BJ's Restaurants Inc (BJRI) 2007 Q3 法說會逐字稿

Good afternoon. My name is Mikel and I will be your conference operator for today. At this time I would like to welcome everyone to the BJ's Restaurant's Incorporated third quarter 2007 results conference call. (OPERATOR INSTRUCTIONS) Thank you. 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, operator and hello everybody. I'm Jerry Deitchle with BJ's Restaurants and welcome to our quarterly investor conference call, which we're also broadcasting live over the internet. I happen to be calling in today from Austin, Texas of where we plan to open our 68th BJ's Restaurant here in a couple of weeks. It's a beautiful day here in Texas today and it is a beautiful restaurant that we're getting ready to open here in the southwest part of Austin here in a few weeks.

Joining me on the call today back in our home office in California are Greg Levin, our Executive VP and Chief Financial Officer; Greg Lynds, our Executive VP and Chief Development Officer; and Diane Scott, our Director of Corporate Relations.

After the market closed today we released our financial results for the third quarter of fiscal 2007 that ended on October the 2nd, 2007 and if you haven't had a chance to see our press release today, you can take a look at it on our website at 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 third quarter. Next, Greg Lynds will provide an update on the status of our new restaurant development pipeline. Greg Levin will then comment on our consolidated income statement, our summary balance sheet and our liquidity position as of the end of the third quarter. And after that we'll be happy to answer your questions. We'd like to wrap up the call in about 45 or 50 minutes and we'll 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, October 25th, 2007. We undertake no obligation to publicly update or revise any forward-looking statements or to make any other forward-looking statements, whether as a result of new information, future events or otherwise, unless required to do so by the Securities' laws. Investors are referred to the full discussion of risks and uncertainties associated with forward-looking statements contained in the Company's filings with the Securities and Exchange Commission.

All right, thanks, Diane. Before we begin our comments on the quarter just ended, we'd like to take a few minutes and provide our investors with an update on the impact of the Southern California fires on our business operations. First of all, before we do that, we at BJ's, our entire BJ's family want to express our deepest sympathy and concern to all of our fellow Southern Californians who have lost their homes or businesses or have otherwise been adversely impacted by this very terrible disaster. Additionally, we want to express our deepest admiration and gratitude to all of the firefighters, the paramedics, the law enforcement agencies, the National Guard troops, everyone that's been assisting our fellow citizens throughout the region. They are our heroes and we sure owe them a lot.

With respect to the impact of the fires on our business operations in the region, we are very, very fortunate to be able to say that we have not experienced any material disruptions, any material impact on our business as of today. No restaurants have been closed. Substantially all deliveries to our restaurants have been on schedule. Substantially all of our restaurant staff members have reported for duty, as scheduled. None of our restaurants has been directly located in a burn zone to date. We've had a few that have outdoor patios that for a while had to limit the use of those outdoor patios during periods of heavier smoke and ash. And a few others experienced some temporary, but short, power outages as a result of the fires. On the other hand, a few other of our restaurants experienced a higher than normal sales as a result of the evacuation activity, particularly a couple of our restaurants in the San Diego market that I think has been hit the hardest by some of the fires and has suffered much more from an evacuation perspective.

So, just to quickly summarize, as of today our Southern California business operations have not been materially impacted by the fires and we'll keep you advised if that changes as time goes on.

And now back to the quarter just ended. As we indicated in our press release today, our leadership team was very pleased with BJ's solid financial results for the third quarter. Compared to the same quarter last year, our revenues increased a strong 30% to $80.4 million. Our net income increased an impressive 31% to $3.1 million and our diluted net income per share increased 20% to $0.12. Once again, BJ's achieved very favorable results in spite of the continuing difficult operating environment in general for most casual dining restaurant operators.

You know, I mentioned on our last conference call that in my 30 years of experience in the chain restaurant business, I personally can't recall a more difficult operating environment in general than the one we're all currently experiencing. There are always uncontrollable factors at work that impact any business. But I can't recall a time when nearly all of the uncontrollable factors that impact the casual dining restaurant business model have come together to represent the collective operational headwind that they do at the current time.

We believe that most of our investors are quite aware of the continuing pressure on casual dining consumers in the form of higher food costs, higher fuel costs, coupled with declining home values in general. Additionally, for us in the restaurant operational side, higher commodity costs, higher minimum wages in general are likely going to continue to impact the prime cost structure of our businesses for the foreseeable future. And we're also experiencing higher costs for employee benefits, energy, insurance, higher constructions costs in general and those are not expected to abate any time soon either.

Now, again while all of those pressure are quite significant, it also continues to be our belief that the higher quality, more differentiated and more approachable casual dining restaurants with better value characteristics have the best opportunity to deal with these pressures and have the opportunity to perform relatively well in all operating environments, both the easier ones and the tougher ones like we're experiencing at present.

Now while BJ's is certainly not immune from the uncontrollable headwinds that we're facing in the operating environment, I think that our overall financial performance has continued to track quite favorably when compared to most other casual dining, grill and bar chain operators.

And whenever we get the opportunity, we always want to take a few minutes and remind our investors what we believe the underlying reasons are for that favorable performance because those reasons really tie directly into our business philosophy, the on-going strategic evolution of the BJ's concept and business model. And what we believe is the best way for us to capture additional market share in what we believe is a $43 billion bar and grill segment of the restaurant industry as we continue our expansion across the country.

We've said before that a few years ago we came to the conclusion that the BJ's concept was kind of 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 kind of premium casual or casual plus dining. And during the past couple of years we've worked hard to move the BJ's concept clearly off the fence, so to speak, and move it clearly upward to a premium casual or a casual plus positioning in every respect, with greater quality and greater differentiation.

