BJ's Restaurants Inc (BJRI) 2006 Q3 法說會逐字稿

Good afternoon. My name is Mary and I will be your conference operator today. At this time, I would like to welcome everyone to the BJ's RESTAURANTS third-quarter 2006 results conference call.

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 floor over to your host, Jerry Deitchle, President and CEO. Sir, you may begin your conference.

Thanks, operator, and hello, everybody. I'm Jerry Deitchle with BJ's Restaurants and welcome to our quarterly investor conference call which we are also broadcasting live over the Internet. Joining me on the call today is Greg Levin, our CFO, and Greg Lynds, our Chief Development Officer.

As most of you know, after the market closed today, we released our financial results for the third quarter of fiscal 2006 that ended on October 3, 2006. If you haven't seen our press release yet today, you can see it on our Web site; that's www.BJsrestaurants.com.

Our agenda for the call today will be as follows. First, I will give a brief business and operational overview for the third quarter. Then Greg Lynds is going to give us an update on our new restaurant development pipeline. Then Greg Levin is going to briefly review our consolidated income statement, our summary balance sheet, and our liquidity position as of the end of the third quarter. Then after that, we will be happy to take a few questions and if we don't get to your questions on this call, we will be in our offices and will be happy to take your question then.

We would like to wrap up the call in about 45 minutes, so we're going to get started, but before we get started with the formal presentation, I would like to make our standard cautionary disclosure with respect the forward-looking statements and here it is. 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 the forward-looking statements. Investors are cautioned that forward-looking statements are not guarantees the future performance and that underline should not be placed on such statements. Our forward-looking statements speak only as of today's date, which is October 26, 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 to 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 SEC.

Now that we've got that out of the way, as we indicated in our press release today, BJ's reported very strong financial results for third quarter in spite of a continuing difficult sales and operating environment in general for most casual diving restaurant operators. Compared to the same quarter last year, our revenues increased a very solid 30% to 61.8 million. Our net income was about 2.4 million and our fully diluted net income per share was $0.10. I think it's important to remember that the same quarter last year included two extra days of sales that resulted from our transition to a fiscal week calendar that ends on Tuesday instead of Sunday. Now, those two extra days in the same quarter last year contributed about 705,000 of additional sales. So on an apples-to-apples basis, our quarter-over-quarter revenue increase this year would be about 32%.

As we noted in our press release today, we did adopt, like most other public companies, a new financial accounting standard, Statement of Financial Accounting Standards 123R, share-based payment, during the first quarter this year. FAS 123R requires us to recognize stock-based compensation on a go-forward basis, so the results of our operations in prior periods were not restated for this new accounting standard. So on a non-GAAP pro forma basis, if we were to include stock-based compensation expense in our results for the same quarter last year, then our net income and diluted net income per share for the third quarter this year would have increased about 17% and 25% respectively. Similar to our earnings releases for the first and second quarters this year, we did add a footnote to our press release today that provides more detail on the individual components of our stock-based compensation expense.

Now, our 30% reported increase in revenues for the quarter was driven by an approximate 20% increase in total restaurant operating weeks and an approximate 8% very strong increase in average sales per operating week, which does include the impact of a stronger than expected 5.3% increase in our comparable restaurant sales. We were up against a pretty tough comparison that we were able to hurdle for the same quarter last year, a 5.5% comp sales increase for the same quarter last year.

I think it's also important to point out that our reported estimated restaurant level operational cash flow margins also advanced quarter-over-quarter. They increased by about 50 basis points to about 19.9% compared to 19.4% for the same quarter last year. Also remember that the same quarter last year had a bit of a favorable impact of those two extra days of sales.

Now, getting back to the current quarter, 5.3% increase in comp sales for the third quarter represents our 40th consecutive quarter of positive comparable sales comparisons since the Company's IPO back in 1996. I think most investors know that number for the current quarter was achieved in spite of the very challenging sales and operating environment for casual dining restaurants, one of the more challenging restaurants that we've seen in many, many years. We continue to believe that our consistent strong sales results for the past ten years now is a strong testimonial to be sustained popularity and outstanding price value characteristics of BJ's Restaurant concept, which has been in existence in one form or another for over 28 years now. We continue to believe that BJ's offers much more quality and value in the overall dining experience than the mass-market casual dining concepts do. At an average check per guest of about $11, for us that is roughly the same or in many cases actually more than most of our mass-market casual dining competitors. So as we move into 2007 and set up our key initiatives for next year, they're really going to be intended to further strengthen BJ's quality and differentiation advantages over the mass-market players in our industry segment.

While we were very pleased with our solid comp sales increase from the third quarter and while our comp sales comparison for the current fourth quarter to date remains solidly positive as well, we do expect our comp sales comparisons to eventually track closer to our longer-term run rate expectation in the 2 to 3% range or so, which principally contemplates our expected average annual menu price increase. However, depending on the progress of the sales building initiatives that we've targeted, everything else being equal, we do believe that we've got an opportunity to do a little bit better on that measure.

Greg Levin is going to comment on recent sales trends for some of our individual restaurants in his remarks a little later in our call today.

