, Ft. Worth area. And our Summerlin, Nevada restaurant, where sales were up about 12% for the quarter.

And it's very, very encouraging to watch our Texas restaurants continue to build their sales over time. And even better news our newest Texas restaurant that opened last October in Sugar Land, which is a suburb of Houston, which is in a AAA location, and we have great operators executing at that restaurant. Our average weekly sales volumes have continued to give us hope that we're annualizing close to 5 million in sales in that location. I think that's very, very encouraging. And while we don't provide monthly comparable sales data like the large more mature mass market chains usually do and kind of have to do, we're pleased to comment that our comparable sales had remained solidly positive during the first seven weeks of the current quarter. We're very, very pleased with our continuing strong sales momentum.

Company wide our average weekly sales for the fourth quarter were about $86,700 up 12% compared to the same quarter last year, and again this increase is attributable not only to the comp sales increases, but also to the strong sales volumes for most of our new restaurants that we've opened during the past 18 months that haven't entered our comp base yet.

At the end of 2005, we operated 44 restaurants. Now ten of those restaurants are Legacy Pizza and Grill, smaller format restaurants that are very, very profitable. But they're really not our focus going forward in terms of development. Our focus going to be on the development of our larger format, 8,000 square foot restaurants. And we had 34 of those in operation at the end of 2005. So when we look at the sales productivity of those 34 large format restaurants in operation during 2005, they collectively averaged over 7-- $625 per square foot in sales during the year after adjusting for the high honeymoon sales for new restaurant openings. And those same 34 large format restaurants also averaged over 1300 guests a day.

We believe those two sales productivity metrics ranked BJ'S as one of the most productive casual dining chain concepts out there. And as I previously commented those strong sales productivity measures are really quite impressive when considering that we're still missing some of the requisite operational tool sets to help our restaurant operators process our business at a more productive and efficient manner. While simultaneously improving the quality and consistency of the dining experience for our guests and these are on the way in 2006.

Just commenting on our menu a little bit. During the past several months, our culinary team led by chef Ray Martin has been working on several flavor and presentation enhancements to many of our current menu offerings. We've got one of the larger menus in casual dining, offering more than 100 items. And we've got many, many opportunities to make our food and beverages even better. During the fourth quarter we upgraded several of our dishes. We introduced a quality Angus beef program throughout our menu. We also introduced the new Cookies and Cream Pizookie Dessert made with Oreo Cookie dough, that has become very popular with our guests.

We've asked chef Ray to focus his work in 2006 on even more upgrades of existing menu items, including among other things, bolder sauces and dressings across the board. A much more exciting bread program, more flavorful onion strings, new Angus mini-burgers. And I've also asked Ray to work on making our popular deep dish pizza even more cravable. And our pizza dough even more consistent. We're also going to test new China silverware and glassware that, should provide us with more appealing and contemporary presentations of our food and beverages.

Thanks to our gradually improving purchasing power--power and supply chain capabilities led by John Allegretto, who joined us as our Chief Supply Chain Officer just six months ago. We believe that most of our planned menu upgrades can be achieved with a relatively small net cost increase to our business, and these menu upgrades should give us improved pricing power should we choose to carefully deploy it. In connection with John's work, we've also commenced a formal menu optimization study, that's intended to help us better organize and present this big menu to our guests. And by doing so we may have an opportunity to slightly improve the total gross profit dollars generated by that large menu. We hope to complete our menu optimization project by the end of the summer.

The connection with our fourth quarter menu change, we did increase our effective menu pricing by about 1%. Now that was effective at the beginning of December, to offset expected higher costs for utilities, energy, related items in our restaurant and our brewing operations, that we're currently experiencing and it'll probably going to continue for the next several months. Greg Levin is going to comment on those expected cost trends a little later in our call today. As always, we continue to evaluate our operating profit margins, we'll consider other menu and pricing changes that might be appropriate in the circumstances. Our next regularly scheduled menu change will be in the May/June time frame.

Just moving over to our new restaurant openings. We did open three new restaurants during the fourth quarter. One in San Bruno, California, one in San Mateo, California, and one in Sugar Land, Texas as I previously mentioned. Two of those restaurants were opened on the same day in different parts of the country, at San Mateo and Sugar Land. And that's a first for BJ's. And I think represents a good testament to the growing strength and capacity of our restaurant development operating and support infrastructures.

For the full-year of 2005 we did successfully achieve our stated goal at the beginning of the year. To open as many as eight to nine new restaurants. We opened nine. And sales volumes were substantially all of our 2005 openings have continued stronger than we initially expected. Our primary growth goal is to achieve a 20 to 25% increase in total restaurant operating weeks during at least the next few years. In fiscal 2005 we had 2,062 total restaurant operating weeks. So when we look into 2006, we have a built-in operating week increase of about 11%. Which rolls over from our 2005 partial year openings. So we believe we'll need to open as many as 11 new restaurants during 2006 to achieve our operating week growth goal for the year.

