BJ's Restaurants Inc (BJRI) 2006 Q4 法說會逐字稿

Good afternoon. My name is Lindsey, and I will be your conference operator today. At this time, I would like to welcome everyone to the BJ's Restaurants' fourth quarter 2006 results conference call. [OPERATOR INSTRUCTIONS.]

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

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

After the market closed today, BJ's Restaurants released our financial results for the fourth quarter and full year of fiscal 2006 that ended on January the 2nd, 2007. And if you haven't seen our press release today, you can view it on our website, that's www.bjsrestaurants.com. And, by the way, if you haven't looked at our website lately, we did put up a new site about a month ago, so if you get a spare minute, take a look at it, I think you'll be very pleased with the upgrade and overall quality of our site and a lot of the additional information that we've added.

I want to welcome everybody to our call today. I know that there are five or six other restaurant companies that released earnings today and it's a very busy day, so thank you, all, for being on our call.

Our agenda today will be as follows: first, I'm going to give a brief business and operational overview for the fourth quarter and the full year of 2006. I'll also briefly cover our key initiatives for 2007. Greg Lynds, our Chief Development Officer, will then provide an update on our new restaurant development pipeline, and then Greg Levin, our CFO, will briefly review our consolidated financial statements, our balance sheet, and our liquidity position as of the end of the fourth quarter. And then we'll be happy to take some questions. We'd like to wrap-up the call in about 45 minutes.

So before we get started, however, I've got to make our standard cautionary disclosure with respect to forward-looking statements, so 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 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, which is February the 15th, 2007, and 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 [policy]. We refer our investors to the full discussion of risks and uncertainties associated with forward-looking statements contained in the Company's filings with the SEC.

So that concludes our cautionary statement, and now let's get into the information. As we indicated in our press release today, our Company reported what we believe to be very outstanding results for the fourth quarter in spite of a very difficult sales and operating environment in general for most casual dining restaurant operators. Compared to the same quarter last year our revenues increased a strong 34% to $65.9 million. Our net income increased 22% to $2.8 million, and our fully diluted net income per share increased 10% to $0.11.

Now, as we noted in our press release today, like most companies, we did adopt the new financial accounting standard this year, SFAS 123R, share-based payment, during the first quarter of this year. SFAS 123R requires us to recognize stock based compensation on a go-forward basis. The results of our operations in prior periods were [not] restated for this new accounting standard, so on a 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 fourth quarter this year would have increased approximately 41 and 38%, respectively. Similar to our earnings releases for the prior quarters. this year, we added a footnote to our press release today that does provide a little more detail on the individual components of our stock based compensation expense.

Our leadership team was also very pleased with our full year results for fiscal 2006. For the full year revenues went up 34% to $38.9 million. Our net income increased 18% to $9.8 million, and our fully diluted net income per share increased 14% to $0.41. Again, when considering the pro forma impact of SFAS 123R and the results of fiscal 1995 then our net income and fully diluted net income per share for 2006 would have increased approximately 52% and 46%, respectively. Now, we think those are outstanding results, particularly in view of one of the most difficult operating environments in many years for most casual dining operators.

Before we resume commenting on the fourth quarter, I'd just like to take a minute and summarize some of our key accomplishments as a business during the past year. You know, we're sales builders first and foremost here at BJ's, and that's always going to be our unwavering focus. Our comparable restaurant sales increased about 5.8% during the full year, when many national casual dining restaurant companies and the grill and bar or American traditional segments really struggled with [flat] to negative comparable sales comparisons for a variety of reasons.

We believe that our favorable comp sales results were primarily due to two general initiatives that we've been working on at BJ's. First, the ongoing improvement in the overall quality of our popular differentiated restaurant concept, coupled, secondly, with the ongoing improvement in our overall operational execution, particularly with our new toolsets. And we believe that as a result of these quality improvements that we've deliberately made for the BJ's overall dining experience over the past year or so, our guests have accepted our modest menu price increases during the year.

But we did achieve our capacity growth goal for the year by opening 11 new restaurants, and we increased our total restaurant operating [weeks] by about 24% during the year. And we also set new opening week sales records along the way. And not only did we increase our overall capacity by 24%, but we also increased our consolidated average weekly restaurant sales and our consolidated restaurant operating cash flow margins. So we just wrapped up the most successful holiday season in BJ's history. We had one of our southern California restaurants at an all-time new BJ's single day sales record on the Friday before Christmas, coupled with record sales of gift cards Companywide.

