BJ's Restaurants Inc (BJRI) 2008 Q3 法說會逐字稿

Ladies and gentlemen, thank you for standing by. Welcome to the BJ's Restaurants Third Quarter 2008 Results Conference Call. (OPERATOR INSTRUCTIONS.)

I would now like to turn the conference over to our host, Mr. Jerry Deitchle, Chairman and Chief Executive Officer. 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're also broadcasting live over the Internet.

Joining me on the call today are Greg Levin, our Executive VP and Chief Financial Officer, and Greg Lynds, our Executive VP and Chief Development Officer.

Our agenda for the call today will be as follows -- first, I'll provide a business and operational overview for the third quarter. Next, Greg Lynds will comment on the status of our new restaurant development pipeline, and then Greg Levin will comment on our consolidated income statement, our summary balance sheet and our liquidity position as of the end of the third quarter. After that, we'll be happy to answer your questions.

Diane Scott, our Director of Corporate Relations, is out traveling on business today, so Greg Levin has volunteered to provide our standard cautionary disclosure with respect to forward-looking statements. Greg, go ahead.

All right. Thanks, Jerry.

Want to remind everyone today that our comments on the conference call 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 23rd, 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 discussions of risks and uncertainties associated with forward-looking statements contained in the Company's filings with the Securities and Exchange Commission. Jerry?

Thanks, Greg.

After the market closed today, BJ's Restaurants released financial results for the third quarter of fiscal 2008 that ended on September the 30th, 2008. If you haven't had a chance to see our press release today, you can see it on our website at www.bjsrestaurants.com.

I think we all know that most consumer businesses continue to feel the impact of the slowing economy and all of the related financial and economic issues that we hear and read about every day. So, we're not going to spend much time reiterating the obvious on our call today.

While we are very fortunate that BJ's has a large number of loyal guests, our top line performance is certainly not immune to all of these issues. However, we do believe that in our segment of the restaurant industry, the casual dining segment, BJ's continues to perform relatively well compared to most of our similarly situated competitors in terms of size, scope of operations, available resources and geographical concentration.

And while it's clear that the economic downturn is certainly taking its toll on some casual dining companies in terms of damaging their vital organs, so to speak, we believe that not only are BJ's vital organs in great shape today, they're gradually becoming even stronger over time.

We consider our vital organs to be the overall quality and differentiation of our restaurants, the overall approachability and relevance of our restaurants for the consumer and, most importantly, the quality and spirit of the men and women that operate our restaurants.

So, our fundamental strategy remains pretty straightforward. We intend to continue to capitalize on the competitive strengths of our vital organs here at BJ's and continue to position our business to gain additional market share going forward.

We also think it's important to keep in mind that BJ's doesn't yet have even one half of one percent of market share in the casual dining segment. With only 80 restaurants open today, the vast majority of our restaurant growth remains ahead of us.

So, while we definitely have to prudently react to the current economic slowdown in terms of our tactical execution, we still need to keep an eye focused on our longer-term opportunity to build market share and to protect the competitiveness of our restaurant concept, and the strength of our growth and support infrastructure. By doing so, we should be even better positioned when the current economic cycle eventually begins to turn around. Until then, we're going to do our absolute best to control what we can control, to do our best to drive profitable sales, and to do our best to become even more productive and efficient in our overall execution.

Moving to our financial results for the third quarter. As we indicated in our press release today our total revenues for the quarter increased approximately 19% to $95.8 million compared to $80.4 million for the same quarter last year. Our net income and diluted net income per share for the quarter were $2 million and $0.08, respectively.

We also indicated in our press release today that our diluted net income per share comparison for the quarter was also impacted by several key factors. First, our results were unfavorably impacted by about $0.02 per share due to the estimated lost sales, of lost operating profits and property damage from two hurricanes, Hurricanes Gustav and Ike, that were in excess of our property and business interruption insurance coverage.

Next, our results were unfavorably impacted by about $0.03 per share due to higher utilities cost during the quarter, as well as increased marketing expenses. And I'll comment on that in just a minute.

Third, we incurred about $0.02 per share of incremental preopening costs quarter over quarter that were associated with six new restaurant openings in the current year's third quarter, compared to only four openings in the same quarter last year.

Next, we had a favorable comparison of about $0.03 per share due to a reduction of our estimated incentive compensation liability for this year.

And finally, we had an approximate $0.01 per share favorable comparison due to a lower estimated effective tax rate for the current year.

So, I'm going to take a minute and comment on a couple of these factors and then Greg Levin will comment on the rest of them a little later in our remarks today.

First, the two hurricanes caused us to lose about $500,000 in total sales during the quarter. Hurricane Gustav caused us to close our new Baton Rouge, Louisiana restaurant for about six days, and also caused considerable water damage to the restaurant facility. Hurricane Ike caused us to close our four Houston restaurants for a total of 33 sales days, and also caused a little bit of damage to our facilities there.

Unfortunately, in the case of our Houston restaurants, our reopenings were extensively delayed due to a lack of electricity, water and sewer services to our restaurants. So, our Baton Rouge and Houston operational teams did one heck of a job of making preparations to reopen our restaurants as soon as we h ad those services restored. And we're very, very thankful for all their hard work.

We also incurred higher marketing expenses during the quarter in order to prudently respond to the weakening economy, and all the pressure that the economy is putting on overall guest traffic and casual dining in general. And I think that deserves some additional attention on our call today.

Historically, with respect to marketing expenditures, BJ's typically spent less than 1% of sales. Over the years, BJ's has relied primarily on word of mouth and more vocalized marketing efforts to maintain its top of line awareness with consumers.

BJ's also has, and continues, to rely on AAA locations and AAA operational execution to build and maintain our reputation with consumers. And that approach has historically worked pretty well when you consider that, prior to this year, BJ's enjoyed 45 consecutive quarters of positive same store sales comparisons. Unfortunately, in a major economic downturn that we're experiencing like this year, the build-it-and-they-will-come approach isn't going to work by itself.

So, our original business plan for 2008 did not contemplate that the economy would weaken as significantly as it has. So, as the current year began to unfold, we made a decision to accelerate our planned schedule of 2008 key sales-building initiatives and to do our best to prudently defend our top line.

So far this year our team has successfully implemented an incredible number of sales-building initiatives, including our curb-side cashiering service, our call-ahead seating service, our expanded delivery service, new lunch specials, improved happy hour programs, our new online ordering service, as well as some new signature menu items.

In order to support the rollout of all of those initiatives, we decided that it was a sensible business building decision to invest in additional print and electronic marketing resources, up to an approximate level of somewhere between 1% to 1.5% of sales, to property introduce and seed all of these new products and services with consumers, as well as to drive additional top of mind awareness and to reinforce BJ's quality points of differentiation.

In our business the most effective marketing approach will always start with having high quality differentiated products and services that consumers love, and we're always going to focus on that. However, we do believe that we have and will continue to achieve a good return on our incremental marketing spending this year and into the future.

I think that when you're continuing to face a touch economy, where consumers are being even more careful about where to spend their hard-earned bucks on food away from home, it's very, very important to keep in contact with them and to remind that we're here and we're still special.

As long as the economy continues to remain soft, we plan to maintain our marketing spend at the approximately level of 1% of sales; again, to drive awareness for more new products and services that are in our pipeline and that are coming for next year. Having said that, we are not going to resort to excessive discounting or couponing to buy market share, as we often see with the larger mass market casual dining chains.

Speaking about comparable sales, we're very, very pleased that our comparable restaurant metric for the quarter once again outperformed the Knapp-Track benchmark for casual dining comparable sales. As we noted in our press release, our comparable restaurant sales decreased by about 1% during the third quarter, which was up against a strong 5.6% increase achieved in the same quarter last year.

