BJ's Restaurants Inc (BJRI) 2007 Q2 法說會逐字稿

(technical difficulty) conference call. (OPERATOR INSTRUCTIONS)

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

Thanks, Nicky, 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 Chief Financial Officer, Greg Lynds, our Chief Development Officer, and Diane Scott our Director of Corporate Relations.

After the market closed today, BJ's Restaurants released financial results for the second quarter of fiscal 2007 that ended on July the 3rd, 2007, and if you haven't had a chance to see our press release today, you can view it on our website, and that is www.bjsrestaurants.com.

Our agenda for the call today will be as follows. First, I'll provide a brief business and operational overview for the second quarter. Next, Greg Lynds will provide an update on the status of our new restaurant development pipeline.

And Greg Levin will then comment on our consolidated income statement, balance sheet, and liquidity position as of the end of the second quarter. And after that we'll be happy to answer your questions.

And we'd like to finish up the call in about 45 or 50 minutes, so we're going to get started right after Diane provides our standard cautionary disclosure with respect to forward-looking statements. Diane?

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, July 26th, 2007.

We undertake no obligation to publicly update or revise any forward-looking statements nor do we 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 Securities and Exchange Commission.

Thanks, Diane.

Now, as we indicated in our press release today, BJ's reported what we consider to be very favorable financial results for the second quarter compared to the same quarter last year our revenues increased a strong 37% to $79.3 million, our net income increased (technical difficulties) in my almost 30 years of experience in the chain restaurant business, I personally can't recall a more difficult operating environment in general than the one that we're currently experiencing.

There are always uncontrollable factors at work that impact all businesses, but I personally can't recall a time when nearly all of the uncontrollable factors that impact a casual dining restaurant business, higher fuel costs, higher food costs (technical difficulties) cost structure of (technical difficulties) continues to be our belief that the higher quality, more differentiated and more approachable casual dining restaurants have the best opportunity to do well in all operating environments, both the easier ones and the tougher ones like we're experiencing at present.

While BJ's is clearly not immune to any of the uncontrollable headwinds in the operating environment, our overall financial performance has continued to track favorably when compared to many other casual dining bar and grill chain operators.

And whenever we get the opportunity, we always like to take (technical difficulties) investors what we believe the underlying reasons are for that favorable performance because those reasons tie directly into our ongoing strategic evolution of the BJ's concept and business model and what we strongly believe is the best way to capture additional market share and the estimated $43 billion bar and grill segment of the restaurant industry as we continue our expansion across the country.

You know, a few years ago we concluded that the BJ's concept was essentially sitting on the fence with respect to its fundamental competitive positioning. It kind of had one foot in mass market casual dining and the other in premium casual dining.

During the past couple of years we've worked very hard to move the concept off the fence, so to speak, and move it clearly into the premium casual or casual plus positioning in every respect, with more quality and more differentiation.

We strongly believe that positioning represents BJ's best opportunity to capture additional market share in the most competitive segment of the casual dining industry, the bar and grill segment.

There is no question that this upgrade in the concept's positioning, which has been gradually underway for a couple of years now, has required us to make significant and costly investments to add more quality and differentiation to the BJ's concept and to provide our restaurant operators with even better tools to enable them to more correctly and consistently execute our restaurants at a higher level.

Judging by our recent sales results for both our established and our new restaurants, we believe that we're earning a great return on our investments in this respect.

Our consumers have certainly been rewarding BJ's for the work that we've done to upgrade the concept and our ability to execute it and are clearly rewarding us for improving the overall BJ's dining experience, again based on our outstanding top line results for the past couple of years.

And the good new is from our perspective we've just barely scratched the surface in terms of implementing our longer term vision for the BJ's concept for the next several years.

We've got a long way to go in terms of becoming better food and beverage merchants and becoming better optimizers of our overall business results. I think while we've certainly improved in those areas, we're not as good as we need to be yet.

These opportunities are going to be the primary focus of our 2008 key initiatives and we'll update you on those specific 2008 initiatives later this year.

And as a byproduct of our ongoing evolution to full casual plus positioning, we believe that our overall pricing power has also been favorably impacted.

And that's very important because if a restaurant concept doesn't have pricing power, it's going to be very, very difficult to project margins from the impact of normal inflation, not to mention any structural changes that impact the prime costs of our business, which are food and labor costs, such as we've been recently experiencing with the periodic minimum wage increases.

We do believe that as a result of the strength and the approachability, the differentiation, and the value in the BJ's concept, coupled with our successful initiatives to improve overall quality and execution and given our relatively average (technical difficulty) back in the $11 range, we've been able to recently achieve the benefits of slightly higher than normal menu pricing for us when we really need it in this challenging operating environment.

Now, having said that, we know that we can't price our way to success. And we know we can't save our way to success either. You've got to grow your way to success in this business in a very productive, efficient, leverageable and balanced manner.

Now, we're planning to continue with our initiatives to further increase the quality and differentiation of the BJ's concept and at the same time we're going to work hard to maintain our overall price point advantage compared to the other mass market bar and grill operators.

So in short, that's the best way to grow profitable market share over the long run for BJ's and to build the long term value of our Company.

We strongly believe that we need to be unwavering in the execution of this strategy and we're going to continue to raise the overall quality of the BJ's concept and we're going to continue to strengthen our ability to compete, particularly during challenging times.

So (technical difficulty) in spite of the (technical difficulty) and leverage improvements in the business.

And we certainly had the sales (technical difficulty) 25% increase in our total restaurant operating weeks and that was coupled with an approximate 10% increase in average sales per operating week that in turn was favorably impacted by a much stronger than expected comparable restaurant sales increase of 7.5%.

That strong 7.5% comp sales increase (technical difficulty) an increase in second quarter comparable sales for the last two years, which is pretty (technical difficulty) here at BJ's and that's the 43rd consecutive quarter of positive comparable sale comparisons. Other than Olive Garden (technical difficulty) sales comparison for the third quarter to date also remains favorably positive.

We have consistently reminded our investors that as time goes on, we do expect our comp sales comparisons to gradually track closer to our longer term run rate expectation, which is in the 2% to 3% range, which principally reflects our normalized effective annual menu price increases, and doing our best to keep our guest traffic.

Additionally, we should probably point out that during the second half of this year (technical difficulty) begin to roll over some of the significant sales benefits of our operational toolset rollouts that commenced last year.

So we certainly have some tough sales comparisons to roll over going forward, but you know, BJ's has always had tough sales comparisons to roll over.

We're going to continue to work hard on some additional sales building initiatives that we believe have the opportunity to help us continue our top line momentum, which I'll comment on a little later today, and then Greg Levin is also going to comment on some of the recent sales trends for some of our individual restaurants in his remarks a little later today as well.

