BJ's Restaurants Inc (BJRI) 2006 Q1 法說會逐字稿

Good afternoon and welcome to today's BJ's Restaurants first quarter 2006 earnings conference call. At this time all lines have been placed on mute to prevent any background noise. After the speakers' remarks, there will be a question-and-answer period. (OPERATOR INSTRUCTIONS).

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

Thanks, Operator, and hello everybody. I'm Jerry Deitchle of BJ's Restaurants and welcome to our quarterly investor call which we are also broadcasting live over the Internet. Joining me on our call today is Greg Levin, our CFO; Greg Lynds, our Chief Development Officer; and Rob Curran, our Vice President and Treasurer.

As I think everybody knows, after the market closed today, we released our financial results for the quarter ended April 4th, 2006, and if you haven't seen our press release today yet you can view it on our website at www.BJ'sRestaurants.com.

Our agenda for the call today will be as follows. First, I'll provide a brief business and operational overview for the first quarter of 2006. Next we are going to ask Greg Lynds, our Chief Development Officer, to give us a brief update on the status of our new restaurant development pipeline. Greg Levin, our CFO, will then briefly review our consolidated income statement, our summary balance sheet, and our liquidity position as of the end of the first quarter. And then after that we will be happy to take a few questions.

So we would like to wrap up the call in about 45 minutes and we've got a lot to cover so let's get started right after we make our standard cautionary disclosure with respect to forward-looking statements.

Our comments on the 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 and 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, April 27nd, 2006. 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 do so by the 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 with that out of the way, let's get to the good news. As we indicated at our press release today, BJ's reported very favorable financial results for the quarter ended April 4th. Compared to the same quarter last year, our revenues increased a very strong 43% to 53.4 million. Our net income increased a strong 39% to 2.3 million and our fully diluted net income per share increased 25% to $0.10.

Like many other public companies we were required to adopt a new Financial Accounting Standard, statement of financial accounting standards No. 123R - Share-based Payments during the first quarter this year. FAS 123R requires us to recognize on a go-forward basis stock-based compensation that results from our stock option grants.

As a result of our operations at prior periods, we are not restated for this new accounting standard so we've got a bit of an apples to oranges quarterly earnings comparison due to that new standard.

On a pro forma basis, if we were to include stock-based compensation expense in the results for the same quarter last year, then our net income for the first quarter this year would have increased about 107% and our net income per share would have doubled from $0.05 to $0.10. We added a special pro forma footnote to our press release today that provides a little more detail on the components of our stock-based compensation expense in both quarters.

Our 43% increase in revenues for the quarter was driven by an approximate 27% increase at total restaurant operating weeks, an approximate 12% increase at average sales per operating week, and a stronger-than-expected 6.8% increase at our comparable restaurant sales that successfully hurdled a 2.8% gain for the same quarter last year.

I think it's important to note that our 6.8% increase at comparable restaurant sales represents our 38th consecutive quarter of positive comparable sales comparisons since BJ's IPO back at 1996. So that means we are now in our 10th straight year of positive comp sales from (indiscernible) comparisons for the BJ's concept.

And we don't believe there are many public restaurant concepts that have that track record as of late, especially given the challenging operating environment over the last few years. We continue to believe this is a very strong testimonial to the sustained popularity of the BJ's Restaurants concept, which has been in existence in one form for another for about 28 years now. And I think most importantly most of our comparable sales growth during the quarter consisted of higher guest traffic counts, which is the primary driver of our success today and going forward.

We do believe that our comp sales are beginning to benefit from some of our 2006 key initiatives that are still at the early rollout stages, particularly the initiative that we call running the restaurant quality fast. That includes, among other things, our new Kitchen Display System - or KDS system for short.

While we are very pleased with our stronger-than-expected comp sales increase for the first quarter, we would expect our comp sales comparisons for the remainder of this year to gradually begin to track closer to our long-term run rate expectation in the 3% range or so. However depending on the continuing success of our quality fashion initiative and our other sales building initiatives that we've gotten underway, everything else being equal, we believe that we've got a good opportunity to do a little bit better on that measure.

In fact as of the first three weeks of April, our comp sales continued to track stronger than our long-range expectations. So we continue to be very pleased about our comp sales trends.

With respect to comparable sales, a few of our better-performing restaurants and our home court market of California, for the first quarter were our [great] restaurant in Sorrento, California. It was up 9% and that is where we had our first Kitchen Display System operational through the entire quarter. Our restaurant in Irvine, California was up 10% where we are in the middle of installing a major brand image and service enhancement test.