However, after you consider the 4th of July holiday calendar shift that represented about 0.5% of total comparable sales compared to the same quarter last year, and after considering the closures of comparable restaurants due to Hurricane Ike, which also impacted our total comparable sales for the quarter by another 0.5%, our comparable restaurant sales would have been flat for the quarter just ended.

Now, we think that was a pretty respectable performance in these highly volatile times. And in particular, given the fact that 39 of our 56 comparable restaurants for third quarter are located in the states of California and Arizona, where the current economic slowdown has been quite pronounced. We can say that for the first three weeks of our fiscal October, our comparable restaurant sales were down about 1.5%, although our latest week comparison improved, being essentially flat.

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 do not believe that the current economic slowdown is likely to ease up anytime in the near future. And we don't think that we're close to the bottom of this economic cycle.

So, accordingly, we continue to advise our investors to err on the conservative side in their short-term comparable sales expectations, like most investors are doing with the casual dining industry in general. And we're going to do our best to drive profitable sales as aggressively as we can. Greg Levin will provide some more detail on comparable sales in his remarks later on our call today.

We also commented on our last couple of conference calls that our leadership team has never felt better about the factors in BJ's business that we can control. And we still feel that way. We believe that our restaurant management team did a darn good job of managing our food waste, our labor productivity and our other controllable costs and expenses during the quarter.

Additionally, our infrastructure support and G&A expenses were also well controlled during the quarter. As we mentioned on our last call, substantially all of what I would call our catch-up investments in this respect were completed last year, and we're on more of more normalized incremental G&A investment spend pattern going forward in our business.

Now, we are going to continue to make incremental G&A investments in our restaurant management recruiting, training, development, retention and talent development programs this year, next year and in every year as that's really the most critical resource requirement for future growth in our pure company operations business model. We can only grow our restaurant base as fast as we can recruit, train, develop and retain the very best restaurant managers available.

Moving to our new restaurant development plan, we were very successful in opening a record six new restaurants during the third quarter of 2008, including one that was successfully moved forward from an originally expected opening in the fourth quarter. We're pleased to report that our initial sales volumes for these six new restaurants continue to meet or, in most cases, exceed our expectations.

We remain very confident about BJ's ability to continue capturing additional market share in the casual dining segment. In our view, the segment is still an attractive place to be in the restaurant industry. And we don't think that the estimated $90 billion of annual casual dining sales is going to disappear anytime soon.

Now, depending on current pressures and the macro environment, it may not grow as fast as it did in past years. It might even narrow a bit. But it's still a very large, highly fragmented segment that's populated with thousands of restaurants that, in our view, have gradually felt a gravitational pull downward over the years in terms of their quality, their points of differentiation, their energy level, their approachability, their relevance and their overall value for the money. That's where BJ's excels. And we believe that all of those factors play to the strengths of the BJ's concept.

Obviously, our primary opportunity to increase our market share is to open more restaurants. We've only got 80 restaurants open today in 13 states. So, we continue to believe there's room for at least 300 BJ's Restaurants of various sizes and site types domestically. But having said that, we're going to maintain the discipline to execute our growth plan in a very careful and controlled manner.

And speaking of our development plan, I'm going to turn the call over to Greg Lynds, our Chief Development Officer, for his update on our new restaurant development pipeline. Greg, go ahead.

Thanks, Jerry. Good afternoon, everyone.

As Jerry mentioned earlier, our development team has worked hard this year to successfully achieve our previously stated development targets to grow our total restaurant operating weeks by 20% to 25%, and open as many as 15 restaurants, evenly spaced throughout the year.

To date in 2008 we have opened 13 successful restaurants. In the third quarter just ended, we opened 6 restaurants. Peoria was opened on July 4th. On July 21st we opened San Antonio, Texas. Tukwila, Washington, a suburb of Seattle, opened on July 25th. Pearland, Texas, just outside of Houston, opened on the 28th of July. Modesto on August 4th. And our last opening of the third quarter was right here in Southern California in the city of Chino Hills, and that opened on September 29th.

So far in the fourth quarter we have opened our Tacoma, Washington restaurant, and we opened that on October 13th. And we have two more planned openings in the fourth quarter. Both restaurants are under construction and should open before the Thanksgiving holiday. These restaurants are both in our home court of California, and one's in the city of Newark, which is just outside of the Bay area, San Francisco Bay area, and one is in Chula Vista, California, which is a suburb of San Diego.

We are very pleased with the sales of the restaurants we opened in the third quarter. Our restaurant in Seattle had a record-breaking first day of sales for any new BJ's Restaurant outside of our California home court, and is still performing very well. And the last two restaurants we opened in the third quarter, in Modesto and Chino Hills, have achieved initial sales volumes well in excess of our expectations.

Looking forward towards our long-term development plan, we continue to believe that, over time, we have room to open at least 300 BJ's Restaurants of various site types and sizes across the country. At the end of this year we will have 82 restaurants open in 13 states. We have plenty of quality growth opportunity in our core California and Texas markets, and we have now established a strong national brand presence and national footprint from California to Florida, and into the Ohio Valley.

In the near term, over the next two years, our development team will continue to focus on being relentless about securing AAA sites and building a high-quality pipeline. Our new restaurant development targets have always been centered around AAA quality locations, with premier co-tenants in densely populated, more mature trade areas. We will maintain this discipline as we build our 2009 and 2010 site pipelines.

As we indicated in our press release today, the current economic conditions have taken their toll on many national retailers and our external development partners and landlords. Many retail projects have been delayed or cancelled due to challenges in obtaining funding or securing leases for both in-line tenants and anchors.

As a result of these difficulties in retail development, along with the discipline of our own capital investment approval analysis, we are in the process of carefully reassessing each potential new restaurant site. Specifically, we are currently reassessing every current site in our pipeline with respect to its lease economics, TI allowances, co-tenancies, future residential and daytime growth, and projected sales. Once we complete these reassessments during the next 30 days or so, we will have a clearer picture of the number of restaurants we plan to open and the expected timing of each restaurant opening for 2009.

For example, as we initially reassess our site pipeline for 2009 and 2010, there are about 17 prospective high-quality sites in our pipeline where the developers advised us that they had to delay their deliver of the site to us. Either the developer couldn't get financing or they couldn't get enough tenants to sign leases for the project. We've been pretty successful in sourcing some replacement sites, but we still have some work to do on that.

So, with that in mind, and as Jerry mentioned in the press release today, we currently anticipate our growth in total restaurant operating weeks for 2009 to be in the approximate range of 15% to 18%. After we complete our full annual business planning cycle for 2009 during the next couple of months, we will announce the expected number of restaurants for the upcoming year and refine our expected operating week growth target, if necessary.

I know that the entire BJ's team is excited to open more BJ's Restaurants next year and further increase our market share. Our entire development team continues to focus on delivering high-quality, differentiated restaurants with a casual-plus, non-chain image and ambiance. As we have stated before, by elevating the BJ's concept to the full casual-plus level, we are now in that exclusive restaurant club with the national mall developers.

During the past few years we have opened restaurants with some of the largest regional mall owners in America. Our relationships with Simon and Westfield, General Growth, Matrix, CBL and others are solidly in place, and we will continue to leverage these relationships as we expand across the country. These major national developers usually offer larger landlord construction contributions, along with favorable lease economics.

During 2008, we expect to receive approximately $15 million in total landlord construction contributions to support the development of our new restaurants. Going forward, it is our goal to secure an average of at least $1 million landlord construction contributions for every new restaurant. Some sites may have a little more dollars available, some a few less depending on each site and each landlord.

In the softening retail environment, we do expect to see a significant of solid real estate opportunities, both with our existing regional mall owner partners and some smaller regional developers, upon corners and parcels that were previously slotted for or operated by banks, other restaurants or other specialty retailers.