Now we strongly believe that that positioning represents BJ's best opportunity to capture additional market share in what we believe is the largest and most competitive segment of the casual dining industry, the grill and bar segment. Now there's no question that all of the work that we've undertaken over the past couple of years to upgrade BJ's fundamental competitive positioning has required us to make significant and higher costing investments to add more quality, to add more differentiation to the BJ's concept and at the same time to give our restaurant operators better tools to enable them to correctly and consistently execute our restaurants at a higher level. And these investments have clearly had their typical initial rollout costs and their typical associated learning curve challenges to overcome and those have been clearly reflected in our operating margins during the past couple of quarters. But having said that, we believe those investments have better positioned BJ's to continue profitably growing our market share and to further leverage our business model during the challenging year ahead of us here.

And I think that judging by the recent sales results for both our established restaurants and our new restaurants, we believe the consumers are certainly noticing and appreciating the quality improvements that we've made to the concept.

And as a byproduct of BJ's ongoing evolution to a full casual plus positioning, we believe that BJ's overall pricing power has 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 protect its margins from the impact of normal inflation, not to mention any structural changes that are impacting the prime costs of food and labor, such as periodic minimum wage increases.

We believe that as a result of the strengthened approachability, the strengthened differentiation and value in the BJ's concept, coupled with our successful initiatives to improve overall quality and improve overall execution and keeping in mind that we're starting with a relatively low average check, which we currently estimate to be in the $11.70 range at present, we've been able to recently achieve the benefits of slightly higher menu pricing when we really needed it in this challenging operating environment and not dislocate ourselves relative to our primary grill and bar competitors, most of which have average checks either equal to or higher than ours. And we're certainly going to need to deploy a little more of that pricing power next year to help us protect our operating margins in light of expected increase in our operating costs.

During the year, the full year this year of 2007 our estimated effective price increase will probably be in the mid 4% range and we're likely going to require a similar effective price increase to help protect margins during the upcoming year. But again, with our estimated average check still below $12.00 today and with all of the added value that we've introduced to the BJ's dining experience, we're confident that we have room for slightly more pricing next year.

Having said that, we know that we can't price our rate of success. We also know that we can't save our way to success either. We have got to grow our way to success in a very productive, efficient, leveragable and balanced manner. We're also planning to continue with our initiative to further increase the quality and differentiation of the concept, while simultaneously maintaining our overall price point advantage compared to the other mass market grill and bar competitors that we're up against.

So, in spite of the operating environment, once again BJ's was able to achieve market share gains to drive its business forward during the third quarter, achieve record levels of sales and net income by staying focused on the execution of our strategic growth plan and the implementation of our key initiatives.

Since we don't anticipate much relief in the general operating environment any time soon, it's absolutely critical during these 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. And the fundamental key to accomplishing those objectives is driving sales, which we were able to accomplish quite effectively during the quarter just ended.

As long as we've got the sales, we'll have the opportunity to work on productivity and efficiency and leverage opportunities that we have in our business. And we sure had the sales in the third quarter. Our strong 30% increase in sales for the quarter was driven by an approximate 24% increase in our total restaurant operating weeks coupled with a 5.6% increase in comparable restaurant sales that actually was slightly stronger than we had internally expected. Now, our 5.6% comparable sales increase during the third quarter successfully hurdled a strong 5.3% increase for the same quarter of last year. It also represented our 44th consecutive quarter of positive comparisons on that measure since BJ's IPO back in 1996.

So when you add those two percentage increases together, that's a 10.9% increase in third quarter comparable sales for the last two years, which is pretty remarkable when you consider how difficult the operating environment is and has been and continues to be.

BJ's continues to rank among the leaders in the casual dining segment for driving comparable sales gains. Again, thanks to the inherent competitive strength and points of differentiation of our concept and also to our steadily improving ability to correctly and consistently execute our restaurants. So we have a sales building mentality first and foremost here at BJ's. Internally we say if we're going to error, we always going to error on the side of sales building and that will always be our unwavering focus.

Again, while we were very grateful for our solid comparable sales increase for the third quarter and while our comparable sales comparison for the fourth quarter to date also remains favorably positive, we always want to remind 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 in the 2% to 3% range, which principally reflects our normal effective annual menu price increase philosophy and doing our best to maintain our current levels of guest traffic.

Additionally, during the next couple of quarters we're going to continue to roll over some of the significant sales benefits of our operational tool set roll outs that we've accomplished over the past several months. 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 for 44 consecutive quarters now. We're continuing to work 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 Greg Levin will also comment on some 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 in general with the sales volumes for our new restaurants and which in the aggregate continue to be higher than we initially expected. We believe those stronger sales volumes are principally due to a combination of improved site selection, our upgraded and differentiated brand identity and image as reflected by our new look in our facilities, our improved operational execution and I think growing overall consumer awareness of the BJ's concept - who we are, how best to use us, particularly in our non-California markets.

From an operating margin perspective, the prime cost in our business, cost of sales and labor continued to be impacted during the third quarter by higher commodity costs, principally cheese and produce, and higher minimum wages compared to the same quarter last year. We believe the unanticipated cost increase for cheese alone impacted our diluted net income per share comparison for the third quarter by approximately $0.01 per share. Greg Levin will comment further on these and other cost pressures a little later in our call today.

Additionally, as we've indicated in our conference call during the last couple of quarters, we also experienced some additional cost pressure associated with the initial roll out and the operational learning curve associated with certain of our quality upgrade initiatives. We've upgraded china, silverware, glassware; we have a new linen program in place. We have a new uniform program in place. We also have a new service assistant program in place in our restaurants. All of these roll outs have now been completed as of the end of the third quarter to all of the large format restaurants that are going to get them and their associated learning curve should be fully overcome by the end of the fourth quarter.

While these upgrades represent an incremental cost to our business, they are absolutely necessary to enhancing our casual plus competitive positioning and they also enhance our pricing power. And again, as we've said previously, we believe the consumers are giving us great credit for our upgrades as reflected in our strong sales trends.

So, in spite of the controllable and uncontrollable cost pressures that we experienced in our business during the third quarter, the leverage from our increased sales volumes for the quarter were sufficient to maintain our estimated restaurant level four wall cash flow margin at the approximate 20% level compared to 19.8% for the same quarter of last year.

