BJ's Restaurants Inc (BJRI) 2008 Q2 法說會逐字稿

Ladies and gentlemen, thank you for standing by, and welcome to the BJ's Restaurants Incorporated Second Quarter 2008 Results Conference Call. (OPERATOR INSTRUCTIONS) This conference is being recorded today, July 24, 2008. I would now like to turn the conference over to Mr. Jerry Deitchle. Please go ahead.

Thanks, Operator. Hello, everybody. I'm Jerry Deitchle with BJ's Restaurants and welcome to our quarterly investor conference call, which we are also broadcasting live over the Internet as usual. Joining me on the call today is Greg Levin, our Executive VP and Chief Financial Officer and Diane Scott, our Director of Corporate Relations. Greg Lynds, our Executive VP and Chief Development Officer is usually on our calls, but he's out traveling this week working on our upcoming new restaurant openings, so he's not going to be joining us on the call today.

After the market closed today, BJ's Restaurants released financial results for the second quarter of fiscal 2008 that ended on July 1, 2008, and if you haven't had a chance to see our press release today, you can see it on our website, that's www.bjsrestaurants.com.

Our agenda for the call today will be as follows. First I'll provide a business and operational overview for the second quarter. Greg Levin will then comment on our consolidated income statement, our summary balance sheet and our liquidity position as of the end of the second quarter and then after that, we'll be happy to answer your questions. We're going to try to wrap up the call today in about 45 minutes and we're going to get started right after Diane provides our standard cautionary disclosure with respect to forward-looking statements. Diane, go ahead.

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 24, 2008. 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.

Thanks, Diane. As we indicated in our press release today, our leadership team was very pleased with our solid overall financial results for the second quarter particularly after considering the current conditions in the macro environment and the very difficult quarterly comparison that we had to overcome. The key message that we continue to communicate internally to our team here at BJs is, we can either let the events overwhelm us or we can do our best to overwhelm the events. Our approach here at BJs is to do our best to overwhelm the events and as a result of that basic philosophy and mindset, we believe that our restaurant, brewery and infrastructure support teams did a very good job of driving our business forward and controlling the parts of the business that are within our control during the quarter despite the continuing challenges in the macro environment we're all aware of that are clearly impacting consumer spending for restaurant occasions in general, but are also impacting the costs of tying inputs to our business.

Compared to the same quarter last year, our revenues for the second quarter went up about 16% to $99.2 million. Our net income for the quarter was $2.9 million, compared to $3.3 million for the same quarter last year and our diluted net income per share was $0.11, compared to $0.12 for the same quarter last year. As I previously mentioned, our quarterly earnings comparison was a pretty tough one this quarter as we were up against a very strong 7.5% increase in comparable restaurant sales and a 40% increase in net income dollars in the same quarter of last year. But we should also point our that our diluted net income per share comparison for the quarter was impacted by about $0.03 per share due to asset disposal costs related to selected restaurant remodels in the current quarter in addition to reduced amounts of interest income and gift card breakage income which we record in the other income line item. All of that compared to the same quarter of last year.

On top of that, the timing of our new restaurant opening costs also represented about another penny per share of impact in the quarterly comparison. Finally, since we had three of our four new restaurant openings occur during the second half of the quarter just ended, we had to absorb all of their pre-opening costs in the quarter and didn't get much of a benefit from their operations during the quarter.

Even so, in the face of all those factors, we were very pleased that our income from operations before restaurant opening costs and asset disposal losses increased about 11% compared to the same quarter last year. Greg will comment in more detail on all of these factors later in the call today. Also, as we noted in our press release today, not only did we achieve a positive comparable sales comparison for the quarter, we also achieved a slight sequential quarterly improvement in our estimated four wall operating cash flow margins to 19.1% compared to 19.0% for the first quarter of this fiscal year.

We commented on our last conference call in April that going forward through 2008 our leadership team had never felt better about the factors in BJs business that we can control. And you know, we still feel that way. We believe that our restaurant management team did a good job of managing our controllable costs and expenses during the quarter Additionally, our infrastructure support and our G&A expenses were also well controlled during the quarter. To that point, our G&A expenses were about 90 basis points lower as a percentage of revenues this quarter versus the same quarter last year. And I think that clearly demonstrates our ability to begin to better leverage that necessary investment in our business.

We also mentioned in our press release today that our 6/10 of a percent increase in comparable restaurant sales for the quarter has successfully hurdled a 7.5% increases for the same quarter last year which also happened to represent our strongest quarterly comparable sales comparison in the last 4 years or so. Additionally, we also mentioned in the press release that our positive comparable restaurant sales metric for the second quarter compared pretty favorably to an estimated decrease of 1.1% for the June quarter in the Navtrak Benchmark Metric of US Same Restaurant Sales for Casual Dining Chain. Greg will provide some additional color on our quarterly comparable sales metric in his comments a little later in our call today.

As we mentioned on our last quarterly conference call, while no one can accurately predict how the consumer is going to continue to react in this very volatile and slowing economy, we here at BJs don't believe that the current macro environment is likely to ease up any time in the near future. We don't think that we're that close yet to the bottom of this economic cycle. So we made a decision last quarter to do our best to accelerate our planned schedule of 2008 key sales building initiatives and to do our best to try to overwhelm the uncontrollable events in the macro environment. And we think we have achieved some initial success in this respect. So far this year, we successfully implemented our curbside cashiering service, our call ahead seating service, expanded delivery service, new lunch specials, improved happy hour programs, and additional print media support for our new menu entrees. During the second half of this year, we currently plan to promote our upcoming and new online ordering service, some new signature menu entrees, an updated wine program, and some new seasonal beers, all of which are currently scheduled to roll out later this year.

Matt Hood is our new Chief Marketing Officer and I'm sure that Matt is going to provide additional strong leadership for us in our overall merchandising, marketing, culinary, and branding activities going forward. In this tough macro environment, we think it's very, very important to continue to drive BJs' top of mind awareness and constantly reinforce our points of quality differentiation with consumers and we believe that we can execute that at BJs without having to resort to excessive levels of couponing and discounting. We just don't have to and don't need to and don't want to get into the couponing and discounting game.

Longer term, we still remain very confident about BJs ability to capture additional market share in the estimated $90 billion casual dining segment of the restaurant industry and I would like to take just a minute and comment as to why we still believe that. In our view, the casual dining segment is still an attractive segment of the restaurant industry and we don't think that $90 billion of annual casual dining sales is going to disappear any time soon. Clearly depending on current pressures in the macro environment, it may not grow as fast as it did in past years, but it is still a very large, highly fragmented segment that is populated with literally thousands of restaurants that in our view have gradually felt what we kind of call a gravitational pull downward over the years in terms of their overall quality, their overall energy level, and their overall points of differentiation. So as a result, we think that many of these restaurants have kind of gradually fallen out of warranty with the consumer so to speak.

I think this becomes particularly evident when the macro environment for the consumer gets tougher and the consumer is economically forced to be even more selective when choosing their casual dining occasions. Then if you've got a restaurant that's fallen out of warranty, what's going to happen next is that your vital organs can start failing. And the most vital organ in our business is the overall quality of the people running your restaurants. Once your vital organs start to fail in our business, it's pretty tough to recover.

We believe that not only are BJs' vital organs in good shape today, they're gradually becoming stronger over time. We're fortunate to have a middle of the fairway higher quality and more differentiated causal dining restaurant concept at BJs and our investors know that we've worked very hard during the past three years to complete the concept's evolution to what we call the full casual plus positioning level and whereby improve BJs' longer term competitiveness and its ability to take additional market share.

We believe the BJs' concept is more contemporary, it's got more energy, and also, very, very importantly, has an average guest check that is in the same range as many of our mass market competitors that have kind of lost their warranty with consumers over the years. And thanks to the quality upgrades that we've added to the concept during the past couple of years, we believe that we've improved BJs' overall pricing power which is very important given all of the cost pressures for key inputs to our operations.