Lastly, our construction and design teams at BJ's are more focused than ever on delivering a high quality, efficient and cost effective prototype that will simultaneously deliver the best possible labor productivity, guest experience, throughput capacity and return on investment.

Going forward, all of our new restaurants now feature large, impressive entry statements, high ceilings with detailed contemporary decors, wood floors in the dining rooms and slate and granite materials in the bar. Our raised high-energy 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, our significant pizza and beer, we have a unique, differentiated dining experience, and really a terrific value proposition to offer our guests in the communities we serve.

So, even though many retail projects have been postponed or cancelled as a result of the slowing economy and, as a result, the number of our new restaurant openings in 2009 will be less than they are this year, over the long run we still remain very confident that BJ's should have many years of new high quality restaurant growth to come.

Jerry, back to you.

Hey, thanks, Greg.

As we note in our press release today, we still believe very strongly that BJ's four-wall economics are very sound. And they certainly support a continued steady pace of new restaurant expansion. And we also think that our currently estimated 2009 growth rate of 15% to 18% in total operating weeks is pretty darn respectable in this environment.

The hallmark of our new restaurant development program has always been AAA quality locations, with premier co-tenants that create maximum consumer synergy. And we strongly believe that delivering a high quality ROI on each of our new restaurants serves our long-term interests better than opening new restaurants just for the sake of maintaining a certain growth rate, particularly in a slowing economy.

Greg mentioned that we have an internal process of carefully underwriting new restaurants one at a time. It's a very effective process and we're going to maintain that internal discipline to let that process work exactly the way it was intended to work.

And there is certainly not any lack of sites in America in general to support our longer-term growth, but as a result of the slowing economy, there are less high-quality sites available in the trade areas where we want to develop during the next couple of years that will best leverage our supply chain and our field supervision infrastructure.

So, if we're going to have to choose between quality and quantity in a restaurant expansion plan, particularly during a slowing economy, we're always going to choose quality. And we can only grow as much as the operating environment is going to allow us to grow. And it's very, very important to grow with quality because quality facilitates dependability, it facilitates predictability. And I think those are two pretty important considerations for investing in restaurants.

So, now I'm going to turn the call over to Greg Levin, our CFO, for his comments. Greg?

All right. Thanks, Jerry.

Let me take a couple of minutes here and I'll go through some of the highlights for the third quarter and provide some forward-looking commentary for the remainder of 2008 and, really, some preliminary commentary for 2009.

As Jerry previously noted, total revenues for BJ's third quarter of 2008 increased approximately 19% to approximately $95.8 million from $80.3 million in the prior year's comparable quarter. This increase is a result of approximately 23% more operating weeks, offset by a decrease in our weekly sales average of about 3%. And this decrease in our weekly sales average of about 3% is inclusive of both the July 4th holiday weekend shift and the lost sales weeks from our five restaurants that were closed for some people time due to both Hurricane Gustav and Ike.

As Jerry mentioned, our aggregate comparable restaurant sales for the third quarter was a negative 1%, including the effects of the July 4th holiday weekend shift and the closure of those three high-performing comp restaurant sales in the Houston market.

As we mentioned in today's press release, we estimated the cost of the July 4th holiday weekend shift impacted comparably restaurant sales by about 0.5%, and that the closure of those the comparable Houston restaurants -- they were closed for a total of 28 days -- also impacted comparable restaurant sales for the quarter by about 0.5%. Therefore, adding back the effects from these items, we estimate that our comparable restaurant sales for the third quarter would have been flat compared to last year.

I think even more impressive was our ability to generate these type of comparable restaurant sales given our geographic location, in which 39 of our 56 comparable restaurants for the quarter are located in the states of California and Arizona. In the softening macro environment, those states really put an impact on comparable restaurant sales. And not to mention that we are going up against a 5.6% comparison from last year.

Looking forward, we do have one more challenging comp sales comparison. That's for this upcoming fourth quarter in which we did a 4.9% comparable restaurant sales. After that, our comparisons begin to lighten up considerably in 2009.

While we don't normally give monthly comparable restaurant sales numbers, I would like to note that, similar to comp sales reports that we have seen so far from other casual dining companies, we began seeing softer comparable restaurant sales in September compared to the other months of the quarter.

Additionally, I'd like to note that in my entire career, really in the restaurant industry, I have never seen the magnitude of the sales volatility and the overall choppiness from week to week and day to day that I saw in this past third quarter. While I'm sure the anticipated external events such as the Olympics and the national political conventions and debates played a larger role in this volatility, the unanticipated events of the historic financial market freeze and meltdown seems to have played just as great a role in the sales volatility during the quarter.

As we have previously mentioned, the softness in our overall comparable restaurant sales metric is primarily isolated to the Sacramento, Central California region, the Inland Empire areas of California, and the Phoenix, Arizona market. These were the regions of high growth over the last several years. And the housing meltdown and the latest slowdown in overall construction activity has taken a toll on these local economies. And we hear the same sales trends from many of our other casual dining competitors in these markets.

As we stated before, we have 10 restaurants in the Sacramento, Central California region, in the Inland Empire areas of California, that were in a comparable restaurant base in the first quarter, second quarter and third quarter of 2008. These 10 restaurants in the first quarter of 2008, as we previously said, had comparable restaurant sales declines in the 6% range. In the second quarter, these same restaurants had a comparable restaurant sales decrease in the 5% range. And in the third quarter, these restaurants continued to have comparable restaurant sales decrease in the 5% range.

Overall, these restaurants in aggregate continue to have strong weekly sales averages, and the weekly sales averages have remained stable in the $110,000 to $120,000 range, really depending on seasonality. And most important, as we stated before, at these sales volumes these restaurants well exceed our return on investment targets.

We continue to see some slight improvement in our three restaurants in the Phoenix, Arizona market. As we've previously mentioned, these three restaurants have comparable restaurant sales decreases in the 7% to 8% range in Q1 and in the 6% range in Q2. In this past third quarter, these restaurants in aggregate had comparable restaurant sales decreases in the mid-5% range.

In many of our other restaurants in different areas we continue to see solid increases in comparable restaurant sales. Our South Orange County and San Diego, California restaurants continue to do well, as do our Dallas and Houston restaurants.

Our La Mesa restaurant in the San Diego area of California had comparable restaurant sales increases in the 6% range. And our Westwood Restaurant, which is one of our smaller format legacy restaurants located by the University of California, Los Angeles, had comparable restaurant sales increases in the quarter of an 8% range.

Our Lewisville and Plano Restaurants in the Dallas area each had comparable restaurant sales increases in the 6% during the third quarter.

As we say in today's press release, we opened six new restaurants, including our first in the state of Washington at the South Center Mall in Tukwila, a suburb of the Seattle area. The six restaurants across one quarter is the most we have opened to date. And as such, with other casual-plus positioning, large footprint and many complexities, opening this many restaurants in one quarter had a negative effect on our operating margins, and not just on preopening costs.

These new restaurants impacted our consolidated operating margins by about 70 to 80 basis points. We do expect to see gradual margin improvement in these six new restaurants during the fourth quarter as the sales volumes become more predictable and the staff gain experience.

We do want to remind investors that many of our new restaurants, particularly those opened in our home court market of 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 are opening restaurants coinciding with grand openings to a new development. Those will result in significantly higher honeymoon periods.

On the flip side, some restaurants opening in new markets for the BJ's concept often open with initial sales volumes less than our average and will usually build over time with consumer awareness, trial and usage.

During the third quarter our estimated menu pricing factor was approximately 4%, which is down from the mid-5% range and upper-4% range in the first two quarters of this year. We do anticipate menu pricing for the fourth quarter to be right around 4%.