And let's see, San Jose, California was up almost 12% for the quarter in spite of the rainiest month of March ever recorded in California. As we mentioned in our press release today, the 10 comparable restaurants outside of our home court of California achieved a very strong double-digit sales increase during the first quarter, which continues to give all of us great encouragement as to our future growth prospects outside of California.

Just to mention a few of those restaurants. Our Chandler Restaurant - Chandler, Arizona restaurant - our sales were up 9% during the quarter. Our Louisville, Texas and Clear Lake, Texas restaurants had comp store sales increases of 10% and 14%, respectively. And our restaurant in Summerlin, Nevada - in a suburb of Las Vegas - had its sales up over 13% for the quarter.

I think it's very encouraging to watch our Texas restaurants continue to build their sales over time and our newest Texas restaurant that opened in October of last year in Sugarland, a Houston suburb, has continued to generate weekly sales volumes that continue to exceed our internal expectations. And that restaurant is at a very competitive trade area. So we are very pleased with our performance in Sugarland.

While our first restaurants in new markets outside of California often initially achieve average sales volumes that are less than those of our restaurants in our home court market which is, per our expectation, we do believe that over time our restaurants in new markets have a strong opportunity to gradually build their sales, as we build our reputation and awareness in the market.

We've only gotten 47 restaurants open as of today. BJ's is not yet large enough to afford a [efficient] media advertising umbrella to help drive a (indiscernible) in trial so what we've got to relay on to drive our business and our reputation would be great locations and great operations. Over time, we will have the opportunity to build our reputation with consumers and, again, that typically takes a little bit of time. But over the long run as evidenced by our 10 restaurants outside of California for the quarter, our comp sales continue to build.

Our Companywide average weekly sales for the first quarter were up about 12% to approximately 91,700, compared to the same quarter last year. Now this solid 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 in the comp base yet.

We do believe that our strong sales for most of our new restaurants is a direct reflection of the broad appeal and versatility of the BJ's concept. Also coupled with, I believe, BJ's improving ability to operationally, correctly, and consistently execute the concept that what we refer to internally as the gold standard of operational excellence. BJ's has proven its ability to drive strong sales volumes successfully not only in trade areas and markets with higher-than-average household incomes - where the concept has historically opened most of its restaurants - but also in markets with average household incomes.

We are not aware of many traditional casual dining concepts that have the versatility in their everyday appeal to different household income levels that BJ's has. So that could be an attribute that we believe is somewhat unique to BJ's competitive positioning. And that could also be reflected in a higher number of BJ's Restaurants that could ultimately be developed domestically over time.

And speaking of new restaurant development, I'm going to turn the call over to Greg Lynds, our Chief Development Officer, right now and he's going to give you a brief update on the status of our new restaurant development pipeline. Greg, go ahead.

Thanks, Jerry. As we mentioned in our press release today our new restaurant development pipeline is in excellent shape. Our internal goal is to maintain at least 18 months of forward visibility for specific new locations at all times; and our development team has focused and worked hard to stay on target with that goal.

We have opened three successful restaurant so far in 2006. In Vacaville, California; Phoenix, Arizona; and Westminster, Colorado. We currently expect to open as many as eight additional restaurants during the rest of 2006. All of 2006 planned sites have been secured with signed leases and five of these restaurants are already under construction.

In the Tomas, California; Elk Grove, California; El Paso, Texas, [Temeculah], California, and Aurora,, Colorado, we plan to start construction in three more sites next month. The first in Reno, Nevada, which will also include a brewery with capacity to brew 15,000 barrels per year. Next in Arlington, Texas and last in Bakersfield, California.

It is difficult to precisely predict the actual timing of our new restaurant openings due to many factors that are outside of our control including factors under the control of our landlords, contractors and outside municipalities. With that in mind, as of today we currently expect two more openings in late second quarter, three or four openings in the third quarter, and two or three openings in the fourth quarter.

We mentioned in our press release that we currently have 15 signed leases or letters of intent for potential new restaurants in 2007 and 2008. We are currently close to signing letters of intent for another 12 potential locations for future development. Our 2007 events will likely include our first restaurants in Florida and Ohio.

In addition, our 2007 development will include several restaurants in our home court core markets that will allow us to prudently balance our growth in both established and new markets to achieve optimal awareness, distributions, and field supervision leverage. We continue to be very pleased with the overall quality in the new sites in our development pipeline.

For the next few years, our primary growth goal is to increase our productive capacity 20 to 25% each year, as measured by total restaurant operating weight. Our internal real estate design and construction teams are staffed with strong professionals and we have a solid network of outside engineers and general contractors of national standing as our partners.