Based on the current status of our development pipeline, and we're all very confident that we can achieve our 2006 operating week growth goal. Accordingly, we're pleased to reiterate once again our plan to open as many as 11 new restaurants during 2006, of which one has already opened in Vacaville, California, last week. And I got to tell you our first week sales were much, much stronger than anybody expected except maybe for Greg Lynds, our Chief Development Officer, who recommended the site to us. In fact, Vacaville's first week sales represented the second highest opening week sales in BJ's history. Second only to our Roseville, California, opening last year. Signed leases or letters of intent are currently in hand for all of our expected 2006 openings. And five more restaurants are already under construction for potential 2006 openings.

Additionally, as of today when we look at our real estate pipeline, we've already got four signed leases and ten signed letters of intent in hand for potential 2007 and 2008 openings. So Greg Lynds and his development team continue to do one heck of a job in managing our real estate and construction pipeline, for which we strive to maintain at least 18 months of specific forward visibility at all times. Based on the current status of our development pipeline, it does appear that we're going to be able more evenly spread out our planned 2006 openings over the entire year, so when analysts and investors are modeling out our planned opening for this year, you should contemplate enough preopening costs in your models for as many as two openings during the first quarter, three in the second quarter, three or four in the third quarter, and either two or three in the fourth quarter.

Having said that, we always remind our investors it's pretty tough to precisely predict the timing of our new restaurant openings by quarter. As a restaurant construction and preopening processes are subject to many factors outside of our control. Since new restaurant openings are the primary driver of our revenue growth, it's our practice to issue a press release announcing the opening of every new restaurant so that investors can keep track of our progress.

During 2006 our new openings will principally focus on further leveraging our consumer awareness and our economies to scale in our existing markets. So when we look at our potential openings for 2006, about five are currently expected to open in our home state of California, where our awareness and our leverage has historically been the strongest. And where our sales volumes has also historically been the highest. The remaining openings for 2006 will likely be fill in locations in four other states, where we already have a presence. Texas, Colorado, Nevada and Arizona.

We're committed to future new restaurant openings in our existing core market of California. We think there's room for at least 15 to 20 additional restaurants, without cannibalizing existing restaurants gradually over time. And we currently only have one restaurant open in each of Nevada and Colorado and only three in Arizona. So we've got plenty of room to fill in additional restaurants in those states. We've only got six restaurants currently open in Texas. So we're committed to further growing and leveraging our competitive position in that state. Additionally we continue to evaluate potential locations in new markets in Florida, Ohio, and Oklahoma. But depending on the timing of site availability, will likely become a part of our development plan in 2007.

As we note in our press release today, our consolidated operating margin expanded about 130 basis points to 6.2% during 2005, after excluding the one-time gain from the sale of assets during 2004. Having said that we believe there is clearly an opportunity for further improvement in our consolidated operating margin, gradually over time through a combination of four wall productivity improvements, supply chain leverage, and infrastructure or fixed cost leverage.

As we commented on our last conference call, our Management's team been working hard to develop and test several key initiatives that are intended to improve the quality of the BJ's dining experience for our guests, improve the quality and depth of our restaurant management talent base, and to provide more modern robust tool sets for our restaurant managers to help them run more productive and efficient restaurants. And as of today, many of these initiatives have already been successfully tested and are now ready for gradual controlled roll-out during 2006. We should have an opportunity to begin to see some of their benefits later this year and in fiscal 2007. And here's an update on some of the more important initiatives.

First we've develop and tested a state of the art kitchen display system or KDS, that'll replace our kitchen printers on our cook lines. And that'll automate the timing of the firing of the different food items on the cook lines to improve overall food quality, speed up our ticket times and our table turns. And help us reduce the amount of complimentary meals from our guests due to mistakes. We now have KDS fully operating in three restaurants, and we expect to complete a gradual control of roll-out of KDS to all of our restaurants by the end of July.

Next we've developed and tested a state of the art web-based labor scheduler and productivity analyzer that'll help our restaurant managers to more efficiently schedule their labor and to better monitor and control labor productivity by work group on a daily basis. We now have this labor scheduler operating in three restaurants. And we also expect to complete a gradual control of roll-out of this new labor system to all restaurants by the end of July.

Next we're working on a theoretical food costs system to help our restaurant operators better track and control food and beverage waste and improve their yields. We expect to have this system ready for initial testing in 60 days. Since we've got a large complicated menu, this is the most difficult tool set to put together and test. So it does require very, very careful evaluation and testing. We currently expect to have this system ready to--for roll-out this summer. And we would expect to complete the roll-out to all restaurants by the end of 2006.

We're also working on an automated table management system to approve our ability to accurately quote wait times, improve our overall seating efficiency and our table turns, particularly during peak meal periods. This system is going to link into our POS and our KDS systems, and we're currently designing the systems in our IT lab here in the office. We currently expect to install the system in one restaurant at the start of live test before the end of March. So based on the results of a live test, we'll decide on a roll-out time frame and we'll keep everybody advised.

So as you can see many of the tool set initiatives that we're getting ready to roll-out are designed to evolve certain of our operating methods to run our restaurants faster. At peak meal periods without rushing our guests, and at the same time improve our food quality, our service quality. In many of our restaurants the peak meal periods--we're offered more business than we can processes with our existing systems and tool sets. And a lot of the time I believe we create artificial waits because our service flows and methods are not really designed to run as productively as we could be. And these tool sets have helped to correct that.

