BJ's Restaurants Inc (BJRI) 2009 Q2 法說會逐字稿

Good afternoon, ladies and gentlemen. Thanks for standing by. Welcome to the BJ's Restaurants second-quarter 2009 results conference call. During today's presentation all parties will be in a listen-only mode. Following the presentation the conference will be open for questions. (Operator instructions.) This conference is being recorded today for replay. You may access the replay system anytime by dialing 1-800-406-7325 or 303-590-3030 of the access code 4114111.

I will now turn the conference to our host, Jerry Deitchle, Chairman and Chief Executive Officer. Please go ahead, sir.

Well thanks, operator. Hello, everybody. I'm Jerry Deitchle with BJ's Restaurants and welcome to our second-quarter 2009 investor conference call, which we're also broadcasting live over the Internet. After the market closed today, we released our financial results for the second quarter for our fiscal year 2009. Our second quarter ended on June 30th, 2009 and if you haven't seen our earnings release yet, you can view the full text of the release on our website at www.bjsrestaurants.com.

Joining me on the call today is Greg Levin, our Executive VP and Chief Financial Officer; Greg Lynds, our Executive VP and Chief Development Officer; and Diane Scott, our Director of Corporate Relations. The agenda for our call today will be as follows. First, I'll provide a brief business and operational overview for the second quarter of 2009 and also review the status of some of our current key initiatives and expansion plans. Next, Greg Lynds will comment on the status of our new restaurant development pipeline. After that Greg Levin will comment on our consolidated income statement, our summary balance sheet, and our liquidity position as of the end of the second quarter. Then after that we'll be happy to answer your questions. And then we're going to finish up the call with a short concluding comment today.

We'll get our call 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 23, 2009. We undertake no obligation to publicly update or revise any forward-looking statement 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.

Our leadership team is very pleased to report that, in spite of the ongoing difficult environment for consumer discretionary spending in general, and for dining-out occasions in particular, BJ's continued its forward momentum during the second quarter, as evidenced by our overall favorable financial performance for the quarter. And most importantly, BJ's continued to gain additional market share during the quarter in the estimated $80 billion casual dining segment of the restaurant industry, which is our principal longer-term objective.

Obviously, in the shorter term we have to prudently manage our business in response to the pressures of the current economic recession and, frankly, we believe that we've been very effective in balancing both our short- and long-term objectives as evidenced by our recent performance, particularly when compared to that of our similarly situated casual dining competitors in terms of size, scope of operations, available resources and geographical concentration.

Moving to our financial results for the second quarter, when compared to the same quarter last year, our total revenues for the quarter increased about 17% to $107.7 million. Our net income and diluted net income per share for the second quarter increased approximately 52% and 45%, respectively, to $4.4 million and $0.16 a share, respectively, compared to the same quarter last year.

Our results for the second quarter benefited from a favorable comparison for restaurant pre-opening costs compared to the same quarter last year, which impacted the quarterly diluted net income per share comparison by approximately $0.04 a share. We opened just one restaurant during the quarter just ended, compared to four openings during the same quarter last year. However, even after adjusting for that comparison we still increased our bottom line profits when compared to the same quarter last year, in spite of the ongoing recession.

Additionally, we were pleased to have maintained our estimated four-wall restaurant operating cash flow margins in the 19% range during the quarter, compared to the same quarter last year in spite of the deleveraging effect of the 1.3% decline in our comparable restaurant sales during the quarter. Also, our estimated four-wall operating cash flow margins for the quarter just ended achieved a 40 basis point improvement compared to the sequential quarter. Greg Levin will comment on our operating margins in more detail later in our call today.

As we noticed -- noted in our press release today, our comparable restaurant sales decreased by 1.3% during the second quarter of fiscal 2009 compared to an increase of 0.6% on that metric during the same quarter last year, which we believe will rank BJ's among the better performances on that metric in the casual dining segment for the quarter just ended.

We were also pleased that our performance on that metric for the second quarter will once again outperform the widely followed Knapp-Track benchmark survey for casual dining comparable sales, which is expected to report an estimated decrease of at least 6% in casual dining comp sales for the second quarter. In particular, after considering the slowing national economy and BJ's significant presence in the states of California, Arizona and Florida, where 46 of our 67 comparable restaurants for the second quarter were located, we believe that BJ's ability to retain the vast majority of our comparable restaurant sales in the aggregate during the quarter is a pretty strong testimonial to the continuing popularity, the relevancy and the overall value of the BJ's Restaurant concept for the consumer, coupled with our steadily improving ability to correctly and consistently execute within the four walls of our restaurants.