As far as our vital organs go, BJs remains one of casual dining segment's leaders in guest traffic productivity per square foot of restaurant space. Our overall new restaurant site quality continues to improve. Our overall restaurant management talent base continues to improve. Our overall execution continues to steadily improve. Our estimated annualized restaurant manager terminal rate has now dropped below 20% and the fold of qualified restaurant manager applicants has increased by almost 50% this year. Quality attracts quality in the restaurant business and our talent pipeline is the most critical of all the growth pipelines in our business model and clearly the quality of that pipeline is dramatically improved and continues to improve over time.

So our fundamental strategy at BJs remains pretty straightforward. We intend to continue to capitalize on the competitive strengths of our vital organs and continue to position BJs to gain additional market share over time. I think it's important to keep in mind that BJs doesn't even have one half of one percent of the casual dining market yet in terms of sales, so we've got a long way to go.

Obviously our primary opportunity is to gradually increase BJs market share over time and the best way to do that is to open additional BJs restaurants. We've only got 75 restaurants open today in only 12 states. We continue to believe there is room for at least 300 BJs restaurants of various sizes and site types domestically. But having said that, we're going to maintain strong discipline in terms of executing our growth plan in a very careful and controlled manner and we're only going to do it with the right operational talent, the support infrastructure and modern tool sets in place.

As I previously mentioned, Greg Lynds, our Chief Development Officer, can't be on the call today, so I'm going to give the update of our development plan. And speaking about that plan, we're very, very proud that we're doing an excellent job of managing and controlling that key component of our business execution. Our development team has worked very hard to put BJs in a favorable position to successfully execute our previously stated restaurant expansion plan for 2008 which remains solidly in place and which calls for the opening of as many as 15 new restaurants in high quality locations this year. I think it's also important for our investors to keep in mind that our targeted 20% to 25% increase in total restaurant operating weeks for the full year of 2008 does represent the most significant component of our expected growth in total revenues and market share for the year.

We've already opened 8 new restaurants so far this including 4 in the second quarter. We opened one in Kissimmee, Florida which is a suburb of Orlando on May 12th. We opened another one in Greenwood, Indiana which is a suburb of Indianapolis on May 19th. We opened a great restaurant in Baton Rouge, Louisiana on June 9th and a tremendous restaurant in Torrance, California here in our home court of California on June 23rd. To date in the current third quarter, we've opened a restaurant in Peoria, Arizona which is a suburb of Phoenix on July 14th and we opened one in my home town of San Antonio, Texas on July 21st. Tomorrow we're going to open our first restaurant in the state of Washington at the recently expanded and remodeled Westfield South Center Mall in Tukwila, Washington which is a suburb of Seattle. And within the next couple of weeks, we plan to open new restaurants in Carrolton, Texas, which is a suburb of Houston, and in Modesto, California. All of our remaining 2008 projected openings are all under construction and are currently on track to open before Thanksgiving.

It is important to always remind our investors that the actual timing of restaurant openings is inherently difficult to precisely predict and is subject to a number of factors outside of the Company's control including factors that are under the control of our landlords, municipalities, and contractors. Even with some of its current economic difficulties, our home court state of California still represents, in our view, a very attractive development opportunity for future BJs restaurants. Our new Torrance restaurant demonstrates that fact very nicely as our sales in that restaurant have been in the $150,000 per week range since we opened. California has got about 37 million people and we've only got 40 BJs restaurants open in that state today, so we still have significant growth opportunities here.

Additionally, we plan to focus additional development in the state of Texas where there are 24 million people and where we only have 12 restaurants currently open and that's a state where also our comparable sales comparisons have been running steadily positive in the aggregate now for over 3 years.

By elevating the BJs concept of a full causal plus level, we're now in a very exclusive restaurant club so to speak with the national mall and retail center owner/developers. As these developers reinvest in their more productive projects with major facelifts and other upgrades that all can make room to add a few higher volume restaurants to revitalize and drive overall traffic at their projects and BJs is now solidly on that list. And the major developers usually offer landlord construction contributions on reasonable rent terms. During 2008, we now expect to receive approximately $15 million in total landlord construction contributions that will help finance the development of our new restaurants. Going forward, it's our goal to secure an average of $1 million of landlord construction contributions per new restaurant. Now some sites may have more dollars available, some sites may have less or none available depending on each site and each landlord, but on average, it's our goal to secure about $1 million of contributions per new restaurant going forward.

Looking ahead to 2009 and 2010, our primary development strategy remains the same. That is, we want to secure prime AAA sites in very densely populated, more mature retail trade areas. We're going to take a pass for now on most of the greener sites in greener trade areas although we may decide to develop a site or two with some of those characteristics if it makes compelling sense to us to enhance BJs' longer term positioning in a specific geographical area.

During the past three to four years, we've opened more BJs restaurants with some of the largest retail developers in America including Simon Property Group, General Growth Properties, Macerich, CBL, Westfield and others. These relationships are solidly in place and we're going to continue to leverage these relationships to maintain the high quality of our new restaurant development pipeline.

We believe that our site pipelines for 2009 and 2010 are in good shape to date in terms of the absolute number of sites in attractive geographical trade areas for our concept. Having said that, as many of you know, many retailers and restaurant companies are cutting back their short term expansion plans in light of the current economic slowdown. Where this could potentially impact BJs down the line is not necessarily in the number of good sites available to us, but in the desired co-tenancies of the projects in which we want to open and the resultant timing of our decision to develop the sites. Having the right mix of cotenants with us in a retail project is pretty important to us as it is to most retailers and restaurant because of the synergies that all players collectively generate in terms of overall customer traffic and energy for the project. We would prefer not to open in retail projects that are having difficult getting fully leased up with their anchor tenants or that might open with less than say half of their total project leased up.

In addition to the co-tenancy factor, there are some other retail projects which we're interested in opening in, but have been postponed in their entirety for the time being due to the economic slowdown. At this time, we're not going to adjust our targeted range of 20% to 25% growth in total operating weeks for 2009. But we do need to very closely monitor the co-tenancy status of every potential site that's currently in our development pipeline for the next couple of years and we do need to be prepared if necessary to adjust the timing of development of some of those sites, again, based on how the retail environment continues to evolve. And we'll keep everybody advised on that.

Before I turn the call over to Greg, I would like to update you on a few other things. First, as most of our longer term investors know, we've been intentionally strengthening our field supervision and home office support infrastructures for future growth during the past couple of years. As we mentioned on our last call, substantially all of what we would call our catch up investments in that respect were completed last year and now we're on more of a more normalized incremental G&A investment pattern going forward in our business. We will continue to make incremental G&A investments in our restaurant manager and talent, recruiting, training, development and retention programs going forward, because as I mentioned earlier, that's the most critical resource requirement pipeline for growth in our business model which is a pure company operations growth model. We can only grow our restaurant base as fast as we can recruit, train, develop, and retain the very best restaurant managers available. As a result, even having said that, we still expect to achieve further gradual leveraging of our G&A expenses going forward as time moves on.

Also, our in-house brewery operation team continues to be very pleased with the high quality and consistency of the brewing of our two more popular beers by our new large scale contract brewing partner that we brought on in the second quarter. So we're well on our way with this new brewing relationship that's very critical to our future growth. We've been using a smaller contract brewer for several years to support our Texas restaurant beer requirements and now we've been able to add one of the top ten contract brewers in America to our contract brewing team.