Before I move on to the middle of the P&L, I do want to elaborate on our quarterly comparison. As Jerry noted, in this quarter, compared to the same quarter last year, we recorded an approximate $446,000 charge net of an insurance receivable related to incremental costs to get our restaurants that were closed from Hurricanes Gustav and Ike back to normal operating conditions. Much of this cost is related to facility improvements.

In addition to this cost, we also had approximately $150,000 to $200,000 of lost operating profit, which is not broken out separately on our financial statements. And this is really related to loss sales and the profits on those lost sales. This is approximately $0.02 in net income per share related to the hurricanes in the third quarter.

In regards to the middle of our P&L, our cost of sales was 25.4%, 10 basis points better than last year's third quarter. And on a sequential basis, 40 basis points higher than the second quarter. This decrease compared to prior year was essentially driven by two components -- menu pricing and a reduction in waste driven by our new theoretical food cost system, offset by higher commodity costs.

Sequentially, compared to the second quarter of 2008, the increases due to higher commodity costs were product, primarily I potatoes, and higher costs for our poultry, ground beef and dressings. In addition, about 20 basis points of the increase is due to inefficiencies from our new restaurant openings.

Our labor and benefits during the third quarter increased by 50 basis points to 34.9% of sales from 34.4% of sales last year. This increase is due to the expected inefficiencies related to the opening of six new restaurants in the third quarter, and higher management wages as a percent of sales as a result of the deleveraging from the fixed nature of these costs over lower comparable restaurant sales this quarter.

Looking at labor on a sequential basis, we saw a 20 basis point decrease from 35.2% in the second quarter of 2008. This decrease is primarily due to lower workers compensation costs compared to the prior quarter, offset by higher hourly labor due to the expected inefficiencies from the new restaurants, as well as from existing restaurants as they try to manage through the unusually extreme sales volatility and choppiness that we experienced in the third quarter.

Our operating occupancy cost as a percentage of revenues increased 270 basis points to 22.9%. 70 basis points of this increase was due to our stepped-up marketing efforts in the third quarter, and as Jerry previously discussed. Marketing costs in our third quarter were approximately 1.3% of sales as we increased the use of electronic and print media to market our new menu items, guest services and lunch specials.

Another 70 basis points of the increase was due to significantly higher summer rates for our electricity and gas in our restaurants. We saw rates increasing 11% to 16% across our chain from the prior months. To combat these costs going forward, we have engaged an outside specialist to implement a full review of our rates and billings and other utility management systems.

The remaining increases in operating occupancy costs were due to higher facility maintenance costs of approximately 30 basis points, and the deleveraging and the fixed nature of many of our costs related to occupancy and other fixed contract costs.

Sequentially, operating occupancy costs were up 220 basis points from the second quarter of 2008. And this increase is really due to the higher utility and marketing costs which I spoke about, and equates to about 150 basis points. And the remaining increase of the percent of sales is due to the deleveraging and the fixed nature of many of our costs related to occupancy and other fixed contact costs.

Our G&A expenses in the third quarter of 2008 decreased 200 basis points from prior year to 5.9%. Included in G&A for both 2008 and 2007 were $636,000 and $562,000 of equity compensation, respectively, or 70 basis points in each year. Excluding equity compensation, G&A for the third quarter of 2008 was approximately $5.1 million or 5.2% of sales.

In the third quarter of this year, based on our results to date, we reversed approximately $1 million of performance compensation that had been previously accrued in the prior quarter as incentive compensation. As such, excluding this reversal, our G&A would have been approximately $6.7 million or 7% of sales.

Depreciation and amortization was 5.2% sequentially. It was up 30 basis points. And that's really due to the deleveraging from softer sales or the fixed nature of those costs.

Our restaurant opening expenses were approximately $2.6 million during the third quarter, which is a result of the six restaurants that opened plus pre-opening rent of approximately $300,000 for restaurant rent expected to open this next quarter. As we previously mentioned, we anticipate total pre-opening to be in the $500,000 range per restaurant.

Our effective tax rate of the quarter was approximately 23% compared to our prior run rate of approximately 29%. This decrease is the result of higher FICA tax tip credits than previously estimated, and our tax rate interest on our auction rate securities. As such, year-to-date our effective tax rate is right around 28%, which is what I anticipate it to be for all of 2009, as well as this fourth quarter of 2008.

Our CapEx year-to-date is approximately $55 million net of landlord improvement allowances, and we still anticipate our CapEx for 2008 to be around $60 million, net of landlord allowances.

Before I turn the call back over to Jerry, let me spend a couple minutes commenting on our liquidity position, and also provide some forward-looking commentary on the rest of this year and 2009.

In regards to our auction rate securities, we were able to redeem at par $1.8 million of these securities during the third quarter. As such, we currently own $35.3 million in face or par value auction rate securities. The auction rate securities we own are all student loan collateralized obligations. And these student loans are public student loans guaranteed by the US government under the Federal Family Education Loan Program.

The interest we earn on our auction rate securities is cash exempt. And from my understanding, as I said before, 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 other student loan auction rate securities.

Because of the illiquidity of these investments at the current time, in accordance with FASB-157, the Fair Value Measurement, we continue to obtain third-party valuations of 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 $1.4 million or about 4% through the third quarter of 2008. This temporary impairment was recorded in other comprehensive income, which is part of shareholders' equity on our balance sheet, and was recorded in accordance with FASB-115, Accounting for Certain Investments and Debt in Equity Securities.

This temporary impairment does not affect our current income for our 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 $7 million outstanding at the end of the third 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 four fee properties that we can monetize if we so chose.

I'll now provide some forward-looking commentary on sales and margins for the remainder of this year, based really on information and expectations as of today. All this commentary is subject to the risks and uncertainties associated with forward-looking statements as discussed in our filings with the SEC.

Although we remain very confident in the vital organs of the BJ's Restaurant concept, as Jerry mentioned earlier, we remain cautious about the remainder of 2008 and fiscal 2009. 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 volatile, to say the least. Additionally, being only three weeks into October it's hard to ascertain any real trends as of today.

Specifically looking towards the fourth quarter, we believe it would be prudent to continue to expect negative comparable restaurant sales comparisons. It is impossible for anyone to accurately predict how consumers will continue behave in a slowing economy, so we are unable to provide any predication of our comparable sales for the upcoming quarter with a high degree of certainty. As Jerry mentioned, our comparable sales for the first three weeks of fiscal October are down about 1.5%. So, that's all we have to go on at this point.

We do know that, during the fourth quarter, Halloween will sit to a Friday this year compared to a Wednesday last year, and both New Years' Eve and New Year's Day will be in key one, or period one of 2009. Losing a Friday night to a holiday, and losing both New Year's Eve and New Year's Day will unfavorably impact our comparable restaurant sales for the fourth quarter. Traditionally, both New Year's Eve and New Year's Day are high sales days for us.

We anticipate our restaurant operating weeks to increase about 18% to 20% in the fourth quarter. However, I do want to remind investors that 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.

I would continue to expect a decrease in our weekly sales average in the 2% to 3% range as a result of some of the holiday shifts from 2008 to 2009, the continued expected slowdown in the overall consumer spending, and based on our trend in average weekly sales 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 openings.

In regard to margins, our restaurant operators did an excellent job managing food costs and labor despite the historic volatility we saw in sales during the third quarter. I would anticipate that food costs and labor will remain in the mid-25% range and the low 35%, respectively.

In regard to operating occupancy costs, as Jerry mentioned, we will continue to spend around 1.3% to 1.5% of our sales on marketing for the fourth quarter. And we continue to expect to see high utility costs going forward.

In addition, as we mentioned on our fourth quarter conference call earlier this year, we really anticipate needing about a 4% increase in comparable restaurant sales this year to match our four-wall restaurant economics that we achieved in 2007.

Our absolute G&A expense dollars in the fourth quarter will more likely be closer to the $6.7 million to $7 million range.