I'm confident that our BJ's should have many years of solid new restaurant growth to come. Jerry, back to you.

Thanks Greg. You know, I think Greg and his development team continued to do an outstanding job in maintaining a very visible and high-quality real estate pipeline to support our new restaurant growth goals. I've been in this business for about 30 years now; and I know how difficult it is to keep a very high-quality real estate pipeline properly primed and pumping at all times. And BJ's is very very fortunate to have the development team, the leadership and the restaurant growth opportunity that we have today.

We've only got 47 restaurants opened in six states. We continue to believe there's a solid opportunity for BJ's to open in least 300 restaurants domestically during the next several years.

Now having said that, we will maintain the discipline to execute our growth plan in a very careful and controlled manner and with the right operational talent, and support infrastructure, and the right operational tool sets in place. And speaking of the tool sets, we now have several of the requisite tool sets gradually being developed and implemented in our restaurants. I think all of us are really looking forward to seeing how well we begin to execute when some of the requisite tool sets that should be in place in an efficiently run restaurant concept and growth company are in place as currently planned by the end of this year. I'm going to give you an update right now on a few of the more important initiatives and tool sets we are working on.

In connection with our quality fast incentive initiative that I previously commented on, that we currently have the Kitchen Display System up and running in 18 restaurants. We've had very good initial results. We've got a bit of a learning curve to overcome but once our restaurants pass that learning curve, we have consistently seen our ticket times gradually improve and the amount of food comps or refires where the food comes out wrong, we've seen that gradually decrease. And more importantly, we've got many many complements from our guests where we've installed KDS with respect to faster, better quality food.

We're currently on track to have KDS up and running in all of our large format restaurants by the end of the second quarter so that's a little bit ahead of our initial schedule. Moving to our labor productivity initiative that the majority of our restaurants have now started using - our new web-based labor scheduler and productivity analyzer. They are in the process of gradually transitioning from the previous method of scheduling labor, based on achieving a targeted percentage of sales. But now scheduling labor, based on achieving a targeted level of labor hours per 100 guests - which is a productivity measure - and achieving a target average hourly wage level.

We do believe that some of the benefits of this initiative are beginning to be reflected in our results already as evidenced by the reduction in labor and benefits as a percentage of sales from 35.7% in the first quarter last year to 34.5% in this year's first quarter. Again we can't give the new scheduling system full credit for that reduction. But it's very clear that our absolute labor productivity measured in terms of labor hours per 100 guests did improve during the quarter and continues to gradually improve with our new tool.

We're also working on the design and implementation of the theoretical food cost system to help our restaurant operators better track and control food waste and yields. We still currently expect to have the system ready for initial testing in at least one restaurant by the end of the second quarter. Since we've got a very large complicated menu at BJ's, this is going to be the toughest new tool set that we plan to introduce and, therefore, it's going to require very careful design and testing. But we currently expect to have the system ready for rollout later this year.

As we mentioned on our last conference call, our Chief Supply Chain Officer, John Allegretto, has been reviewing our current purchasing and distribution agreements with the goal of improving purchasing and distribution leverage for all of our restaurants, and particularly those that are outside of our core California market.

I think we finally reached the size in terms of our number of restaurants and scope of operations where we have a stronger negotiating position in that respect. And we are currently in the process of evaluating proposals from some of the leading national foodservice distribution houses who are now interested in our business. And we currently expect to execute a new lower cost in foodservice distribution agreement before the end of the second quarter, with any resulting transition work to occur during the third quarter.

Finally, we are in the middle of installing a fairly significant facility and service enhancement initiative that we internally call Project Irvine in our restaurant in Irvine, California. This initiative includes among many things new dining room decor, new furnishings, new china, silverware and glassware to upgrade our food and beverage presentation. A completely new bar design with the latest flat screen television technology. We've got an upgraded and enclosed patio seating area. New floors throughout the dining room. Remodeled restrooms, new contemporary staff uniforms, a new front desktop operation with an automated table management system.

We are going to be testing some integrated handheld order-taking devices that are integrated into the KDS and POS systems. We've got some new kitchen prep and cook line equipment in the back in the house. We've got new guess service procedures and many, many other small details.

And, again, this is a test that we are in the process of developing and, really, the test is really intended to help BJ's continue to play to its strengths of its current positioning as a premium casual dining concept, according to what consumers tell us they see BJ's operating at and what they expect from BJ's.