Previously, our total beer requirements were frankly in the aggregate too small to attract the attention of the larger-scale contract brewers, but now that we've got 75 restaurants open with an annualized total beer requirement in excess of 50,000 barrels of beer per year, we've been able to get the attention of the larger contract brewers. Last year about 15% of our total beer was contract brewed and we still expect this percentage to gradually grow to the 35% run rate range by the end of this year. Our longer term objective is to have large contract brewers produce substantially all of our larger volume beers and we'll continue to create and brew our smaller volume, seasonal, and specialty beers. So that's an update on our business and operations and now I'm going to turn the call over to Greg Levin, our CFO, for his commentary on the numbers for the quarter. Greg?

Thanks, Jerry. Let me go ahead and take a few minutes and go through some of the highlights for the second quarter and provide some forward-looking commentary for the rest of 2008. As Jerry previously noted, our total revenues for BJ's second quarter of 2008 increased approximately 16.5% to around $92.2 million from $79.3 million in the prior year's comparable quarter. This increase is the result of approximately 19% more operating weeks offset by a slight decrease in our weekly sales average of about 2%. The operating week increase is due to 14 new restaurants that we have opened since the second quarter of 2007 and that's offset by the closure in the first quarter of this year by one of our legacy small format restaurants up in Oregon.

As Jerry mentioned, our aggregate comparable restaurant sales for the first quarter was a positive 6/10 of a percent and we were able to achieve that despite rolling over a 7.5% comparable restaurant sales in the second quarter of 2007 and a softening and what I would call a more challenging economy for the consumer. While we don't normally give monthly comparable restaurant sales numbers, I would like to note that our comparable sales comparisons steadily improved as the quarter progressed.

We've gotten a lot of questions regarding the stimulus check and what effect that may have had on comparable restaurant sales for the quarter and really our answer is we just have no way to determine that. While we did see comparable restaurant sales steadily improve during the quarter, we believe that that was due to BJs competitive advantage to handle large parties. The majority of our restaurants are built with what we call dining room free that allows for flexible seating and can be separated from the rest of the dining room to accommodate large parties. As such, our restaurants tend to do well during celebratory periods and we had a strong comparable restaurant sales comparison on Mother's Day, Father's Day and during mid June graduation weeks.

In fact, as we mentioned earlier in an earlier press release in the second quarter, we had our first BJs restaurant ever to achieve $200,000 in weekly sales and that was achieved during the Father's Day fiscal week. That is twice our company average not to mention it was done on an average check of around $12.00. That's a lot of guests coming through that restaurant, and frankly, and I think this is important to remember, that two years ago we would not be able to handle that type of volume. Being able to do $200,000 a week in sales on a $12.00 check average really goes to the strength of the restaurant management team that did an outstanding job of delivering gold standard execution in hospitality and to the quality fast tool sets that we have implemented in our restaurants over the last few years such as KDS, labor scheduling, and table management.

As we previously mentioned in the first quarter, the softness in our overall comparable restaurant sales metric is were primarily isolated to the Sacramento/Central California region, the Inland Empire areas of California, and the Phoenix, Arizona markets. These are regions of high growth over the last several years and the housing meltdown and related slowdown in overall construction activity are taking their toll on these local economies. And we hear the same sales trend from many of our other casual dining competitors in these markets.

We have 10 restaurants in the Sacramento/Central California region and the Inland Empire area of California that were in the comparable restaurant base in both the first quarter 2008 and the second quarter of 2008. These 10 restaurants in the first quarter of 2008 as we've previously said, had comparable restaurant sales decreases in the 6% range. In this past second quarter, these same restaurant had a comparable restaurant sales decrease in the 5% range. And the average weekly sales for these restaurants improved to just over $121,000 per week. We have mentioned this before, the absolute sales for these restaurants have remained pretty stable. In fact, from Q1 to Q2 you could say we have seen some improvement both in the WSA and their associated drag on comparable restaurant sales. And most importantly, at $121,000 weekly sales average, these restaurants well exceed our return on investment targets.

We have also seen some slight improvement in the Phoenix, Arizona restaurants which we said in the first quarter of this year had in aggregate a decrease in comparable sales of approximately 7% to 8% for the quarter. In the second quarter, these restaurants had a decrease in comparable restaurant sales in the 6% range. For many of our other restaurants in different areas, we continue to see solid increases in comparable restaurant sales. Our LeMesa restaurant in the San Diego area of California and our Laguna Hills restaurant in the South Orange County, California area had comparable restaurant sales increases in the 11% and 7% range respectively. Our Texas restaurants continued to deliver solid comparable restaurant sales increases with both our Willow Brook and Clear Lake restaurants, which are in the Houston market, deliver mixed double digit comparable restaurant sales during the quarter. And our Summerlin, Nevada restaurant, a suburb of Las Vegas, achieved a comparable restaurant sales increase of about 9%.

During the second quarter we opened 4 new restaurants as Jerry mentioned. Two of those were in new markets, the Indianapolis, Indiana and Baton Rouge, Louisiana markets. We are very pleased with the initial sales in both of these new markets. However, we do want to remind investors that many of our new restaurants, particularly those opened in our home court market, California, will often open with higher than normal sales volumes due to the honeymoon period. These honeymoon periods can last up to six to nine months depending on the areas and the developments that we open in. In many cases, we may be opening our restaurants coinciding with the grand opening to a new development which will result in significant honeymoon periods. On the flip side, some restaurants opening in new markets for the BJs concept will open with initial sales volumes less than our average and will usually build over time with consumer awareness, trial, and usage.

During the second quarter, our estimated menu pricing factor was in the mid to upper 4% range which is down from the mid 5% range of the first quarter. We do anticipate menu pricing for the remaining quarters to be in the low 4% range. As we've mentioned before, additional menu pricing is really the last place that we look when we consider actions to protect our full level operating cash flow margins. Our initiatives center on driving guest counts by improving and differentiating the BJs experience from the other dining choices facing our guests and by improving our efficiencies within the restaurant. Thankfully we do believe that BJs has this additional pricing power. Thanks to the many quality improvements that we've made to BJs 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 grille competitors. That is offering a better overall dining experience at BJs for about the same price as the mass market bar and grille restaurant chains.

Before I move on to the middle of the P&L, I do want to elaborate on our quarterly comparison. As Jerry noted, in the quarter compared to the same quarter last year, we reported an approximate $300,000 charge related to the disposals of certain assets as part of our continuing remodel and enhancement program. Also, last year we recorded a one-time benefit related to unredeemed gift cards since we implemented our gift card program in 1998 which was about a $230,000 amount that we recorded last year. And we also had higher cash balances resulting in the higher interest income. The net of these items is about $1 million before taxes or approximately $0.03 per net income per share.

In regards to the middle of our P&L, our cost of sales was 25% and that was 60 basis points better than last year's second quarter and on a sequential basis was 20 basis points better than the first quarter. This decrease, compared to prior year, was principally driven by two components -- menu pricing and a reduction in waste driven by our new theoretical food cost system which was offset by higher commodity costs.

As we mentioned in our first quarter conference call, we expect to see about a 3.0% increase in our overall commodities basket for the full year of 2008. For most of the second quarter, we have seen less than the 3.0% increase that we expected. This lower than anticipated increase in our commodities, coupled with the efficiencies from our theoretical food cost system and menu pricing, has allowed us to maintain our cost of sales percentage. However, we have seen recently an increase in certain commodities and fuel surcharges which I will comment on shortly.

Labor and benefits during the second quarter decreased 20 basis points to 35.2% of sales from 35.4% of sales last year. This decrease is really due to productivity efficiencies, gain in hourly labor offset by higher fixed management costs due to the de-leveraging from softer comparable restaurant sales. Despite the softer comparable restaurant sales, the majority of our restaurants continue to operate at such high sales volumes that our restaurant management team was able to continue to drive productivity and maintain their targeted productivity levels which are based on the labor hours per 100 guest statistics.