During the past year we successfully rolled out our automated state-of-the-art kitchen display system, our automated labor scheduling and analysis system. We rolled out a new career development program for our restaurant managers. We upgraded all of our central kitchen systems throughout the year. We recruited 174 new restaurant managers to join our team. We increased the overall quality of our management talent along the way. We successfully transitioned our restaurant supply chain to a more leverageable food distribution arrangement during the second half of the year. We're well on our way to transitioning to a more leverageable beer distribution arrangement, as we speak. Our home office support team also significantly strengthened its abilities to support our growing base of restaurants and brewery operations.

We built and opened a 15,000 barrel a year brewery in Reno, that's going to get us down the road at least another year with respect to satisfying our handcrafted beer requirements. We structured and just rolled out a new meaningful equity incentive program for our key restaurant and brewery operators that should help us recruit even better restaurant management talent and drive overall performance. We opened--we implemented a new [balanced] scorecard cash incentive plan for our restaurant and brewery operational teams, and that's driven by specific and objective metrics with respect to great restauranteering and great restaurant business execution.

We tested and are about ready to launch our brand-new logo and brand identify for BJ's. We designed and are just about ready to unveil a more contemporary look for the BJ's restaurant buildings, what we internally call "BJ's 2010" in Norman, Oklahoma that ought to open this spring. We pushed the envelope for the BJ's concept with our Project Irvine test, for those of our investors and listeners that have visited our restaurant at Irvine, you can see some of the experiments that we did with respect to overall facility and operational quality. We've learned a great deal about how to add more "wow" to BJ's with respect to better facilities and operations. We raised another $61 million of new equity capital to help finance our planned future growth. And last, but not least, we were able as a business for the first time to offer a group health insurance benefit to qualified hourly team members, which happens to be my personal favorite accomplishment during 2006.

So, you know, that's quite a list of key accomplishments during 2006. We've been extraordinarily busy here at BJ's, building a wonderful business. I'm sure I forgot a few things on my list, but just to recap one more time what all of this hard work and all of these key initiatives resulted in during the year from a financial point of view.

For the full year comp sales up 5.8%, growing over a tough 4.6% increase. Our average weekly sales per restaurant increased 8.2%, reflecting the strength of our new restaurant openings and our same store sales. Our estimated [four wall] restaurant cash flow margins increased 50 basis points for the year to 20.1%, again reflecting our ability to preserve and improve our restaurant operating margins as we grow. Our total restaurant operating weeks increased 24%, reflecting the successful execution of our development plan for the year.

Our total revenues increased 34%, reflecting solid increases in both our overall sales capacity and our unit level sales productivity. And, finally, our net income and diluted net income per share went up 52% and 46% for the year, respectively, on a SFAS 123(R) comparable basis.

Now those are truly outstanding results in almost every measure, and they were achieved, once again, in a very difficult operating environment in general for most casual dining restaurant operators. So really all we can say is thank you to our colleagues and our management team, to our restaurant managers and their teams, our brewery operations team, our supplier partners, and, of course, our stockholders for supporting us this year and for helping us to achieve these truly outstanding results.

You know these achievements were largely the result of, first, having a good plan and, number two, executing a good plan, together as a team. We worked real hard to strengthen our foundation to support the future profit and growth of our Company last year. And having said that, you know, we're never satisfied with the status quo in any aspect of our business and operations, and I'm going to cover our 2007 key initiatives in that respect in just a few minutes.

Back to the fourth quarter, our 34% increase in revenues was driven by an approximate 24% increase in total restaurant operating weeks for the quarter and an approximate 8% increase in average sales per operating week, which does include the impact of a stronger than expected 5.5% increase in our comparable restaurant sales that successfully hurdled a 5.3% comp sales increase for the same quarter last year. And for the fourth quarter our reported estimated restaurant level operational cash flow margins also advanced quarter-over-quarter, they increased about 60 basis points to about 19.7% for the quarter.

Our 5.5% increase in comparable restaurant sales for the fourth quarter represents BJ's 41st consecutive quarter of positive comparable sales comparison since the Company's IPO, back in 1996, and again as most restaurant investors know, we achieved our strong comp sales increase in spite of a pretty difficult operating environment out there in general.