In regards to 2009, as Jerry and Greg Lynds mentioned, we are reviewing our current real estate pipeline. However, as we noted today, we do expect less new restaurant openings in 2009 due to the delay in many retail developments and the slowing economy.

As such, a lesser number of restaurant openings next year will yield some short-term benefits in terms of reducing our capital spending levels, reducing our pre-opening costs, reducing our restaurant management, recruiting and training costs, and should allow us to move closer towards using cash flow from operations to fund our net capital expenditures after landlord allowances.

As we have previously mentioned, after we complete our full annual business planning cycle for 2009 during the next couple of months, we will announce the expected number of new restaurants for the upcoming year and refine our capital spending plan as necessary. I this operating environment, cash is king and we will prudently manage our capital resources to weather the continuing economic storm.

In regards to margins for 2009 and inflationary costs for next year, it is still very difficult for us to comment with a high degree of certainty, as we stated on our second quarter conference call. While in general many food commodity costs have recently come down from their highs, there is still a lot of volatility in the marketplace and many of our suppliers are reluctant to quote annual contracts unless we want to pay a large premium over the spot market.

On our past conference call we commented that we expected the overall cost for our basket of food commodities for 2009 to increase in the range of 6% to 8%. Based on this information from our supply chain department -- and this is still very preliminary as we are continuing to negotiate with our suppliers -- we now anticipate our commodity cost basket to increase in the 5% to 6% range next year. Again, our current expectation is subject to significant risks and uncertainties in the food and energy commodities markets.

One thing to remember for BJ's is we are still starting with a relatively low check average compared to many other restaurant companies. Our check average for the third quarter was just slightly over $12. And therefore, as we've said previously, if our market basket of commodities were to increase, for example by 6% next year, and excluding any pressure on labor or other operating costs for us to be able to maintain our dollar profit and what we call 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 that we have made to our concept over the last few years.

In regards to labor, there is another $0.70 increase in the federal minimum wage in July of 2009. And certain states do have annual minimum wage increases. However, on average, we are not expecting significant inflationary increases in labor for next year. As such, we believe labor for 2009 should be in the 35% range as we have seen in 2008. Included in this labor number will be about 20 basis points for our non-cash equity compensation for our gold standard stock ownership plan.

While we have increased our marketing costs for the remainder of 2008 to closer to 1.5% or so, we expect marketing costs for next year to be in the 1% range. Additionally, we are reviewing our current operating costs so that we may optimize some of these costs through better contracts and better management systems. However, because a significant percentage of these costs are fixed, such as occupancy, insurance and preventative maintenance contractor, our operating occupancy costs as a percent of sales will vary based on comparable restaurant sales comparisons.

Our expected tax rate for 2009 should be in the 28% range. And we still continue to have the diluted shares outstanding for 2009 to be in the 27 million range.

Jerry, back to you.

Thanks, Greg. That was a very thorough commentary and hopefully answered everyone's questions in advance.

I want to take one more minute before we open up the call for any possibly remaining questions and reiterate our confidence in BJ's longer term ability to continue to increase its market share in the casual dining segment.

As Greg mentioned, we also feel very confident that our average guest check in the $12 range, coupled with our strength in casual-plus competitive positioning, our sales building initiatives, the strength of our vital organs, that should provide BJ's with a solid opportunity to continue to outperform most of our peers in this pretty touch environment.

At BJ's we're going to remain fully committed to our longer-term strategy to drive our concept and our business forward. And by doing so, we should be even better positioned when the current economic cycle begins to turn around.

So, that concludes our remarks and now we're going to open up the call for your questions. And again, if we don't have time to get your question on this call, and we'll try to run the Q&A session as long as reasonably possible, please give us a call here at our offices as it's in California and we don't go home for several hours yet.

So Operator, we'll take some questions.

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

Great. Thank you. 15% to 18% operating week growth in size, a pretty wide range of unit openings depending on the timing of those openings. Can you guys give us any type of ballpark absolute range?

We're not in a position to really give an absolute expected number of new restaurants yet, Jeff. We've got a good pipeline that's come together very nicely. We're finalizing our reassessment of all of the economics of every site that's in the pipeline. We're still working on a couple of potential sites here, trying to gather all of the final details with respect to expected co-tenancies, which is very, very important for us to open up in any retail project.

And additionally, we do have to have a full completion of our annual planning process and have a board of directors' meting, which is going to be happening here shortly. So, we ask that you give us a little more time to complete all of our work and all of our processes and then I think we'll be able to give you a pretty solid number of absolute expected restaurants and a pretty good idea as to when they're going to fall.

The good news is we're going to be opening many new restaurants next year. But we can't really dimensionalize it until we've finished these processes. And I hope that you understand that.

I do. And -- well, I was going to be persistent about this. I was going to ask for the over/under on ten units next year. Well, having said that, so I think you mentioned that 17 pipeline units have been slagged with co-tenancy issues. How many total units were in the pipeline to begin with?

Well, we had well over 40, 40 to 45 restaurants in the pipeline. In this business, to really secure high quality sites you have to be at least 18 months to 2 to even 3 years out in order to really get on developers' plans and really start to begin to work all of the economics.

Greg Lynds and his development team, one of their hallmarks has been building a high quality pipeline of plenty of great sites, particularly in the trade areas where we want to develop. As I mentioned in our comments a little earlier, we're trying to focus our development over the next two or three years in trade areas that really help us to leverage our model, leverage our existing field supervision costs, leverage our supply chain as best as we possibly can.

So, that's really what we're trying to focus on. We're trying to avoid the temptation to jump to new markets ahead of really when we're ready. Could we go to Washington and Baltimore? Could we go to Charlotte? Could we go to St. Louis? Could we go to Chicago? Could we go to Atlanta? Could we go to Kansas City? Absolutely. But we're trying to maintain a very strong discipline of opening restaurants to where we achieve maximum economic and consumer leverage.

Greg, you want to add anything to those comments?

Yes. I'd just say that when you look at our 2009 and 2010 pipeline, there is more than 40 restaurants there that we are looking at. And as our peers have stated, the early on, the 2009 pipeline are the ones that really push the most. They continue to push quickly. And I think you'll see a lot of our peers that move their early '09 to late '09 or early '10.

But as we look further into the future, our 2010 pipeline's looking very strong. And especially when you think about the Steak & Ales, the Bennigan's and some of these restaurants that are coming online. We don't want to jump too early when we can get a prime corner that we pass up today that's going to be available in 2010.

Okay. And then a last question. Switching gears on you, looking to get a little bit more color on the same store sales by day parts, specifically lunch, if you guys are making any inroads with this incremental marketing spend?

We are, actually. As we've stated before, lunch has been the softer area for us and continues to be the softer area for us. However, midway through, I guess August, we rolled out our lunch menu. And we have seen that lunch menu actually take on about a third of the lunch time visits. And we've seen -- I would say overall the guest traffic has marginally improved since we've rolled out that lunch menu. Are we still negative in that day part? We are, but we have seen improvement.

And the other thing, too, is that many of our sales building initiatives -- again, we supported them with an initial burst of media, both print and electronic support. But these all are intended to build over time. So, as the word spreads about our lunch specials, we would expect to see a gradual flattening of our traffic during lunch.

Where -- in casual dining, in all of my years of being in this business, whenever the economy slows down it's really the lunch business in casual dining that begins to feel it first. We responded with I think very thoughtful lunch specials, that we can make that have a reasonably low break-even hurdle rate with respect to the trade and per person check versus the required incremental guest counts in order to break even on absolute gross profit dollars. And we are seeing at least a breakeven on gross profit dollars, so we're very pleased with our performance to date.

Okay. Thank you guys.

You're welcome, Jeff.

Thank you, sir. And our next question comes from the line of Brian Moore with Wedbush Morgan. Please go ahead.

Good afternoon.