Looking at labor on a sequential basis, we saw a 10 basis point decrease from 35.3% in the first quarter of 2008. This decrease is primarily due to lower payroll taxes as a percent of sales since we incur higher payroll taxes at the beginning of each year as we work through many state and federal minimum employer tax requirements. On an overall basis, hourly wages were up in the 2.0% to 3.0% range compared to last year and that's due to California's $0.50 minimum wage increase which took place this January. And sequentially our hourly wages were flat compared, again, to the first quarter of 2008.

Our operating and occupancy costs as a percentage of revenues increased 150 basis points to 20.7%. This increase is due to a combination of higher costs related to the implementation of the previously-mentioned hospitality enhancements which included upgraded china, glassware, linens, and a new uniform program, just to name a few of the items, higher absolute dollars for our utility costs, and the de-leveraging of many of these fixed costs in the softer comparable restaurant sales. From a sequential quarterly perspective, operating and occupancy costs increased 30 basis points due to an increase in marketing and energy costs.

As we mentioned before, our hospitality initiatives were rolled out at the beginning of the third quarter of 2007 and in fact, if you look sequentially at our P&L beginning in Q3 of last year, you'll see our operating and occupancy costs were 20.2% in Q3 of 2007, 20% in Q4 of 2007, and then 20.4% in the first quarter of 2008 as I mentioned. While the 20.7% is frankly higher than we expected, it's really due to the de-leveraging from the softer comparable restaurant sales and the higher than anticipated energy costs for our restaurants compared to last year.

While these hospitality initiatives costs more money in absolute dollars, as we've said before these changes are integral to our overall strategy of 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 the strength of our average unit volumes which are close to $5 million on an average guest check of around $12. And we really can't think of many other volume growth concepts that are doing close to $5 million average unit volumes on a $12 average check.

We firmly believe that in these tough economic times these high quality guest touch points continue to help differentiate the BJ's dining experience and therefore give us a competitive advantage over many of the commoditized, mass casual players that are looking to save their way to success instead of prudently controlling what they can control and growing their way to success by exceeding the guest dining experience.

Our general and administrative expenses in the second quarter of 2008 decreased 90 basis points from prior year to 7.6%. Included in G&A for both 2008 and 2007 is approximately $617,000 and $555,000 of equity compensation, respectively, or 70 basis points in each year. Excluding the equity compensation, G&A for the second quarter of 2008 was $6.4 million or 6.9% of sales, which is an increase of about $260,000 in absolute dollars from prior year. The $260,000 increase in G&A is primarily related to costs for our field supervision including wages and travel offset by lower costs related to our manager in training program. In addition, during the second quarter, we reduced our corporate bonus accrual by about $200,000.

Sequentially from quarter one of 2008, G&A decreased about $400,000. This decrease is a result of less salaries and travel and lodging related to expenses for our manager in training programs as compared to Q1 of 2008 and the reduction of our corporate bonus accrual of about $200,000 as I previously mentioned. The decrease in our manager in turning expenses is a result of lower manager turnover, as Jerry mentioned, thus reducing the number of new managers we need to hire to continue our growth rate. In addition, it also means more seasoned managers for our new restaurants which is absolutely critical when executing a BJs restaurant which turns out higher guest profit and more complexity than most of our peer restaurant companies.

In addition to the lower manager in training costs for the second quarter, we were able to more effectively control costs related to legal, consulting, and a variety of other general corporate costs. Depreciation and amortization was 4.9% which sequentially was flat compared to Q1 of 2008. Our restaurant opening expenses were $2.2 million during the second quarter of 2008 which was the result of four restaurants that opened in the quarter, plus pre-opening rent of approximately $300,000 for the restaurants expected to open in the next two quarters. As we previously mentioned, we anticipate total pre-opening to be in the $500,000 range per restaurant.

Our effective tax rate for the quarter was approximately 29%, which is about 200 to 300 basis points lower than what we anticipated. The lower effective tax rate is primarily due to our tax rate interest on our auction rate securities, which I will comment on shortly.

Our CapEx year to date is approximately $37.1 million net of landlord improvement allowances and we still anticipate our CapEx for 2008 to be around $60 million, again, net of landlord allowances.

Before I turn the call back over to Jerry, let me spend a couple of minutes commenting on our liquidity position and also provide some forward-looking commentary on the rest of this year. As we have previously disclosed and discussed, we currently own $37.1 million in face or par value auction rate securities that remain illiquid. The auction rate securities we currently own are all student loan collateralized obligations. These student loans are public student loans guaranteed by the US government under the Federal Family Education Loan Program or the FFELP Program. These securities were sold every 7 to 35 days as part of the normal auction process, which up until February 2008 had worked for over 20 years. However, beginning in February as a result of the credit crisis, the auction process failed for these types of investments. We're not alone here, as many corporations and individual investors held over $300 billion of auction rate securities when the market failed in February.

The interest we earn on our auction rate securities is tax-exempt. This so-called penalty interest rate for the investments we hold is primarily based on what is called the SIFMA Municipal Swap Index, which SIFMA stands for the Securities Industry and Financial Markets Association. Plus an applicable penalty spread. From my understanding, because we own the tax exempt student loan auction rate securities, our investments continue to pay interest during the penalty period and do not reset at zero for any period of time, unlike some of the other student loan auction rate securities.

Because of the illiquidity of these investments at the current time, in accordance with FASB 157, fair value of measurements, we continue to obtain third party valuations for our investments. Because there is currently not an active market to compare to like investments, the valuation process is very subjective, in which slight changes to the inputs used can have a dramatic effect on the valuation of each security. Based on these valuations, we have recorded a temporary impairment in the value of these investments of approximately $2.0 million or about 5.5% through the second quarter of 2008. This temporary impairment was recorded in Other Comprehensive Income, which is part of shareholder's equity on our balance sheet and was recorded in accordance FASB 115, which is accounting for certain investments in debt and equity securities. This temporary impairment does not affect current income or earnings. However, if circumstances change in the future and we determine that we have a permanent impairment in the value of these securities, then we would be required to take a charge directly to our income statement.

In regards to our liquidity, we currently have a $45 million line of credit with only $5 million outstanding at the end of the second quarter. This line of credit, cash flow from operations, and our expected tenant improvement allowances should be sufficient to provide us with the liquidity to execute our current restaurant expansion plans through 2009 not to mention that we also own 4 fee properties that we could monetize if we so chose.

Now let me provide some forward-looking commentary on sales and margins for the remainder of this year based on our information and expectations as of this date. All of this commentary is subject to the risks and uncertainties associated with forward-looking statements as discussed in our filings with the SEC. Additionally, I would also restate the obvious, in that the economy continues to slow and gas, energy, and food prices continue to be high and the outlook for these commodities remains uncertain. Additionally, being only three weeks into July, it's hard to ascertain if the economic stimulus checks had any real bearing on our sales in the second quarter as I already mentioned. And as Jerry mentioned, while no one can accurately predict how the consumer will continue to react in this volatile and slowing economy, we do not believe that the current difficult operating environment is likely to ease up in the near future. We don't think that we're close to the bottom of this economic cycle quite yet.

Additionally, we want to remind investors that we need to take into consideration the structural changed in the local economies that have occurred and continue to occur in the Sacramento and Inland Empire areas of California and the Phoenix, Arizona area. These areas continue to have good overall population densities to allow us to achieve our sales targets and return hurdles on our restaurants in these markets. However, from the comparable restaurant sales perspective, we should not be looking to these 13 restaurants in these particular trade areas to be positive contributors to our consolidated comparable sales metric for the rest of this year. However, if we can continue to maintain the current level of guest counts for those restaurants, which have been stable week to week since early January, 2008, and we can get our normal pricing, I do believe that these restaurants can be positive contributors to comparable restaurant sales next year as they lap this current timeframe.