And while we're on the subject of comparable restaurant sales, for the first three weeks of fiscal July, our comparable sales comparison for those three weeks in total continues to be soft at minus about 2% when compared to the same three weeks in the third quarter last year. However, we should add that comp sales for the third week of July improved to flat when compared to the same week last year. Again, our weekly sales comparisons continue to be quite choppy during the current recession and, as a result, aren't really of much value in helping us to accurately predict the future. We always caution that our results for any partial period of time do not necessarily represent what our results might be for a full period of time.

I think it's also important to keep in mind that BJ's is still a relatively small, more of a regional competitive player in the varied-menu, or grill-and-bar, or pizza-and-beer segment of casual dining. Most of our direct competitors in the segment have greater numbers of restaurants open and greater penetration of most of our major markets than we do. They've got greater media spending and capital resources than we do. They've got greater economies of scale than we do. But having said that, being smaller also enables us to be a little more nimble, maybe a little quicker and more agile in terms of lining up and allocating what resources we do have for more speedy and effective execution.

We also have an intense mindset at our company that, while we might be outspent by our larger competitors, we're sure as hell not going to be outworked by them. So not only will we continue to be relentless in terms of outworking our peers during these tough times, we're also going to continue to prudently invest in the overall quality and differentiation of the BJ's concept and the strength of our restaurant to support infrastructure. For example, during the first half of the year we've retrofitted eight of our existing restaurants with our expanded guest tap beer offerings in order to strengthen our competitive positioning as the leading merchant of high-quality craft beer in the casual dining space. In these restaurants, we offer up to 24 guest craft beers on tap in addition to our proprietary BJ's beers on tap. And we've seen nothing but favorable responses from our guests as well as better per-guest economics.

Additionally, we've upgraded three more of our older restaurants with our new 103-inch plasma television technology. We know of no other casual dining concept that has had the courage to step up to this type of investment. And believe me, our guests love what we've done. And we believe that BJ's ranks among the leaders in audio-visual technology for casual dining and we're very committed to maintaining this competitive advantage so that we continue to stay relevant and contemporary with the consumer.

And we're continuing to move forward with several major remodels and interior/exterior enhancements of some of our older existing restaurants this year, because we've got to preserve the longer run productivity of our cash cows.

In addition to investing back into our restaurant facilities, we also continue to invest in our menu and our operational processes that could further raise the overall quality of our concept and our four-wall execution. And while some of our peers have adopted a save-your-way-to-success strategy during these tough times, our strategy is a little bit different. Our strategy continues to be a grow-your-way-to-success strategy, but only in a productive and effective -- and efficient manner.

As most of our investors know, during this past quarter we rolled out our most comprehensive menu update in many years, and our new menu and beverage creations have been extremely well received by our guests. In order to properly implement this extensive menu change, we prudently increased the amount of our training investment to support this rollout. And we also invested in a formal sampling program for our new menu creations. And we believe all of these investments are beginning to pay off very nicely, as most of our new menu items have risen to become the top sellers in their respective menu categories and have also yielded a favorable impact on our average gross profit per guest.

We also continued to make investments in technological toolsets and what we call quality-fast operational systems that are intended to enable our restaurant operators to become even more productive and efficient in their four-wall execution. We are currently testing an improved version of our automated kitchen display system that we rolled out a couple of years ago and its associated order-expediting and food-running processes that, in a one-restaurant test, has improved the speed of service in our restaurants and also improved our labor productivity. So based on the results of that one restaurant test, we're planning to expand this test to more restaurants this coming quarter.

And we've just begun recently implementing a new wait time, or quoting system for our front desk operations that's intended to reduce the chances of creating false waits and simply over-quoting the wait times to our guests. With our industry-leading guest traffic per square foot, we absolutely can't afford to be misquoting wait times, particularly during peak meal periods. We want to process every bit of business that's being offered to us.

In addition to these two initiatives, we have other sales-building and productivity initiatives under test or planned for rollout during the next six months or so. And we'll be happy to update you on those initiatives when they reach our restaurants.