But we think that our consistent strong sales performance for the past ten years plus is certainly a strong testimonial to what we call the "broad approachability and sustained popularity of the BJ's restaurant concept," which has been evolving for now 29 years. We believe that BJ's offers much more quality and value in the overall dining experience than what we call "the mass market casual dining concepts," what they do, and with our average guest check at about $11 it's really actually the same or even lower than many of the mass market casual dining competitors out there, that gives us a tremendous advantage. And as we move forward into 2007 most of our key initiatives are designed to further improve our quality and differentiation advantages over the mass market players in our segment.

While we were very pleased with our solid comp sales increase for the quarter and, as we mentioned in our press release, while our comp sales comparison for the first six weeks, quarter to date here, also remains [up] very nicely at around 5%, we do expect eventually at some point our annual comp sales comparisons to eventually track closer to our long-term run rate expectation, in the 2 to 3% range or so, just reflecting our menu price increases. However, depending on the progress of the sales building initiatives that we've targeted, everything else being equal, we believe that we have an opportunity to continue to do a little bit better on that measure. Greg Levin will comment on our 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, our initial sales volumes for our four openings during the fourth quarter, we opened up in Bakersfield, California, Arlington, Texas, Aurora, Colorado, a suburb of Denver, and Reno, Nevada. Those sales volumes remain right in line with our expectations and really help to drive the increase in our average sales per week, our statistics for both the quarter and the fiscal year.

We think that the stronger sales volumes for most of our new restaurants is really a direct reflection of three factors. First, the broad consumer appeal and perceived value of the concept, itself. What we, again, internally call "approachability," coupled with better site selection under Greg Lynds' leadership and our gradually improving operational ability as a result of the great operational theme that we have put into place, to more correctly and efficiently execute the concept.

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 we've historically opened most of our restaurants, but we've also proven our ability to drive strong sales productivity in markets with average household incomes. And, you know, we're not aware of many traditional casual dining concepts that have the degree of versatility in their everyday appeal and approachability to different household income levels as BJ's does. So we think this could be an attribute that is somewhat stronger for our concept and could also be reflected in a higher number of BJ's Restaurants that could ultimately be developed domestically over time.

And now, speaking of new restaurant development, I'm going to turn the call over to Greg Lynds for his perspective on our 2006 new restaurant development and our pipeline for 2007. So, Greg, go ahead.

Thank you, Jerry. As we mentioned in our press release today, our 2006 new restaurant development growth targets were achieved. For 2006 we increased operating weeks by approximately 24%, and opened 11 new restaurants. Our construction development team did an outstanding job in 2006 at delivering all of our new constructed restaurants, so our [operations seems] pretty much evenly throughout the year, and this will be our principal objective going forward.

Moving on to our targeted 2007 new restaurant development plan, we currently expect to open as many as 13 restaurants this year and increase our total operating weeks by approximately 20 to 25%. For 2007 we already have a built-in increase in restaurant operating weeks of about 12% that results from the carryover impact of partial year 2006 openings. As of today all of our potential 2007 openings have been identified, we've secured the signed leases, purchase agreements, or letters of intent, and seven of those restaurants are already under construction. As such, we are well on our way with identifying specific sites for potential 2008 development, with ten signed letters of intent already in hand.

As we mentioned in our last conference call, our 2007 restaurant openings will include our first restaurants in central Florida and the Ohio Valley, which we believe have strong potential for the BJ's concept. We are currently under construction on two sites in the Tampa market, one in Orlando that is across the street from the highly successful Millenium Mall, and one in Columbus, Ohio that's on a [pad] site at the also highly successful Polaris Mall.

Our 2007 development plan also calls for several new restaurants in our home court or core market. This will allow us to prudently balance our growth 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 in our new market.

Overall, our 2007 and 2008 development pipeline remains in excellent shape, and we continue to be very pleased with the quality of the new sites in our pipeline. Our internal goal is to maintain at least 18 months of forward visibility for specific new sites and our development team worked very hard to stay on target with that goal.

As we all know, it's difficult to precisely predict the actual timing of our 2007 new restaurant openings due to many factors that are outside of our control, including factors under control of the landlords, our contractors, and municipalities. With that in mind, as of today, we currently expect to open as many as 2 in mid March of '07, as many as 4 openings in the second quarter, as many as 3 openings in the third quarter, and as many as 4 openings in the fourth quarter. Again, our quarterly opening schedule can fluctuate due to many factors, and we'll keep you advised of all future changes on our quarterly conference calls.

Lastly, our internal real estate design and construction teams are staffed with strong professionals. We have a solid network of outside engineers and general contractors that are of national standing as our partners. We're all confident here that BJ's should have many years of solid new restaurant growth to come.

Jerry, back to you.