With respect to our newer restaurants, initial sales volumes for our two openings that occurred during the third quarter remain quite strong. Our El Paso, Texas opening in July has been one of our absolute best openings to date outside of California in terms of absolute and sustaining sales. We're very pleased with that. Our new restaurant that we opened here in southern California in Temecula on September 5 came within $2000 of surpassing our all-time first-week sales record that we previously set earlier this year with our Elk Grove, California opening in the Sacramento market. Our opening in Bakersfield, California earlier this month of October came very close to equaling Temecula's first-week sales. So we're really on a roll with respect to the new sales volumes for our brand new restaurants.

We believe the stronger sales volumes for most of our new restaurants continues to be a direct reflection of three factors. First and foremost, the broad consumer appeal and perceived value of the BJ's concept itself, it's something that we internally call BJ's very unique approachability to all consumer demographics and preferences. Then when you couple that with improved site selection under Greg Lynds' leadership and our gradually improving operational ability to correctly and more efficiently execute the concept, that generates additional sales.

BJ's has proven its ability to drive strong sales volumes successfully not only in trade areas or markets with higher-than-average household incomes where we've historically opened most of our restaurants, but also in markets with average household incomes. We're just not aware of many casual dining concepts that have the degree of versatility or approachability, as we call, it in their everyday ability appeal to different household income levels and consumer demographics. So we believe that this could be an attribute that is somewhat unique to BJ's and also be reflected in a higher number of BJ's restaurants that could ultimately be developed domestically in the long haul.

As our press release indicated yesterday, we opened two new restaurants just two days ago, one in Arlington, Texas, which is our fourth restaurant in the Dallas market, and another one in Aurora, Colorado, which is our second restaurant in the Denver market. We are on target to open our 11th new restaurant this year in Reno, Nevada before Thanksgiving, so our entire leadership team is very pleased to have been able to deliver upon our previously announced goal to open as many as 11 new restaurants this year and thereby increase our total restaurant operating weeks by about 23 to 24% this year.

Now, speaking of new restaurant development, I'm going to turn the call over to Greg Lynds, our Chief Development Officer. He's going to give you his perspective on our 2007 restaurant expansion plans. So Greg, go ahead.

Thanks, Jerry.

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

To date in 2006, we have opened ten successful restaurants. In the third quarter just ended, we opened El Paso, Texas on July 11 and Temecula, California on September 5. So far in the fourth quarter, we have opened Aurora, Colorado and south Arlington, Texas. Both of those restaurants just opened two days ago on October 24. Our 11th and final restaurant opening is in (technical difficulty) in this year 2006 will be in Reno, Nevada right before Thanksgiving. Our restaurant in Reno includes an on-site brewery with the capacity to produce approximately 15,000 barrels of our premium handcrafted beer per year. This 15,000 barrels is enough to produce capacity to provide our handcrafted beer to about 20 of our BJ's restaurants.

Moving onto our targeted 2007 new restaurant development plan, we currently expect to open as many as 13 new restaurants next year and increase our total restaurant operating weeks by approximately 20 to 25%. As of today, nine of our potential 2007 openings have been secured with signed leases or purchase agreements and four of those restaurants are already under construction. We plan to begin construction on two more restaurants prior to the end of 2006. In addition to those signed leases, we also have 13 signed letter of intent agreements in-hand for potential additional restaurant openings in 2007 and 2008.

As we mentioned in our last conference call, our 2007 restaurant openings will include our first restaurants in Florida and Ohio, which we believe have strong potential for the BJ's concept. We're currently under construction on a pad at the Polaris Mall in Columbus, Ohio as well as across the street from the Millennium Mall in Orlando, Florida. Our 2007 development plan also calls for several new restaurants in our home court core markets that will allow us to prudently balance our great emphasis in both established and new markets. This balanced growth strategy should allow us to better leverage and optimize our field supervision and supply chain infrastructures and to improve our overall consumer awareness. We continue to be very pleased the overall quality of the new sites in our development pipeline.

It is difficult to precisely to date the actual timing of our 2007 new restaurant openings due to many factors that are outside of our control, including factors under the control of our landlords, developers, contractors, and municipalities. With that in mind, as of today, we currently expect as many as two openings in the late first quarter, as many as four openings in the second quarter, as many us three openings in the third quarter and as many as four openings in the fourth quarter. Again, our quarterly opening schedule can fluctuate due to many factors. We will keep you advised of all future changes on our quarterly conference calls.

Our internal real estate design and construction teams are staffed with strong professionals and we have a solid network of outside engineers, contractors that are of national standing as our partners. I'm confident the BJ's should have many years of solid new restaurant growth to come.

Thanks, Jerry. Back to you.

Thanks for the update, Greg.

You know, we've only got 54 restaurants open today in only 6 states, so we continue to believe that there's a very strong opportunity for BJ's to expand to as many as 300 restaurants domestically during the next several years. Now, having so that, we're going to maintain the discipline to execute our growth plan in a very careful and controlled manner and only with the right operational talent, support infrastructure and modern toolsets in place. We now have a few of those modern toolsets in place and they're currently beginning to favorably impact our recent results.

When we look back at 2006 for our business, I think that this year was a year in which we focused most of our key initiatives on strengthening BJ's ability to process more sales in a much more productive efficient and leverageable manner while simultaneously improving the overall quality and differentiation of the BJ's dining experience. When you look back during the last six months, we've essentially completed the rollouts of our new kitchen display system and our Web-based labor scheduling and analysis system. Both of these new systems are beginning to contribute to increase sales and operating profits in our baseline established restaurants. But also upgraded our essential system systems. We introduced a new balanced scorecard incentive system for our restaurant operations that rewards both great restaurant terrain and great financial results. We also developed a new career roadmap program to help every one of our restaurant managers in our company developed their restaurant touring and business skills. We also implemented a new national food service distribution arrangement that provides us with greater economic leverage and improved product consistency as we continue to expand into more states across the country.