We also continue to be very pleased with the sales volumes for our new restaurants, which, in the aggregate, continue to be much higher than any of us initially expected here at the Company. And we think that those stronger sales volumes are principally due to three or four reasons.

First of all, improved site selection. Secondly, an upgraded brand identity and image is reflected in our newer facilities. Third, improved operational execution. And fourth, growing overall consumer awareness of the BJ's concept, who we are and how best to use us, particularly in our non-California markets.

From an operating margin perspective, the prime costs in our business, cost of sales and labor, were certainly impacted during the second quarter by higher commodity costs, principally cheese and produce, and they were also impacted by higher minimum wages compared to the same quarter last year.

We believe the unanticipated and uncontrollable cost increases for cheese and produce impacted our diluted net income per share for the quarter by about $0.01 and Greg Levin will comment on those costs a little later in our call today.

Additionally, as we indicated in our conference call last quarter, we also experienced some additional costs associated with the rollout of certain of our quality upgrade initiatives, including our upgraded china and linen programs as well as our new service assistant program.

These rollouts are going to be completed to all large format restaurants that are going to get them by the end of the third quarter.

And while these upgrades represent an incremental cost to our business, they are absolutely necessary to our casual plus competitive positioning and we believe that consumers are giving us credit for all of our upgrades, as reflected in our strong sales trends.

So in spite of all of the cost pressures that we experienced in our business during the second quarter, the leverage from our strong sales volumes was sufficient to maintain our four wall estimated operating cash flow margins in our restaurants at the 19.8% level and that was the same margin that we reported for the first quarter of this year.

Additionally, we were also able to achieve about 20 basis points of leverage in our G&A expenses during the second quarter compared to the same quarter last year, which is certainly in the right direction for that expense category.

We think that most of our investors know that we've been intentionally strengthening our infrastructure for growth during the past couple of years.

And I think the good news is substantially all of what I would call our catch-up investments in that respect will be in place by the end of 2007. So accordingly, we expect to begin realizing increasing leverage of our G&A expenses starting next year.

We continue to make great progress on our 2007 key initiatives. Here's an update on some of the more significant ones. During the second quarter we successfully completed the rollout of our automated table management system to all of our large format restaurants.

This systems brings much better organization to our front desk operation and helps us to seat guests more quickly and efficiently during peak meal periods.

We also completed the upgrade of our large party buffet programs, which, among other things, introduced some new buffet offerings with more attractive price points and margins.

About a year -- after about a year of careful development and testing, we finally started the initial rollout of our theoretical food cost management system to all of our restaurants and Greg Levin will comment on that in more detail a little later in our call today.

We're also finalizing our work on the reengineering and remerchandising or our off premise sales channel in order to be in a position to commence a gradual re-launch of that channel starting in the forth quarter.

And last but not least, we're continuing our evaluation of more strategic, leverageable and longer term contract brewing arrangements for our higher volume handcrafted beers and we expect to be in a position to make our final decisions in that respect before the end of this year.

We're making good progress in those negotiations. We currently have negotiations underway with three potential large contract brewing entities that clearly have the ability to support a national contract brewing arrangement in that respect.

So in addition to all of the hard work to open as many as 13 new restaurants this year, we've been also working equally as hard to open even better restaurants as we grow.

And that's the principle difference between a restaurant company that is growing and a restaurant growth company. There's lot of the former, but few of the latter and BJ's aspires to be one of the latter.

Just moving to our new restaurant development, as we mentioned in our press release, initial sales volumes for our six new restaurant openings to date during 2007 remain solidly in line with our expectations, in fact have exceeded our expectations.

And along with our strong comparable sales increase for the quarter helped to drive the approximate 10% increase in our average sales per week for the second quarter.

Those six new restaurants consist of our first two restaurants in the state of Florida, our first restaurant in Ohio, our first two restaurants in Oklahoma and a very strong restaurant opening in our home court here in California in Palmdale.

We're very grateful that the BJ's concept ahs been well received by consumers in the very competitive casual dining markets of Orlando, Tampa, Columbus, Oklahoma City and we have plans to continue the development of new restaurants in those states in the near future.

In terms of new market development for the remainder of 2007, we have one more new restaurant opening planned for next week in Tampa at the Citrus Park Mall and that opening will kind of finish up what we call our "away games" on our opening schedule this year.

We've got a solid slate of home games on the schedule for the remainder of 2007 with three planned openings in each of California and Texas.

And speaking of new restaurant development, I'm going to turn the call over to Greg Lynds, our chief development officer, for his perspective on our [2000] development plan and our pipeline for 2008. Greg, go ahead.

Thanks, Jerry. As we mentioned in our press release today, our 2007 and 2008 new restaurant development pipeline remains in excellent shape and we continue to be very pleased with the overall quality of the new sites in our pipeline.

Our internal goal is to maintain at least 18 months of forward visibility for specific new locations at all times and our development team works very hard to stay on target.

As Jerry mentioned today, we have opened six successful restaurants so far in 2007. In the second quarter we opened three new BJ's restaurants. Our first is in Orlando on April 17th, then in Palmdale, California on May 2nd and Norman, Oklahoma on May 8th.

In addition, two weeks following the end of the second quarter we opened Oklahoma City. That's on a pad at the Quail Springs Mall and that opened on July 17th.

All seven of our potential remaining 2007 openings are under construction and are currently projected to open before Thanksgiving.

As Jerry mentioned, our seventh new restaurant opening this year for 2007 is projected to open next Tuesday in Citrus Park, Florida. It's a northern suburb of Tampa. This will be our third Florida restaurant and our second restaurant in Tampa.

As we've said before, it's difficult to precisely predict the actual timing of our new restaurant openings due to many factors outside of our control, including factors under the control of our landlords, outside municipalities and contractors.

With that in mind, as of today we currently expect to open as many as four restaurants in the third quarter, of which one's already open in Oklahoma City, and as many as four restaurants also in the fourth quarter.

For the next few years our primary growth goal remains the same and that's to increase our productive capacity 20% to 25% each year as measured by total restaurant operating weeks.

Based on the current status of our site development pipeline, we believe that we can achieve that objective for 2008 by opening as many as 15 new restaurants fairly evenly throughout the year. To date, we already have 16 signed leases or letters of intent for potential new restaurants in 2008 and 2009, so our site development pipeline remains in excellent shape going forward.

Our internal real estate and design and construction teams are staffed with strong professionals. We have a solid network of outside engineers, architects and general contractors that are of national standing as our partners.

This development team has done an excellent job this year of delivering our newly constructed restaurants to our operations team evenly throughout the year without delay and this will continue to be a top priority of our team.

In addition, our design team will continue to focus on delivering high quality differentiated restaurants with a non-chain image and ambience, consistent with our premium casual positioning. Our teams looking forward to the 2008 plan and I'm confident that BJ's should have many years of solid new restaurant growth to come.