With all that being said, we believe it would be prudent to continue to expect flattish comparable restaurant sales for the rest of this year with our expected menu pricing largely offsetting expected guest traffic declines. We do not anticipate opening as many as -- I'm sorry, we do anticipate opening as many as 5 new restaurants during the third quarter of which 4 are anticipated to open in July. And therefore, we estimate an increase in our restaurant operating weeks of about 20% to 22% during the third quarter. In regards to the fourth quarter, based on our current estimated opening date, we anticipate our restaurant operating weeks to increase by about 17% to 20%. However, I do want to remind investors that the actual timing of restaurant openings is inherently difficult to precisely predict and is subject to a number of factors outside of the Company's control including factors that are under the control of the Company's landlords, municipalities, and contractors.

Based on our opening schedule to date, we have only opened one new restaurant in California and that was in Torrance, California and we anticipate opening one new restaurant in California during the third quarter and three restaurants in California during the fourth quarter. As we mentioned before, our California openings tend to generate higher absolute sales volumes than our non-California openings to absolute population densities in California and overall brand awareness of the BJs concept which started here in California. In fact, as Jerry, mentioned our Torrance restaurant, which we opened in late June, has averaged in the $150,000 range since its opening.

Because our California restaurants are more backend weighted this year and represent about a third of our new restaurant openings, I would continue to expect a decrease of our weekly sales average in the 2% range which has been the trend over the last few quarters beginning in 2007 as we started our nationwide expansion and reduced the amount of California openings as a percent of our growth to roughly one third of our new openings.

In regards to margins, our restaurant operators did an excellent job managing the areas within their control and in fact, we were able to expand our restaurant level cash flow margins on a sequential basis by about 10 basis points to 19.3% if you exclude the equity compensation. However, as we mentioned on our fourth quarter conference call, we anticipated needing about a 4.0% increase in comparable restaurant sales this year to match our four wall restaurant economics that we achieved in 2007. While our gross menu pricing will likely be close to our originally expected target of 4.0% for 2008, our guest traffic in comparable restaurants is expected to be negative this year, which will likely have the affect of de-leveraging certain fixed costs in our business model.

Based on our current commodities contracts and the productivity from the theoretical food cost system which was implemented in the fourth quarter of 2007, we have been able to maintain our cost of sales in the low 25% range. Currently, the majority of our commodities under contract, which typically run from January to December except for cheese, which is about 8% to 9% of our cost of sales. We are beginning to experience some pressure on cheese which moved above the $2 per pound in May compared to about $1.80 to $1.90 per pound price that we experienced in the first quarter of 2008.

Also beginning in July of this year we entered into a new sandwich bread contract that was about 5% higher than our old contract. Sandwich bread makes up about 5% of our cost of sales and with the price of diesel increasing to around $4.80 per gallon, we are seeing an increase in our fuel surcharge which in the past has been around 10 basis points in cost of sales. To try and offset these pressures, we are taking many proactive steps including reviewing our case sizes and freight consolidation for some of our key ingredients. One thing we will not do is cheapen the quality of the BJs concept. We are not looking for less quality, smaller portions, or cheaper products. Consumers today are demanding even better value and better quality and therefore we believe the more differentiated, higher quality concepts have a better chance of not only defending their market share, but also growing their market share. However, we do understand the pressures facing the key inputs to our business and we will do everything we can to stay as productive and efficient as we can be. With that said, I would anticipate that based on the slight increases in our input costs, such as cheese, bread, and fuel surcharges to name a few, plus we will have some inefficiencies from the six new restaurants that have opened in the past 60 days, the cost of sales will likely be in the mid to low 25% range.

Recently we've been asked to provide some forward-looking statements on our expectations for commodity cost inflation in 2009. It is difficult for us to comment with a high degree of certainty on this subject because really three factors. First, the overall food commodity markets remain very volatile in general. Second, fuel cost plays a significant role in our FOB pricing from our vendors and fuel costs remain volatile. And thirdly, we are just beginning the 2009 negotiation process with many of our vendors, so we really don't have much of 2009 finalized as of today.

With those factors in mind, and based on what we know and expect as of today, we currently believe that it would be reasonable to preliminarily expect the overall costs of our basket of food commodities to increase in the range of 6% to 8% next year which is pretty consistent with some of the estimates we have seen from other restaurant companies with varied menus. Again, our current expectation is subject to significant risks and uncertainties in the food and energy commodity markets. We should be able to comment more definitively on this subject when we have our next investor conference call in late October.

I think one thing that's really important to remember for BJs is we are starting with a relatively low average check compared to many other restaurant companies. In fact, if our market basket of commodities were to increase, for example by 6% next year, excluding any pressure on labor or other operating costs for us to be able to maintain our dollar profit and what we call our prime profit percentage, which is cost of sales and labor, we would only need to increase the average check by about 2.5% or approximately $0.25 to $0.30.

As such, our average check would still be in the $12 range and when we compare that average check to many of our peers in casual dining, we believe we provide a much better value for the overall dining experience, especially when you consider all the upgrades we have made to our concept over the last few years. Not to mention that these upgrades give us the pricing power. So if we choose to deploy it, I think we're in a better position than many of our peer restaurant companies. In this business, you can't just raise prices without improving the overall dining experience. The guests have too many options, too many to choose from, and are too sophisticated to accept this strategy which may have worked five or ten years ago for other concepts.

In regards to labor, we currently anticipate that labor that will likely be in the low 35% range for 2008. We expect our operating occupancy costs, based on our current revenue expectations, to be in the mid 20% range.

As Jerry noted, we have pretty much completed the requisite investments necessary for our infrastructure as we build a national restaurant growth Company. Therefore, we should continue to see leverage in G&A this year, based largely on the incremental sales expected to be contributed from new restaurant openings.

For the first six months of this year, our G&A has increased about 11% compared to last year as we've been able to gain sales leverage over the fixed portion of our G&A costs and we have seen lower absolute dollars on our manager in training program due to better retention rates than in the past. Therefore, we still anticipate from an absolute dollar perspective that G&A will grow in that mid to low teens as compared to last year. We currently expect opening costs to be about $500,000 per restaurant. However, we will incur pre-opening non-cash rent as much as five or six months before a restaurant opens and therefore pre-opening costs for any quarter may not be indicative of the number of restaurants that open in the quarter.

For the third quarter, this upcoming third quarter, we expect to open as many as 5 restaurants, plus we expect non-cash [standard] rent for as many as 4 restaurants to be opened later in the year. I estimate that our pre-opening costs could be as much as $2.9 million to $3 million in the third quarter. I expect our income tax rate for 2008 should be in the 29% to 30% range, due primarily from the tax-exempt interest expected to be received from our investments. And we continue to expect that diluted shares outstanding for 2008 will likely be in the 27 million range.

With that, Jerry, that was a lot there, I'm going to turn it back to you.

I'll say that was a lot, Greg. That was one of the most complete and thorough financial news that we've had. And you know, we have a lot to say and I'm glad that we were able to take the time to do it And as a result of that, we'll keep our call live for a little bit longer to take as many questions as we have. But before we open it up for questions, I want to take one more minute and just reiterate our confidence that 2008 still offers a significant opportunity for BJs to continue to gain market share in the casual dining segment. Our leadership team has never felt better about the factors in our business that we can control. The vital organs of the BJs concept are in great shape, the BJs concept still has a very strong warranty with consumers, and I've been in the retail and restaurant chain business for over 30 years and been through a number of cycles and I can say with some certainty that tough times never last. But well positioned concepts likes BJs' that are well managed and well executed by committed professional management teams, do have a tendency to last. And at BJs we remain fully committed to our longer term strategy to drive our concept and build our business and we're going to try to do our best to position our business to really take advantage of the next economic up tick when it does come around. And until then, we're going to do our very best to drive sales, control what we can control, and as I mentioned at the beginning of our call today, we're going to do our best to overwhelm the events.