Additionally, for the second consecutive quarter we were also able to achieve some additional leverage on our G&A expenses, compared to the same quarter of last year, which is trending in the right direction for that expense category. As most of our investors know, while we've been intentionally strengthening our field supervision and our home office support infrastructure for growth during the past couple of years, sometimes you have to pay the price for growth in advance. And that's in essence what we have been doing very thoughtfully and very prudently, we believe, over the past couple of years. The good news is, substantially all of what I would call our catch up investments in this respect will be in place by the end of this year. Accordingly, we currently expect to achieve increasing leverage of our G&A expenses starting next year as absolute G&A expenses should increase at a lesser rate than expected revenue growth.

Now having said that, we're going to continue to make incremental G&A expenses in our restaurant manager recruiting, training, development and retention programs next year, as that is the most critical requirement for future growth in our business model, which is a tier Company operations restaurant business model. We can only grow our restaurants as fast as we can recruit, train, develop and retain the very best restaurant managers available.

We continue to make good progress on our 2007 key initiatives. Here's an update on a couple of the more significant ones. On the cost control side of the ledger, during the third quarter we successfully completed the initial roll out of our theoretical food cost system to all of our restaurants. This system will definitely help our operators track and control food waste by individual commodity category on a weekly basis and we've already begun to realize a measurable reduction in reported waste that is actually slightly better than I think both Greg Levin and I had originally anticipated with the system.

On the sales building side of the ledger, with respect to our initiatives, we're finalizing our work on the re-engineering and re-merchandising of our off-premise sales channel. Curbside cashiering technology will be activated in about 40 to 50 restaurants during the fourth quarter. And we're also going to be pilot testing web-based online ordering in three restaurants during the fourth quarter and again provided that the results of those tests continue to be as favorable as we believe they'll be, I'm confident we'll have a rollout in the first quarter of next year of online ordering.

We also have upgraded to-go packaging. Our signage, our merchandising programs all related to the off-premise portion of our business, all of those programs have been updated and completed and will be gradually rolled out to all of our restaurants during the next six months or so.

I think we've previously mentioned that our off-premise sales of BJ's only represent about 4% to 5% of our total sales and we believe over time with these operational enhancements to the off-premise channel, we have an opportunity over time to double the amount of our total off-premise sales as a percentage of our total sales.

Last but not least, we continue to evaluate more strategic leveragable and long term contract brewing arrangements for our more popular and larger volume handcrafted beers. We still expect to be in a position to make our decision in that respect before the end of this year. We currently are finalizing discussions with a few large contract brewing entities that have the ability to support a national contract brewing arrangement in that respect. And we'll update our investors on our next conference call as to where we come on that.

So, in addition to all of the hard work to open 13 high-quality new restaurants this year, we've also been working equally as hard to open even better restaurants as we grow. And really that's the principle difference between a good restaurant company that is growing and a restaurant growth company. They're very different animals. BJ's aspires to be a restaurant growth company. You know, there are many good restaurant companies that are growing. There are very few restaurant growth companies and that's what we're positioning our business to achieve.

Moving to our new restaurant development. Our planned opening here in Austin in a few weeks will make it a total of 13 openings for 2007, which is right on target for us. 2007 has been a very successful year overall for BJ's new restaurant development and I'm going to turn the call over to Greg Lynds, our Executive VP and Chief Development Officer, to give you his perspective on 2007 development plan and our pipeline for 2008. Greg?

Thanks, Jerry. As we mentioned in our press release today, our new restaurant development pipeline remains in excellent shape. Our development team continues to work hard and stay focused on maintaining our previously stated 18 months of forward visibility for specific new locations at all time.

To date in 2007 we've opened 12 successful restaurants. In the third quarter just ended we opened four restaurants. Our first was in Oklahoma City, Oklahoma on July 17th. Next was Citrus Park, Florida on July 31st. Then McGowan, Texas on August 13th and our last opening of the third quarter was in our home court, Stockton, California and that opened on the 17th of September. So far in the fourth quarter we've opened Temple, Texas on October 8th, Montebello, California on October 15th and Glendale, California opened just three days ago on Monday, the 22nd. Our 13th and final restaurant opening in 2007 will be in Austin, Texas and, as Jerry said, should open here in the next couple weeks.

As we mentioned this time last year, our 2007 plan included our first restaurants in Florida and Ohio. We now have three successful restaurants opened in Florida and one successful restaurant in Columbus, Ohio. Our initial sales volumes for all these new restaurants continue to exceed our expectations and we now have a solid foundation in these markets that will allow us to continue to build out both Florida and the Ohio Valley during 2008 and beyond.

Additionally, we opened two new restaurants in Oklahoma this year. This is a new state for BJ's and, again, we're proud to report that these two new restaurants are doing exceptionally well, with sales volume exceeding our initial expectations.

Moving on to our targeted 2008 new restaurant development plan. We currently expect to open as many as 15 new restaurants next year and increase our total restaurant operating weeks by approximately 20% to 25%. As of today, all of our potential 2008 openings have been secured with signed leases or letters of intent and two of the restaurants are already under construction. We plan to begin construction on another 4 to 5 restaurants prior to the end of 2007.

During the first half of 2008, our development plan calls for continued growth in the Ohio Valley region and central Florida. We have planned new restaurants in Cincinnati, Ohio, Louisville, Kentucky, Indianapolis, Indiana and Kissimmee, Florida. In addition, our 2008 development plan calls for several new restaurants on our home court and our core western markets. This will allow us to prudently balance our growth in both our established and new markets. Our balance growth strategy allows us to better leverage and optimize our field supervision, supply chain infrastructures and to leverage our overall consumer awareness.

As we've discussed in the past, it's difficult to precisely predict the actual timing of our 2008 new restaurant openings due to many factors that are outside of BJ's control. With that in mind, as of today we currently expect to open as many as 2 openings in the first quarter, as many as 4 openings in the second quarter, as many as 5 openings in the third quarter and as many as 4 openings in the fourth quarter. Again, our quarterly opening schedule can fluctuate due to quite a few factors and we will keep everyone advised of any future changes on our quarterly calls.