Hey, thanks for the update, Greg. You know, we've only got 55 restaurants open today in only six states, and we continue to believe there's room for at least 300 BJ's restaurants domestically, and we continue to plan to increase our annual productive capacity by 20 to 25% for the next few years or so. Now, having said that, we're going to maintain the discipline to execute our growth plan in a very careful and controlled manner and with the right operational talent, support, infrastructure, and modern toolsets in place.

Now, for our business, 2006 was a year in which we really focused hard on key initiatives to strengthen our ability to process the business currently being offered to us in a more productive, efficient, and leverageable manner, while simultaneously improving the overall quality of the BJ's dining experience.

Moving forward now, into 2007 we're going to focus our key initiatives on building more business now that we're better positioned to process it. As we mentioned before, all of the great American consumer growth companies were sales builders first and foremost, and that's something that we are always going to focus on here at BJ's.

So as we kind of look at our key sales building initiatives for next year, we've got six areas of opportunity that I'd like to cover--first of all, we're really going to focus on building our off-premise channel sales. Our off-premise sales are only about 4 to 5% of sales in our larger restaurants. We think they should be closer to 10% of sales, in our opinion, in those restaurants over time. We are in the process of retooling our entire off-premise sales channel, from packaging and merchandising, to signage, to technology, to operational procedures in order to essentially re-launch our entire off-premise sales program before the end of June throughout our Company.

Over the next few years, if our initiative proves to be successful, we would expect our off-premise sales to gradually build to the 10% level. We'd also expect a good portion of those sales to be incremental sales, again, based on the experience of the curb-side programs that were rolled out and are currently offered by our mass market competitors.

Second, we're going to build our large party channel sales. Our building layouts and menu offerings really facilitate large parties probably better than most of our competitors, clearly better than the mass market competitors that we have. We're in the process of retooling all of our buffet offerings and our operational procedures, our reservation procedures to essentially re-launch our large party sales program Companywide by the end of April.

Third, we're going to add productive capacity to some existing restaurants. In many of our restaurants we have outdoor patios that we can enclose to get year-round productive use of those seats, and we can also add some patios to some restaurants, high volume restaurants in some favorable climate areas. We have four of those patio projects currently in design, and we expect to get those done before the end of the summer.

Number four, we're going to be rolling out two additional toolsets, what we call "quality fast toolsets." We're going to be rolling out an automated table management system that's already been tested and it's in place in seven restaurants. We're also going to be rolling out a new server productivity analysis to help us better schedule our most productive servers in the most productive stations in each restaurant.

Five, we're going to continue to improve our overall quality points of differentiation through the implementation of what we call our "Project Irvine image enhancements" and our operational improvements. We're going to be including upgraded china, silverware, and glassware, among other things in our restaurants. We're going to have a new logo and brand identity rollout, a new menu format, and a planned upgrade in all of our beverage programs.

We're also going to implement a national marketing calendar for the first time. Again, our promotional calendar will not involve discounting, it'll be 100% focused on top-of-mind awareness building for our signature projects and products.

Excuse me just a minute. I've got a lot to say today, and I think I'm wearing out my vocal cords.

And, number six, I think I covered our national marketing talent. You know, we've enjoyed ten straight years of positive comparable sales momentum, and it's absolutely essential to keep that sales building at the top of our initiative list for 2007. You know, as long as we have the sales, we have the opportunity to optimize the bottom line results for our business.

Our key initiatives for 2007 will be focused on talent building and margin building, which among other things will include the roll-out of a theoretical food cost system by the end of this summer. While we don't think that our restaurant kitchens currently have an excessive amount of waste, the new system will help us to more easily identify specific issues quickly and will also help us to bring better discipline to our kitchen operations.

I'd like to turn the call over to Greg Levin here, while I go get a little bit of water, and he'll finish up my part and roll into his part. So, Greg, take it from here.

All right. Thanks, Jerry.

Also, in 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. Reno is now our largest capacity brewery with about three times the productive capacity of our current large breweries here in California. The ramp-up of production of operations in Reno is going according to plan, and we expect to be at full production in Reno by the end of the first quarter

As we've previously noted, Reno provides us the opportunity to rebalance all of our internal beer production activities to take full advantage of the economies of scale offered by the Reno brewery, and this will help us further reduce the average [delivered] production costs per barrel of beer to all of our restaurants. Based upon our preliminary modeling this cost reduction could prove to be as much as 20%, while we currently expect to begin seeing that benefit during the second half of 2007, we are currently in the process of completing this rebalancing during this current quarter. Based on our ongoing evaluation, it may make sense for us to decommission or mothball as many as four of our existing small capacity, inefficient legacy breweries.