So again the purpose of the test initiative is really not to revolutionize the BJ's concept, but it's really just to continue its natural evolution. Our job is not to change BJ's. Our job is to make sure that we are BJ's. And that means that we want to protect all of the brand equities that BJ's has built over the past 28 years but at the same time, continue to evolve the concept and keep a strong contemporary feel, high-energy level and really emphasize its non-chain points of differentiation so that we can continue to capture and retain more market share as we grow. Hopefully, at the expense of the mature mass-market casual dining chains that have thousands of restaurants open out there and that all seem to deliver a pretty average experience to consumers these days.

We should complete our Project Irvine initiaive during the second quarter and then we will sit down and evaluate each initiative component for potential future application in our restaurants, either retroactively and prospectively. And we'll keep you posted on how that test comes out.

While we are unable to precisely predict the amount and timing of any specific sales or operational margin benefits from each of our key initiatives that are currently underway, we are very confident that - taken as a whole - all of these initiatives should provide us with the best opportunity to gain initial leverage of our four wall restaurant operating margins over time and give us the best shot of gaining additional market share as we grow the concept in the Midwest and in the Eastern U.S. over the next several years.

Other leading restaurant companies have proven the viability of these tools. The methods and their operations. So really our challenge is to take these methods and tools, get the state-of-the art level and convert them to BJ's operational concept.

So that completes the quick operational update for you and now I'm going to turn the call over to our CFO, Greg Levin, and he's going to go over our quarterly financial results in more detail. Greg.

Thanks, Jerry. I'm going to go through a couple of highlights here and bear with us as there's probably a little bit of redundancy to what both Jerry and Greg Lynds already said. And I will provide you guys with a little bit of forward-looking commentary for the second quarter and the rest of 2006.

As Jerry previously noted, our total revenue for BJ's for the first quarter increased approximately 43% to approximately 53.4 million from the 37.4 million in the prior year comparable quarter. This increase is a result of 27% more operating weeks this quarter than last year and a strong 12% increase in average weekly sales compared to last year. The 12% increase in average weekly sales is a result of the 6.8% increase in comparable restaurant sales. And, really, the fact that our new restaurant is not yet in the comparable sales base continue to open up volumes greater than our existing restaurants.

I think it's important to note that many of our new restaurants will open up at volumes typically greater than their run rates. This honeymoon period may last up to six to nine months and, therefore, we caution analysts when developing their models to take this honeymoon period into consideration.

The 6.8% increase in comparable restaurant sales is principally due to increased customer traffic, coupled with an approximate 1.6% of menu pricing for the quarter. And we estimate that the benefit from the Easter holiday shift from Q1 last year to Q2 this year resulted in about 220,000 of additional sales for the quarter and as such, the Easter Sunday [slip] will result in an estimated net loss on sales of that same amount - approximately 220,000 for the second quarter.

And for those of you monitoring menu price settings. We have approximately 1.4% of menu pricing going into the second quarter. We do anticipate taking some additional pricing somewhere in the 1+% range towards the end of the second quarter when we roll out our new menu. The current 1.4% of menu pricing will roll off in October of this year. And when we look at menu pricing, our strategy is really based on protecting our current margins.

Moving on to the middle of our P&L we saw our cost of sales increase by about 60 basis points to 25.6% of sales in the first quarter this year compared to last year's first quarter. And as we've mentioned before there are really four variables that we continue to experience in our 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 open more and larger format restaurants that sell less higher margin pizzas than our 10 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 this increase in the first quarter of this year. And, unfortunately, based on the current price of gasoline these days and like most restaurant operators we do not expect to see this surcharge go away any time soon.

We did also experience some normal cost of sales pressure related to our three new restaurants that opened in the first quarter, compared to only one new restaurant that opened at the end of the first quarter last year. We do expect that cost of sales to be higher in our newer restaurants really during the first 90 to 120 days, as our operations get used to the restaurants and our management teams really become accustomed to [ultimately] predicting, managing, and servicing sales volumes vividly experience on new restaurants.

Also as we've 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. As Jerry previously stated, we are currently reviewing formal proposals for nationwide distribution which we believe will have an impact on our cost of sales once implemented in the second half of this year. And more importantly, it'll really provide leverage in our distribution system as we continue to grow outside of California.

Please remember that any change in our distribution arrangement does not happen overnight once an agreement is signed. It could take months for any changes in distributors is fully implemented throughout the chain. As we continue to go this process, we will keep everyone informed.

I also think it is important to note that when you look at our cost of sales on a sequential basis, our 25.6% is really pretty consistent with the last four quarters beginning in the second quarter of 2006. And I would really anticipate that on a go-forward basis we will continue to see cost of sales in this mid 25% range.