Our internal real estate and design and construction teams continue to focus on delivering a high quality differentiated restaurant with a non-chain image and ambience. All of our new restaurants feature a large, impressive entry statement. We have high ceilings and detailed contemporary decors. We have wood floors in the dining rooms. Slate and granite material is in the bar. Our raised, well-lit bar is visible from all dining rooms and contains the latest in high quality audio visual technology. When we combine this high energy, casual plus atmosphere with our broad menu, signature pizza, our signature beer, we have a unique differentiated positioning and a great brand to represent to the development community as we compete for some of the best retail real estate sites in the country.

Lastly, over all we're very pleased with the quality of our new sites in our development pipeline. We're pleased with the whole pipeline and I'm confident that BJ's should have many years of solid new restaurant growth to come.

Jerry, back to you.

Thanks for the update, Greg. You know, we've only got 60 restaurants open today and oh, I'm sorry, 67 restaurants open today in only 9 states and we continue to believe there is room for at least 300 BJ's Restaurants of various sizes and site types, domestically.

As Greg mentioned, we continue to plan to increase our productive capacity. We measure that in total restaurant operating weeks by 20% to 25% for the next few years or so. Having said that, as Greg mentioned, 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 to support infrastructure and tool sets in place.

Now I'm going to turn the call over to Greg Levin, our Executive VP and CFO, to review our third quarter financial results in more detail. Greg?

All right. Thanks, Jerry. Let me take a couple of minutes and we'll go through some of the highlights for the third quarter and provide some forward-looking commentary for the rest of 2007 and also for next year.

You know as Jerry previously noted, our total revenues for BJ's third quarter of 2007 increased 30% to approximately $80.4 million from $61.8 million in the prior year's comparable quarter. This increase is a result of approximately 24% more operating weeks, coupled with an approximate 5.1% increase in our weekly sales average. The operating week increase is due to 13 new restaurants that have opened since Q3 of last year and a full quarter of operating weeks from the 2 restaurants that we opened in Q3 of last year.

As Jerry mentioned, our comparable restaurant sales for the quarter were a solid 5.6%. And all of our restaurants in our comparable restaurant base, outside of California, have positive comparable restaurant sales for the quarter. You know, our Texas restaurants, they continue to show some of the best comparable restaurant sales for our Company and collectively the Texas region again had comparable restaurant sales in double digits.

California also continues to be a solid market for us, both in comparable restaurant sales increases and also in sales volumes for our new restaurants. Our San Bruno restaurant which opened in October, 2005 and therefore became a comparable restaurant in the second quarter of this year, had comparable sales of 9%. And our Le Mesa restaurant in the San Diego area, which opened in 1999, had comparable restaurant sales of approximately 11% for the quarter.

Now I think everyone who turns on the TV, listens to the radio or reads the newspaper is familiar with, obviously, the sub prime issue and what the means to California and what that means to the related construction economy here in California, as well. For BJ's, most of our restaurants in California are in densely populated and mature areas. And therefore to date we have not really felt any significant sales impact in these specific locations. That's not to say we are recession proof or immune to these economic issues.

In fact, we do have two restaurants in our comparable restaurant base in what is known as the Inland Empire area of Southern California and this area is an area of high growth, both residential and commercial over the last several years and is now one of the leading counties in California and the nation in both the number of sub prime loans, foreclosures and the number of homes currently offered for sale. Both of these restaurants in the Inland Empire have seen negative comparable restaurant sales this year.

Excluding these two restaurants from our total comparable sales for the quarter, our comparable restaurant sales would be approximately .7% higher during the quarter. With that being said, both of these Inland Empire restaurants are still 5 million plus AUV restaurants and provide a very, very healthy return on investments.

As Jerry mentioned, our comparable restaurant sales continue to trend positive to date in the fourth quarter. I really cannot reiterate the importance of the investments we have made in this business to enable us to drive top line sales and therefore deliver earnings growth in these challenging times. These investments have allowed BJ's to stand out and differentiate itself from the mass casual players and offer what we believe to be a better dining experience. You know, we've said it before - the best return on our investment we can offer our shareholders is by driving sales productively.

Our 5.6% increase in comparable restaurant sales for the third quarter is due to a combination of increased customer traffic, coupled with about a 4.5% of menu pricing for the quarter. As we mentioned before, additional menu pricing is really the last place that we look when we consider actions to protect our four wall operating cash flow margins. Our initiatives center on driving guest counts by improving and differentiating the BJ's experience from the other dining choices facing our guests and by improving our own efficiencies within the restaurant. We do not believe in making guests pay for more for our own inefficiencies.

That being said, looking into 2008 we'll be facing higher commodity costs, higher minimum wage pressure, both in our home state of California, as well as another scheduled increase in the Federal minimum wage and higher energy costs. We believe, based on these cost pressures, that in order to help protect our current restaurant level margins, our effected annual pricing for 2008 will need to be in the 4% range for the full year, which we believe will be in line with many of our tier restaurant companies.

As Jerry previously mentioned, we do believe that BJ's has this additional pricing power and that's thanks to many of the quality improvements that we made to BJ's over the past couple of years in terms of better food, service, facilities and execution and thanks to our relatively low average check at present.

Having said that, we will continue to be very, very careful about our menu pricing in order to protect our principal 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 guys.

Moving onto the middle of the P&L. Our cost of sales up 25.5% was 50 basis points better than last year's third quarter, but basically flat sequentially from this year's second quarter. If we compared our commodity costs right now to last year, we're seeing about 30 basis points more in produce costs, primarily related to avocados and citrus, and another 50 to 60 basis points related to higher cheese costs. That's almost a full percentage point increase in cost of sales compared to the prior year. We've been able to essentially offset these higher costs to date with some modest menu pricing, brewery efficiencies driven in large part by our Reno brewery and from the waste reduction as a result of our theoretical food cost system which was recently rolled out to all restaurants this past quarter.