Good afternoon, Brian.

I guess a clarification. I think you may have mentioned this in the last question. I'm trying to understand the opportunity for conversions at existing retail developments versus new retail developments.

Greg, you want to--?

Yes. I mean, conversions have always been opportunistic for us. So, as we travel around the country, you have new developers that are building new power centers or new regional malls. And so, that's one opportunity, a freestanding pad in a new center.

And the conversion opportunities are the existing Steak and Ale, the Bennigan's, with the department store consolidations, with the Mervyns bankruptcy. As well as other kind of lifestyle components that are being developed by our regional mall partners, we will have a fair amount of conversion opportunities compared to our freestanding opportunities.

Nothing by geography you can comment on in terms of home court in California where you already have brand recognition?

I'm sorry. What was the question?

Brian, it's still opportunistic. So, I don't' think we necessary have a pipeline of conversions, if you're trying to get to that. But the other thing that makes it a little bit more challenging for BJ's as well is our footprint's a little bit bigger. Like at Steak and Ale and Bennigan's, some of them are in the 6,000 range.

So, we need to look -- if they're freestanding, can we have that opportunity to take them and really bulldoze them and make them a brand new BJ's. So, those are the things that really -- that we have to look at when we look at conversions.

So, just to quickly summarize all of our comments, we do have a handful of those opportunities that match up with the required square feet and the required number of parks that we have to have to support our high volume restaurant. We do have a handful of them. We have a couple in Florida. We have a couple in California. We have a couple in Texas.

Those are subject to a bidding process. They're AAA locations in very mature, densely populated areas. So, you can bet that other restaurant concepts are also putting in bids for those sites. We hope we're going to be successful. And if we're able to get hold of a couple of them, then those could be wildcards in our development for next year and the year after. But we are pursuing them where they make sense for us.

And just lastly, Brian, I think that the other thing that I think all of our peers will tell you is that a conversion is not any cheaper for us when you convert a restaurant. So, typically, it's not a big savings to convert one versus just bulldoze it and start over.

Correct.

Okay. Fair enough. And then I guess for Greg, a clarification on the average check. Did you mention something about a menu price increase for '09?

We still expect our overall average menu pricing to be around 4%. Maybe -- it could be a tad less for '09, based on what we have today. I mean, our average check is still kind of holding right at the low $12 range.

And again, just to reiterate our menu pricing strategy, it's purely defensive with respect to our operating margin. So, if we get a better than expected break on some of our key commodity costs for next year, then our tendency will be to not price as aggressively for next year.

We're trying to keep our average check as low as we possibly can because that's the most important competitive advantage that I think BJ's has, is we compare our concept and our pricing against the mass market casual dining chain. So, we'll learn more about the precise pricing that we need next year to defend margins over the next couple months when all of our commodity contracts get finalized. But I think for now, a 4% assumption is probably a reasonable assumption.

That's great. That actually leads into my final question, which is -- and you probably spoke a little too quickly, Greg, for me to write down all those numbers on the labor guidance. But are we looking for a restaurant level margin expansion in '09 year-over-year? Are we looking for flat margins? How should we think about that?

Yes. I don't know if we gave that superficially. I think the wild card's going to be the operating occupancy line based on where you believe comparable restaurant sales are going to come in. I mean, I think the area that we can control, which a lot of it goes to that food cost and the ability on the waste, even though commodities are a little bit of a wild card, and labor.

With our systems in place I think we can do a good job, as we've done this year, maintaining what we call that prime profit number. I think the operating occupancy, you have a lot of fixed costs in there and they're going to be based on really how comparable restaurant sales come through.

Okay. Thank you.

You're welcome.

Thank you, sir. And our next question comes from the line of Brad Ludington with KeyBanc Capital Markets. Please go ahead.

Thank you. Good afternoon.

Hey, Brad.

Hey, I had a question first off on the charges for the natural disaster and related expense. That 446 was just on repairs that were related specifically to damage -- excuse me, damage from the hurricanes. We're just trying to figure out if that's extraordinary and something that would be taken out on a pro forma basis.

Well, that's a separate line item that we've shown on the P&L from that standpoint.

But it's still an operating income. It's not an extraordinary item for GAAP.

Right.

It's just part of our (inaudible), so it's part of operating income but Greg did break it out.

Okay. Going on to the openings. Trying to get a number of openings for '09, but traditionally we would think that probably your first and second quarter '09 openings were already in some sort of construction process, I think. So, if you compare it to first half '08, should we expect a similar number, six that were opened in first half '08 may be locked in, in first half '09, or is that open for change as well?

Well, it's -- again, we're just hesitant to begin to give pieces of our new restaurant development plan for next year at this time. Although, if you drive by a handful of those sites you're going to see two restaurants already under construction. And so, that's obviously in the public domain. And we have a number of other sites that are in their permitting process for potential first half opening.

So, I guess I would ask for just a little more patience here as we ramp up our final goals for next year over the next 30 days as we'll have a board of directors' meeting. And then we'll have our full plan put together and we'll have another announcement.

And I think everyone will be very, very satisfied with the pace of our continuing restaurant development for next year. We're all very excited about it here. But as we mentioned earlier, there's still some moving parts. And we just want to really nail it for you guys.

One thing at BJ's that we have always done, is we've always done what we said we were going to do. So, we're just hesitant to start talking here before we have our final plans prepared and approved by our board of directors. So, we just ask a little more patience but we are going to open some new restaurants next year. We're excited about it and we'll get the information out here very shortly.

Okay. And then final question. Greg, when you were going through CapEx I lost track. I think I heard $60 million guidance for '08 still, but I didn't hear if you said what you spent in the third quarter.

I did not say what we spent in our third quarter. And I think I would have my year-to-date capital numbers here in front of me. Why don't you give me a call afterwards and I can get you what it was.

Okay. Well, thanks a lot, guys. I appreciate it.

Brad, I know its $55 million, as I said, year-to-date. I forget what I said it was at the end of the second quarter.

Okay. Yes, I've got that down. So, thank you very much.

Okay.

All right. Thank you, sir. And our next question comes from the line of David Tarantino with Robert W. Baird & Company. Please go ahead.

Hi. Good afternoon.

Hello, David.

Greg, just following up on a prior question related to restaurant level margin. What type of traffic do you think you would need to hold that flat next year given all the costs that are known right now and the pricing you expect to take?

Well, I think what we'd be looking at next year is probably comparable restaurant sales somewhere in the -- and when I say -- when you guys are talking about holding margins flat, I guess I'm -- In my mind I'm thinking about getting back to that 19% level versus where we are today. And getting back to the 19% level, which we showed in Q1 and Q2, I still think we're looking at somewhere in that 3% range, which would kind of probably be flattish guest traffic and we'd get our pricing through, which is always been kind of our business -- long-term business plan.

If we want to hold on to the guest traffic, get some pricing through that we'd have to put in place from an inflationary standpoint. At the same time, continue to leverage the productivity and the efficiencies within our four walls. So, I don't think anything really changes next year. I think based on that 5% to 6% commodity cost, assuming labor is somewhat flat, we said we needed about 2.5% to 3% in menu pricing to cover that.

Okay. And just to reconcile this, Greg. I think you mentioned you might have 4% on pricing and you just said 2.5% to 3%. Is there -- what's the discrepancy there?

Well, I guess your -- I thought your question was what do you think you kind of need for comp sales to kind of get flattish margins. While we might have 4% of pricing in there, I think it's really you're needing somewhere in that 3% range to keep your margins flat.

So, I guess just to clarify, it's your plan to take 4% of pricing--.

--No--.

--When you only need 3% to cover your costs?

We don't know what our menu pricing's going to be right now. Going into next year it's going to below 4%. And then we'll determine it based on commodity contracts and other stuff if we have to take more.