While we're unable to precisely predict the timing and amount of any specific operational margin benefit from each initiative, we are very confident that the collectively these initiatives will give us a great opportunity to gain additional leverage of our four wall restaurant operating margins over time. And, other leading restaurant companies have proven the viability of these tools and methods in their operations. So really our challenge is to take these, bring them up to the state of the art capability and then adapt them to the BJ's Concept.

Now as we begin our roll-outs for these new systems, we will incur the typical onetime roll-out related travel and training costs during the next six months or so, and Greg will comment on that a little later. But I don't think they're going to be that significant. And we would expect to recover any of these onetime roll-out costs within six months or so after each roll-out is completed. So we'll keep you posted on our progress. Now I'm going to turn the call over to Greg. And he's going to go over our quarterly financial results in more detail. Greg.

Alright thanks,Jerry. I'm going to go through a couple of highlights for the fourth quarter and then provide some forward looking commentary for 2006. First, I want to remind everyone that last year's fourth quarter was a 14-week quarter compared to this year's 13-week quarter. The extra week in last year's fourth quarter makes it kind of difficult. So we'll comment on that as we go along.

As Jerry previously noted, total revenues for BJ's restaurants for the fourth fiscal quarter of 2005, increased approximately 30% to 49.3 million from 37.9 million in the prior year's comparable quarter. This increase is a result of 16% more operating weeks this quarter than last year for the same period, and 5.3% increase in comparable restaurant sales. The 5.3% increase in comparable restaurant sales is principally due to increased customer traffic, coupled with approximately 1.6% of menu pricing for the quarter. And as Jerry previously noted, our comparable restaurant sales have remained solidly positive during the first seven weeks of the current quarter.

For those of you monitoring menu pricing, we have approximately 1.4% of menu pricing rolling over into fiscal 2006. And we do anticipate taking some additional pricing in the middle of the year, probably in the 1 to 1.5% range. I think it's important to know that our pricing strategy is really based on protecting our current margins. If we exclude the 14th week from the same quarter last year to compare apples to apples, our revenues for the current year quarter would have increased approximately 42%, which is a result of 25% more operating weeks and increased weekly sales averages for both our comparable and new restaurants. The extra week of revenues for the same quarter last year was approximately 3.3 million and we believe the per share impact that extra week was in the range of 1 to $0.02 last year.

Before moving onto the middle of the P&L, I want to first highlight the reclassifications that we have made related to nonfood items and our managers and training program as we previously discussed in our third quarter conference call. These reclassifications only move certain expense items between P&L line items and do not change operating income, net income, or earnings per share. There are simply line item reclassifications that were made really to conform to the prevalent practices of our peer companies in casual dining.

The first reclassification was to move certain nonfood items from cost of sales to operating and occupancy costs. These items are primarily paper supplies and include items such as napkins. On average these nonfood items represented about 1.3% of sales for both 2005 and 2004.

The second reclassification was to move our salaries related to our managers and training from restaurant labor to general and administrative expenses. Our restaurant managers go through a ten-week training program in which they go through a culinary and dining education. During this time period these managers are not running a solo shift, but are in training and are not part of the productivity of the restaurant. In most cases these managers in training are for upcoming new restaurants and are monitored and coached by our training department. And as with the majority of our peer companies, we view this as a restaurant support function, like any other G&A support cost. On average the MIT costs for all of 2005 were about six to seven tenths of a percent of a sales and only about four tenths of a percent of sales in 2004. And again the details of the line item reclassifications by quarter for 2004 and 2005 are all listed in our earnings release issued earlier today.

Now with that behind us, let's talk about some of the cost items that we have seen. Our cost of sales increased about 60 basis points to 26% in the fourth quarter of this year, compared to last year's fourth quarter. And there are really four variables that we continue to experience in cost of sales. They are distribution related fuel surcharges, higher food costs related to restaurants outside of our core Southern California market, a restaurant mix shift as we opened more larger format restaurants, that sell less higher margin pizza than our ten Legacy Pizza and Grill restaurants, and new restaurant inefficiencies.

Fuel surcharges passed along to us by our food distributors, accounted for about 20 basis points of the increase in the fourth quarter. And unfortunately like most restaurant operators, we currently expect this 20 basis points of fuel surcharges to remain with us in 2006. As we had mentioned before, our restaurants outside of our core Southern California market do not currently enjoy the same distribution economies of scale of our local Southern California restaurants.

In addition, our Brewhouse and Brewery Restaurants feature over 100 menu items including center of the plate protein entrees that have a higher food cost, but yield a much, much greater absolute gross profit dollars. In 2005 approximately 59% of our sales were from Southern California as compared to 67% of our sales being from Southern California. Also our ten Legacy Pizza and Grill restaurants represented about 9% of our consolidated sales during 2005, compared to 15% of consolidated sales last year. And as Jerry mentioned our growth will be centered on the large Brewhouse restaurant.

The Pizza and Grill format is a Legacy format. And at this current time we do not intend of building any more of these. While the percentage cost of sales is lower for those restaurants compared to our larger format restaurants, which have a lower pizza sales mix, the absolute gross profit dollars are again much higher with the large format restaurants.