But most importantly, we also completed what we call our quality restaurant touring initiative at our restaurant here in Irvine, California. This initiative included, among many things, the testing of new dining room decor and furnishings, new china, silver, glassware to upgrade our food and beverage presentations, a completely new contemporary bar design with the latest flat-screen television technology. We have a upgraded and fully enclosed patio seating area. We have new floors throughout the dining room. We remodeled our restrooms and we have new contemporary staff uniforms. We have got a new front-desk operation with an automated table management system that can be integrated into our POS and KDS systems. We've got new kitten prep and cook line equipment. We've got new guest service and hospitality procedures. And we've got many, many other small details as part of that test. Really that test was really intended to help BJ's continue to play to the strength of its positioning as a premium, or I guess put another way, casual-plus dining concept according to our consumer research.

The purpose of our Irvine initiative was not really to revolutionize BJ's, but it was really intended to continue its natural evolution. Our job, as the leaders of BJ's, is not to change BJ's. Our job is to make sure that we are BJ's. That means that we want to protect all of the brand equity that we have built up over the past 24 years, but at the same time continue to evolve the BJ's concept to keep its very strong contemporary feel, its high-energy level, its non-chain look, and all of the points of differentiation in the concept so that it will give us the ability to continue to capture and keep more marketshare as we grow, particularly at the expense of all of those thousands of mature, mass-market casual dining concepts out there that, again, have thousands of restaurants and that all seem to kind of deliver the same average experience to consumers these days.

Now, we've learned a lot from our Irvine test. Some of the components of that test are already being reflected in our newly opened restaurants. So we've had one busy year and we've got another one lineup for next year.

In addition to opening as many as 13 new restaurants, which is going to keep all of us very busy, our 2007 key initiatives are also going to include the rollout of two additional productivity enhancing toolsets that we are currently developing and testing, the automated table management system that I previously mentioned and also a theoretical food cost system. We also believe that we've got several opportunities at-hand to increase the absolute sales productivity of our establish restaurants, so our sales building initiatives next year are going to focus on the following six opportunities--first, build our off-price channel sales. They only currently represent about 6% of our sales and they certainly have the opportunity to be closer to 10% of our sales, of which a great deal of that increment should be incremental to us. Secondly, build our large party channel sales. Our building lay-outs at BJ's and our menu offerings facilitate large parties of 20, 30, 50, or more much better than most of our mass-market competitors. Third, we're going to add productive capacity to our existing restaurants. We've got some opportunities to enclose certain of our outdoor patios to get year-round productive use of those seats and areas where the weather can impact our service. We also have some opportunities to add patios to existing high-volume restaurants where we have favorable climate areas.

Fourth, as I mentioned earlier, we've got these two quality fast toolsets that we are going to be rolling out, the automated table management system that we are already testing in three restaurants, and we've got a new server productivity analysis approach that's going to help us identify and then schedule our more productive servers in the most productive stations in each restaurant. Fifth, we're going to really drive hard to improve overall hospitality with the rollout of our quality restaurant touring service system that we've been testing in our Irvine restaurant in addition to some other things that we are going to be doing. Finally, number six, we're going to continue to drive concept differentiation with the rollout of our quality restaurant touring facility enhancements that we've tested here in Irvine, coupled with a new contemporary logo and brand identity system rollout. We're also going to be adding more specialty food and beverage options to our menu as well as romancing the current strengths of our menu, which is our pizza and our handcrafted beer.

As I noted earlier, BJ's has enjoyed ten straight years of positive comparable sales momentum and we believe it's absolutely essential to keep sales building at the top of our initiative list next year. As long as we've got the sales, we're going to have the opportunity to optimize the bottom-line results of our business.

As Greg Lynds also mentioned, during early 2007, we're going to take advantage of the strong economies of scale that are offered by our new 15,000 barrel brewery in Reno. That is going to become our largest capacity brewery. It's going to have about three times the productive capacity of our current large breweries here in California. Now, after we get the Reno brewery up and running smoothly during the next 60 days, we're going to rebalance all of our internal beer production activities among our ten other internal breweries so that we can take full advantage of the economies of scale offered by the Reno brewery to help us to reduce the average delivered production cost per barrel of beer to our restaurants. Based on our preliminary modeling, we think that this cost reduction could prove to be as much as 20%. We'll keep you posted on the progress of our Reno brewing and production rebalancing activities during the next several months.

So, like I said, in addition to opening as many as 13 new restaurants next year, we've got a lot of exciting initiatives to work on that should advance our ability to be both great restaurateurs and great restaurant people. While we're unable to precisely predict the amount and timing of any specific sales or operational margin benefit from each particular initiative, we are very confident that, when you take them as a whole, our initiatives ought to be able to provide us with the best opportunity to gain additional leverage of our four-wall restaurant operating margins and capture some additional marketshare.