Jerry, back to you.

Okay, thanks for the update, Greg.

You know we've only got 61 restaurants open today in only nine states and we continue to believe that there's room for at least 300 BJ's Restaurants domestically.

As Greg mentioned, we continue to plan to increase our productive capacity, as we measure it in total restaurant operating weeks, 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 I'm going to turn the call over to Greg Levin, our CFO. He's going to review our second quarter financial results in more detail. Greg?

All right, thanks, Jerry.

Take a couple of minutes and go through some of the highlights for the second quarter and provide some forward-looking commentary for the rest of 2007.

As Jerry previously noted, total revenues for BJ's second quarter increased 37% to approximately $79.3 million from $57.8 million in the prior year's comp quarter.

The increase is a result of 25% more operating weeks coupled with a strong almost 10% increase in our weekly sales average.

The operating week increase is due to 11 new restaurants that have opened since Q2 of last year and a full quarter of operating weeks from the two restaurants that we opened in Q2 of last year.

The weekly sales average increase is driven by our comp restaurant sales of 7.5% and stronger than expected sales from our new restaurants not yet in the comparable sales base.

And just to give you a quick flavor of comparable sales for the quarter, we really continue to see solid comparable sales growth in our restaurants outside of California. Texas and Arizona both continue to be very strong markets for BJ's in terms of comparable sales comparisons.

In fact, all of our Texas restaurants and our comparable restaurant base had double digit sales increases during the quarter and all of our Arizona restaurants in the comparable sales base had mid to high single digit comparable restaurant sales increases.

California also continues to be a solid market for us, both in comparable restaurant sales increases and in overall sales volume for our new restaurants.

Our Brea, California restaurant, which was the first large format BJ's Restaurant and was opened in 1996, which is over ten years ago, had comparable restaurant sales of almost 10% for the quarter.

And our Huntington Beach restaurant, which opened in 2000, had comparable restaurant sales of 9%.

Both of these locations over the years have seen a steady increase in competition, both from new restaurants in their centers as well as from new retail shopping areas.

However, as a result of the toolsets that we have put in our restaurants, the quality upgrades to the facilities, food and service, and really the broad approachability of the concept, not only have these two restaurants been able to maintain their loyal guests, but they have been able to increase their guests over the years.

As Jerry mentioned, our comparable restaurant sales continue to trend positive to date in the third quarter.

As we mentioned before, much of the success in driving comparable restaurant sales increases over the last three to four quarters is really a testament to the strength of our toolsets that have allowed us to process more business in an efficient and effective manner while improving the overall dining experience. The best return on our investment we can offer our shareholders is by driving sales productively.

I do want investors to note that beginning with this quarter we will begin to overlap the original sales productivity benefits from our kitchen display system, which was fully implemented by the end of June last year, and that some of our highest volume openings of last year will also begin to enter the comparable restaurant base.

The kitchen display system has really allowed our restaurants to improve their productivity and therefore expand the maximum capacity in the restaurants, especially at peak meal periods.

As we begin to lap the rollouts of these toolsets and continue to build more high volume productive restaurants that are closer to capacity from the initial openings, we would expect our comparable restaurant sales comparisons to begin to move closer to our long range projections of menu pricing and some nominal guest increases [we've said together] in the 2% to 3% range or so.

Our 7.5% increase in comparable restaurant sales for the second quarter is due to a combination of increased customer traffic, coupled with an approximately 4% of menu pricing for the quarter.

For those of you monitoring menu pricing, we expect Q3 and Q4 to have around 3.5% to 4% of menu pricing, which we believe is relatively in line with the new pricing taken by most casual dining chain operators this year.

However, we do believe that BJ's has additional pricing power thanks to the many quality improvements that we made to BJ's over the past couple of years in terms of better food, service, facilities and execution.

Having said that, we will continue to be very, very careful about our menu pricing in order to protect our principle competitive advantage against the mass market bar and grill competitors, that is offering a better overall dining experience at BJ's at about the same price as the mass market bar and grill players.

While we are extremely pleased with the strong initial openings of many of our new restaurants which resulted in the approximate 10% increase in weekly sales average, I do want to caution investors that many of our new restaurants continue to open at volumes typically greater than their expected mature run rate.

Additionally, while we are extremely pleased with our sales volumes at our Ohio, Florida and Oklahoma restaurants, we need to remind investors that these are new markets for us.

In many cases, restaurants in new markets will either open up very soft due to lack of brand awareness or they will have a large honeymoon period as everyone tries the new concept.

It usually takes a while for new restaurants that are not supported by large media or marketing budgets to gain traction and become part of the guests' regular dining rotation.

And as with any new market, we anticipate for our internal modeling purposes that those restaurants will open up at sales volumes below the volumes in our home court established markets where we have had more time to build our reputation and brand.

Based on the remaining restaurants to be opened this year, we anticipate our weekly sales average growth to be closer or perhaps just slightly below the rate of our comparable restaurant sales growth.

Moving on to the middle of our P&L, our cost of sales of 25.6% was flat with last year's second quarter, but sequentially increased from 25.3% in Q1.

If we compared our commodities costs right now to last year, we are seeing about 30 basis points more in produce costs, primarily related to avocados and citrus, and another 50 basis points related to higher cheese prices. That is almost a full percentage point increase in cost of sales compared to prior year.

We have been able to essentially offset these higher costs to date with some modest menu pricing and just recently some benefit in terms of lower cost of production for our beer from our Reno brewery, which in June had its most productive month of the year.

Our partially hedged cheese contract expired this past March and we, like many of our competitors, are now in the spot market for purchases of that commodity. Cheese represents about 8% of our cost of sales.

And while we do expect cheese prices to come down from its high in June of over $2 per pound, we still expect cheese prices to be 40% to 50% higher than where they were last year at this time.

We estimate that taken by themselves, incremental cheese costs will likely impact operating margins by approximately 40 to 50 basis points for the remainder of the year.

All of our other major proteins are locked in with contracts that expire towards the end of this year. We will provide the investment community an update on our contracts during our Q3 conference call.

As Jerry previously mentioned, we do not anticipate much relief in the general operating environment anytime soon.

Therefore, it is absolutely critical during these challenging times that we continue to work hard to control everything that we can control and do our best to become even more productive and efficient in the execution of our restaurants and our brewing operations.

With that said, we just commenced the initial rollout of our new theoretical food cost system and we expect to go live with the system company-wide at the start of the fourth quarter.

Initial data from that systems suggests that we do have an opportunity with respect to identifying and eliminating excessive food waste from the BJ's concept.

We have asked our restaurant operators to put a full core press on both learning and debugging this system during the next 60 days, as it could help us to offset some of the negative commodity cost pressure that we are currently experiencing and may experience next year.