Got it. Makes sense. And then last clarification question. On the average weekly sales comment for Q4, where the 2% to 3% decrease, were you talking about the GAAP relative to comps or is that the absolute decrease that you expect to have?

That's the absolute decrease. I think this quarter we were down about 3%. If you kind of added back the hurricane and the 4th of July, you actually get down to about a little -- actually, I think just hurricane itself gets you down to the negative 2%, 2.3% range.

So, when I think of the fourth quarter I do think that, unfortunately, New Year's Eve and New Year's Day were big days for us last year. And as a result, we're going to kind of continue on an absolute basis to see that negative WSA in the 2% to 3% range.

Got it. Thank you.

You're welcome.

You're welcome.

Thank you, sir. And our next question comes from the line of Sharon Zackfia with William Blair. Please go ahead.

Hi. Good afternoon.

Hey, Sharon.

I don't have that many questions since you guys did such a good job. But I guess, as your sales likely slow in '09 as you slow development, I'm just kind of curious about your ability to leverage G&A next year. You did a good job, somewhat with the held of bonus reversals this quarter, leveraging G&A this year. I'm just curious as to whether we can see any kind of G&A leverage continue.

Well, I think the answer will be found when we complete our full-year planning process for next year over the next 30 says or so, Sharon. But again, I think we're trying to run this business to where the absolute increase in G&A dollars year-over-year will be less than the increase in capacity growth for our business.

So, right now we've indicated a 15% to 18% increase in potential capacity for next year. So, we would intend to hold our absolute G&A expenditures at a rate of less than that. And I believe that, again, depending on the absolute number of restaurants that we open next year, there is a portion of our G&A that varies related to the amount of restaurants that you open.

So again, depending on how that all shakes out this year -- for next year, rather, our 2009 comparisons actually might be favorably impacted with a temporarily reduced rate of growth. Because you get all of those -- reduced G&A. You don't have to spend as much on management, recruiting and training. You don't have to spend as much on field supervision and some of the other variable factors in our G&A that are more directly associated with the amount of restaurant growth.

So, I think at this point we're very confident that we'll be able to keep the rate of G&A growth less than the rate of capacity growth and get some additional leverage.

Okay. And then just one final question. When I saw you guys in September, you had some new initiatives with the draft beer. And also, I think you were going to test breakfast in California on game days. Anything there kind of worth mentioned on either of those initiatives?

Well, we're not in a position to really make any chain-wide announcements with respect to those two initiatives other than to say that we're very, very encouraged by the progress on both right now.

We have -- I believe it's four or five restaurants now where we've kind of experimented with an expanded guest beer tap arrangement, where we have surrounded our premier quality beers with anywhere from 24 to 28 guest taps, so high quality craft beers.

We started doing that in our Austin restaurant a little over a year ago when we first opened to try to gauge how the consumer would react to it, and whether or not we would cannibalize sales of our own beer. And lo and behold, we sold more beer and it was the guest tabs.

And we actually held our own sales of our own branded beers. And we thought, wow, that's fascinating so let's try it in Baton Rouge and let's try it up in Seattle, let's try it in our home court here in California, which we've just done at Delano and our Chino -- I think we did it at Chino Hills. Right. I kind of lose track. And so far the results have been incremental for us. So, we're not ready to make a chain-wide decision with respect to that program.

As far as the weekend brunch program, we wanted to try it here in Southern California, kind of an under-the-radar test, although your radar's pretty good, Sharon. You picked it up.

So far, the results have been pretty darn encouraging. And being on the West Coast with all of the games, game day coming on at 8:00 in the morning here on Saturday, and with the pro games and college games all starting at 9:00 and 10:00, it makes sense for us with our wonderful video statement, our televisions, to open up our restaurants at 10:00.

And we came up with a very small high quality brunch menu of about 8 or 10 different items that are executable in our kitchens. And so far the results have been very, very encouraging. So, we're going to continue to work it and we'll see where we end up with it.

Okay, great. Good luck.

Okay. Thank you, Sharon.

Thank you. And our next question comes from the line of Graham Tanaka with Tanaka Capital. Please go ahead.

Yes. We're all in a mode of talking about price increases, menu adjustments for inflation. And at some point we're going to have declining energy costs and food and packaging costs. Jerry, historically what's happened when you've had price declines, cost declines? And would you tend to keep menu pricing where it is and catch up on margins, or would you drop prices as costs go down?

You know, Graham, in all of my years of being in the restaurant business, 30-plus years, and going through all of these particular cycles, I don't -- I am not aware of any chain that has actually rolled back their pricing on their menus in a very material way.

What I have seen when commodity costs tend to get a little more favorable, the major chains trade those benefits for additional marketing expenses. And they really go out and try to hammer their competitors with respect to offers. So, while they may not roll back their absolute sticker prices on their menus, what they'll effectively do is discount back price increases to their guests in order to drive guest traffic. I have seen that several times over the years.

And if that manifests itself going forward, clearly we're going to have to be prepared to think about that and to competitively respond to that. But in terms of reducing sticker prices, I personally can't recall any chain having done that in a big way in my 30, 35 years of being in the business. I think they do it in the other way.

And the other -- how's the takeout at curbside been doing? What is it as a percent of revenues and what about the profit margins doing on that issue?

It's building very nicely. And before we started the initiatives, our off-premise was running about 4%, 4.5% of sales. It's up to 5% of sales. It continues to build. And there's a bit of at trade. On a percentage basis, the percentage margin is going to be a little bit less because you're tending not to sell as many side items and drinks with that higher margin.

On the other side of the coin, the absolute gross profit dollars from the transactions are going to be higher because your average check on an off-premise order is typically much higher than your on-premise order. So, there are some trades there. But overall, I think the other mass market chains have proven off-premise business when they've really driven it to be at least 70% to 75% incremental. And as time goes on, we would have the same expectation.

I think some of the other chains are getting much, much higher percentage of total revenues, right?

Yes. Yes, they are, but they didn't happen overnight. When you look at what Applebee's and Chili's and Outback Steakhouse were able to achieve by doubling their off-premise sales as a percentage of total sales, I think it took them two or three years to do that. And we're very early in our program. But I think the opportunity is there, Graham, for us. Particularly when you consider our menu offering; our pizzas, our pastas, our salads and how well they travel.

Thank you.

You're welcome.

Thank you, sir. And our next question is coming from the line of Matt DiFrisco with Oppenheimer.

Hello, Matt.

Hey, Matt.

I just-- I don't want to keep you any longer. I appreciate you going this long on the call. I don't think you said anything about-- specifically about cheese, where you are there, how long you might be locked in, if at all, on that extended into '09? And then also, I'm just curious on the tax rate, why it was so low. I'm sorry if I missed that on the call, as well.

That's fine, Matt. In regards to cheese, we've locked in a small portion, somewhere in the neighborhood of about 25% of our cheese for next year. We think, with the volatility in the commodities, we think it was prudent to take some of that risk off the table and hopefully still capture maybe some downside that might happen as the commodities seem to be coming down, so to speak. So, a little bit of it is on an annual contract. And cheese, as we've said before, it's about 8% to 9% of our cost of sales number.

No, I know that but -- okay, yes.

In regards to the tax rate, it was really due to FICA tax tip credits. As, unfortunately, our income came down a little bit, our FICA tax tip credit was significantly more than what we thought. And as a result, we were able to take a large portion of it and that resulted in a lower tax rate.

Okay. And then just as a last question, on the growth and how we should look at you with that. It's a modest amount of growth being pulled back, but getting into the teens instead of in the 20s on your growth rate.

How much dilution have you had, I guess, in the last couple of years from those stores? Obviously, the run rate usually is that sales start off strong, profitability starts to look better towards the second year, you start to approach the more mature margins. How much of a drag or benefit could we see removed from the '09 number in the fixed costs lines such as the occupancy and operating expense in a modestly slower growth environment?