Just one other comment and them I'm going to turn the call over to Greg Levin for his financial review. As we noted on our last couple of calls, our G&A expenses for the quarter and also year-to-date represent and reflects a necessary investment spending for our restaurant manager recruitment training and development programs. We have very--we have a lot of capable restaurant managers already on our team. We're very thankful for those folks, but we also need a stronger bench to help us improve our overall execution in our established restaurants and also to support our future growth. So this year, we're going to continue to make some upfront investment in stronger restaurant managers to which we do expect to earn a good ROI over the long run. We currently expect to have our restaurant management pipeline and bench strength closer to where we would like it to be by the end of the fourth quarter.

Again, in a pure operating growth model like BJ's, there is generally plenty of capital and plenty of good real estate available to support our growth. The real critical challenge for us in this operating model is to recruit enough great restaurant managers to join our team to correctly execute the concept and to stay with us for the long haul. In most restaurant companies, there is a direct correlation between restaurant manager retention and consistent operating results and that's particularly true with the more operationally complex concepts like ours. We can only grow as fast as we can recruit, train, develop, award and keep our great restaurant managers. That's a principle focus of our leadership team and that's also why we're planning to shortly implement what we call implements what we call the BJ's Gold Standard Stock Ownership Plan for all of our restaurant managers that we mentioned in our press release today. Without a plan like that in place, it's going to be much more difficult to recruit, to motivate, to retain our best restaurant managers as we continue to build a national reputation for operational excellence at BJ's. We strongly believe that, whatever the modest cost is associated with introducing this incentive plan, it has a longer-term ROI profile in terms of motivating better operational execution and reducing the costs associated with restaurant manager turnover. In fact, we believe the cost of recruiting and training just one restaurant manager is roughly equivalent to the average annual expense per restaurant for a new incentive plan. Next year, we're going to have to recruit over 200 restaurant managers of which about half of those are going to be needed to fill vacancies created by expected turnover, not by new restaurant growth. So any investments that we can prudently make to reduce manager turnover and motivate better four-wall execution should have a measurable payback to our business.

Now, I'm going to take a break for a minute and turn the call over to Greg Levin. He is going to review our quarterly financial results in more detail.

Thanks, Jerry.

I am going to apologize in advanced to everyone that I am fighting a little bit of a cough and cold here and I'm going to do my best to get through this about hacking and letting you guys listening to my annoying cough.

So starting really with the topline, I think, as Jerry previously noted, our total revenues for the third quarter increased approximately 30% to about 61.8 million from the 47.6 million in the prior year's comparable quarter. This increase is the result of 111 more operating weeks this quarter than last year, which is about a 20% increase in operating weeks and a positive comparable restaurant sales of approximately 5.3%. If we exclude the impact of the two extra days of operations in the same quarter last year, our operating weeks would have increased approximately 23% during the quarter.

Just to give you a quick flavor of our comparable sales for the quarter, our non-California restaurants really continue to see strong comparable restaurant sales. Our non-California restaurants had comp sales increases of almost--of approximately 9% this quarter. You know, that's in addition to the double-digit gains they've seen, both in Q1 and Q2.

Some of our best performing comparable restaurant sales outside of California were our Summerlin, Nevada and Louisville, Texas restaurants which both had comparable restaurant sales of 16% and 15% prospectively. In our home court of California where we continue to do really well, in addition, our Laguna Hills and our San Jose restaurants had comparable restaurant sales increases of 10% and 11% prospectively.

As Jerry already mentioned, our company-wide average weekly sales for the third quarter increased almost 8% to approximately 94,600 per week. When you look at that, that's a result of the 5.3% comparable sales increase but also it means our new restaurants that are not in a mature base are doing well and really coming in above the mature restaurants. However, I do want to caution our investors that many of our new restaurants will open up at volumes typically greater than their expected mature run rate, particularly in our home state of California. 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.

Looking at our real estate pipeline for next year, as many as five to six of our new restaurants could likely have a significant honeymoon period based on their initial sales volumes. Our 5.3% increase in comparable restaurant sales for the third quarter is principally due to increased customer traffic, coupled with approximately 2.5% of menu pricing for the quarter. For those of you monitoring menu pricing, in November of this year, approximately 1.4% of menu pricing will roll off and be replaced with about 1.2% of menu pricing. This, coupled with our 1% menu pricing in this past spring, will result in about 2.2% of menu pricing impact through May of 2007. We anticipate the 1.2% of new company-wide menu pricing will really help us offset the upcoming increase in California minimum wage. I think, as many of you know, beginning January 2007, the California minimum wage will increase by $0.75 to $7.50 an hour.

Taking a look at the middle of the P&L, our cost of sales increased by 70 basis points to 26% of sales in the third quarter compared to prior year's third quarter. This increase was due to higher produce costs related to the summer heat wave in California, which had the unfortunate effect of damaging the lettuce crops. We also experienced temporary transition costs and inefficiencies related to our new distribution and produce suppliers.

As we mentioned on our last conference call, we have successfully entered into a new distribution agreement that would provide us with better supply chain leverage in new markets such as Florida and Ohio, and also provide us better supply chain opportunities in our current markets. The transition to this new agreement took place in late August and September and it resulted in incremental transition costs and inefficiencies.