Our Reno brewery operated at maximum capacity in June and its cost per barrel was approximately 40% lower than our other breweries.

While we still have more cost savings to get from the Reno brewery, we have reached our targeted production capacity and this should help us gradually reduce the cost of delivered beer to our restaurant.

We do believe that based on our current contract and the current commodities environment, coupled with the savings from the Reno brewery and our theoretical food cost system, that we should be able to offset some of the effects from the higher cheese prices.

One thing to remember is that we -- as we continue to grow and open new restaurants, we, like all casual plus or premium casual dining restaurants with a more complex menu, with many prepared from scratch menu items, may experience pressure in cost of sales related to the timing of new restaurant openings as well the location of these new restaurants.

As we've 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 team becomes accustomed to optimally predicting, managing and servicing sales volumes typically experienced in our new restaurants.

In Q3, as Greg Lynds mentioned, we anticipate opening four new restaurants plus we will have some inefficiencies related to the new restaurants that just opened this past quarter.

Our labor and benefits during the second quarter increased 30 basis points to 35.4% of sales from 35.1% of sales last year.

Included in labor this year, as we previously mentioned, is approximately 20 basis points related to our Gold Standard stock ownership program for our restaurant general managers and executive kitchen managers.

The program, which consists of restricted stock units and has a five-year vesting and performance requirement, will allow us to recruit and retain top talent for BJ's, improve our operational execution and lower management turnover expenses going forward.

For BJ's to become a national restaurant growth company, the most critical success pipeline is the recruitment, retention and motivation of our restaurant managers.

Taken by itself, we estimate the cost of this equity incentive program to be approximately $16,000 per restaurant on an annual basis, which is less than the cost to recruit and train a new manager.

If we exclude the Gold Standard stock award, our labor increased about 10 basis points, which is really a result of increased hourly wages due to state minimum wage increases, some inefficiencies related to the rollout of our new service assistant program, as well as the upgrades of our china, silverware, glassware and linen napkin initiative. These were offset by some leverage from our 7.5% comparable restaurant sales.

Looking towards the rest of this year, we expect labor to maintain its mid-35% range.

Our operating occupancy costs as a percentage of revenues increased 40 basis points to 19.2% from 18.8% last year.

This 40 basis point increase is a result of the additional expenses and inefficiencies related to the rollout of our upgraded china, glassware, barware and linen napkins in the restaurants.

It is important to note that these enhancements are more costly than our old china, glassware and barware, and linen napkins are more expensive than paper napkins.

However, as we've said before, these changes continue to differentiate BJ's from the mass casual restaurant companies and present us in the casual plus category.

We believe that these enhancements are directly related to our continued comparable restaurant sales growth and the strength of our sales in our recently opened new restaurants in our new markets.

Our general and administrative expenses in the second quarter of 2007 decreased 20 basis points from prior years to 8.5%.

Included in G&A for 2007 and 2006 is approximately $555,000 and $400,000 of equity compensation respectively, or 70 basis points in each year.

Excluding equity compensation, G&A for the second quarter of 2007 was $6.2 million, which is an increase of about $1.6 million compared to prior year.

The majority of that increase is related to personnel, travel and lodging as we continue to build new restaurants in new states, and recruiting costs to maintain our management pipeline.

As we've mentioned before, 2007 will continue to be a year where we put many of the final touches on our infrastructure. That includes field supervision and corporate support, our manager and training program and additional travel costs related to new restaurant openings in new markets.

Our restaurant opening expenses were approximately $1.7 million during the second quarter of 2007, which was the result of three restaurants that opened in the quarter plus pre-opening rent of $250,000 for eight restaurants expected to open later this year.

As a result of our openings in new markets this year, we incurred additional pre-opening costs related to travel and lodging, inventory supervision, and we hosted a series of opening parties to introduce our brand in these new markets.

As a result of our opening costs were greater than our expected run rate of $470,000 per restaurant. We do anticipate our run rate to come back in line later this year as we open more restaurants in many of our existing states.

It is important to note for people developing their models that we will incur pre-opening expenses, primary from 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.

Looking toward the third quarter, we anticipate opening as many as four new restaurants during the quarter and four new restaurants in the fourth quarter.

As a result of having to account for phantom rent in the construction period, I anticipate that we will incur close to $400,000 of additional pre-opening costs in Q3 related to phantom rent for restaurants that will open subsequent to the third quarter.

Also during the third quarter we will plan to open one restaurant in Florida and one restaurant in McAllen, Texas that may require higher opening costs related to travel and lodging.

Our other income for the quarter of $290,000 was primarily related to the reduction of our gift card liability in accordance with FASB number 140, which is accounting for transfers and servicing of financial assets and extinguishment of liabilities.

BJ's began offering credit cards in 1998 and prior to this quarter we never reduced the gift card liability for gift cards that had significantly aged from the date of purchase and the likelihood of them ever being redeemed were considered remote.

Therefore, in accordance with this FASB140, we reviewed our detailed history of gift cards and determined a reasonable reserve percentage based on cards that have been outstanding for 24 months or greater. The result was approximately $270,000 of additional income related to these old, unused gift cards.

It is important to note that the $270,000 in adjustment, which represents about $0.005 of EPS for the quarter, is essentially a one-time cumulative effect adjustment resulting from gift certificates and gift card activity during the past several years.

Going forward, any additional income recognition from gift card breakage will likely be immaterial to our consolidated results.

Our effective tax rate for the quarter was 32.7%, which brings our full year tax rate to around 33% and we do anticipate that our full year effective tax rate for 2007 to be in the range of 33% to 33.5%.

Our CapEx year-to-date is approximately $34 million, of which $2 million was related to upgrades of flat panel televisions in all of our restaurants and $1.4 million for the purchase of land underlying one of our new restaurants.

We continue to target CapEx of around $60 million to $65 million for fiscal 2007. At the end of the second quarter we had cash and investments of $64 million and no funded debt.

And really based on our 2007 expansion plan and the current operating environment, we anticipate funding this CapEx through our cash flow from operations, cash and investments on hand and landlord contributions.

Our diluted shares were approximately 26.8 million for the quarter and we continue to expect that our diluted shares outstanding for the year to be around 27 million.

With that, I'd like to turn the call back over to Jerry.

Thanks, Greg, for that very thorough review.

And just to wrap it up, BJ's reported very solid results for the second quarter of 2007 in spite of the challenges in the operating environment.

We were able to achieve that thanks to the hard work of all of our restaurant operators and thanks to their continuing hard work we enjoy strong sales for both our new restaurants and our established restaurants.