In regards to purchasing and distribution, our Chief Supply Chain Officer, John Allegretto, is currently reviewing our purchasing and distribution arrangements, with a goal of achieving higher economies of scale and greater distribution leverage in the near term, particularly for our nonSouthern California restaurants. We should have the results of that review during the next 60 days or and we'll keep you all advised.

We did also experience some normal cost of sales pressure related to our three new restaurants that opened in the fourth quarter. We do expect our cost of sales to be higher at our newer restaurants during the first 90 to 120 days of operations, versus our mature restaurant, as our management teams become accustomed to [inaudible] predicting, managing and servicing sales volumes typically experienced in our newer restaurants. In the fourth quarter all three of our newer restaurants, San Mateo, and San Bruno, California and Sugar Land, Texas, averaged well over 100,000 in sales per week during this period. And while we were happy with the sales volumes, frankly that weren't sufficient as we'd like to see in managing cost of sales. And that is being corrected as we speak.

On the commodity cost front, we are still expecting the blended cost of our basket of commodities that we use in our operations to be generally flattish with the cost for the prior fiscal year. We believe as a Company that we have the ability to eventually gain some leverage in our cost of sales from not only more efficient distribution and purchasing networks, but also through the introduction of a theoretical food cost system, that Jerry previously mentioned, that which we anticipate implementing later in the year.

Our labor during the quarter increased about 20 basis points to 35.7% from 35.5% in the same quarter last year. But it improved about 40 basis points from the sequential quarter. These relatively small basis point swings are a result of higher management labor offset by productivity improvements in hourly labor. As we have previously discussed in our prior calls, we have made a deliberate decision to improve our management staffing levels as well as upgrade the talent level. As of our fourth quarter, our management staffing level was about 97%, compared to par. Which is a much, much higher staffing percentage than we were a year ago. We are intentionally recruiting a more experienced and qualified [catoray] of restaurant and kitchen managers, and are paying a little more for that talent.

Additionally, our restaurant operators continually -- continue to gradually improve hourly labor productivity as we move into the first quarter of the year. We have recently started to carefully track productivity using a statistic called labor hours per 100 guests. And as Jerry mentioned, we are rolling out a web-based labor scheduler and analyzer during the next six months that will enable our operators to track labor productivity on a daily basis in each restaurant by work group.

The operating occupancy cost as a percentage of revenues increased 20 basis points to 19.2% from 19% last year. The slight increase is really a result of the additional leverage the Company received last year due to the 14th or extra week for the period. However, trying to look at those kind of an apples to apples basis, we are seeing pressure on utilities, like most restaurant operators. On average the utilities have increased about 20 basis points to 2.2% of sales, compared to last year. At the same time this has been offset by lower rent expense due to the land purchase of two locations in 2005, as compared to leasing these locates and sales leverage over the fixed nature of many of these costs.

Our restaurant level cash flow was approximately 19.1% for the quarter, compared to 20.1% for last year's fourth quarter. However, taking out the extra sales week from last year, which we estimate had about 30% restaurant flow through, we believe that last year's restaurant margins would also have been about 19.1%.

Looking at our general and administrative expenses in the fourth quarter of 2005, they decreased 270 basis points to 7.6% of revenues from 10.3% last year. Included in last years fourth quarter was approximately 800,000 or 200 basis points of nonrecurring costs related to Sarbanes-Oxley implementation and severance. Excluding these one-time costs we effectively leveraged G&A as a percent of sales by 70 basis points. On an absolute basis, G&A increased to 3.7 million from 3.1 million, again, excluding the nonrecurring cost of approximately 900,000. This increase of approximately 600,000 was as a result of additional expenditures associated with the continued infrastructure investment in our business both field supervision and corporate support.

The depreciation and amortization increased to 2.1 million during the fourth quarter of 2005, from 1.6 million during the comparable quarter of 2004. The increase in total dollars is primarily due to our investment in nine new restaurants opened this year as well as our investment in tool sets for our restaurant managers. I would expect depreciation to average somewhere in the low 4% range for 2006.

Our restaurant opening expenses were 517,000 during the fourth quarter, compared to 1.1 million during the comparable fourth quarter of 2004. A significant portion of preopening expenses for our three restaurants that opened in the fourth quarter this year were incurred in Q3 as these result -- as these restaurants all opened in early October. On average we opened nine new restaurants this year and incurred about 3.5 million in preopening costs. This averages to about 390,000 to 400,000 per restaurant.

During the fourth quarter of 2005 our net interest income increased to 356,000 from 70,000 quarter-over-quarter. This increase is primarily due to increase investments after the completion of our March 11, 2005, equity transaction, coupled with higher interest rates. Our effective tax rate was 32.9% for the fourth quarter, and 32.5% for the full fiscal year of 2005.

Looking at 2006, we currently believe that our effective tax rate should be in the 33% range, based on our current estimates of revenues, [portion] in factors, [fica chip] credit calculations and net income. These estimates may differ from actual results, which may have an effect on our income tax rate.

Turning to our balance sheet, we ended 2005 in a very, very solid position. We have almost 50 million of cash and investments, 129 million in shareholder equity, and no funded debt. The strength of this balance sheet will provide us the flexibility to continue to execute our business plan.