In the brewing component of our business model we believe that maximum economies of scale and maximum quality and consistency can be achieved by carefully concentrating our brewing operations in fewer, higher capacity breweries, gradually over time, by also developing strategic contract brewing relationships. This has been and will continue to be our brewing strategy during the foreseeable future.

In addition to opening as many as 13 new restaurants this coming year, we have a lot of exciting initiatives to work on that should advance our ability to be both great restaurateurs and great restaurant business people. While we are unable to precisely predict the amount and timing of any specific sales or operational margin benefit from each initiative, we are confident that taken as a whole our initiatives will provide us with the best opportunity to protect and preserve our [four-wall] restaurant operating margins over time as we grow and profitably gain additional market share.

You know, one other comment, is we really want to talk about our G&A expenses and where they are for the quarter and YTD, and they reflect not only the impact of SFAS 123R, which is our stock compensation expense this year, but also some absolutely necessary investment spending for our restaurant manager recruiting, training, and development programs, as well as some technology based programs to help us better execute this concept.

While we have many capable restaurant managers already on our team, for which we are very thankful, we needed a stronger bench to help us improve our overall execution in our established restaurants and really to support our future growth, particularly in our new markets, such as Florida and Ohio, that are further away from our home court. We have made some upfront investments in stronger restaurant managers, for which we expect to earn a good return on investment over the long run.

And, 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 growth. The critical challenge for us in our operating model is really to recruit enough high quality restaurant managers to join our team and to correctly execute our concept in a very consistent manner.

At the end of the day we can only grow as fast as we can recruit, train, develop, award, and retain great restaurant managers, and that is a principal focus of our management team. Our recruitment model calls for approximately 235 new managers to join us this coming year, and that's up from the 174 managers that joined us last year. And that's a huge investment for our management team, both in time and money. Now, in our business model it is very difficult to be successful if you save your way to success. We need to not have that mentality when building a restaurant management pipeline.

Let me then just jump real quick into our fourth quarter highlights here, and I know Jerry touched on some of them, but let me just reiterate a couple key points here. First is our total revenue for the fourth quarter, as we noted, they increased approximately 34% to $65.9 million from $49.3 million in the prior year's comparable quarter. This increase is a result of 24% more operating [weeks] which is a result of the 11 new restaurants we opened this year and a full quarter of operating [weeks] from the three restaurants we opened in the fourth quarter of 2005, coupled with a strong 8.2% increase in our average weekly sales, which was driven by the comparable restaurant sales of 5.5% and the stronger than anticipated sales levels from many of our new restaurants.

Just to give everyone a quick flavor of comparable sales for the quarter, our non-California restaurants have comparable restaurant sales for the quarter of approximately 9% and finished the year with comparable restaurant sales greater than 10%. Some of our better performing non-California restaurants for the fourth quarter were our Summerlin, Nevada restaurant, which saw comparable restaurant sales increase of 15%, and our Willowbrook, Texas restaurant in the Houston area, which also had comparable restaurant sales just north of 15%.

When looking at the first six weeks of 2007 our non-California restaurants really continue to show strong comp restaurant sales. In our [home court] of California our Oxnard restaurant, which is now four years old, had comparable restaurant sales increase of 8%. And our West Covina restaurant, which is now six-and-a-half-years old, had comparable sales increases of over 11% for the quarter and almost 7% for the entire year.

And really you get--the ability to get these types of comparable restaurant sales out of our mature restaurants is a testament to the restaurant toolsets that we put in place in 2006. You know, as Jerry mentioned, these toolsets were designed to be able to process the business currently being offered to us in a more productive, efficient, and leverageable manner, while simultaneously improving the overall quality of the BJ's dining experience.

In particular, we have talked about our kitchen display system, which has really allowed us to reduce ticket times and improve the quality of the product [inaudible]. Our 5.5% increase in total restaurant sales for the fourth quarter is principally due to increased customer traffic coupled with approximately 2.5% of menu pricing for the quarter. And for those of you monitoring menu pricing, we have approximately 2.3% of menu pricing currently on our menu. You know, as we've stated before, our goal is really to try and limit menu pricing only to the amount necessary to protect our margins based on inflationary costs.