And you know that doesn't happen by itself. We're doing a lot of things correctly in our restaurants and while I'm always quick to point out that we have many, many opportunities to do much better in terms of being better merchants and better optimizers of our business, our operators do a fine job of executive our restaurants.

Having said that, we're never going to be satisfied with anything in our business. We can always surpass our previous best.

Our leadership team remains very highly confident about our ability to continue to execute our national growth plan while at the same time executing all of our key initiatives and working hard to achieve steadily increasing leverage as we grow.

Our sales trends continue favorably positive for both our established and our new restaurants. Yes, like all other casual dining restaurant companies, we've got our share of cost pressures to deal with. But again, as long as you got the sales, you got the opportunity to manage those pressures, those particular cost pressures.

Our new restaurant pipeline for the remainder of 2007 and for 2008 is in excellent shape at this point.

We've got signed leases or letters of intent already in hand to support our planned capacity growth of 20% to 25% next year and we've got a comprehensive strategic and tactical plan in place.

So, really, our challenge now is to continue to correctly and consistently execute the plan and keep an unwavering focus on the long term growth and success of BJ's.

So that wraps up our formal remarks and at this time we'll open up the call for questions. And again, we're here in California so if we don't have time to get to your question on the call, just call us at our offices and we'll try to help you as much as we can.

So, Nicky, Operator, we're ready for some questions.

Thank you. (OPERATOR INSTRUCTIONS). Our first question is coming from Jeff Farmer from CIBC World Markets.

Afternoon, guys. How are you?

Hey, Jeff. What's going on?

Good. I have a few questions for you. First up, your same store sales are clearly best in class. So with that said, have you seen any shift at all in your customers' behavior in terms of weak bar trends, (inaudible) bar trends, menu management, anything else like that?

No, we really haven't.

Okay, that's easy enough.

Pretty straightforward.

And then I know it's still early days on the automated table management system, but are you seeing any benefit at all to throughput from that yet and what would you expect in the future?

Well, I'm certain that we are, but with all of the other sales building initiatives that we have underway in all of our restaurants, it's hard to specifically isolate a particular cause and a particular effect against a certain initiative.

We've got KDS, we've got table management, we've got the web-based labor scheduling system, we've got other changes in our operational execution in terms of how we run our front desk and how we run our food out to our guests and so forth. So it's very, very difficult to isolate a specific favorable effect of the table management system.

But without a doubt, when you come into our restaurants during peak meal periods, particularly on a Friday or Saturday night, you're going to find our restaurants to be much smoothly executed upfront, you're going to find our seating to be much more effective, you're going to see our table turns improved slightly. And it is an overall benefit to the execution of our restaurants.

When you look at our guest traffic per square foot compared to other casual dining restaurant companies, we're among the leaders in the restaurant industry based on the information we have, at least among publicly held operators.

We've got a lot of guest traffic that we're processing and this automated system really helps to organize our entire front desk operation. It is clearly going to continue to benefit our execution.

But in terms of trying to isolate a specific percentage against it, its just very difficult to do given all of the noise that we have with all of the other initiatives going on.

Okay, that's fair. But you guys do obviously manage or I guess measure your throughput. And how do you do that?

Well, in our KDS system we do track our ticket times --

Okay.

-- display system. So we do track ticket times.

And actually there's another version of software that's coming out in our table management system that will enable us to really measure the entire duration of the dining experience from when a guest checks in at the front desk and we get them into our table management system to when they actually get seated, when the order gets rung in the POF system, when the KDS system actually sells the order and it's run out to the table and then when we cash that guest out in our POF system.

So shortly, we'll be able to measure the entire duration of the guest experience at all [day parts] and we'll be able to compare that among restaurants.

Now, that's an awful lot of data and I'm not sure exactly what our operators are going to do with all of that data, but it will give us the ability to benchmark throughput against our top quartile performing restaurants.

And we'll be able to identify opportunities during certain meal periods where it may very well be that a slight addition in labor can have a solid return on investment in terms of a table turn improvement.

Got it. Okay, that's helpful. And one final question from me in reference to the Reno brewery, what exactly -- in terms of percentage cost of goods sold, what percent of COGS is brewed beer for you guys?

It's only about -- it's about 8% to 10% total brewery cup sales.

Okay. And then so brewed beer is 8% to 10% of your COGS. And then you mentioned a 40% reduction but I think you said it's the Reno brewery costs, so --?

It's purely the Reno --

What would that imply system-wide, then?

System-wide we would hope somewhere in the 10 to 30 basis points if we get it up to efficiency in what we target.

Oh.

I think we're right. I think what we've consistently said, once we got Reno to its run rate and got all of the pre-opening inefficiencies out of the way, we felt that we could gradually achieve about a 20% reduction in the total cost of delivered beer to our restaurants once Reno hit its -- hit its run rate in terms of productivity, which we've just achieved.

So as the year unfolds, we would hope to gradually begin realizing that 20% reduction in the cost per brewed beer for our restaurants.

Great. Thank you very much.

Okay, Jeff, thank you.

Thank you. Your next question is coming from Destin Tompkins from Morgan Keegan.

Thank you. My first question is on menu pricing.

Greg, I think you -- excuse me. I think you mentioned 3.5% to 4% is what you expect in Q3 and, if I remember correctly, I think we had 4% in Q2 and we rolled over some menu pricing in June. So did you guys take some pricing recently?

Right now we put through about a 0.4%.

Okay.

That kind of puts it out there. And we'll have possibly -- well, we will have a little bit more menu pricing coming later in August as well.

That 0.4% effective menu price increase we kind of took here just a few weeks ago and it really involved our liquor offerings.

We don't really have liquor printed on our menu in terms of the pricing, so we've got a little bit more flexibility to adjust pricing on liquor. We do have our normal menu changes, which happen in May and November.

Given some of the cost pressures that all of us have faced in this industry, we've taken advantage of our quality improvements and our increased pricing power to try to accelerate some of those normal price increases that we would normally take.

Historically BJ's has kind of tried to take about a 2% or so effective menu price increase every year in normal times.

And what we're going to do here probably sometime in mid August is to accelerate kind of the final 1% of menu pricing that we would have otherwise taken in the November menu change just to get a little bit ahead of it and deal with some of these cost pressures.

And again, you're always a little bit nervous about taking price, but when you take a look at all of the quality improvements that we've made to BJ's in terms of food and service and facilities and execution and when you start with a relatively low average check that we start off with, we feel we've got a little bit more room this year and doesn't really put us out of synch with the general pricing strategies of our competition.

That's helpful. And as it relates to cost of sales, in Q1 you had some favorability year-over-year and Q2 was relatively flat as a percent of sales.

And as you net out the pricing and the savings from the brewery and against the higher commodity costs you're experiencing, do you expect that you can get back to a favorable cost of sales year-over-year in the back half of the year or is the commodity cost pressure fully offsetting that?