During 2005 our total CapEx was approximately 40 million, with the majority of that for construction of new restaurants, some minor remodels and we did purchase two feed properties in 2005. And before I turn the call back over to Jerry, I want to provide some insight into our current expectations for certain components of our business for 2006.

As Jerry previously commented, our primary growth goal is to achieve a 20 to 25% compounded annual increase in productive capacity with productive capacity measured in terms of total restaurant operating weeks. Our long term sustainable expectation for comparable restaurant sales is in the 1 to 2% range. However, shorter term results may be higher or lower depending on many factors both within and outside of our control. During the past four years or so, our annual comps have averaged in the plus 3 to 4% range. At the current time as I previously said, we have 1.4% of carry over menu pricing going into 2006, and we currently anticipate adding another percent or so in the middle of the year. Any significant changes in minimum wage or other input factors may result in us changing our pricing strategy, just like most other restaurant operators would.

As we previously mentioned, we continue to see some pressure in cost of sales from distribution fuel surcharges, which we like most other restaurant operators do not expect to go away at least in the first half of this year and a new restaurant outside of our core Southern California market. As I mentioned previously, our Chief Supply Chain Officer is currently reviewing our distribution arrangements, and we expect to achieve greater economies of scale from that review during the second half of this year, particularly for our nonCalifornia restaurants.

In operating and occupancy costs we like most restaurant operators continue to see higher utility costs. As I previously mentioned, they were up 20 basis points in Q4. Also as a byproduct of higher fuel and utility costs, we expect to see some higher costs on our paper products which right now make up about 1.4% of sales. We will also incur short-term pressure from our tool set roll-outs during the next six months or so, which we anticipate being around 3,000 to 5,000 per restaurant, which is normal for roll-outs of this nature. However, we also expect to recover these roll-out costs during the succeeding six months after each roll-out is completed.

Over the next six months we plan on implementing our kitchen display system in all of our Brewhouse and Brewery Restaurants and our labor scheduling system in all of our restaurants. Additionally, we have just completed a one-time region by region strategy branding and tool set conference for all of our general managers and executive kitchen managers. In the second half of this year, we plan on implementing our theoretical food cost system for all of our restaurants. I think it's important to note that these costs are only temporary. They represent a capital investment into our business to set a solid foundation for leverageable growth. These tool sets are not untested or bleeding edge technology. They have a proven track record of measurable benefits to productivity and efficiency.

Most national restaurant companies are already using kitchen display systems, labor productivity systems, or theoretical food cost systems. If we're going to transform from a regional restaurant company that is growing to a highly respected national restaurant growth company, we have to make this short-term investment to lay this foundation. As many of you already know, we will be adopting FASB staff position 13-1 beginning in the first quarter of 2006, which now requires us to expense non-cash phantom rent during the construction period. The typical BJ's Restaurant takes approximately four months to construct once the site has been available to us. We anticipate the adoption of 13-1 to increase preopening costs per restaurant in the range of 50,000 to 60,000 per restaurant. Based on 11 restaurants, that will be around 700,000 or approximately $0.02 a share this year.

It is important to note for people developing their models that we will now incur preopening for a new restaurant as early as four months before a restaurant opens, and therefore quarterly preopening costs may have a greater variability from the actual number of new restaurants opened in a quarter.

Also beginning in fiscal 2006 the Company will record equity based compensation in accordance with FASB 123 R. Excluding any per equity award grants in 2006, equity-based compensation will be around 1.5 million net of taxes or $0.06 per diluted share. We expect our diluted shares outstanding to be about 24.5 million, however, this can change as a result of any prospective equity awards or share price, which can have a direct effect on dilution of equity awards.

Our capital expenditures for 2006 are estimated to be about 46 million. Included in that is the cost of 11 new restaurants, two land purchases, the construction of a 15,000-barrel brewery in Reno, Nevada, the reinvestment in some of our older restaurants to bring them up to what we are calling like-new first class and normal maintenance CapEx, and the investment in our restaurant tool sets. We will fund both our new restaurant growth, and our investments in restaurant tool sets from our current cash and investment balances in cash flow from operations.

You know, as I look forward to 2006, I am quite excited about with our current momentum. Not only do we have a solid balance sheet to execute our business plan, we have the ability to gradually improve our margins to improve productivity and efficiency from our new restaurant tool sets. With that, I'd like to turn the call back over to Jerry.

Thanks Greg. And just to wrap up of our comments, BJ's achieved clearly very solid results for the fourth quarter and the full-year of 2005 on almost every key measure. And our first quarter of 2006 is off to a great start. You know, thanks to the hard work of all of our restaurant operators we continue to enjoy strong sales for both our new openings and our established restaurant. That doesn't happen by itself. It's a result of a lot of hard work and a lot things being executed correctly in our restaurants, and for that we're very thankful.

Thanks to our consistently strong sales trends, we've got the ability to focus on optimizing the productivity and efficiency and leverage in our business model. I do think that fiscal 2006 is going to be a critically important year for our business as we complete the roll-out of all of these tool sets. And also do more work on building a more leverageable supply chain network during the year. The good news is all of this work is underway.