I do want to mention that, as we continue to grow and open new restaurants, we may experience pressure in cost of sales related to the timing of new restaurant openings. As we have mentioned before, 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 restaurants, as our management teams become accustomed to optimally predicting, managing and servicing sales volumes typically experienced in our new restaurants. With that in mind, we anticipate openings four new restaurants in this fourth quarter, of which three have already opened. And as such, I would anticipate that, over the next few quarters, we will continue to see cost of sales in the upper 25% range.

Our labor and benefits during the second--during the third quarter decreased 150 basis points to 34.7% of sales from 36.2% of sales last year. This decrease is a result of improved productivity and leverage primarily in hourly labor as a result of our new toolsets. As we have mentioned, our new toolsets allow our managers to optimally manage the restaurants based on guest counts and traffic flows and not percentages.

Looking specifically at the fourth quarter, we should continue to see some leverage year-over-year in our labor costs. However, we will have the four new restaurants opening up in the fourth quarter and may incur some additional costs on a sequential basis related to these new restaurant openings.

Our operating and occupancy cost as a percentage of revenues increased 40 basis points to 19.5% from 19.1% last year. This increase is a result of higher spending on our facilities, facilities maintenance, kitchen in dining supply, and some other facility related costs compared to prior year and is truly a result of our deliberate decision to improve the quality of our facilities and improve the dining experience for our guests.

Our general and administrative expenses in the third quarter of 2006 increased to 8.3% of sales from 7.2% of sales last year. As we stated in today's earnings release, beginning with the first quarter of this year, we adopted SFAS 123R, share-based payment, which requires us to expense stock-based compensation. As such, including G&A expenses for the third quarter of 2006, it was approximately 425,000 of stock-based compensation, which equates to about 70 basis points of sales or 70 basis points in G&A. If we exclude the stock-based compensation, G&A on an apples-to-apples comparison increased 40 basis points to 7.6% of sales. And on absolute basis, excluding the 425,000 of stock-based compensation, our G&A increased to 4.7 million from 3.4 million last year. As we previously mentioned, this dollar increase is a result of additional expenditures associated with the continued infrastructure investment in our business, both field supervision and corporate support, our manager and training program and additional travel costs related to new restaurant openings and the field supervision costs related to those new restaurant openings.

As we have discussed in the past, our manager and training pipeline, which represents the costs associated with recruiting and training new managers, was fairly thin last year. As such, we put a lot of resources behind this pipeline and we're really playing catch-up this year so that we can optimally run our restaurants with quality execution from Day One. In fact, during the third quarter, we hired over 40 new managers and had over 70 people in our manager-in0training program. As part of this recruitment process and as Jerry already mentioned, we are in the final stages of structuring a meaningful performance-based equity incentive plan for our restaurant general managers, executive kitchen managers and field supervision.

As we have previously stated, the most critical success pipeline is the recruitment, retention, and motivation of our restaurant managers. We believe this program, which will consist of restricted stock units and have a five-year vesting and performance requirement, will not only allow us to recruit and retain top talent for BJ's, but will result in a better operational execution and lower management turnover expenses going forward. When you think about it, the cost is approximately $16,000 per restaurant on an annual basis, or roughly 0.3% of average restaurant sales. Just when you put that in perspective, the cost to hire a new manager is significantly more than the 16,000, so if we can reduce our management turnover, this cost will definitely pay for itself.

Since we will be incurring this expense for all of our 55 restaurants at the beginning of 2006, we would expect to incur an incremental non-cash compensation expense of approximately 880,000 for those 55 restaurants during fiscal 2007. If we open 13 new restaurants during fiscal 2007 per the expected timetable mentioned by Greg Lynds, then we would incur an additional 100,000 of non-cash compensation expense related to just those 13 openings. We believe, clearly, that the modest cost associated with this incentive plan clearly has a longer-term ROI profile in terms of motivating better operational execution and reducing the costs associated with restaurant manager turnover.

Just taking a quick look at our pre-opening expenses, which were 1.3 million during the third quarter of 2006, it was a little higher than last year. In pre-opening costs, we do have the FAS 13-1 pre-opening rent. As a result, we saw rent costs incurred of about 200,000 and we also had pre-opening costs for not only the two restaurants that opened in the third quarter, but we incurred pre-opening costs for our Bakersfield, Aurora, and Arlington, Texas restaurants that opened in October.

It's important for people to note, when developing their models, that we will now incur pre-opening expenses, primarily phantom rent, for a new restaurant as early as four to five months before a restaurant opened and therefore, quarterly pre-opening costs may have a greater variability from the actual number of new restaurants opened in the quarter.

As we look towards this fourth quarter, we anticipate opening four new restaurants of which we've mentioned three have already reopened. We also anticipate incurring pre-opening rent for two restaurants will open in the first quarter of next year.

Our interest income for the quarter of 321,000 was pretty much in line with last year's interest income of 369,000. Our effective tax rate for the quarter was 33.9%, bringing our year-to-date tax rate to about 34.2%. We anticipate that our effective tax rate should be between the 34% and 35% this year.

Turning to our balance sheet, we ended the third quarter just shy of 30 million in cash and investments in approximately 141 million in shareholder equity an no funded debt. Our CapEx through the first nine months of this year was approximately 41.6 million, which is primarily due to new restaurants that have already opened as well as the restaurants that are going to be opening in the fourth quarter, as well as we've already mentioned some construction for new restaurants that will be opening and 2007.

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 2% range. However, shorter-term results may be higher or lower depending on manufacturers, 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.