I think the commodity cost pressure's fully offsetting that. I think we'll see a little bit of pressure there. We're looking at our theoretical food cost system that we talked about on the call and trying to understand how much opportunity we do have there.

We do think Reno brewery, as we mentioned, will help us a little bit. I wouldn't expect cost of sales to move significantly up but I think it's going to be a pressure area.

Okay, great. And then one other one on the operating expense line. It sounds like the pressure there was result of a lot of the upgrades to the plate ware and the -- a lot of the other additional barware and other things.

And that sounded more kind of one-time in nature. Do you expect that to continue as well or are we through most of that?

I think we're still going to see a little bit of that going forward. One of the things that we've talked about, really, as we start getting into next year, one of our initiatives is we need to optimize some of these things that we've put in place.

So as we put the linen napkins in place, that's -- BJ's has never used linen napkins before. We don't know if it should be we use $5 for every 100 guests the way we measure it or should it be $6 per every 100 guests.

So we have a lot of optimization to do and that's going to take us through a quarter. So I would still continue to see that pressure a little bit into Q3 as we continue to understand and begin to optimize it.

I would agree. We've got some learning curve pressures associated with these quality rollouts.

And Greg Levin's absolutely right, in an absolute basis the paper napkins that we were using cost about $0.055 each and the linen napkins cost about $0.01 more, so to get them cleaned and through a linen service.

But paper napkins are pretty easy to manage. You just roll them up around the silverware and the guests throw them away and you pitch them.

Linen napkins are a bit of a different beast to manage and you've got to have systems in your restaurants in terms of storage and rotation and you've got to be careful to manage losses because you're going to get hit with a pretty good linen loss charge.

And this is something entirely new for BJ's and it's a consequence of the elevation of our concept from the mass market casual positioning up to more of a premium casual positioning. So we've got some learning curve to go through. We probably got another quarter of that.

And then hopefully beyond that things will smooth out a little bit and there'll be more of a steady state.

Great. Thanks. Congratulations on a continued impressive sales trend.

Well, thank you very much. It is quite remarkable that we've been able to drive these wonderful sales in a very, very difficult operating environment.

But you know at the end of the day I really do believe that our guests are beginning to recognize the quality and the differentiation and the value of the BJ's concept compared to the mass market operators out there.

Thank you. Our next question is coming from Larry Miller from RBC.

Hey, guys. How you doing?

Hey, Larry.

Hi, Larry.

Hey, I just had a question on what the economic impact of the national brewing contract might be and sounds like you're in negotiations right now. Any sense of timing on that?

Well, we're in the process of completing those negotiations. There's work other than just pure economic negotiations that has to occur at the same time.

For example, as I've been in this business for about three years now and have tried to learn a little bit about brewing beer, it's amazing how brewers protect their yeast and how the different yeasts are really the generators of the different flavor profiles in the brews.

And some brewers have certain preferences on yeast, some brewers don't want to have another type of yeast or another strain of yeast in their breweries period, some have flexibility to accommodate different types of yeast.

So what we're going through now are some of the necessary test brews that you have to undertake to make sure that the different yeast strains that produce the flavor profiles in your beers can be accommodated in all contract brewing opportunities.

So we're doing that work right now. And all of our final evaluations, both brewing quality, yeast and economic, should be done before the end of the year and then we'll be able to make a decision as to what direction we go.

Preliminarily, although it's very, very preliminary, we do believe that in a -- in the right contract brewing situation, the economics of brewing some of our higher volume beers in mass quantities are probably going to be favorable to what it costs us to brew it internally.

And we'll have a better idea of how much favorable that may be as we complete our negotiations.

[Cold] contract brewing for BJ's has been kind of driven by kind of three factors.

First of all, we had to get the scale in terms of our overall absolute brewing requirements to really get some of the major contract brewers interested in working with us. And then you've also got the brewers out there.

You've got some that are willing but not able and some that are able but not willing. And we've got to find both the willing and the able that can take our requirements and make sure that we're carefully diversified.

Obviously you don't want to have all of your eggs in one basket with respect to having a major outsourced relationship like that.

And so we're very, very carefully evaluating three or four different opportunities to partner up with someone with the scale and with the economic advantages that we believe will be able to carry us forward on a national basis.

Frankly, we're quite excited about some of the preliminary work that we've done and we're going to be in a position to make our announcements and make our decisions before the end of the year and then we'll be able to be in a better position as to the economic consequences of what we're looking at. But preliminarily, we're going to pay less for beer.

Am I wrong in thinking it's just going to be a revenue royalty stream for you guys and -- ?

No. No, it will not be a revenue royalty stream. This will be a pure production cost benefit for us going forward.

Obviously over the longer term, as we build this brand, we do believe that we have a couple of products, perhaps our [Bazuki], maybe our pizza, maybe even our beer, which may be licensable to other marketers and other distribution channels.

That's something that we'll work on over the next couple of years. But for the immediate future, no, it will be just a production cost savings.

Got you. Is there -- is there a longer term opportunity to do the bottle brews in the grocery case? Is that something you're also pitching around with these guys?

You know, there may be. And clearly, a couple of the potential contract brewers that we're -- that we're working with today do have mass market distribution capabilities for their own brands and through other relationships.

So again, we'll cross those bridges when we come to it. That will be one of the factors that we consider in our selection of a contract brewing partner.

Great. Jerry and Greg, you guys talked about a lot of short term, at least I think they're short term, maybe not structural, kind of cost [crate]. Is there any opportunities for you guys to get some short term cost savings?

Where might you be able to do that to help offset some of these things other than the brewing efficiencies at the Reno brewing?

Well, I think Greg mentioned the theoretical food cost system probably represents our best opportunity to work on reducing waste and improving yields in our kitchens.

And that'll unfold over the next three or four months as we get that system rolled out and go through our debugging of the system and get our operators to believe in the system and the data which it's reporting.

We've really worked hard and continue to work hard on our overall efficiency in the restaurants. Our labor productivity we believe is in excellent shape overall, although we do have some improvements to do better.

In terms of the operating cost per guest, as Greg mentioned, as we've rolled out our new china, silverware and glassware packages and our linens, we do measure productivity and efficiency in terms of the relative cost per guest.

And when you have 61 restaurants and you look at linen cost per guest, you've got a pretty wide spread of different numbers there. So you know you've got opportunities to overcome the learning curve and do better over time.

But having said all of that, I think our best opportunity would be the theoretical food cost system and what it might be able to give us. Initially I think we felt that our kitchens were pretty well operated and we still feel that way.

But we have a very large menu, we've got a lot of scratch cooking back there and some of the initial data that we got out of our theoretical food cost system indicates that there might be more of an opportunity there than we initially thought.