Our labor benefits during the quarter decreased 120 basis points to 34.0% of sales from 35.7% of sales last year. In this decrease is a result of an improved productivity and leverage as a result of our very strong comparable restaurant sales of 6.8%. The increase in productivity was a result of our restaurant operators really beginning to use some of the tools that's provided to them which allowed them to optimally manage the restaurants based on hours and guest counts and not percentages.

Some of this efficiency was offset by higher training costs, related to the gradual rollout of our new restaurant toolset such as the Kitchen Display System. And while Jerry mentioned that we currently have about 18 restaurants using KDS at the end of the first -- KDS right now, at the end of the first quarter, there was only 14 restaurants using KDS or about one-third of our large format restaurants.

And as such, we anticipate still incurring additional training costs in the neighborhood of 3 to 5,000 per restaurant to fully train and implement these new toolsets.

Our operating occupancy cost as a percentage of revenues increased about 50 basis points to 19.4% from about 18.0% last year. The increase is related to higher fuel costs which resulted in higher utility and paper costs. We also are seeing higher credit card fees as a result of higher credit card use in our restaurants. And, finally, we incurred higher restaurant supply costs as really a result of our deliberate decision to improve the quality of our dining room and kitchen supplies and utensils.

Our general and administrative expenses in the first quarter of 2006 increased to 8.8% of sales from 7.9% of sales last year. And I think as we stated in today's earnings release in the supplemental footnotes that, beginning with the first quarter, we adopted FAS 123R - the share-based payment - which requires us to expense stock-based compensation. As such included in G&A expenses for the first quarter of 2006, there's approximately 449,000 of stock-based compensation which equates to about .8% of sales.

So if we go ahead and exclude that stock-based compensation, our G&A on an apples to apples comparison increased about 10 basis points to 8% of sales. And on an absolute basis - again excluding the 449,000 of stock-based compensation - G&A increased to 4.2 million from 2.9 million last year and this is really a planned increase as a result of the additional expenditures associated with the continued infrastructure investment in our business - both field supervision and corporate support.

Our depreciation and amortization increased to 2.2 million during the first quarter of 2006 to 1.4 million during the comparable quarter of last year. And this increase in total dollars is primarily due to a full quarter of depreciation for the new restaurants that we opened last year and partial depreciation for the restaurants we opened this last quarter. I think as we mentioned on our fourth quarter conference call, I would expect depreciation to average somewhere in the low 4% range for the rest of 2006.

Our restaurant opening expenses were approximately 1 million during the first quarter of 2006 which was about the same as last year's first quarter. Preopening costs in the first quarter were primarily for our Vacaville, California and Phoenix, Arizona restaurants which opened earlier in the quarter. And we did have some cost for our Westminster, Colorado restaurant which opened on the last day of the quarter.

As we also discussed previously and, like our peers, we adopted FASB Staff Position 13 1 which is accounting for rental costs incurred during construction which requires us to expense the non-cash phantom rent during the construction period. As a result, we incurred approximately 120,000 of non-cash phantom rent during the first quarter compared to 0 last year.

And for people developing their models, I think it's important to remember that we will now incur preopening expenses primarily phantom rent for a new restaurant as early as four months before our restaurant opens. And therefore portly preopening costs may have greater variability from the actual number of new restaurants opened in the quarter.

Looking towards the second quarter, we anticipate opening two new restaurants plus we'll incur a significant amount of preopening costs for our Westminster, Colorado restaurant and as I said open on the last day of quarter one. As well, we will incur preopening rent for as many as three restaurants that will open in the third quarter of this year. As we've mentioned, we anticipate preopening rent to be about 60,000 per restaurant.

During the first quarter of 2006 our net interest income increased to 443,000 from 100,000 quarter-over-quarter. And this increase is primarily due to increase in investments after the completion of our 2005 equity transaction in March of last year. And that's also coupled with higher interest rates.

(indiscernible) earnings release, we disclosed - because of our previous grants of incentive stock options - we will not be able to get the entire tax benefits related to stock-based compensation expense under FAS 123R. Based on our visual analysis we had estimated that our effective tax rate for 2006 was to be approximately 33%. However, due to the nondeductibility of compensation expense related to previous incentive stock option grants, we now anticipate our effective tax rate to be closer to 35%.

And really turning to our balance sheet we ended the first quarter with approximately 42 million in cash and investments, approximately 135 million in shareholder equity and no funded debt. The strength of this balance sheet should provide us with financial flexibility that continues to execute our growth plan for the near future. Our CapEx for the first quarter was approximately 10.8 million, which was primarily due to new restaurant construction.