Looking at 2007, we are operating in numerous states that have increased their minimum wage, including California and Nevada and Colorado, to name a few. As such, in March we will begin rolling out a new menu format that will have a more contemporary look and design, and we have been testing in two restaurants during this past year. The food and beverage offerings are the same, but the menu format, itself, has changed. The new menu format will have some additional pricing in the middle 1% plus range to offset some of the minimum wage pressure we are experiencing. And really, in effect, all we're doing is taking our typical 1% menu price increase, which is usually planned for our midyear menu update in May, a few months early. So after that, our next menu price increase will be considered with our November menu.

While we are extremely pleased with the strong initial openings of many of our new restaurants, which resulted in the approximate 8% increase in weekly sales average, I do want to caution investors that many of our new restaurants will open up at volumes typically greater than they're expected mature run rate, particularly in our home State of California. In 2006 we opened 5 of our 11 new restaurants in California, or approximately 45% of our new restaurant openings last year. In 2007 we anticipate opening another 5 in California, or approximately 38% of our new 2007 openings.

In addition, as Greg Lynds mentioned, we'll be opening up 3 restaurants in Florida and 1 new restaurant in Ohio this year, which will all be new markets for BJ's. And as with any new market, we anticipate for modeling purposes that those restaurants will open up at sales volumes below the volumes in our home court's established markets where we have had more time to build a reputation and brand. It usually takes awhile for new restaurants that are not supported by a large media or marketing budget to gain traction and become part of the guests' regular dining rotation. As such, for 2007 we are currently anticipating that our average weekly sales volumes and comparable restaurant sales growth will be a similar range experienced during 2007.

Now, looking at the middle of the P&L, our cost of sales decreased by 40 basis points and really put us back to the 25.6% range, which is where we were in some of the prior quarters, really prior to some of the transition costs that we incurred in Q3 as it related to our new distribution and produce suppliers.

You know, I do want to mention that as we continue to grow and open new restaurants, we like all casual plus or premium casual dining restaurants that have a more complex menu with many prepared from scratch menu items, may experience pressure in cost of sales related to 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 operation, versus our mature restaurants, as our management team become accustomed to optimally predicting, managing, and servicing sales volumes typically experienced in our newer restaurants.

You know, looking towards 2007 the majority of our commodities are under contract, and on a total commodity market basket, they are contracted at pretty much the same overall price of 2006. Of course, some of our fresh commodities, such as certain produce and dairy items, are not contractable over long periods of time. I would anticipate over the year as we implement our new theoretical food costs and complete our brewery rebalancing that we should get a gradual improvement in cost of sales on a year-over-year basis, beginning sometime later in the second quarter.

Looking specifically at the first quarter, I would anticipate a little bit of cost pressure, primarily related to produce resulting from the January cold spell in California. Unfortunately, some of our produce cannot be contracted and the quality of certain produce items can be sub par, particularly in the winter months, which result in lower yields of those products which drive-up produce costs.

Additionally, we are still ramping up the production of our Reno Brewery, and will have some transition related inefficiencies related to the rebalancing of all of our brewery activities during the next couple of months. Once that work is completed, however, we expect to begin realizing a reduced production cost per barrel of beer during the second half of this year.

Our labor and benefits during the fourth quarter decreased 60 basis points to 35.1% of sales, from 35.7% of sales last year, and this decrease is a result of improved productivity and the leverage primarily in our hourly labor as a result of our new toolsets.

For 2007 we expect on average to see about a 20 to 40 basis point increase due to minimum wage on an annual basis. I [would] anticipate that based on menu roll-out timing, which is scheduled for March, and that minimum wage increase took effect January 1st, that we will see some initial margin pressure in Q1 and then see it begin to gradually taper off in Q2 through the rest of the year.

In addition, beginning in the first quarter of 2007 we will incur approximately 30 basis points of additional non-cash restaurant labor expense related to our Gold Standard Stock Ownership Program for our restaurant general managers and executive assistant managers. As we have stated in our third quarter call, we believe this program, which consists of restricted stock units and has 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 better operational execution and lower management turnover expenses going forward. For BJ's to become a national restaurant growth company, as we've said, the most critical success pipeline is the recruitment pipeline. We need to be able to recruit, retain, and motivate all of our restaurant managers.

Taken by itself, we estimate the cost of this equity incentive program to be approximately $16,000 per restaurant, which on an annual basis is roughly about three-tenths of a percent of our average restaurant sales. And just to put that into perspective, as we've mentioned before, that $16,000 cost per restaurant per year is less than the cost to train one new manager.