So that concludes our remarks and at this time, we'll open up 'er up for calls. Operator, please start taking questions.

(OPERATOR INSTRUCTIONS) Our first question comes from the line of Jeff Farmer with Jefferies & Co. Please go ahead.

Good afternoon, guys. You mentioned that same store sales steadily improved as the quarter progressed. So two questions there. Did that trend carry over into July? And then the second part of that, is there any particular top line initiative that you can point to as a driver?

A couple things, Jeff. We really can't comment on July. The only thing I would say is with July 4th moving to the Friday, that really froze out the first couple of weeks of July to get an understanding because unfortunately you kind of lose that weekend. You lose that Friday which is a strong Friday as people are doing something different for July 4th and you kind of lose that Saturday. So being only three weeks into it, it's really hard to give a top line perspective in regards to that.

Okay.

As far as the impact of the specific sales building initiatives, as we mentioned in our press release and in our comments, Jeff, we've got a number of things that are kind of working in tandem out in our restaurants today. We have our curbside cashiering service, our call ahead seating service, we've expanded our delivery service, we have lunch specials in 22 restaurants. And based on the favorable results of those lunch specials, we will expand that program to all of our restaurants here in the third quarter and we will give that some media support. So there are many, many things that are happening concurrently from the sales building initiative perspective in our restaurants and I think are helping us to protect our market share. And frankly, to get enough menu pricing to offset, at least in the second quarter, the decline in guest traffic that we experienced.

You definitely produced a lot of detail on the initiatives, I guess I was just curious if there were any standouts for you so far in the early days.

No, the only thing that I would comment on is that a lot of these initiatives are going to take some time to build. We've been very pleased with our off premise initiatives, the curbside cashiering initiative in particular. We have seen about 0.5% increase in sales with respect to our overall off premise sales. So I think that's early results of what we've been talking about for a couple of years now in terms of the under delivered channel for off premise sales in BJs in general and what off premise can do for us given our menu. We also mentioned that we have our online ordering capability which will be completed from a rollout perspective this quarter and we do intend to give that some external media here before the end of the third quarter. So I think we'll be one of the very few casual dining chains of our size and scope of operation or larger out there that have rolled out chain wide online ordering and curbside cashiering which we believe should give us a bit of a competitive advantage.

Okay, than sort of switching gears on you, I think your first two Florida units and I think the first Ohio market unit have been open for more than a year now. So sort of looking back, I know they opened pretty big, but a year plus later, are they still performing pretty well for you?

The answer is yes, Jeff. We're very satisfied with the aggregate performance of our restaurants in Florida. And it still represents in our minds a very prosperous market that will be a very fertile development ground for BJs restaurants. And going forward in the future our intention will be to develop out Central Florida and Northern Florida before we take on South Florida which, based on my prior experience, it can be a very challenging market to develop. But we do have prospective sites in Gainesville and Jacksonville as well as a few more in Tampa and a couple more in Orlando that we would intend to put into our development plan over the next several years.

Okay, and then final question for me, Greg, I might have missed it, but did you give the average weekly sales number for the quarter?

I did not, but it's I think 98 -- hold on a second here-- it was 100.9.

Say that again?

The weekly sales average was 100.9.

Okay, I gotcha. So $100,900.

Correct.

Okay, thank you very much, guys.

Thank you. Our next question comes from the line of Matt DiFrisco with Oppenheimer. Please go ahead.

Hello, this is Jake Bowman in for Matt. I have a question about your comp guidance and I guess if you can give us some color about how you expect it to proceed throughout the year. So third quarter versus fourth quarter. I know the year ago comparison has eased. I'm also wondering whether there's an impact happening from stores coming into the comp base that might be dragging it down even though you're kind of getting easier year ago comparisons.

We don't give quarterly comp guidance. I think the way we look at it, which we said in the formal remarks is, we're kind of thinking it's going to be flattish for the rest of this year. That's kind of the best we can give at this time.

Okay, but is there anything specifically that you're seeing? I mean on a two year basis it does decelerate, that implies deceleration. I'm just wondering whether there's something that you're seeing now that is leading in that direction.

Yes, I think what it is is those 13 restaurants that are in the Sacramento area of California, the Inland Empires, and the Phoenix markets. So you've got 13 restaurants there of 54 in our comp base that as I kind of mentioned were doing negative 5% to negative 6% range. I think I said negative 5% in California so there's ten there and negative 6% in the three in the Phoenix market. So those are what have really brought us down and really that's kind of the -- to some degree a macro picture even though as Jerry mentioned, we're doing what we can to continue to drive sales in those areas and hold onto our guests and eventually get those positive again.

Okay, great, and one question just about the remodel, the remodel program. How many stores did you remodel and could you maybe describe whether that's, whether you expect that to be ongoing throughout the year, whether we might see some similar charges.

There were actually a couple of restaurants, some of our older restaurants that we want to put our current interior and certain components of our exterior look on our new restaurants to gauge guest reactions and to gauge whether or not there was a reasonable return on investment profile for those particular investments. I think we're a little bit early in that, but overall we're very, very satisfied with what we've seen so far in terms of guest reactions, in terms of staff reaction and in terms of our incremental sales performance. And we'll try to provide some additional metrics on that on our next call.

We have not yet committed to any additional major renovations or remodelings. About 15 or 20 restaurants that frankly still have what we internally call the industrial cozy look from the early part of this decade and clearly the concept has evolved past that as we've added the casual plus interior and exterior look and energy and feel to the concept. So everything else being equal, I think over time we would love to go back and get that group of restaurants that kind of opened from the year 2002 through 2006, we might give them a little bit of a facelift and bring them more current to the current look of our concept. But obviously that requires a little bit of time and a little bit of money and we have to factor that into our plan. But we did want to do a couple of experiments to gauge overall results. So far they've been very favorable and we'll see where we go from here.

I think one other thing that's in there is we've gone through and we'll continue to go through and upgrade our television technology. So we replaced some of these old televisions that were basically kind of a 4 by 4 cube with a 103 inch plasma right in the center of our bar that just looks fantastic. It really gives a huge pop to our restaurants and we will continue doing that through the rest of this year and into next year.

That's very important, I forgot to mention that, Greg. Thank you. You know, the whole video, television positioning of the BJs concept, is one of the high quality points of differentiation of our business in casual dining. We're not a sports bar. We are a casual dining restaurant that happens to have some of this great technology. And one of the many reasons why guests visit us is because of our televisions and particularly that 103 inch plasma provides a video statement in casual dining that we believe is second to none.

Great. Thank you very much.

Thank you. Our next question comes from the line of Brad Ludington from KeyBanc Capital Markets. Please go ahead.

Thank you. I just had a couple of questions on-- well first off, has the percentage of to-go sales increased at all with the delivery and curbside and all that yet? Or is it too early to tell?

We have seen about 0.5% increase in our off premise sales. So while they might have been at 4%, 4.5%, we've seen it up closer to 5%. So still a ways to go but it's looking very promising for us.

Okay. And then when you look at the delivery, what percentage of the store base do you think that could go to? I would imagine there are some markets that aren't large enough to support the delivery.

We've rolled out either internal or outside third party delivery service to substantially 95% of our restaurants. The restaurants that we haven't rolled it out to have a constraint generally because of where they're positioned on the street to where we can't get dedicated parking or dedicated curbs or have enough space for the cars to get in or out from the delivery service, whether it's ours or whether it's an outside service. So we have rolled it out during the second quarter to substantially all of our restaurants and that business will begin to gradually build over time.

Okay. And so, Greg, what did you say the CapEx in the third quarter was? My phone kind of went fuzzy there.

I think what I gave was we spent $37.1 million year to date.

Okay.

And we still expect that $60 million net CapEx, those are net CapEx after tenant improvement allowances.

All right, well thank you very much.