And real quick before I turn the call back over to Jerry, I want to remind everyone that 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 dependent on many factors both within and outside of our control and as we noted in the past four years or so, our annual comps have averaged in the 3 to 4% range.

Looking specifically at the rest of this year, we do anticipate some of our newer high-volume restaurants dropping into the comparable sales base, beginning in the second quarter. Some of these restaurants include San Bernardino and Folsom, California that both average significantly well over 100,000 a week. Since many of these restaurants are already operating close to capacity their comparable sales increase may be closer to our menu pricing in the 1 to 2% range. But really, only 21 large format restaurants in our comparable sales base, these new high-volume restaurants may have the effect of lowering our overall comparable restaurant sales from quarter 1's very strong 6.8%, as these new restaurants become part of the comparable sales base.

With that, I will turn it back over to Jerry.

Thanks Greg, just to wrap up our comments so we can get to some questions our Company achieved very solid results for the first quarter of 2006 on almost every key measure. Thanks to the hard work of all of our restaurant operators we continue to enjoy strong sales to both our new openings and our established restaurants. That doesn't happen by itself. It's the result of a lot of hard work and a lot of things being executed correctly in our restaurants. And we are continuing to do very, very well but we still have so much work to do to build more leverage in our operating model.

Our management team remains very, very confident of our ability to continue executing our growth plan while at the same time gradually implementing all of our initiatives and our tool sets and working hard to really achieve that steadily increasing operating leverage in every aspect of our business.

Our new restaurant development pipeline for this year, 2006, is fully primed and staged for completion at this point, thanks to the work of Greg Lynds and his team. We're almost already done with priming our 2007 [sub-] development pipeline. We strongly believe that the best years for BJ's are still yet to come and we really do appreciate the confidence and support of our stockholders, our supplier partners, our staff members and most importantly BJ's loyal restaurant guests.

So that concludes our formal remarks and, at this time we will open up the call for a few questions and, again, if we don't have time to get your question on this call, please feel free to call Greg or myself at our offices and we will try to help you as much as we can.

So, operator, we're ready for some calls.

(OPERATOR INSTRUCTIONS) Jeff Farmer of CIBC Global.

Good afternoon. Quick question. Reference to the fact that you have roughly two-thirds of your restaurants in California what are your pricing plans if that state actually does implement a minimum wage increase? And I guess more specifically are you guys going to look to protect margins if minimum wage is increased in the state of California?

This is Greg. Great question. We've looked at that and we've heard the rumors of possibly a dollar increase. That equates to about 1.2% pricing or really $0.11 on our kind of $10.50, $11 check average. So we will, like our competitors or our peers, we will have to take some pricing to protect margins. Luckily in our case it's not significant - $0.10 or $0.11 - to cover that number.

And I apologize if you already touched on this but labor roughly down 120 bips year-over-year. I understand that you are implementing the new labor scheduling system. But how sustainable is that for the balance of your year or for the balance of the year in your estimation?

That's again another great question. I think on our hourly labor we continue to do some really nice things there. Some of it as we mentioned in the call is due to the comp sales; and we get comp sales like that that are able to leverage both the management as well as your taxes and benefits. So some of that plays out on the sales side of things.

I do think as we continue to grow we want to make sure we have the right management talent and management pipeline in place. And that's going to put a little variability in that number but I do think over time we [can't] sustain lower labor percentages.

(MULTIPLE SPEAKERS)

This is Jerry. Just to let me follow on with what Greg said. There is clearly additional upside in managing a more effective labor productivity performance in our restaurants. We look at labor productivity in terms of labor hours per 100 guests. The whole scheduling system is really based on that fundamental statistic.

And as we watched the new system come into place we monitored that statistic on a weekly basis; and in fact, the new system gives us the ability to monitor it on a daily basis. And any time in this business that you put a flashlight on any key statistic like that at your restaurant, it's going to get a lot of attention. So again, it's hard to predict the precise impact of where we're going to end up.

But I can tell you, there's more on the table there and I think Greg would agree with me.

Conrad Lyon of KeyBanc Capital Markets.

Nice topline. Question is regarding kind of -- if you could brought any color going forward regarding any sales trends? I just had (indiscernible) some other California-centric operators talk about some softness today and I just want to see if you could add some color, provide some insight into that?