Our new restaurant development pipeline for 2006 is in excellent shape at this point. Our 2007 pipeline is almost already come together for us. And as of this date we strongly believe that the best year for BJ's are yet to come. We sincerely appreciate everybody's confidence and support. So that's enough of us talking. So at this time, we're going to open up the call for a few questions. And again if we don't have enough time to get your question on this call, please feel to 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 take some calls.

[OPERATOR INSTRUCTIONS]

Ready.

Thank you our first question is coming from Tony Brenner of Roth Capital Partners.

Thank you. And two things. First of all, it looks like you restated the fourth quarter for the new lease accounting regulations. But you didn't include that in your reconciliation for previous yearly or quarters [fees]. Just going to restate those one at a time as you go through the year, or what are you going to do?

Tony, the restatement of the reconciliations are only related to nonfood related cost of sales.

Right.

And are related to our managers in training.

Right. I gathered that.

Yes, we haven't done any new lease accounting restatements.

That's just on the go-forward.

[inaudible] on the go-forward.

Okay. One other question. And comparing your Southern California restaurants with those in other locations that are to spare a trends and initially those other locations are starting out at a much lower margin, but they've -- as a result of higher distribution costs and sales mix, but the sales are growing faster, they're in two credit states. I wonder if you can give us a sense of what the margin difference is and at what rate that gap might be narrowing, and still level margins?

I'm not sure that we've really gotten into specific margin analysis by geographical area in our concept, Tony. When you take a look at the restaurants outside of California as you mentioned, we do have higher food costs of probably a couple hundred or so at least basis points. And so that pretty much offsets any tip credit benefit that we're getting in states like Texas where, we do get such a benefit.

So now what our challenge is, is to continue to fill in those markets to really review all of our food distribution arrangements, particularly outside of Southern California, which John Allegretto was currently doing. And I think once the review is done, we'll take a look at it, and I think we'll be in a better position to comment on the prospects for margin expansion in those restaurants outside of the state of California at that time.

We are seeing nice comp sales, benefits as you mentioned. I think that's to be expected when we enter new markets, particularly Texas and Colorado and Nevada. And it takes awhile for BJ's to build its reputation and its credibility,because we don't do any media advertising. And, having worked for another restaurant company that had a similar nonmedia advertising business model, as long as you pick AAA locations and execute in a high quality way, it's not uncommon to see steady comp sales increases over a three for five-year period.

Now I haven't been here that long, and those restaurants haven't been open that long either. But I do believe with those two things going on, the ability to get some distribution economies here toward the middle of the year, and with continued same-store sales build, I think our chances of closing the gap between our California margins a our nonCalifornia margins are pretty darn good. But in terms of predicting the exact time and the amount of basis points there, it's really--it's a little early for us to do that. I think we'll have a better idea once we get our distribution outside of California kind of rebid here in the next 60 days or so.

Thank you.

Okay, thank you Tony.

Thank you, our next question comes from [Jeff Armor] of CIBC.

Good afternoon guys, how are you?

Hi, Jeff.

You have multiple operation initiatives currently in some stage of roll-out. What are you doing to make sure that your restaurant level managers and the staff don't get overwhelmed while it's going on?

Very good question. It's--that's the top of all of our lists here. We have the very careful controlled roll-outs over reasonably long periods of time. We've only got 44 restaurants. I mean theoretically we could activate the new labor system and hang all of the new KDS systems, and turn them on all tomorrow for every restaurant. We don't believe that's the appropriate thing to do. We want to do this in a very carefully controlled manner. So that's why we have six month roll-outs in a very careful manner of stage. So that the area directors and kitchen operations managers responsible for each restaurant have the time to sit down and really carefully walk through our restaurant operations team, these are things that we don't want to redo. We don't want to plow these fields again. So we're going to do it one time or we're going to do it right.

The other thing that we've told our operators to always remember, is to never take your eye off of building sales and driving guest counts, and our normal operation of execution while all of these particular roll-outs are underway. We've carefully considered what our restaurants operations teams are capable of digesting. And so we believe that our six-month roll-outs schedules for the labor system, the KDS system are very reasonable. They should not have a wobble in them. They shouldn't get our operators to take their eye off the ball. And then we'll finish in the last half of the year with our theoretical food cost system,and we'll kind of do that by itself. So I think we're in pretty good shape there. Wouldn't you say Greg?

Yes, I think another point, Jeff, and I mentioned it in kind of the prepared remarks. Is we spent the month of January doing a regional kind of conference. Where we really talked with all the general managers and the executive kitchen managers. getting them ready, getting them a little bit of knowledge about what's coming down over the next six months. So it's not something that one day they're going to walk into the restaurants and see these systems in there and go, "what's going on"? It's really something that we've prepped for, we've planned and we're doing it in a very strategic and logical roll-out way.

And just one other comment. The systems that we're rolling out, most of our restaurant managers have experienced them at other concepts before they joined us. So these are not really [Eurekas]. These are standard requisite operating system that you find in well-run casual dining companies. So most of our kitchen operators, and our restaurant managers have seen these in one form or another in their prior lives. And even our--even the cooks on our cook line, most of our line cooks like other restaurant concepts in order to make a living, they work two jobs. So it's not uncommon for a lot of our line cooks to work a shift with us and then go work a shift at Applebee's, or another concept where they have KDS in place. So these are tool sets that are pretty familiar out there.