I have to get back to you on that one. I just don't have that in front of me, kind of pulling out of let's say the last year or year and a half before that. Generally speaking, though, your point's right on in the sense that newer restaurants, until they reach their predictable sales levels, they've gone through a holiday seasons, they've gone through what might transpire with school starting and so on, allows them to be much better operated than restaurants in their first year. But I couldn't tell you exactly what that number is, unless you've got--.

Well, the only comment I would have is that the benefit to be derived would not necessarily be in occupancy and other operating costs as a percentage of sales. It's really in your prime costs. It's your food and labor. Because until the restaurant gets really predictable with respect to sales, it's little harder to manage your inventories. And most importantly, it's harder to really get very, very-- optimize your labor productivity. So in a new restaurant situation, your tendency is to over-staff labor, because you don't want to disappoint guests and you generally get your food costs in line within 30 to 45 days, in most cases, but your labor, you're very, very careful with and that's a little stickier coming down.

So, really, that's where the benefit could be obtained with slightly less impact of new restaurant weeks in your total operating weeks. So, we'll just have to see about that.

Okay. And then any update on the other-- the remaining $35 million or so of the auction-rate securities. Is there a timetable or anything being discussed out there, or changes in the credit market that we might not be aware of, that are now becoming available to you for possible liquidation of these securities?

Nothing new that I'm aware of. As you know, most of the banks have settled up. We've settled up with, really, the small businesses, the charities and retail investors and what they've really promised is to use their best efforts to provide liquidity sometime in 2009 on the auction rate securities. That's kind of where we are today. We have heard rumblings of different things happening out there, different tender offerings, different shield loan issuers trying to take out small portions at times, but I don't have anything real concrete on that.

Okay. And just as a side note, I guess, a little humor here, I wish you guys, maybe the industry could petition Congress next when we have a slowdown like this that we don't have holidays fall on Fridays so often.

Absolutely.

Like in July and Halloween. It's not being friendly to you. Take care.

Well, this is a year that, unfortunately, I don't think is friendly to the casual dining industry in general and when you kind of look at our business, over the long run, we have a well-positioned business and it's been a wonderful concept. It's very relevant. But, gosh, this year, when you consider the slowing economy, the calendar shifts off of Friday, our hurricanes, the auction rate securities, we've been a little bit snakebit, unfortunately, on a short-term basis. But over the long run, there are very few opportunities as well positioned and as legitimately positioned as BJ's to execute a national growth plan and that's why we're all hanging in there.

That's great. Thanks.

Yes, sir. And our next question comes from the line of Robert Derrington with Morgan Keegan. Please go ahead.

Yes, thanks. I'm calling for Dustin. A question, real quickly, on the basket of goods, Greg, that you talked about for 2009. You mentioned that it looked a little bit more favorable, up about 5% to 6% versus previous up about 6% to 8%. I'm wondering where you're seeing those rays of sunshine that are bringing that down a little bit? Or is that due to menu pricing or diesel costs or can you give us some color?

Well, it's a little bit coming down on some of the input costs into some of those-- into, like, the proteins. For instance, with corn coming down, that's helping us a little bit. Also, with the slowdown in some of the other proteins, chicken, that's come down a little bit.

Well, bread, too. When you look at the drop in wheat prices and the potential impact on our pizza dough and our bread. We sell a heck of a lot of sandwiches here at BJ's. Actually, our projected increases in those commodities, with wheat coming down, has actually caused us to move our total commodity basket down a little bit.

And then there have been some other things, as well, but I think that pretty much explains it.

Well, some of those things are actually down, year-over-year, so I guess to turn it around the other way, which are the items that you're feeling the most pressure on?

Well, at this point, chicken is still a little bit of a wildcard for us. Cheese is still moving around a little bit. Those are pretty large pieces of our total cost of sales. As Greg mentioned, cheese is about 8% and poultry is about 10% for us. So those are still moving around and--

Some of our dressings, as well.

Yes, dressings and, again, what we're trying to do, as everybody else is trying to do, is trying to convince our key suppliers to enter into long-term, fixed-cost contracts with us. So at this stage of the game, on the supplier side, they're still generally reluctant to give you full-year quotes going into 2009 on a lot of these commodities. Now, they will, but they're going to cushion those prices with a pretty good premium for that predictability and so far what we've received haven't really been acceptable to us.

But as time goes on, we're beginning to see a little more favorable price talk with respect to our suppliers in that respect. So we've still got another 30 days or so to go. And if we cannot get acceptable fixed-price contracts for a full year, then we'll go to 90 days and do the best that we possibly can. So it's still moving around a little bit. We still have some work to do.

I think one of the other areas for us is on our pizza dough, we had a two-year contract. So we locked into that in 2006. As a result, even though wheat's coming down, it's going to be a little bit more impactful, maybe, to us than somebody else that had a wheat contract last year.

That's good color. Thank you.

Okay. We'll take one more question and then we'll wrap it up today.

All right. Thank you. And our final question comes from the line of Greg Ruedy with Stephens, Inc. Please go ahead.

Good afternoon. A question for Greg Lynds. Your Tukwila, Washington, location looks it seats a few more guests than average. How do you see the shape and size of our footprint evolving over the next few years and can you comment on where you think industry trends will move, as well?

Yes, our Tukwila restaurant is a custom footprint restaurant. So it-- a lot of our custom footprints depend upon the space that the landlord originally constructs. This one, we had a little bit of flexibility, but it's right in there in the 9,000 square foot range in Tukwila. It seats-- more importantly, you've got to look at the seats and the tables that this restaurant has. And Tukwila is about 62 tables, I believe, and seats about 280, which is very similar to our proto-6A and all our prototypes.

In terms of the industry, I think, the industry has the-- has always been in the area of dumbing down or moving smaller and making it cheaper, beater, faster. I think with BJ's it's quality. It's about the guest. It's about efficiency and productivity.

So at this point, our goal is to continue to build restaurants that are more efficient, higher quality, and serve the guests better. So we'll continue to build our restaurants to the same size we've been building them.

Thanks, Greg.

Okay. I wanted to shift to somewhat of a guest mix perspective. Do you know to what extent your business is supported by, maybe, other service industry professionals or retail hourly staff that are around these AAA sites that come straight from work?

Greg, you know what, each site is independent. And I could tell you, Westwood, California, there's a lot of medical buildings in that area. So, we get a huge lunch from them, as well as the kids in the school.

Unfortunately, we don't have a general rule of thumb for our restaurants. It's very, very site-specific.

Yes. It really is. We do open later than most casual dining restaurants, so when the malls and a lot of other restaurants close up at 9 or 10 and we're still open 'til midnight or so, we'll get a little bit of late-night business for a late-night happy hour from service industry professionals, other restaurant workers and so forth, but I don't think it's a material part of our business.

Do you have-- Greg Levin, do you know, offhand, how much of the alcohol sales is post-dinner-daypart?

Not much. I'm trying to think. That late-night business is somewhere in the-- somewhere around 7% of our business. When we look at our incident rates, we do see liquor down a little bit from an incident rate than what we've seen in the past, but we've seen every other category hold up very nicely.

Well, actually, our beer incident rate per 100 is actually up, so that's-- which is a little bit fascinating, but maybe it's kind of a sign of the times.

No one wants to give up their vices in this environment.

Well, we hope not.

That's all I had. Thanks so much.

Okay, thank you. Thank you all for being on the call today. That'll conclude our call.

And, ladies and gentlemen, this concludes the BJ's Restaurant Third Quarter 2008 Results Conference Call. If you'd like to listen to a replay of today's conference, please dial 303-590-3030 or 800-406-7325. Enter access code number 3930855.

ACT would like to thank you for your participation. You may now disconnect.