Thank you. Our next question comes from the line of Destin Tompkins with Morgan Keegan. Please go ahead.

Thank you. Jerry, you mentioned the development target for 20% to 25% square footage growth, that you guys weren't going to change that for 2009. But can you kind of handicap that as we look at 2009 and the potential that there may not be as many good sites available with the cotenants that you would typically look for? Can you kind of give us a little bit more color on maybe what that could look like if it, if things don't turn out too good?

I think we'll know more about that over the next three months, Destin. Right now, if I had to comment on the overall pipelines, and I'm looking at them right now, of the approximate 30 restaurants or potential sites that we have in our current pipeline, there are clearly at least 15 that do not appear to have any of these co-tenancy issues. And there's probably some other ones -- again, I'm not as close to it specifically as Greg Lynds is, that's one of the reasons why he's out this week. We're really trying to get with all of our developers and understand all of their leasing issues and opportunities.

So the challenge, as I mentioned earlier, is not necessarily having enough satisfactory sites to pick from, but trying to get them scheduled in in a thoughtful manner. So give us another three months or so to get a little more information and then I think by our next quarterly conference call, I think we'll be able to give a much more fair handicapping of what we're going to be seeing out here. But right now, I think we're pretty confident that in the aggregate we'll have enough to execute that capacity growth for next year. But it's a very quickly evolving situation out there. We have to stay on top of it.

Okay, and then following up on that, have there been any changes in terms of the development cost trends because maybe there's maybe less competition for some of these sites or has that really not changed too much?

I think it's fair to say that there have been some very slight improvements for tenants like ourselves in terms of some of the rent terms, some of the landlord construction contributions available. But there haven't been any material favorable changes yet.

The type of sites that we seek to develop are AAA sites with the major developers, are highly desirable sites, and developers have not yet begun to dramatically or materially reduce any of their lease economics on that particular collection of sites. What we have seen however is with the reduction of development in a lot of the smaller concepts that require a couple thousand square feet, for example the Jamba Juices or the Starbucks where they have pulled back their development, a lot of these major developers used to take 10,000 square foot or 8,000 square foot spaces that were highly desirable on the point corners of their projects and they used to reserve them for that group of prospective tenants. Not that a lot of those tenants have pulled back their development, we have seen some of those 8,000 square foot sites become available to us which obviously are very, very attractive to us. So we have seen that occur, but as far as any material improvement in lease economics, I think it's fair to say we have not yet begun to see that yet. Greg, would you want to add anything to that?

I think the other would be the construction costs. And right now most of our jobs are currently bid out for this year so we're not really seeing much changes there. But I do know that that market is slowing and I think we'll, hopefully as we get into 2009, we'll be able to get some general improvements in that area.

Okay. And then on menu pricing, you mentioned the 6% to 8% food cost inflation is your best guess for 2009 and the 2.5% of average check needed to offset that. Can you kind of give us maybe your philosophy on that menu price given that traffic has been a little soft here recently? Does that change your pricing decisions as you go into 2009?

I'm glad you asked that question. Our basic philosophy with respect to menu pricing is that is the last consideration that we will give to our margin protection program. Just like all the other great restaurateurs and high quality restaurant operations out there, we will work hardest on productivity and efficiency and execution and we will pull all of those levers before we will reduce the quality, before we will reduce portion sizes, before we will do anything to subtract from the guest experience. And after we've worked all of those opportunities in our margin protection plan, only then would we consider menu pricing.

As far as BJs is concerned however, maybe-- and this might be contrasted a little bit to some of our other restaurant chain competitors, we believe we have, everything else being equal, a little more pricing power in the BJs model today than maybe some of our competitors do. First of all, as Greg mentioned, our average check is still in the $12 range so a 2.5% increase on say a $12.50 average check is about $0.30 if my mental mathematics serves me correctly. So asking our guests to pay another $0.30 or $0.35 and taking our average check up to say $12.50 to $12.80 or so is clearly something that, everything else being equal, we would be reluctant to do, but then compared to our competitive set, it does not dislocate our relative prices from those of our mass market competitors. So I think what we have to do going forward is to-- we have about 100 items on our menu. We're not a 20 item menu offering where it's a little bit harder with 20 items to camouflage your price increases. We do have 100 items, there is a bit of a science to it, there also was a bit of an art to it. And we'll carefully consider menu pricing as a final component of our margin protection plan. So that is our basic philosophy. I think we have a little more room than a lot of chains do to take a little bit of price.

The other thing strategically I think that's important when you're running a restaurant business, is that even during these challenging times, most restaurants, most good restaurant operations, Friday, Saturday, and Sunday, they're full, they're running rates. Where our business is hurt and where maybe some of our competitors are hurt more has been during the early week and particularly the lunches. So Friday, Saturday, Sunday where you typically get 55% of your sales and you're on rate, you want to get full menu pricing. You've got to get the benefit of your menu pricing. Now you may have to give back a little bit of that benefit lunches Monday through Thursday in order to protect your guest traffic in this particular environment. And I think with our new lunch programs, we may have to do just that. But nevertheless, the turn and earn dynamics of our new lunch programs are such that from a gross profit dollar perspective, we actually come out ahead, again, based on the structure of those offerings. So that's kind of a number of different pieces to our overall menu pricing philosophy.

Great. Thanks for taking my question.

Okay, that was a good question, thank you. Any more questions?

Yes, thank you. Our next question comes from the line of Nicole Miller with Piper Jaffray. Please go ahead.

Good afternoon. On price, you talked about 4% I think, Greg, for the back half. If I'm calculating that right, it would be an incremental maybe 2% to 3% on the fall menu, does that sound right?

Let me pull out my--

And can you just confirm what the June price increase was?

June was about 8/10 of a percent.

Okay, and then what's planned, is it November, is that the next one?

It will probably be somewhere in October probably. And looking at it, we've got-- yes, probably has to be somewhere in that neighborhood.

I think it's going to have to be. Our objective would be to try to replace any pricing with rolling out other comparisons.

Okay, that makes sense. On the depreciation, can you just run through again quickly-- I think we understand that for initiatives that it's higher year over year in the first half. I guess my real question is, will that trend persist in the second half?

I think the way to look at depreciation is to some degree kind of maybe just take it as cost per week. I think we talked about this before. So if you took the first quarter and how many restaurant weeks we have and divide it into that, it's going to probably be your dollar amount. If I look at the depreciation quarter to quarter, meaning Q1 to Q2, I believe we were kind of sitting right at the 4.9% for both quarters. So when I'm thinking about where depreciation is going to be and based on flat comparable restaurant sales, it's probably going to be right in that percentage.

Okay, and then just the last question, Jerry, you talked having gone through these cycles before. As you look back, what were kind of some of the key factors, with hindsight being 20/20, that you said, oh, okay, that was kind of signal that we were coming out of it? And/or what should we be looking for this time around just more broad based, not specific even to BJs necessarily?

Well I think obviously the answer would be the consumer feeling a little bit better about their overall income levels, their overall fundamental costs of living in terms of food and energy costs, of feeling a little bit better in terms of their overall asset values. As I think back in the late 70s and early 80s and I think back in the year 2000/2001, I think clearly that consumers are about to start feeling a little bit better on all of those measures before you're going to likely begin to see some of the top line improvements hit the restaurant industry, particularly the casual dining industry. So your crystal ball is probably a lot better than mine in that respect as to when that's likely to occur here given the current downturn. But again, as I just think back off the top of my head, I think those factors are going to have to be in place.

I also remember back in the late 70s when I bought my first house and took out my first mortgage, it had a 13% interest rate. Boy, I've got to scratch my head on why I did that one. But obviously inflation was out of control right at the end of the 70s and early 80s and I think it took some changes in governmental monetary policy and fiscal policy to bring inflation under control and get the consumer feeling a little bit better about the overall predictability of the basic cost of living here in this country. And I think our country has a lot of challenges in that respect. So how that's all going to resolve itself is anybody's guess at this point in time but I do think those are the important factors.