As we mentioned in our last quarter conference call, the majority of our proteins, sauces, dressings and other commodities are contracted through the end of this year. As such, our purchasing department right now is currently knee deep in contract negotiations for these items for 2008. And based on preliminary discussions with our purchasing department, we currently anticipate an approximate 3% overall increase in our food ingredients for 2008. Just to give you a flavor of what that means, a 3% increase would translate to about a 70 basis point increase in cost of sales for next year, compared to where we are today, absent any additional menu pricing.

Again, we do believe that our planned menu pricing for next year, coupled with reductions in waste and improvements in yield resulting from our new theoretical food cost system should provide us with a good opportunity to offset these inflationary pressures and keep cost of sales in line with where they are today, which is in that mid 25% range.

And one thing to remember that as we continue to grow and open new restaurants, we like all casual, plus or premium casual dining restaurants, a more complex menu with many prepared from scratch menu items, makes serious pressure and cost of sales related to the timing of new restaurant openings as well as the location of these new restaurants. As we have mentioned before, we do expect our cost of sales to be higher at our newer restaurants during the first 90 to 120 days of operations, versus our mature restaurants, as our management teams become accustomed to optimally predicting, managing and servicing sales volumes typically experienced in our new restaurants. In Q4, as Greg Lynds mentioned, we anticipate opening 4 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 third quarter decreased 30 basis points to 34.4% of sales from 34.7% of sales last year. The decrease is really a result of leverage over the fixed nature of our worker's compensation and payroll benefit programs, partially offset by higher hourly wages due to the state minimum wage increases and the cost for our gold standard stock ownership program for our restaurant general managers and executive kitchen managers.

As we previously mentioned in our calls this year, the GSSOP program is an equity incentive program which we introduced in the first quarter of 2007. This program, which consists of restricted stock units and has a 5 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 estimated the cost of this equity incentive program to be approximately $16,000 per restaurant on an annual basis which, again, is less than the cost to recruit and train a new manager.

Looking towards the rest of this year, we expect labor to be right in that 35% range. In 2008, California, as well as the 4 other states that we currently operate in, will have another minimum wage increase. We anticipate that the state minimum wage increases, as well as the Federal minimum wage increase scheduled for next July, will have about 20 to 30 basis point increase in our labor costs for 2008. And again, that is absent any menu pricing. As I previously just mentioned, with food costs we do believe that our targeted menu pricing for 2008 will help us maintain our current labor margins.

Our operating occupancy costs as a percentage of revenues increased 70 basis points to 20.2% from 19.5% last year. This 70 basis point increase is a result of the additional expenses and inefficiencies related to the roll out of the upgraded china, glassware, linen and the uniform programs in our restaurants, plus additional costs related to our deliberate decision to maintain our restaurants in what we call a like new, first class manner.

It's important to note that these enhancements are more costly than our old china, glassware and barware and that linen napkins are slightly more expensive than paper napkins. However, now that we have gotten the initial learning curves behind us, it is our job to optimize and manage this program and thus removing inefficiencies that we incurred in these past couple of quarters. Once we have fully optimized this serviceware upgrade program, the net cost to BJ's should be about 40 to 50 basis points greater than our previous operating occupancy run rate and should be adequately covered though by menu pricing and other productivity increases going forward.

As we've said before, these changes are integral to our overall strategy in moving BJ's away from the commoditized, mass casual restaurant chains, while still maintaining BJ's broad consumer approachability for any dining occasion. 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 40 basis points from the prior year to 7.9%. For those of you taking a look at the equity compensation included in G&A for 2007 and 2006 is approximately $560,000 and $425,000 of equity compensation, which is about 70 basis points in each year.

Excluding the equity compensation, our G&A for the third quarter of 2007 was $5.8 million, an increase of about $1.1 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 mentioned before, 2007 will continue to be a year where we put many of the final touches on our infrastructure that includes both field supervision and corporate support, our manager in training program and additional travel costs related to new restaurant openings in new markets.

Our depreciation and amortization increased 60 basis points, up from the prior year to 4.8%. This increase is due to the higher cost of some of our new restaurants in the Florida market, which because of the construction requirements in this state resulted in higher construction costs than a typical prototype restaurant, as well as higher construction costs for our proto 210 restaurant in Norman, Oklahoma and a related depreciation on some of our initiatives this year, including our flat panel televisions and some minor remodels. Going forward, I would anticipate depreciation to be in that mid to upper 4% range.

Our restaurant opening expenses were $1.9 million during the third quarter of 2007, which was the result of 4 restaurants that opened in the quarter, plus pre-opening rent of $315,000 for the 4 restaurants to be opened in the fourth quarter and 2 restaurants which will be opened in the first quarter of 2008.

It's important to note for people developing their models, that we will incur pre-opening expenses primarily phantom rent for a new restaurant as early as 5 months and it could be in some cases 6 months before a restaurant opens and therefore quarterly pre-opening costs may have a greater variability from the actual number of new restaurants opened in the quarter.

Looking toward the fourth quarter, we anticipate opening as many as 4 new restaurants. Additionally, Greg Lynds mentioned that we have 2 restaurants currently under construction and we expect to begin construction on 4 or 5 more restaurants before the end of the year. That means we could have up to 7 restaurants under construction in the fourth quarter, but will not open until next year. Because of this accounting rule, I anticipate that we will incur close to $400,000 of additional pre-opening costs in Q4 related to phantom rent for restaurants that will open subsequent to the fourth quarter.

In regards to pre-opening expenses for 2008, about 75% of our new restaurants will be partially financed next year from landlord contributions. This is a result of our increasing stature with the major mall developers as we continue our national expansion strategy. These landlord contributions reduce BJ's net capital investment for new restaurants in return for a higher minimum rent. In many cases, we are already paying a portion of this higher rent in the form of percentage rent. And therefore, by taking landlord contributions to help reduce the net capital investment in new restaurants, we are in essence converting a portion of what would have been percentage rent paid to the landlord to be part of the fixed minimum rent.