Since we will begin incurring this expense for all 55 restaurants currently open at the beginning of 2007, we expect to incur an incremental non-cash compensation expense of approximately $880,000 for those 55 restaurants during fiscal 2007. And if we open 13 new restaurants during 2007 for the expected timetable laid-out by Greg Lynds, then we would incur an additional $100,000 of non-cash compensation expense related to just those 13 openings. We believe that the modest costs associated with this incentive plan clearly has long-term return on investment profile in terms of motivating better operational execution and reducing turnover.

Our operating occupancy cost as a percentage of revenues increased 40 basis points, to 19.6% from 19.2% last year, and this increase is a result of higher spending on facility maintenance and kitchen and dining supplies compared to prior year, as a result of our deliberate decision to improve the quality of our facilities and dining experience.

General and administrative expenses, which I already commented on a little bit, was consistent with prior year at 7.6%. Now, as we've stated today, we've got the SFAS 123R share-based payment in there. If you exclude the share-based payment our G&A expenses for the fourth quarter would have been a half a percent less, which is approximately $355,000, so on an apples-to-apples basis our G&A would have dropped 50 basis points to 7.1% of sales.

On an absolute basis, again excluding the $355,000 of stock based compensation, the G&A increased from a dollar perspective to $4.7 million from $3.7 million last year. And, again, as we've mentioned, that dollar increase is really the result of additional expenditures associated with the continued infrastructure and investment in our business, both field supervision and corporate support, our manager and training program that we talked about, and additional travel costs related to new restaurant openings and field supervision.

During this coming year of 2007 we will continue to invest in the corporate infrastructure, to support our restaurant and brewery operations, however, with our manager and training pipeline continuing to fill up and the majority of [other] support positions in place, our expected G&A expense growth rate for 2007 should be less than our expense and revenue growth rate for the year, and should be less than the percentage growth rate for the previous year.

Our depreciation and amortization increased to $2.9 million or 4.4% of sales during the fourth quarter of 2006 from 4.2% last year. And the increase is primarily due to increased depreciation on our new restaurants resulting largely from increased construction costs in general and the depreciation related to our investment in toolsets for our restaurant managers. For 2007 I would expect our depreciation to average somewhere in the low to mid 4% range.

Our restaurant opening expense was approximately $1.6 million during the fourth quarter of 2006, which was the result of four restaurants that opened in the fourth quarter, plus the additional pre-opening related to the Reno Brewery. As previously discussed, we adopted, like our peers, FASB Staff Position 13-1, accounting for rental costs incurred, during construction, which requires us to [pay a] non-cash [phantom] rent during the construction period.

As a result, we incurred almost $160,000 of non-cash phantom rent during the fourth quarter compared to zero last year, and almost $700,000 for the entire year. It is important to note for people developing their models that we will now incur pre-opening expense, primarily the phantom rent for a new restaurant as early as five months before a restaurant opens and, therefore, quarterly pre-opening costs may have greater variability from the actual number of new restaurants opened in a quarter. On average, our pre-opening costs are running in the range of $450,000 per restaurant to $470,000, depending on the non-cash phantom rent.

Looking forward to the first quarter, we anticipate opening two new restaurants late in the quarter, and four new restaurants in the second quarter. As a result of now having to account for phantom rent in the construction period, I anticipate that we will incur close to $225,000 of additional pre-opening costs in Q1 related to phantom rent for restaurants that will open in early Q2. On average, we anticipate pre-opening rents to be as much as $60,000 per restaurant, which is already included in the $450,000 to $470,000 average pre-opening costs that I've spoke to.

Our interest income for the quarter of $600,000 was about $250,000 more than last year and was a result of the additional capital we raised through an equity transaction in November of 2006.

Our effective tax rate for the quarter was 29.8% or just below 30%, bringing our YTD tax rate to about 33%. The slightly lower tax rate in Q4 was due to a decrease in stock based compensation related to incentive stock options, for which the related compensation expense is not deductible and so the options are exercised. We currently anticipate that our effective tax rate for 2007 to be around 33% to 34%.

Our CapEx for 2007 is approximately $55 million of which about $5 million relates to outlays either paid for or accrued for in--for 2007 new restaurants where we began construction earlier than anticipated in 2006. I would anticipate that CapEx for 2007 to be $60 to $65 million, and that should include the potential CapEx liabilities for 2008 openings that we get paid for in late 2007.