That's very helpful. And unrelated follow up, you mentioned AAA sites. So could you talk just a little bit about your site selection process, and your relationship with the developers. And I guess more specifically, how can you make sure that you continue to get the quality sites, especially outside of California, where the concepts probably not quite as well known?

That would probably take me a good 15 minutes to really give you a complete answer to that question. But it all begins with the credibility of the concepts and our ability to generate sustained sales productivity and our ability to be financially capable of paying our rents over a long period of time. And our ability to be something new and differentiated and exciting for these developers to include in their particular projects. So we have all of that going for us at this moment.

We've currently built our reputation here on the West Coast with all of the major developers. We have -- we are beginning to build our reputation with a national developer such as General Growth, Simon, Westfield, Mesa Rich. We have excellent relationships with those firms. We already have leases with many of those outstanding national developers already. They've opened up many of their national portfolios to us. So it gives us an opportunity where they're doing either new projects or major enhancements of existing projects to become a player there and to compete for the space.

Our demographic criteria are pretty darn flexible for our concept. Most concepts are positioned to really be successful only against a specific demographic, either an upscale demographic or a mid-scale demographic. BJ's is one of those few concepts that has the flexibility to be successful against both demographics. And we're learning that as we build more restaurants. So that broadens the overall appeal. And it broadens the overall number of perspective sites that are available for us to develop. Plus we have an outstanding development team led by Greg Lynds, I don't want to bunch of head hunters calling him after I get off the call today.

But this guy is good, his team is outstanding, and we have a wonderful track record, and are disciplined in terms of the due diligence that we go through with respect to our site selection, is as rigorous as I've seen anywhere else in my career. So that's really the short answer for you.

Okay. And just one quick final question for Greg. In terms of preopening costs per unit. What's it expected to be in '06 including the new accounting rule?

It'll probably be somewheres in the 450 to 460 range. We averaged it about 400,000 this year, 390 to 400, and I think you're averaging--going to be adding 50 to 60 on top.

All right. Thank you, guys.

You're welcome, Jeff.

Thank you. Our next question comes from Mike Smith of Oppenheimer.

Good afternoon.

Hi, Mike.

Just a couple of questions. Actually, I think you've been pretty thorough. Was your guidance for same-store sales for this year to be 1 to 2%?

No, we just say 1 to 2% as kind of our long term same-store sales expectation. Eventually BJ's Restaurants once we achieve their productivity run rate, that's about all the guests we're going to be able to get through. So to the extent that we can get our menu price increases and our comp base, and sustain our guest every year over the long run, that's our long-term expectation.

We clearly mentioned in our comments that during the last three our four years our actual same-store sales have been tracking much higher than that, probably twice that number. They were up 5.3% last year. Their tracking very strong at this moment. So again, we do not give specific guidance. We can only comment on our long-term objectives and kind of what the short-term experience has been.

Okay. That's kind of what I thought you would say. When you've gotten all of your tool sets in, including the table seating, which is that by the end of the year as well?

Yes, we're getting it into test in one of our restaurants here as I mentioned, I think I said 30 to 60 days. I think it's about 30 days we're going to get it into test. And then we'll see how it runs. Again this is technology that other high-volume casual dining chains use, except we have a more contemporary version of it that links into our KDS and POS systems, which is-- think is going to give us a competitive advantage. So, we'll get it in. And then once we see how it works, we'll decide which restaurant it might help us. Any of our restaurants doing over 100 a week, which is most of them these days, are probably going to benefit from this tool.

Did you tell us what you thought -- once those things are all done, obviously KDS, you're going to get--you're going to increase you're capacity. You're going to get people in and out quicker I guess. What do you think that will do to the comps over--looks like in '07 and '08 and sort of that?

I think it's a little too early to make that call, Mike. I think we have to get more of these out there. And then let's get some actual experience under our belt here. We've only got it up and running in really in three -- actually we do have a few statistics I think we can share with our Cerritos Restaurant ,but we've had it up for 90 days. Greg , do you want to just quickly comment on that?

As Jerry mentioned in our Cerritos, we did see some tremendous comps in the fourth quarter of 10 %. We've seen what we call adjustments or refires where the food comes out wrong, so we're kind of giving it away. We've seen that reduced from about nine tenths of a percent in that restaurant to five tenths of a percent. So almost 40 basis points improvement there in regards to adjustments we've made. So that actually will improve the restaurant sales and we've seen about a minute and a half reduction on the ticket times there. So it's definitely improving the, what I would call the capacity at that restaurant. But to try and really nail down what we would think comp sales increase might be from that, just too early to tell.

But those are very positive indicators. Again I would hesitate to advise you to kind of apply those to every restaurant. Because every restaurant is a little bit different. But I think our main opportunity to build same-store sales off these tool sets is going to be a peak meal periods. Were we've got waits of an hour, hour and a half. And I believe some of that's artificially created.

The last question I have. Did you mention brewery in Reno? Is that a restaurant or is that a separate brewery?