As we've previously mentioned on prior calls, our newer high-volume restaurants are beginning to drop in the comparable sales base. In fact, at the end of the third quarter, we had only 25 large-volume restaurants in our comparable sales base. Our newer, large format restaurants in many cases are already operating at capacity or are very close to capacity. Therefore, we expect our increase in comparable sales to be closer to our menu pricing, which will traditionally be in the 2% range. With only 25 large format restaurants in our comparable sales base, these new high-volume restaurants may have the effect of lowering our overall comparable sales from the 5.3% rate that we experienced in the third quarter.

Therefore, as we look out towards 2007, I would like to reiterate that our goal is to increase our top line by increasing our restaurant weeks by 20% to 25% plus some nominal comparable sales growth to maintain our restaurant level margins. Over time, we should begin to see leverage in our G&A once our restaurant support systems and infrastructure have been firmly put in place. As such, we would anticipate our earnings growth to basically reflect our top-line revenue growth next year with some upside potential depending on the progress of our key sales building initiatives for 2007 and excluding the incremental costs for introducing our new stock ownership plan for 2007. We believe that this is the right growth rate for a company-owned and operated model, especially given the operational complexity of a BJ's restaurant.

With that, I'll turn back to you, Jerry.

Thanks, Greg. We're going to wrap of our comments now and then take a few questions and we will stay on the line as long as we need to here. We'll stay on for a few extra minutes to take as many questions as we have.

We had very solid results for the third quarter in almost every key measure in spite of the challenges that are out there in the operating environment. Thanks to the hard work of all of our restaurant operators, we continue to enjoy strong sales for both our new restaurants and our established restaurants and that doesn't happen by itself. It's as a result a lot of hard work; it's a result of a lot of things being executed correctly. But having said that, we can and we will execute even better. We can never be satisfied with our operational execution in any aspect of our business.

Our leadership team remains highly confident of our ability to continue to execute our national growth plan as well as to execute all of the key initiatives that we've got. What we're trying to do here at BJ's is to make the transition from a good restaurant company that is growing to a restaurant growth company. They are two very different types of companies. The former type of company is just kind of satisfied to keep opening more of the same restaurants. Now, that's a lot of work in and of itself, but the latter company is focused on opening even better and better restaurants, and that's twice the work; it takes twice the amount of time. It's twice a stressful. It may take a little more money up on the front end, but that is the type of company that I think you've chosen to invest in in BJ's restaurants and we are committed to making that transition.

All great consumer growth companies or sales builders first and foremost and during 2007, again, we have got six major areas of sales building opportunities that we are going to be focusing on to keep our favorable sales momentum going forward. We're going to get our 11th restaurant open in Reno before Thanksgiving, so we will achieve our stated growth goal for the year. Greg Lynds mentioned that our pipeline for 2007 and even 2008 is coming together very nicely. We've got 22 signed leases or letters of intent already in-hand to support our planned capacity growth for the next couple of years. We strongly believe the best years for BJ's are yet to come. On behalf of Greg and Greg and myself, we appreciate your continued support and confidence.

So that wraps up our formal remarks. Now, operator, we will take some questions.

(OPERATOR INSTRUCTIONS). Jeffrey Farmer, CIBC.

Good afternoon, guys. Now that you've collected the majority of your learnings from Project Irvine, can you talk a little bit more about your plans for potentially retrofitting the existing units?

We collected all of those and what we're doing right now is going through our capital budgeting process and trying to identify which restaurants would get some of those initiatives first. It will probably be phased in over a couple of years. Some things we just definitely have to do that were part of Project Irvine. We need to move to LCD TVs. I think, as you guys all go out there and dine at different restaurants, you see the old TVs, it just doesn't look really that nice any more. We wanted to rid of some of the carpets in our restaurants that just really have some smell that are not nice. That honestly--I think the new hard floors look a lot better. So we're going to kind of take it in phases. We are also going to identify what I would call probably a couple of different Project Irvine phases where some restaurants will get a little bit more in-depth, some will get a little bit less. But until we get through our final capital budgeting, Jeff, we just don't have that exact number towards the dollar or which restaurants will get it.

Okay, that's still helpful. In terms of your take-out sales initiatives, what does this mean in terms of potentially additional labor or any type of structural change or physical change to the restaurant itself?

Well, I think that there's going to really be the need for any major structural changes. You know, most of our restaurants are fairly large for casual dining restaurants, anywhere from 7500 to 8500 square feet. We already have a substantial amount of square footage devoted in our facilities to carry out business. Frankly, that's some of the most unproductive square footage in our restaurants. So we have the physical capacity. We have the kitchen capacity. We're going to more aggressively market, sign our restaurants. We're going to work with our developers to get dedicated parking spots like most of the other mass-market casual dining operators have with their curbside and tail-gating and other programs. So this is an area where, through better execution, better promotion, better signage, I believe we're going to be able to really drive our business through these channels.

Right now, in most of our restaurants, we don't have any exterior signage whatsoever as to our carry-out activities and capabilities. We have a lot of dedicated doors specifically in all of our new restaurants, but we really have not aggressively signed or promoted this particular channel. When you really consider our menu with our pizza and our salads and it's incredibly strong for carry-out business. So this is an opportunity that's kind of been under-delivered at BJ's, particularly in our large-format restaurants for several years. We have got several key initiatives underway that are not capital intensive, not labor-intensive, and have the opportunity to be pretty darn productive.