I appreciate the perspective, thanks, guys.

Thank you. Our next question comes from the line of Larry Miller with RBC Capital Markets. Please go ahead.

Hey, guys, I just have a couple of quick ones. Greg, did you say that comps improved sequentially during the quarter and that was due to the easier comparisons? Is that what you said exactly?

It wasn't because of easier comparisons. We think that comps improved sequentially in the quarter really because I think BJs has a competitive advantage in regards to large parties. So we saw some tremendous sales on Mother's Day, Father's Day, and some graduation related weeks.

Yes, I would just add to that, Larry, that if you're achieving any positive comparable sales in casual dining in this environment, you're having to fight hard for it, you're having to work for it. For those concepts that kind of say, hey, we built it, they will come, that is just not likely to happen in this environment. And when you look at all of our sales building initiatives, when you look at what we drove in our business from the large party perspective and what we've got locked and loaded in for the second half of the year, you've got to fight for this, and we fought hard for it and we're going to continue to fight hard for it. So it was not a matter of easy comparisons. On an absolute basis, we went out and fought for it.

Gotcha. That makes sense. And I'm just curious what the comparisons look like sort of the next few quarters for the Sacramento, Phoenix, Inland Empire group. I know that you said that you lapped them in January but I remember that the market, the restaurant market started rolling over in Q3 and maybe you don't lap them fully in January, but do they get sequentially easier in those particular markets? Is that also explaining what's happening right now?

No, not really. And the reason I say that is there was only two restaurants that we talked about at the end of last year's third quarter which were in the Inland Empire. They were kind of the Marino Valley and Corona restaurants that we saw softness in. For us specifically, we didn't see softness until the first quarter of 2007 even in those restaurants. Some of those restaurants that were really, frankly that were rolling over, were some of the large volume restaurants that we opened up in 2006 and a little bit in 2007 that to some degree are rolling into the comp base. So those are some of the newer restaurants, they opened up with all the initiatives and tool sets already in place. So they were very effective and very efficient from the beginning. And as they've come into the comp base, they probably come in more from a drag standpoint again because a little bit of the macro and the fact that they were opening up with such high volumes.

Okay, that makes sense. And then, Jerry, I think you kind of eluded to this, but it's certainly an achievement to have positive comps in this environment, but how do you guys see the day to day volatility? You tend to see sort of in these consumer cycles where confidence is very volatile, a lot of swings in the business. Are you guys seeing that and have you guys prepared the team to kind of meet that challenge?

That's a great question, Larry, and I will tell you that throughout the second quarter and even here into the first few weeks of July, it's choppy. I mean, it's big surf out there where there's some lulls and then some huge surf that comes in. That's California speak out here. So with that in mind, every Friday-- I know you guys try and call me on Fridays and I will tell you I can't return anybody's call on Fridays because we sit on conference calls going through our business metrics every Friday where these restaurant operators literally schedule out how they're going to do for the day. They schedule out their labor hours per 100 guests that are coming through and they try to be proactive based on how the shifts are coming. We-- one of the tool sets that we're working on is to give them kind of a live score board, for lack of a better term. Think of a 50 inch plasma TV right when you walk into the kitchen. It's kind of showing you all the key metrics of what's going on in your business at that time so they can adjust accordingly. So really we spend a good Friday going through all the metrics of our business and from there, the restaurants have really some great tool sets that help them manage on a shift to shift basis.

But having said that, given the choppiness in the roll up business in sales from restaurant to restaurant, some are much more predictable than others. And it is a challenge for our operators to really nail their productivity and efficiency. We call them PE statistics here which kind of has a double meaning obviously. But it makes it very difficult and challenging for them to hit their targeted PE statistics. But it is a choppy environment for sure.

Great. And then just last thing, just with interest income, because it's an unusual year, can you give us an idea what a good number might be for '08? And I thought you said 28% to 29% tax rate, is that right, because of the ARSs?

That's correct. I'm sorry, I missed your question-- do you just want to know what we think our tax rate is going to be?

I thought you said 28% to 29% tax rate and I just wanted to confirm that. And also maybe you can help us with kind of an interest number for this year given that the ARS has an unusual effect.

Yes, I would think that tax rate would be close to 29%. In regards to the ARSs, the best way to think about it is $37 million and interest rate somewhere in the neighborhood of kind of 3% to 5% depending on how that SIFMA Index moves up and down.

Okay, thanks.

Sure, Larry. Thank you. We'll take a couple more questions. We've run a little long today, but our prepared remarks were a little bit long.

Thank you. Our next question comes from the line of Sharon Zackfia with William Blair. Please go ahead.

Hi, it's like a marathon conference call. I wanted to go over your new restaurant productivity because it looks like it's dampened a little bit along with the comps over the past few quarters and I'm just wondering, is that generally mirroring what you're seeing with comps in regions that are having particular difficulties? Or if you could kind of walk us through what's happening there.

Well I think, Sharon, that's really a function of where we've opened the restaurants. If you take a look at our last-- well all of our restaurants that we've opened so far this year, you have brand new markets in Cincinnati, Louisville, our second restaurant in Orlando, our first restaurant in Indianapolis, a new market in Baton Rouge-- so I think what you're seeing there is what we expect to see in brand new markets where we first open a BJs where we see their average weekly sales generally come in indexing 75% to maybe 80% of the average. And then over time as we build consumer awareness, trial and usage, we would expect those numbers to gradually move closer to the average. And I really think that's what you're seeing for the most part over the last couple of quarters. We do have a handful of restaurants that have not hit the comp base yet. Stockton -- let's see Stockton, Palm Vale, a handful of them that are probably in the Central California, Inland Empire area that might we seeing a slight decrease as well reflecting general economic conditions. But Greg, is there anything else that we could add to that, any other color?

No, it's really--

I think that's it.

The shift of California openings versus non-California opening.

Right, I think that's really it and that's -- and Greg also mentioned at the beginning of our call today that that shift is going to kind of turn as we finish up the rest of the year's development where we've got more California and Texas restaurants coming on board.

Okay, that helps. Thanks.

Thank you. Our next question comes from the line of Paul Westra with Cowen & Company. Please go ahead.

Most questions obviously answered. I just wanted to confirm on this occupancy and other line item though, Greg, you obviously are lapping the hospitality initiatives, then you gave us a mid 20% range for the year. So obviously the 100 basis points plus or more in the first half is going to only be modestly increasing going forward the year over year basis.

That's correct. On the year over year basis because we start to hit that Q3 where we roll them out. The thing that I think was a little bit unexpected here in Q2 is really the energy costs. There's about 30 basis, or actually 40 basis year over year on energy costs, about 20 basis sequentially from Q1 to Q2. And in listening to what's going on there with commodities, steel and so on, well natural gas seems to be going down, but I kind of imagine that that energy cost might stay with us a little bit.

Okay, and as far as the-- you mentioned the asset disposals. There's no one-time stuff in that number. All the asset disposal was put into the broken out line item, right?

Yes, that's-- in fact there was no like they were doing X, Y and Z catch up on a bunch of restaurants that were closing there or something like that. It was things that were implemented during the second quarter.

Okay, great. And congratulations on having a strong quarter.

Thanks, Paul. It wasn't easy. I'll tell you, we had to work hard.

I don't doubt it.

Thank you. Ladies and gentlemen, that does conclude our question and answer session. I would like to turn the call back over to our speakers for final remarks.

Well thank you, Operator. Thank you all for being on our extended call today and if we can help you in any other way, please call us at our offices here in California. Thank you.

Ladies and gentlemen, that does conclude our conference for today. Thank you for your participation. You may now disconnect.