We have not seen any direct impact or realized any of some of the softness that maybe some of the other California-based operators in different niches in the restaurant industry may be experiencing. When you look at our home court comp sales for the quarter - and I think if you do the math, if you take that 6.8% and you adjust for the 10 top restaurants outside of California that were in the double digits - our California comp restaurant sales were probably 4 to 5% up. And most of that is traffic growth. So we have not seen any softness as of yet in our California restaurants, with respect to the difficult operating environment out there.

And we had record rainfall in California in the month of March and our restaurants in northern California where most of the rain fell continued to comp pretty nicely. You know our beach and college restaurants - particularly our beach restaurants - are small format restaurants down here in Southern California that are right on the coast. They are going to get impacted by some of the rainy weather from time to time.

But in terms of an overall direct impact of some of the increase in gasoline prices - at least in terms of our customer base and given the positioning of our concept - we have not seen it yet. And like I mentioned earlier, for the first three weeks of April our comp sales have continued to be very, very strong. Surprisingly strong for us. Greg, would you like getting into that?

No. I think that's right on. I will say because I'm a cautious guy. I want to reiterate that. Those large volume restaurants will be dropping into the comp base later this year.

Sure. That's a good problem to have. Thank you very much.

Mike Smith of Oppenheimer.

Good afternoon. A couple of things. In doing everything on your -- seems like perfectly on your cost of goods sold labor and (indiscernible), I was just wondering if we know that this a year from now, what kind of movement when you expect to have in both of those line items? One, because of the labor, the labor package that you've now got in place and two, the cost of goods sold because of KDS and the new distribution agreements?

I don't know if we know the absolute margin impact. I think we kind of said on the call that we are going to go through these tools and systems that other concepts have used. And we don't know the direct impact on margins. We have seen some nice improvements, obviously, in labor as we talked about it today.

I do think even as we get some improvement in distribution over time and can bring that down I think, like most of our peer companies, restaurants outside of California tend to run a little bit higher cost of sales. It gets made up in labor and then some in certain other areas outside of California. But again I don't think we have a specific margin in place. I think, ultimately, we look at that 20% restaurant level cash flow. We hit this quarter and that's something that we want to hit consistently quarter to quarter.

I don't know if, Jerry, if you've got anything else.

The only other thing I would add is we are still very early in the rollout of these particular initiatives. We are still in our learning curve. There's clearly opportunities on the table. It may take us a while to achieve them. I think we will have a better way of answering your question six months from now than we do today.

I think our overall goal has been, as Greg mentioned, to try to really protect that 20% or so four-wall restaurant cash flow margin. And as we begin to get more leverage in the business model whether it's four-wall leverage or macro leverage in the business - with respect to better distribution arrangement and so forth - our thinking is is to take some portion of that and reinvest it in the concept in terms of better quality food, better quality service, better quality facilities and obviously carefully manage the impact of inflation that kind of creeps on your margins over time; and really work hard to protect that 20% cash flow margin.

And again I hope we will be very, very successful in that respect and we'll be able to accomplish all of that and maybe over time see a slight improvement off that 20%. That's probably the best way we can answer it right now.

The other question I had in terms of Irvine how dramatic are the changes in that restaurant, as opposed to the ones that you kind of have now?

I'm not sure that they are that dramatic. Represents really a natural evolution of the concept. We've done a great deal of consumer research when I joined on with the Company about a year and a half ago and consumers came back and said, "We see BJ's as a premium or polished casual dining concept. We don't see it as a mass market casual dining concept and we don't see it as an upscale casual dining concept. We see it kind of sandwiched in between the two."

So really, what we are trying to do in Irvine is make very, very certain that we have taken a look at all of the existing mass market attributes of the BJ's concept - whether it's our glassware, our china, our silverware, our uniforms and some of the feel in the restaurant. And just make sure there's a clear differentiation between what we're trying to do for guests at BJ's and what some of the mass market casual dining players might have.

So that's all we are really trying to do. It's a natural evolution. We will be done in about 30 days and we certainly invite everyone - including our stockholders and our guests - to come in. We are about maybe three-fourths of the way through right now. We've still got some major work left to do. We have done extensive consumer research before we commenced the project. We will do extensive consumer research after we're done here in about a month.

And I got to tell you, based on our guest comment system, we have been really getting some incredibly favorable comments from our guests. And we do have a guess tell us about our type of system that's an IBR-based comment system like most of the restaurant chains have these days. And we've seen a really nice spike in top box overall satisfaction ratings over in Irvine.

So again I don't think they are really that revolutionary. I think they're evolutionary and, again, what we want to do is maintain that very, very delicate balance between the 28 years of brand equity that BJ's has built over the years and make sure that we remain contemporary and high energy so that we continue to take this thing and build them in the Midwest and build them on the East Coast and build them down in the Southeast, that we are clearly have strong points of differentiation between us and the mass market casual diners.