Okay. Then, just drilling down the model a little bit, couple of questions for Greg, Greg Levin that is. Stock-based comp, I think you guys have been guiding to about 2.1 million for '06. It looks like it's about 1.3 year-to-date. Is that 2.1 number still good or is it going to be a little bit lower than that?

We have been pretty consistent now with that 225 a quarter, so you can probably kind of assume around that 425 for the fourth quarter as well, which would put you more at the 1.7, 1.8. That is probably about right.

Okay. Then you gave pretty specific guidance in terms of how the new restricted stock plan will impact '07 expenses. If you put the total stock-base comp sort of picture together, what does that look like in terms of dollar terms, on EPS terms, in '07? Total stock-based comp--restricted stock plus one, two, three, everything in there?

I don't know if I have a total answer for that. I can probably help you a little bit more off-line, but I would assume, just offhand, Jeff, that we're going to have the current compensation expense that we have now, which is kind of at that 1.7 or 1.8 that you talked about. We will have this restricted stock plan, our Gold Standard Stock Ownership Plan that we talked about. So those two things kind of get layered on towards next year.

Final question--I apologize for dragging on here, but your diluted share count, it looks like it fell sequentially a little bit from the 2Q. Can you explain that?

Some of that is related to the stock price and how the (indiscernible) restock method works in regards to both now under 123R and then again the stock price.

Great. Thank you, guys.

Larry Miller, RBC Capital Markets.

I just want to follow up on the G&A question. There is so much noise going on year-to-year here with the FAS 123R and all the investments you are making in managers and now the restricted stock units. Are we going to assume that, on a growth basis, the G&A will continue to grow in excess of sales or how you think about it in the next year or so? Then, when might it grow at a rate lesser than sales, Greg?

Well, I think, in 2007, as we put together our final approved budgets and initiatives for next year, we would expect to see the rate of G&A growth be less than the rate of revenue growth. Now, we're going to have to take a look at the impact of the stock-based compensation, the restricted stock units. However, not much of that is really going to hit G&A. Most of that is restaurant labor because that's related to restaurant managers. The only piece that's going to hit G&A good will be the field supervision component for our area directors and our culinary training managers, which is a much smaller component of that. Greg can provide some of that detail a little bit later.

But I would expect us to begin to see G&A leverage next year. We made certain investments to strengthen the foundation of the business this year. We really had to prime our restaurant manager pipeline a little bit stronger and a little bit deeper this year, particularly towards the last six months, to get ready for next year's growth. I believe we will be in an excellent position with respect to that pipeline by the end of this year. So it is a personal goal of our leadership team to get leverage on that number next year.

Great. I just have two other quick questions. How does the accounting work for that [RSUs] because looks like it's a five-year plan, Greg? Is it an accrual base? Does that get reversed if they don't complete the plan?

That's correct. If we look at that 16,000, that's the annual compensation expense, but technically, it is being amortized. You can take the 16 times 5 and figure that's kind of what the overall impact is to a restaurant over that five-year period, which is the plan.

The final question, just since you are a California-based company and clearly it looks like some of the real estate prices are coming down there and you have a lot of other pressures in that (indiscernible) insurance rising, and minimal wage increasing, the California stores, you pointed out a couple are doing well. How are they all holding up relative to the past couple of quarters?

Well, all of our California, what we call our home court restaurants, continue to be our shining stars among all of our--all of our restaurants are stars, but they happen to be the shiniest ones in terms of absolute sales productivity. Even though a lot of them are going through honeymoon periods, we do expect them to settle in at sustained sales rates in excess of where we pro forma-ed them internally. When we do pro formas, we kind of target at least a 30% return on BJ's capital employed and a 25% return on total capital employed in these restaurants. I believe that all of our California restaurants will probably come in north of our internal targets. So we're very, very pleased. In fact, we've been extraordinarily pleased with all of our California openings this year.

Great. Thank you guys.

Mike Smith, Oppenheimer.

Good afternoon. Just a couple of modeling questions I guess. From what I'm gathering here, the Gold Standard would add about 30 basis points to your labor cuts?

That would be about right. After the call, I can talk to you in regards to how much of it is probably restaurant labor versus a little bit of it will be in our G&A number. But overall, from a modeling, let's say you put it on a separate line, you're going to add about 30 basis points or at the cost we just discussed.

The toolset that you put in place in the quarter, it seems to have had a decent impact on your labor rates. Is that--is the design kind of to have that offset this new plan?

Well, I can tell you that, over the long-term, our intention was certainly not to add another 30 basis points of expense onto the operating side of our P&L and not get some type of a return, in terms of either better execution within the four walls of the restaurant or lower G&A expenses related to manager recruitment and training. So, that is a longer-term opportunity for us and I believe we're going to get that return. I can't tell you how quickly that's going to come but obviously when you kind of consider 30 basis points of additional expense related to the plan just by itself, we felt like that had a reasonably low breakeven hurdle rate with respect to all of the opportunities that we've got in front of us. So, that's kind of how we thought about it.

What has your management turnover been recently, let's say in the last 12 months?