Since this will result in higher minimum fixed rent, we can expect that for 2008 our phantom non cash rent for pre-opening will increase. I'm anticipating that this increase will be about $30,000 to $40,000 per restaurant in additional pre-opening rents for 2008. We anticipate offsetting some of this increased pre-opening rent with some adjustments in our pre-opening process that we've already implemented earlier this quarter. These adjustments in our pre-opening process should net us a savings of about $20,000 per location. So net net we expect pre-opening costs for 2008 to be in the $470,000 to $490,000 range, that's compared to our target this year which was in the $450,000 to $470,000 range.

Our effective tax rate for the quarter was 31.3%, which brings our full year tax rate to around 32.3%. We do anticipate that our full year tax rate will be in the 32% to 33% range. The lower effective tax rate is due to higher FICA tip credits than we originally anticipated. Our CapEx to date is approximately $55 million, excluding tenant improvement allowances, of which $2 million was related to the flat panel television upgrades 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 $65 million for fiscal 2007 and that is net of TI allowances from landlords. And at the end of the third quarter we had cash and investments of $50.3 million and no funded debt.

As we mentioned in today's call, we anticipate opening as many as 15 new restaurants in 2008 and that the majority of these new restaurants for 2008 will be partially financed by landlord contributions. We anticipate receiving about $1 million per location as reimbursement from the landlord to help construct these restaurants. As such, we have estimated our net CapEx after the tenant improvement allowance from the landlord to be around $70 million in 2008. We anticipate funding this CapEx through our cash flow from operations and cash and investments on hand.

Our diluted shares were approximately $26.9 million for the quarter and we continue to expect that our diluted shares outstanding for the year to be around $27 million. In fiscal 2008 we expect our diluted shares to be in the low $27 million range.

And before I turn this back over to Jerry, I want to make a couple more comments for 2008, as many of you are probably updating your models. As we previously have stated, our top line revenue goal is still to increase our capacity as defined by operating weeks by about 20% to 25% per year. Our comparable restaurant sales goal over the time should equal our pricing, which generally will be in the 2% range. However, for 2008 our pricing will be a little higher, more in the 4% range on a full year basis, to offset some of the external inflationary costs that we and our peers in casual dining are facing.

Our margin goal for restaurants is to protect our restaurant level margins, which is approximately 20% this past third quarter, excluding the equity compensation related to our GSSOP program. We believe going into 2008 that the majority of the requisite tool sets and quality upgrades are now behind us and it is our job to begin to optimize those tool sets and therefore improve our productivity and efficiencies within our restaurants. These tool sets including the theoretical food cost system and the activity based analysis for operating occupancy costs should help us to preserve our current unit margins in 2008.

In regards to G&A, we are currently putting our final touches on our 2008 business plan. However, over the last few years as we've been investing in the support foundation to allow our business to productively grow. In 2008, we should begin to gain some leverage in our G&A support.

And one final area investors need to take into account for 2008 is interest income. Interest income this current year is expected to be north of $3 million or $0.08 per share. Next year [inaudible] beginning cash and investment balances and anticipate interest income to be in the $1.5 to $1.8 million range or approximately $0.04 less per share in 2008 than in 2007.

I know that was a lot there. I'm going to turn it back over to Jerry to wrap up the call.

Okay. Thanks, Greg, for an excellent financial review of the third quarter and just to wrap up our comments and then we'll take some questions here. Once again, BJ's achieved very solid results for the third quarter, in spite of the continuing challenges in the general operating environment.

Thanks to all of the hard work from our restaurant operators, BJ's continues to enjoy strong sales for both our new restaurants and our established restaurants. And for those of us in this business, that doesn't happen by itself. It's a result of a lot of hard work and a lot of things being executed correctly in our restaurants.

As we noted in our press release today in this very difficult operating environment where consumer spending for casual dining occasions and the prime cost of doing business are going to likely continue to be under some pressure for the foreseeable future. We still believe the more successful casual dining concepts are going to be those that protect their overall consumer approachability for all dining occasions and that offer even greater quality, greater differentiation and greater overall value to the consumer. These have always been the hallmarks, the competitive strengths of the BJ's concept and we're not going to waiver from that positioning at all. In fact, we're going to continue to enhance our positioning.

Our new restaurant development pipeline for 2008 is in excellent shape at this point. As Greg Lynds mentioned, we've got signed leases or letters of intent already in hand to support our planned capacity growth at 20% to 25% in the upcoming year. Greg and his team are working hard to get 2009 development pipeline already put together for us. We've got a very comprehensive strategic and tactical plan in place, so really our challenge now is to continue correctly and consistently executing our plan. And keep our unwavering focus on the long term growth and success of BJ's.

So that wraps up our formal remarks and since I'm in Austin and Greg Levin and team are back in the home office, I'm going to turn the call back over to Greg Levin and we'll open up the call for questions. Greg, take it from here please.

All right. Thanks, Jerry. And as Jerry mentioned, that did conclude our formal remarks. At this time, as Jerry said, we'll open up for questions. If we don't have time to get to your questions on this call, please feel free to call us at our offices and we'll try to help you as much as we can. With that, I'm going to turn it over to the operator.

Thank you. (OPERATOR INSTRUCTIONS) Our first question goes to Jeff Farmer of CIBC World Markets.

Great. Thanks. Greg, you pointed to flat restaurant level margins. It sounds like a little bit of G&A leverage, but then also some depreciation and amortization pressure. Does that roughly equate to flat EBIT margins in '08 versus '07?

I think just from a preliminary standpoint that's probably where it's looking at. I think maybe we can get a little bit better on those margins. But as we see it right now, based on where we're taking just purely kind of the menu pricing on some of the optimization, it looks about flat at the restaurant level. I think we'll get better at the G&A and I think we can hopefully gain some leverage in some of those other areas over time.

Okay. And then Greg Lynds touched on this, but you've had two Florida units open and one Ohio unit open for 6 months at this point. Just a little bit more color on sort of where the honeymoon sales are trending? And in terms of margins, where are these restaurants relative to sort of the 20% restaurant level margin the system is seeing?