Before I turn the call back over to Jerry, [inaudible] with Jerry, I want to make a couple--a couple other comments. First, as we've mentioned, we successfully completed an equity transaction in November of 2006 in which we raised about $58 million net to BJ's, and that's net of the expenses and commissions, through an equity transaction in which we sold 3,075,000 shares of BJ's common stock. This transaction really allows us to [inaudible] and eliminate any financing risks that may have been inherent in BJ's as a young growth company, and really pre-fund our capital expansion over the next three years or so. As members of management, we do want to thank our shareholders that participated in that transaction. Now, as a result of that transaction, we anticipate that our diluted shares outstanding for 2007 will be in the 27 million share range.

We also noted in our press release today that during the first quarter of 2007 we are evaluating certain initiatives related to our strategic business and growth plans, including our goals to increase our brewery productivity and improve the support of our expanding restaurant operations. When our evaluation is completed this quarter, these initiatives may result in a onetime pretax charge in the range of $1.8 million to $2.2 million or approximately $1.2 million and $1.5 million net of the related tax effect, which has about a $0.05 diluted, per diluted share impact.

We commented on those initiatives in some detail in our press release, so I won't take additional time to cover them again now, but I would like to reiterate that in essence we are clearing the decks of some underproductive assets to make room for more productive ones that will carry us further down the road in a higher quality, more leverageable manner.

The one final comment, and then I'll turn it back to Jerry, in regards to our general outlook for 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.

As the year unfolds we should begin to see some gradual leverage in our G&A expense once the near-term investment in certain of our restaurant support systems and infrastructure components have been completed. As such, we have stated before, we would anticipate our earnings growth rate to basically reflect our top line revenue growth rate this year with some up side potential, depending on the progress of our key sales building initiatives and productivity initiatives for 2007 and excluding the incremental costs for introducing our new stock ownership plan for 2007 and the write-off and disposal of the aforementioned items.

I would anticipate, however, that in Q1 we will see some short-term pressure on restaurant level margins both sequentially and compared to last year's Q1 as a result of higher produce costs related to the weather in California, the impact of minimum wage compared to our menu pricing which will occur in late Q1, and the transitional inefficiencies related to our ramp-up of our Reno Brewery. However, as we move out into Q2 and beyond we should be able to begin to get some more leverage in our business from the implementation of many of the initiatives and additional toolsets.

Jerry.

Okay, thanks, Greg. And thanks for pitching in for me a little bit earlier. You know, we have so many exciting things to talk about our business, and you get so excited about it that sometimes the brain outruns the vocal cords, and that was a first for me, but thanks for pitching in.

We're ready to wrap-up our comments. Again, we had solid results for the quarter and for the year in almost every respect. Our restaurant operators and our brewery operators are operating and executing at a very high level. Our leadership team remains very confident of our ability to continue to execute our national growth plan, while at the same time getting all of our key initiatives done and working very, very hard to achieve steady increasing leverage in every aspect of our operation.

We've got a solid restaurant pipeline in place for 2007, as Greg Lynds has commented on. 2008 is already looking in excellent shape. And when you add up all of our signed leases and letters of intent we've got about 23 specific sites already identified and tied up, so we're highly confident of our ability to grow our total capacity by 20 to 25% in 2007 and 2008. And we have a comprehensive expansion plan and operational plan for 2007. We've got solid financial and support resources. So, you know, in a way 10% of our job is kind of done for the year, but the challenging part, the 90% of our job is execution, is all in front of us. And I think we're becoming better and better executers as time goes on.

You know, in just a few months, for the first time in BJ's history, we're going to have restaurant operations from coast to coast in all time zones, and that's a big step for any company, and particularly for a restaurant company. 2007 is clearly going to be a watershed year for our concept and our business. Our leadership team continues to have great confidence in our plan and our ability to execute our plan. And we strongly believe that the best years for BJ's are yet to come. We really appreciate the continuing confidence and support of our stockholders as we continue to grow the business.

So that wraps up our formal remarks, so at this time we'll open up the call for some questions. And, again, if we don't have time to get to your question, we're in our offices here in California, we're happy to take your question after the call. So, operator, we're ready to go.

[OPERATOR INSTRUCTIONS.]

Well, if there are no questions, we're going to go ahead and get back to work. We'll be here at our offices if anybody has a question after the call. Thanks for being on our call today. It's a busy day for restaurant investors and with a lot of releases out there, but thanks for being on our call today, and we'll see you next quarter.

This concludes today's conference call. You may now disconnect your lines. Have a great afternoon.