No, it'll be a Brewery Restaurant. It be a restaurant with a 15,000-barrel brewery attached with it. The laws in Nevada allow to us build that much of capacity. And that will allow us to service over 20 restaurants, I think, based on average brewery requirements. Barrels per restaurant per year. So that gives us a little more brewing capacity and that's all under construction.

And are you going to ship that interstate?

Yes, we can. In some states we'll be able to ship that. And actually we'll be shipping a lot of that beer back into Northern California. And actually we have another study underway, because when you build a brewery with that much capacity, that's where you're going to get the maximum economies to scale. So we shouldn't let much of that sit idle. So my thinking is, let's fill that brewery up as much as we can, let's rebalance the production of our existing breweries, let's really optimize the production costs per barrel coming out of that brewery when considering freight and all factors. So I think that's going to be a nice little plus for us next year.

Well great. Good job. I wish I had a question for Rob, but I don't.

Okay. Well I'm not sure he's unhappy about that. [ Laughter ] Okay. One more question, please.

Thank you. Our final question comes from Jonathan Waite of KeyBanc Capital Markets.

Good afternoon, guys.

Hey, Jonathan.

Jerry just a quick question for you. I was wondering in '06 you talked about upgrading some of the menu initiatives you have, the -- the glassware, for a contemporary look there. And I'm just wondering, take us -- your thought process. Take us down maybe five years from now. Where do you want to position this brand? Are you -- I mean, do you envision taking this a little more upscale in check? Do you intend to keep kind of a value positioning or is this kind of more going head-to-head with some the-- your higher check competitors?

You know that is a great question, Jonathan. And really the answer is, it's really not so much how I personally want to position it, it's really how the consumer already sees the brand and then trying to play to the strength of what consumers already think about BJ's. Last year we conducted a lot of consumer research to try to answer that specific question. Where do consumers see us.

And we kind of think of the varied menu casual dining segment as being--consisting of a free subsegment. The upscale segment were[inaudible] and Houston's play, with a 16, $17 average check or higher. You have the mass market segment, where Chili's and Applebees and Fridays, Ruby Tuesdays and O' Charlie's are great businesses. They're the mass market chains, where their average cheek is probably 11, 12, $12.50. And then in between, we have what we believe is a premium casual dining segment where we play, perhaps, a Claim Jumper might play or some other similar concepts.

So consumers clearly came back. And all of the research that we did here in California and also in Texas and said, we see BJ's as a premium player, not an upscale player, not a mass market player. But we definitely see BJ's as a premium player. We expect higher quality food, we expect better service, we expect higher energy. We expect and want and love your handcrafted beers. As a point of quality differentiation, we love your televisions, we love all of energy. We see it for multiple uses, its broad appeal. So we want all that you can give us, but try to keep your check as close to the mass market players as you possibly can. So really that's the formula that we have today.

So as we continue to grow the concept, we want to make sure that we play to the strength of that positioning. So as we evolve the concept over the next year, we want to take a look at every element of the concept. Our food, our service, our decor, our overall ambiance. And make sure that we've--that we've carefully created a gap between the mass market guys and us.

I want to have a clear gap on every measure, doesn't have to be a huge gap. Doesn't have to go all the way to the upscale players. But we definitely want to have larger food variety, better food quality, more energy, and over all ambiance, that's just a notch up. Make sure that we look at our uniforms, our--how we serve our guests, the overall quality of the experience.

We want to have as much of a nonchain image as we possibly can with our facility. And really create that point of differentiation, so that as we go and take additional market share. We believe this is a $40 billion segment of the restaurant industry, what I call varied menu. And as we try to take more of that share, we want to make sure that this differentiation built around the premium positioning, allows us to go out and take market share away from the mass market guys. Play to both the upscale demographic and the mass market demographic. But still keep all of the quirkiness and wow, and the handcrafted beer components, that BJ's has today.

So I kind of rambled there a little bit, but that's kind of what we're trying to do. We're trying to really just evolve the concept. We're not trying to revolutionize it. We just want to revolve it and just play to the strengths of where consumers already see it.

So it's basically making sure that you've got the same appeal to a mass market say Applebees varied menu, what not. But making sure that you're differentiated enough. But you're not quite playing to the same-- I mean, maybe some of that. But not exactly 100% overlap with say the Cheesecake and Chang's of the world.

No not exactly. But when you take a look at our 44 restaurants, what's unique about BJ's, is that we probably have ten of our restaurants that sit right next to Cheesecake Factories or PF Chang's, that play to that demographic. But we also have very high volume restaurants in Reno Valley, Corona, Oxnard, Fresno, Folsom, places where, you probably won't see a PF Chang's or probably a Cheesecake Factory anytime soon. So we can play to both demographics. There's enough quality and variety in the concept to where an upscale consumer loves it. But if the price point that we protect, the mid-scale consumer can come in, and say, "Wow, I can't get this in an Applebees or a Chili's". So that's the competitive positioning that we're just trying to accentuate.

Makes a lot of sense. Alright. Thanks.

Okay, thank you. If anybody else has any calls, please call us at our office. We'll be here. Thank you, operator.

Thank you. This does concludes today's teleconference. [OPERATOR INSTRUCTIONS]