In regards to those restaurants, like any new restaurant in new markets, you never know where the honeymoon is going to settle out. I was basically looking at both of the restaurants in Florida that have been open for a while. You know what? They've had their honeymoon period, but they've settled at a real nice level, a level that we're still above our initial expectations. Mainly, I think because, as Greg Lynds and we've mentioned before, just AAA locations and AAA execution.

To be frank though, our margins aren't where we want them to be on those new restaurants. We're trying to error a little bit maybe on the side of building sales and building execution in those restaurants in regards to the hospitality.

Same thing with the Ohio restaurant. While it's come down from its honeymoon, it's still over $5 million AUV's; doing extremely well. Again, the margins aren't exactly where we want them to be to date, but they're not too far off. I don't know. Jerry, do you have any other comments for those three restaurants?

Sure. Yes. With respect to Florida, again, we've been very, very pleased with our operations there. And we're getting into season in Florida now so it's really hard to make a final judgment on where the sales volumes are going to end up in Orlando and Tampa because we're just entering season there. But so far, as Greg mentioned, sales have been well in excess of our initial expectations and in Columbus, Ohio sales have also been in excess of our expectations.

And with respect to margins, we continue to make progress toward our targeted levels. Steady progress is being achieved. As Greg mentioned, we're not that far away. Any time you open up the restaurants with the level of complexity that we have in very remote markets from our home base of California where you've had to bring in new management that might be a little bit less familiar with BJ's way of doing things and BJ's style of operations, you have to expect a little bit of a longer period of time to achieve targeted levels of margin performance in these remote restaurants. Having said that, the performance in our home court openings this year have been well in excess of our expectations, not only from a top line perspective, but also from a margin perspective.

So when you take the entire 2007 development program in the aggregate, we are well exceeding our sales and margin performance expectations for the entire year class of restaurants being brought into our system during 2007.

Okay. And then just a final quick question from me. Greg, just to make it easier for us. Total pre-opening in 4Q '07 in dollar terms, roughly what are you expecting? About $2 million?

Yes. I think that's where we came in in this third quarter with 4 restaurant openings, you got kind of 4 restaurant openings as well and you're always going to have that pre-opening rent. So, that's probably within reason.

Okay. Thank you, guys.

Your welcome, Jeff.

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

Thanks, guys. Excuse me. You mentioned a little bit about the development, the timing of the development in 2008, as well as some of the areas, but can you just review that with me? How many of the 15 restaurants are you looking at that are going to be kind of outside your core markets? And then how many in the more mature markets?

All right. Greg, you want to take that?

Sure. Yes. I think on a quarterly basis we're looking at 2 in the first quarter, 4 in the second, 5 in the third and 4 in the fourth quarter. And really our long term development plan is a third of our restaurants in California, one-third of our restaurants built in western states, outside of California, and then a third in kind of the Ohio Valley, Florida or new markets. So, for 2008 we continue to be right on schedule for that, as well.

And as Greg said, I think in the remarks earlier, as much as that's what we're targeting each quarter, there are those factors that are outside of our control in regards to getting them open within those quarters.

Okay. Great. And you mentioned also about California, your sales in your California markets remain strong. A lot of your peers have mentioned weakness in those markets and you guys continue to seem to be somewhat immune from that. Also we've heard that sales fell off in September and October period. When you're looking at Q3, did the trend slow later in the quarter, similar to what other companies have commented on?

We don't necessarily give the monthly comps, but I would tell you July, August, September, October have all been relatively the same.

Okay. That's helpful. And then Greg, you mentioned the tax rate for this year coming in a little lower. Would you expect that that would continue into 2008, in that 32% to 33% range?

You know, I think so. I was surprised it came in a little bit lower. I think looking at our restaurants, while we continue to build a third in California, that's where you get a little bit more of a benefit from your FICA tax tip credit. But I do think kind of that 32% to 33% is probably going to be a 2008 number, as well.

Great. Thank you.

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

Good afternoon.

Good afternoon.

We're happy to hear that everybody is safe there in Southern California; thanks for that update. Are there any commodities that have been locked in at all yet for 2008?

There have been some commodities that have been locked in. Our dough has been locked in through all of 2008. Some of our sauces have been locked in through 2008. We've locked in, I believe, our chicken wings. So, some of our commodities have, but the majority of them still are kind of being negotiated as we speak. Sorry, I'm just looking at this list here. Some of our sauces have already been locked in, as well.

Okay. And in terms of the pricing in the same store sales, are you replacing some of the price that falls off in November?

We are. We'll have additional menu pricing coming in November, which is really our regular time and we're trying to get back to that maybe twice a year. So, we will replace there, I think, in March. We took a little bit of pricing this year, 2007, which we won't replace at that timeframe. And that will get us, Nicole, just to that kind of effective 4% for next year, which is kind of our target.

Okay. So, you're rolling off, I'm not sure I have this. You're rolling off about 1.3% in November of '06, I believe? Will you replace that basically?

That will get replaced. That's correct.

Okay. And then March you won't and then -- but then you'll get back on sort of your June/November timeframe?

That would be our goal. I mean, I think as we kind of mentioned, we'll always continue to look at pricing as our least attractive way to drive sales. And if we see things going through into the June timeframe where we like our margins, we like our guest counts, we like our business, we might not take menu pricing at that time. We'll definitely roll out a new menu at that time, which is traditional to what we do here with two menu roll outs.

Okay. But if you didn't, you wouldn't be on the 4% in the back half of the year and it seems like that is your kind of stated goal. So, we might make that assumption?

That's correct.

Okay.

That's a reasonable assumption there.

Okay. And then it seems like you gave pretty good color. So, July, August, September and October are all the same so you are getting more than your menu price increase in October currently?

Again, we don't necessarily comment on the individual months. But, again, we haven't seen any real change in our comparable restaurant sales.

Okay. I'm not trying to be sneaky, just reading between the lines.

I understand. We're only a few weeks into October, but we haven't seen any changes in our business.

Well, great quarter, great job and thanks very much for the update tonight.

Thank you. Your next question is coming from Larry Miller of RBC Capital Markets.