And if we're able to do that and keep our average check close to the mass market casual dining level - which is kind of where it is today if not a little bit below - then there you have the formula for gaining and retaining significant amounts of market share. And that is what we're thinking.

Thanks.

Brian Murphy of Merrimman.

Just a quick housekeeping question. On the + 1 4 -- excuse me +1.4% menu increases that you are expecting, is that Q2 or average across the year? Sorry. I just missed that.

The 1.4% is what we have in menu pricing right now. So Q2 would be 1.4% really through the end of May as we roll our new menu in kind of end of May June timeframe. We will probably have some of them in 1% range. So -- (MULTIPLE SPEAKERS)

And did you try anything further for the year?

After that 1%, the 1.4% would roll off in October, at which time we would roll out a new menu. We tend to roll out a new menu twice a year and both of those times we will take a look at our pricing. We will also look at the macro environment. If there is going to be minimum wage, fuel surcharges, those types of things. We take a look at to make sure again we are pricing really to protect our margins.

[Dustin Tombence] of Morgan, Keegan.

Good afternoon. Jerry, why do you think your traffic trends have been so strong, relative to so many others that have seen such weak traffic trends? Is there anything else that -- like maybe strong dayparts, lunch, or late-night business that is driving that? Has there been any change maybe in your alcohol mix or take-out percentage?

There really hasn't. And you know as we sat here and we watched our sales over the past - well, gosh, ever since I've been leading the Company for the past year and a half and even for the next -- for the last three weeks we kind of try to ask ourselves that question.

I guess the answer is, you have to look at the basic concept itself and its broad appeal and it's the tremendous value that we offer. The 100 menu items, the quality is coming up. We're trying to keep our price point right around $11 or so. It's probably one of the best values out there in varied menu traditional casual dining particularly in California. Our customer base is very broad and diverse. We've got restaurants that appeal very strongly to the middle income demographics. We -- it also has enough quality in the concept to appeal to the upscale demographic folks out here in California. So - and plus on top of that - not only do you have the broad appeal of the concept but you also have what I believe is a steadily improving ability to more directly execute the concept on the part of our operational team.

Again we are building talent and operations. We're putting additional tool sets out there and I think over time, their overall ability to execute particularly at peak meal periods has gotten much better since I've been here, particularly with the new tool sets that's coming on board.

Okay and as I try to understand the same-store sales trend, it sounds like you've got the reversal of the holiday shift into Q2. You've also got those stores coming on into the comp base that will negatively effect the comp base. It sounds as though we shouldn't expect something as strong as what we saw on Q1 but, yet, something better than what your longer-term guidance has been. Is that accurate?

I think that's probably a fair interpretation of what we are trying to say. Yes.

Then, one other question. Greg, on the stock option expenses is there -- I guess we don't have the '06 grants in there yet and given that the amount has -- I think you raised it to $0.08 for the full year. How should we spread that? Should that be spread evenly amongst the last three quarters? Is there any estimate on what that additional piece of '06 grants would be?

I'm going to take the first part real quick on that. I would spread it evenly. So if you kind of look at the overall $0.08 impact and, again, that additional $0.02 is - the 33% tax rate to the 35% tax rate - the $0.08 is going to be evenly. So we've already I think in this quarter - if you did the back of the envelope numbers, you are about $0.015 higher on -- as a result of FAS 123. So take eight minus [125] and divide it by three and spread it evenly.

Thank you.

One more question and then we will close up the call.

(indiscernible) of Morgan Joseph.

Just a question on chickens. Can you tell us what percentage you have in sales and what your preparations if any are for the avian situation?

On sales it's about 11 to 12%. Sales of our chicken. We are contracted on all of our chickens for this year. We are -- as John Allegretto, our Chief Supply Chain Operator -- all the chicken that we are buying we are making sure we are buying from one of the large chicken farms out there or chicken producers, making sure that they have things in place to safehouse against the flu to the best of their ability.

I think when you look at our menu, we have a wide variety of a menu. We do have a lot of pizza items that do not have chicken on them. We do have salads. We have the kind of entrees meaning the ribs and the steaks. So I think we've got enough variety to help offset any issues that might happen from the avian flu.

Operator, we are going to conclude the call at this time and thank everybody for calling in and please call us at our offices if you have any further questions. Thank you.

Thank you. This does conclude today's conference. You may disconnect all lines at this time and have a great day.