So we're going to have to just get through the rollout, get through the debugging and make sure that our operators believe in the data and then we'll see where we go from here. Greg, is there anything else that you would comment on there?

No, I think Jerry hit upon those things. I think the biggest challenge in any [grub] company is getting your new restaurants up to efficiency as quickly as they can. It's something that we look at each week.

I think there's an opportunity there for us to continue to manage those restaurants probably more efficiently than maybe where we have been.

Yes, I would echo that. That's one of the challenges when you're at a 61 restaurant count trying to move to 100 and beyond.

You absolutely must focus on bringing -- ramping up your margins, your operating margins in your new restaurants to their targeted levels within a 90 to 120 period on average. And it's that last 100 basis points or so that is always the most challenging and it's always in labor and it just requires a constant focus.

And we've got a lot of new restaurants and new markets. We've got a lot of new general managers and relatively green area directors and that's something that Greg and I constantly work on. We're old hands. We've been around for a long time.

And as Greg mentioned, we focus on that intensely by restaurant every week and that does represent an opportunity for us.

Great. And just two clarifications and then I'll hop off. Greg, when you said labor in the mid 35%, were you talking for the year of '07 or more geared to the second half of '07? And the second thing I was going to ask is you mentioned positive comps for Q3 to date. Are you also seeing positive traffic Q3 today?

Well, we don't give specifics on the comps. We're pleased with where our comparable restaurant sales are, both from the ability to accept pricing as well as guest counts.

Okay.

In regards to labor, we talked about in the first quarter that labor ran high at 36% until we got some menu pricing in there in March and we felt that once we got that in there in March we would bring our labor back down into the mid 35% for the whole year.

So I look at Q3 and Q4 and I know we just ran a 34% -- 35.4% this quarter, I think that's probably similar to where we're gong to be for the rest of the year, right in that mid-35% range.

Thanks very much, guys. Nice job.

Okay, Larry.

You're welcome. We'll take a few more questions if we have them.

Thank you. Our next question is coming from Sharon Zackfia from William Blair.

Hi. Good afternoon.

Hey, Sharon. How are you?

Good. Question, a follow-up question on the labor. Greg, when you're looking at that mid 35%, are you assuming kind of your long term run rate for comps? Can we anticipate leverage if you do -- or better numbers if you do a 7% comp again, 8% comp?

Well, we would hope to continue to get more leverage if we -- if our comps generated those type of numbers. We had some inefficiencies in labor this past quarter with some of the rollouts of linen and the china and silverware, as we talked about it. So that being equal, if we saw comps in that range, we probably would get additional leverage.

I do think, though, we just came off 6.9% and 7.5% comps. Those are extremely great numbers and they're extremely tough numbers to continue to repeat.

And I think as we go into the second half of the year, we're going up against some really strong initial rollouts from our toolsets, or the benefits of those toolsets, primarily kitchen display system. And I mean, God, we all hope to repeat those type of comps. We're not internally projecting those type of comps.

But we're not going to settle for any substandard performance in our comparable sales, I can guarantee you that.

As I mentioned in our comments earlier today, we've always had tough sales comparisons here at BJ's to roll over. We've got many opportunities to build our sales.

And internally we're going to continue to drive sales. If we're going to make any error at all in this business it's going to be on driving sales. So that's really the best guidance that we can give you at this time.

Okay. And then over the past year since you've implemented KDS, your traffic gains have been really nice. Has KDS really generated the bulk of those traffic gains?

You know --

Because you were generating good traffic before KDS as well.

Yes, I think we were but I think that was in a bit of a different operating environment, too.

And I think when you take a look at all of the particular productivity initiatives that we've rolled out over the past couple of years, I think internally, and again as I mentioned earlier it's very, very difficult to isolate a particular productivity improvement with a particular toolset, but I think internally we all believe that KDS really represented the lion's share of the productivity improvements that we've seen in our business over the past year or so.

And then one last question. It was good to see you leverage G&A this quarter. Is that something we should continue to expect for the rest of '07?

Yes, I think as we've talked about G&A for this year, I think we can get some leverage in there.

I think you're going to see the equity awards, that's going to probably sit around 70 basis points year-over-year. So it's coming from our ability to leverage kind of the G&A -- the cash side of it.

And I do think that we've put most of our infrastructure in place. We do have a couple of other things that we're working on. But I really think that's a 2008 year where we start to get more leverage.

I can only comment on the numerator of that particular calculation, Sharon, and I can tell you that we're pretty much done with all of the catch-up infrastructure investments that I felt we needed to make to the business to carry us forward in terms of profitable growth for the next several years, other than just normal routine G&A additions that you would normally expect on a run rate basis.

So from a numerator perspective, I think we're pretty much done with all of the catch-up stuff that we needed to do.

Okay, great. Thank you.

Thank you. Our next question is coming from Nicole Miller from Piper Jaffray.

Good afternoon.

Hey, Nicole. How are you?

Great, thank you. I just wanted to be clear; have you contracted anything yet in terms of food for next year? Has anything been contracted?

Nothing significant. If we have the ability to roll over some items, we will. But the major proteins, chicken, beef, turkey, most of our oils, dressings, most of that has not been contracted for 2008.

We do have a few items, though, however, whose contracts extend through 2008. All of our pizza dough is contracted through 2008, our shrimp is contracted into 2008, our -- the cookie dough for our Bazuki's is contracted through the end of 2008.

So there are some items that are already locked for 2008, but the vast majority of them have not yet been.

Okay. And in terms of the gift card sales, what will be the practice for that going forward? Like, is this one-time in nature or is it something you're going to look at and then spread over quarters evenly going forward on an annual basis or how should we think about that?

We'll be looking at that on a quarterly basis. But the number's going to be very immaterial.

I mean this is since 1998 when we rolled out the gift cards, so we're talking -- we're talking less than probably $50,000 a quarter. I mean a very small number. When you think we've picked up $270,000 since 1998, it's just not going to be that much.

Okay. And is there any -- what are the current initiatives with off premise sales? Can you walk us through that?

Sure. Well, it's quite an extensive project. And it really involves reengineering of every aspect from merchandising and packaging to interior signage to exterior signage to -- it will involve web ordering.

It will also involve curbside cashiering with handheld devices so the guests do not have to leave their cars. So all of that is being totally reengineered.

In addition, in some of our restaurants the curbside dedicated parking spaces aren't really located as conveniently as they should be to facilitate guests using us easy so we're going to be moving a few of the parking spaces around.

So that's really what we're involved in. And different parts of that particular initiative are going to come earlier than others and it could very well be -- well, we're working very, very hard to hopefully commence at least web ordering and curbside cashiering sometime in the fourth quarter.

Now, some of the packaging and merchandising enhancements may have to come a little bit later as we've got to get them into our supply chain and so forth.