Our general manager turnover has been very, very low; it's been less than 5%. Those are the leaders of our individual restaurants, but when you look at the overall level of management, each one of our restaurants averages between, say, five and seven total managers. That turnover has been in the high 20s, which is average turnover for the restaurant industry. Unfortunately, that's kind of like having--I'm 55 years old and I've got high--I've got average blood pressure through for a 55-year-old guy. You won't have average blood pressure for a 55-year-old guy. So you want to have lower-than-average blood pressure and you want to have lower-than-average turnover.

So hopefully, with a lot of these initiatives that we're rolling out plus some other things that we're doing with respect to compensation and recognition and quality-of-life and staffing, I think it's reasonable to expect our turnover for the overall management group to get closer to 20%. I don't know of many of chains--casual dining chains that have total manager turnover less than 20% these days.

Okay. Are all of those five to seven people at each unit going to participate in the Gold Standard or just the GM, kitchen manager and the field supervisors?

Does the latter right now. For all of the rest the managers in our restaurants, we pay competitive salaries and, as I mentioned earlier in my comments, earlier this year, we rolled out a new balanced scorecard incentive program that gives all of those managers a quarterly opportunity to really drive their cash compensation in a meaningful way based on the metrics in that system. I think their opportunities are greater, based on performance, under the new balanced scorecard plan than they previously were. But this is a pay-for-performance type of company here.

The new brewery, is there a dollar amounts that the 20% would equal to? I guess that's basically your beer cuts.

Yes, there is. I don't think we've really disclosed what our internal production cost per barrel of beer is. So, we'll have to think about that disclosure going forward from a competitive perspective. Yes, there is a dollar amounts to it and as we begin to realize it, I believe that we will probably talk a little bit more about it after we've made the transition during the first quarter.

Thank you.

One more question, operator and then we will take any other calls at our office.

Destin Tompkins, Morgan Keegan.

Good afternoon, gentleman. I just want to ask you about cost of sales. Obviously, it sounded like there were some maybe onetime items that affected cost of sales this quarter. How should we look at Q4 and '07? Maybe give us a little bit on a commodity outlook there if you can.

Yes, a couple of things--going into this third quarter, we definitely had some of those kind of nonrecurring costs in there related to the transition over to the new distributors I guess or distribution suppliers, primarily outside of our California market.

Taking a look at the commodities market, most of our contracts start coming out in this kind of October, November timeframe. I would say, generally speaking, it is going to be fairly flattish. There is going to be some pushes and pulls. We are seeing maybe a little bit higher on chicken, but we are seeing a little bit less on a couple of other areas. I do know that, as we continue to grow, we should be able to get some leverage just on our pure size. That's really where our supply chain group is going after. As I think about both the fourth quarter and next year, I really start to see that number kind of where we were running this year and that's kind of in that upper--middle to upper 25% range. That doesn't take into any factors such as the brewery coming on line and being able to rebalance maybe our brewery production and getting some of that additional efficiency there.

Okay great. Another question on labor--it sounds like you have adequately I guess prepared for the minimum wage increase in California. Can you help us with I guess how you look at some of the other states like in Arizona or Colorado where you have some stores where there's some pretty significant increases in the tip wage in those states.

Well, we've only got a handful of restaurants in those states right now, so they're really not material to our overall results. We will approach them similar to the way we do in California. We will have to consider appropriate menu price increases based on what we think the market will bear and at that particular time, if those particular initiatives do get passed. We do have, as Greg mentioned, about a 1.2 effective menu price increase that's going to be effective throughout our entire company in the middle of November. Our next menu change will be in May, so we will analyze our margins; we will look at the legislation in those states and we will make our pricing decisions at that time.

I think Greg might have also mentioned we've got a couple of other things working in our favor with respect to dealing with increased minimum wages. Number one, we've got a lot more pricing power in the BJ's concept today based on a lot of the quality enhancements that we put into the concept recently. With an average check of around $11 to ask guests for another 1 or 2% is not like asking a concept with an average concept check of $17 or $18 for a little bit more money. We've also been offering more to our guests with respect to the quality of our execution. So we've got that advantage.

Then the other advantage that we have are opportunities to drive productivity and efficiency with our new toolsets and not only the ones that we haven't rolled out of our comparisons until the first half of next year but also some of the new ones that we're in the process of testing.

So I think the best answer is we will take a look at all of those factors taken as a whole. We will look at the legislation. But I think we've got enough flexibility to react to those minimum wage increases probably more so than a lot of companies that are positioned like we are.

Great. One more quick one, if I may? On the cost of development, it sounds like you guys have done an excellent job of selecting some great real estate sites. I'm just curious if you can comment on the trends you are seeing in terms of either real estate costs as well as construction costs.

We will let Greg Lynds comment on this one. Greg?

Yes, I think, overall, construction costs, we've recently seen lumber down possibly 10%. Concrete and steel are pretty level. Asphalt has kind of leveled out. Now considering that, that is recent here for 2007. When you go back to '04 and compare to '06, we had some pretty significant both raw material increases as well as the labor, the labor side had been increasing.

Regionally, we are seeing costs in California and Florida about the same in terms of construction costs. The Ohio Valley and Texas seem to be quite a bit less than what we are seeing on both coasts.

Great. Thanks, guys.

Okay, thank you. That concludes our questions and our call, so please call us at our offices if you have any further questions. Thank you.

This concludes today's conference call. You may now disconnect. Have a wonderful day.