Yes. Hi, guys. I want to ask you about the operating expense line guidance you gave, Greg. It seems a bit high, I guess, in light of all the investments you made last year. And maybe you can help me understand the rent shift. My sense would be that you're getting more TI dollars up front so you're getting a little bit more standard rent up front, but the benefit is on the operating expense occupancy line, is that correct? And so, if that's right and you add 4% pricing, help me understand why you might think it might be up that much?

I'll do what I can on the time. I might need to talk to you a little bit after the call. But in regards to at least the third quarter, in the third quarter we went basically chain-wide in regards to linens and some of the other initiatives in the serviceware. And frankly those items cost a little bit more and you need to manage them. Wherein the past you could throw away paper napkins, linen napkins you can't throw away or you can get charged a lost charge. And in July and August we saw increasing lost charges, which really drove that number up higher than we anticipated. We've gone back to it to put in what we call these optimization tool sets. It's getting down to understanding our operating costs per guest count. So, you start wondering why one restaurant might be spending $0.14 on linen per guest while another restaurant's doing $0.07.

So it's some of those types of things that we're putting in place to get that cost back in line. And really I wish to say it was something else, but it was really probably just inefficiency from our standpoint in regards to rolling out this new program.

Does that answer your question?

Well, I was thinking more about 2008 guidance. But I guess my thought on that is can linens have that big of an impact on your operating expense line?

You know they have a bigger -- it's not really linens and I don't want to make it sound like its all linens. I was giving that as an example.

Okay.

We replaced just about every, what I would call, guest touch points in our restaurants. The silverware, the glasses we're using, the china we're using, the linen napkins, all of those items and they're items that need to be managed better. Before we had plastic glasses. I mean, we were trying to be this low cost provider in bar and grill, which doesn't seem to be working today and to elevate it we're going with glasses that are made of glass. And you know what? We had breakage that we shouldn't have had. Some of those types of things that we've just gotten better at over the last few months in regards to managing our business.

This is Jerry Deitchle. I just want to just weigh in on this a little bit. Again, these are temporary inefficiencies associated with what you would normally expect with the roll out of any operational changes to this part of your business. You know you're taking a concept that never thought about its business in this way in a lot of respects and you've asked your restaurant managers and your teams to think a little bit differently and behave a little differently with respect to the restaurants, some of these touch points and some of these enhancements.

So frankly, we had what I would consider to be normal learning curve patterns associated with these programs. We've gone back and we've renegotiated our linen contract, to use just one example, because we've learned a little bit about how to be better negotiators. Our operators have learned how to better manage all of these programs. And frankly, I think what happened here is that for the last six months some of our investments in some of these quality enhancement programs which were absolutely necessary were a little bit ahead of what we're going to be asking our guest to kind of consider when they come to a BJ's.

And in our pricing, we've kept our pricing -- our pricing power has lagged a little bit of the investments that we've made. And I think 2008 will be a year where our pricing power will catch up and reflect the investments that we've made and also from an operational perspective all in a learning curve and initial roll out inefficiencies will be worked out of the business.

So, I think 2008 we'll have a much better representation of where you're going to see our business economics going forward. Again, the whole objective of our plan has been to differentiate, add quality to our business, to be able to drive top line sales, preserve our operating cash flow margins at the 20% level. Begin to really drive G&A leverage in the business. We'll have a bit of a trade off on the depreciation side, but overall I believe that the improvement in G&A leverage will more than offset any slight increase in depreciation resulting from some of the investments that we've made in some of the tool sets as well. And we'll be able to have a much improved operating margin going forward in the business, at least that's our opportunity.

But here over 2007, you've seen the pushes and pulls associated with getting this concept up to the altitude that we want it to fly at going forward. And the good news is by the end of 2007 we'll have the aircraft at the right altitude and now we'll be able to navigate our way much more effectively I think going forward into 2008.

Okay. Thanks, I got that. Two quick questions. I didn't hear you say anything about cheese costs, Greg. The 3% inflation, does that include cheese costs? And what are you embedded expectations for 2008 there? And then also just because you're on the last one, so you can answer at the same time, you're taking 4% price next year. Is the expectation for flat traffic relatively speaking?

Yes. A couple things there. When we talked about the 3% increase in commodities, that does take cheese into account in regards to kind of a overall market basket. I think from where cheese is currently, to what we're paying cheese and we were on a kind of a 4 week lag, cheese will probably be down a little bit next year. It will be offset by some of the other pushes and pulls in the market basket. So, again, that's where we got to that 3% number.

In regards to traffic, I think always our goal is to grow traffic. Jerry talked about the off-premise initiative. We'd like to see that to get traffic and get traction by some of the things we're doing there. We're continually looking at to become better merchants. We still haven't quite hit upon where we want to be in regards to being better merchants. And I think those items, as well as some other things that we're working on, will help drive traffic.

Great. Thanks, guys.

Okay. You're welcome, Larry.

And operator, we have time for one more question.

Thank you. Your last question is coming from Mike Smith from Oppenheimer.

Good afternoon and congratulations the two Gregs. As you went through your presentation, I was writing pretty fast. Was Indianapolis the only brand new market you're planning on entering next year?

We kind of look at that as part of the Ohio Valley. We have Cincinnati coming on board. We have Louisville, Indianapolis and then Kissimmee is in Orlando. So, that's the only major new market. Right.

And the other question I have, Greg, when you were talking about G&A and you were talking about travel associated with the openings, now what goes into pre-opening expense and what goes into G&A?

Yes. You know our pre-opening expense and that travel, that is specifically related to the trainers that fly out there to open a new restaurant. For instance, if Jerry Deitchle and myself, Greg Lynds, other people go out to look at that restaurant or we provide additional support after a restaurant opens, that's going to hit that G&A line.

Okay. So, it's a half a million just what you're spending in the store then, basically?

It's a half a million minus somewhere in that 50 to 75 of pre-opening rent.

Right. Got it. Thanks.

All right. Operator, I think that concludes our third quarter earnings call. Thank you, everyone.

Thank you.

Thank you. This does conclude today's BJ's Restaurant conference call. You may now disconnect and have a wonderful evening.