But we're working very, very hard to get at least web ordering and curbside cashiering done a little bit earlier because we think those can give us a significant competitive advantage. So that's what we're working on.

We've said that our off premise sales and our large format restaurants are only about 4% to 5% of sales. We know they should be double than that, up to 9% or 10% of sales. It's going to take a while to get there. It'll probably take us two or three years to educate the consumer and to really build that channel.

But we know that there's an opportunity based on what the mass market casual dining operators have done with their curbside programs. So that's kind of where we stand with it.

And then my final question, and I apologize in advance, but I'm having trouble reconciling, like, hearing about Reno brewery operations at maximum capacity and then the potential for strategic partnerships.

I'm just not understanding. If the partnership did happen, how much of the beer would you brew, what would happen to Reno, et cetera?

Well, let me try to help you a little bit with that. It is a little bit confusing. Reno only has the capacity to brew about 15,000 barrels of beer annually.

Right now with 61 restaurants, our demand for beer is probably about 48,000, 49,000 barrels of beer. Every restaurant demands somewhere between 700 to 800 barrels of beer a year.

So as you kind of look at our growth that's projected and you look at internal brewing resources, we clearly either need to make a decision to continue to invest in internal brewing assets or look at the ability to outsource our brewing in mass quantities for some of our larger volume beers.

So it becomes an issue of quality and consistency and, frankly, economics. And it also becomes an issue as to whether or not we want to take our internal management time and capital resources and deploy them into brewing assets or restaurant assets.

And I think what we've determined is based on all of the information that we have to date, the best approach would be to probably brew some of our specialty beers in our Reno brewery over time and over time move more of our large volume handcrafted beers to the right outsource to contract brewing partner.

The other issue that we also have to face is one of a legal issue where as we move further east and south and north with our expansion, the laws get a little bit tougher in a lot of the states with respect to the tight house laws and the three tiers of requirements of prohibiting the manufacture, distribution, and retail selling of beer.

Every state has different laws. So the more that we look like a brewing operator, a brewer manufacturer, then that could present some difficulties to us in some states where we'd like to offer our handcrafted beers and sell them in our restaurants.

Now every state in America has a brew pub exception. But the problem with a brew pub brewing operation is there's no leverage in it. There's no economic leverage.

You've got quality issues and really that's -- you get a situation where you get a restaurant concept with a brewing operation at every location, it becomes very, very inefficient.

The better solution is to brew beer in mass quantities under our supervision with our quality recipes and we believe that the Reno brewery offers an outstanding opportunity to give us leverage.

But in the long run, contract brewing with the right partners will represent the best alternative for our larger volume beers from both a quality, consistency, and economic perspective.

Does that help you understand it a little better?

That absolutely does. Thank you very much.

Okay, good question, though. I sometimes get confused myself on this. We'll take one more question and then we'll call it a day.

Thank you. Our last question is coming from Greg Ruedy from Stephens Incorporated.

Good afternoon.

Hi, Greg.

Anything you've learned in the new markets from a concept usage perspective that you can apply to your home and core markets?

You know there really hasn't been any change in consumer behaviors in our new markets of Florida and Ohio and Oklahoma in terms of how they use our restaurants compared to how they use them in California or Texas or anywhere else.

The sales mixes are relatively the same. There's some slight differences and pizza and beer might be a little bit higher and some markets might be a little bit lower.

Obviously we think that's a function of consumer awareness and education and how to best use this over in terms of us as a concept. But frankly, we really haven't seen much in the way of any new learning from the new markets.

I will tell you what does amaze me is how we can open up restaurants in Pinellas Park and in Tampa or in Millennia Mall area of Orlando or in the Polaris Mall area of Columbus, Ohio where there's significant competition, I mean huge intense competition, not only in casual dining in general but in the bar and grill segment, and for us to open up and to start taking $5 million or more annualized out of those trade areas without any knowledge of our concept, without any advertising umbrella, we're just opening a great location with a great rand identity and hopefully executing it as well as we can, to me, that is quite amazing.

And when we're taking $5 million or more out of a trade area like that, that wasn't $5 million just ran around to be taken. That's coming out of somebody else's hide. And to be able to have a concept to do that I think is quite encouraging for us.

So that's really how I would summarize it. Greg or Greg, you guys have anything to add to that?

I think the new markets are also -- they recognize BJ's for large parties as well, so even Polaris Mall in Tampa and in Orlando you can walk into our restaurants there and you'll see a lot of large parties similar that you'll see in Irvine or some of our California markets.

Okay. Given the early success in a place like Oklahoma City, I believe you were testing that unit in El Paso as a market, were looking at McAllen, Temple, Texas later this year, at what point do you revisit unit potential?

Well, we constantly think about it. And again, we've preliminarily said that we thought that the domestic potential for the concept would be at least 300 restaurants.

But you know, I've been around these businesses for over 30 years and I've watched the great consumer growth concepts kind of evolve not only in the restaurant business but also in the retail business and I find it amazing that as those concepts continue to evolve from the early stages, the managements of those concepts gradually ratchet up the amount of total domestic potential they think there are for their concepts.

And I think probably you're going to probably see that happen at BJ's as we continue to grow and get more exposure outside of our home court of California.

It would not surprise me as we learn more and more about how the concept works and what trade areas that it works that we wouldn't ratchet up at some point what we believe the domestic potential is. But right now we're going to stay at at least 300 restaurants and we'll keep learning.

One more, if I may. With the trend towards open air mixed usage development, any plans to test new real estate formats?

Greg, you want to comment on that one?

Sure. No, we've -- our Citrus Park restaurant is what we call an inline restaurant, so it's custom footprints that we're looking at and next year we've got a couple of custom footprints as well.

We've brought in a fellow by the name of [Mark] who's handling our architecture right now and we're -- we have -- the custom footprint is a great growth vehicle for us.

We've also proven that the concept can work not only in inline locations in malls or at mall pop-outs, it works very well in the open air lifestyle centers. We have freestanding prototypes which work very, very well.

I think, again based on the evolution of the concept and the design and the overall casual plus positioning over the past couple of years, we're now a very attractive restaurant concept for almost any kind of national developer. The concept will work in just about any type of format. So we're very, very pleased with that.

We've got a lot of flexibility there. And in fact, this year in Glendale, California we're going to open up our first urban location in the first floor of an office building and we're very, very excited about that.

And if that works as well as we believe it could, then that could open up many more urban locations for the BJ's concept. So we're pretty excited about the opportunities to develop in different types of locations.

That's all I had. Thanks, gentlemen.

Okay. Thank you all and we're going to sign off now. Please call us at our offices if you have any other questions. Thank you.

Thank you. This does conclude today's BJ's Restaurants, Inc. conference call. You may now disconnect and have a wonderful day.