In addition to our four-wall productivity initiatives, last year we made a decision to increase our media marketing spending level to about 1% of sales to more effectively communicate with our customers during this recession. We currently plan to maintain that general level of marketing investment during the rest of this year, although the amount for any given quarter might be slightly more or slightly less, depending on the timing of our internal marketing calendar of key events. While our media war chest is still very small compared to the collective hundreds of millions of dollars spent annually by some of our larger mass market casual dining competitors, we believe that we're strategically investing our limited resources very efficiently, using freestanding newspaper inserts, restaurant point-of-purchase merchandising, email database marketing and an increasing use of online media, including Yahoo!, Google, and Facebook, which we've initially found to be very effective for us.

Additionally, we'd like to also comment that, while our media promotions are intentionally designed to convey a value message during the recession, the offerings that we're promoting themselves do not represent significant discounts in terms of absolute dollars or profit margins. Basically, our media promotions are targeted to do one of four things. A, promote existing menu items that are designed to be sold at everyday low prices, like our lunch specials; B, introduce new guest services with a one-time incentive to try it, like our recent incentive to try our new online ordering capability; C, introduce new menu items at their everyday low prices, like our new flatbread appetizer line; and D, in certain isolated trade areas that really need a special stimulus, offer a discount off a larger purchase amount, where there is a tendency for the guest to trade up anyway.

So we've worked very, very hard to ensure that our promotions are financially prudent, they're fairly balanced and really represent a proportionate response to the pressures of the recession in each trade area. We plan to follow this same strategic and focused approach to our promotions and key event media events for the remainder of this year to maximize the effectiveness of our overall media spend.

We've also mentioned 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 operators have continued to do a good job of managing our food waste and yields, our labor productivity and the other controllable costs of expenses within the four walls of our restaurants during the second quarter, although we all recognize that we still have significant opportunities to improve our productivity and efficiency in many of our restaurants.

Additionally, we believe that our G&A expenses were also well controlled during the quarter and that our infrastructure is solidly in place to allow us to gain leverage as we continue to grow our business. However, as we've already mentioned, BJ's is still a relatively small regional competitor. We've only got 85 restaurants opened as of today. And we're still one of the few casual dining concepts out there today with a pretty active new-unit development effort underway. So we've got to continue to make incremental G&A investments in our restaurant manager recruiting, training, talent development, recognition and retention programs because talent development in the restaurant manager talent base is the most critical resource requirement for future growth for us 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.

Speaking of growing and capturing market share, our new restaurant development plan remains in excellent shape. And now 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.

As we noted in our press release today, our 2009 new restaurant development pipeline remains in excellent shape and we continue to be very pleased with the quality of the sites in our new pipeline this year. Our shorter-term new restaurant development plan continues to focus on taking advantage of the softening commercial real estate market so that we can better secure prime sites in densely populated, more mature trade areas with more favorable lease economics and also with lower construction costs.

We've opened three restaurants so far during 2009, including one that we opened at the end of the second quarter on June 29th in Mesquite, Texas, which is a suburb of Dallas. As I mentioned on our last call, we had two openings in the first quarter this year, in Henderson, Nevada and Gainesville, Florida. Within the next few weeks we plan to open our fourth new restaurant of 2009 in Downey, California. This restaurant is located within the successful Stonewood regional shopping center in a mature, densely populated trade area right here on our home court of Southern California.

As we mentioned in our press release today, including Downey, we have seven new restaurants under construction and we currently expect to open all seven before the end of this year. By doing so, we would achieve our previously stated goal for 2009 to increase our total restaurant operating weeks by 15% to 16%. As we've said before, it's difficult to precisely predict the actual timing of our new restaurant openings due to many factors that are not under our control. So with that in mind, as of today, we currently expect to open two restaurants in the third quarter and five restaurants in the fourth quarter.

As I mentioned earlier the construction costs for our new restaurants that we plan to open this year are coming in less than we originally budgeted. Based on our latest information, we are currently expecting an average cost reduction of approximately $250,000 to build each of our 10 restaurants this year. Most of this cost reduction is coming from the lower construction labor costs. We currently expect these average cost reductions to continue into next year.

Speaking of next year, we're in the process of finalizing our 2010 new restaurant development pipeline during the next 30 to 60 days. And we should be in a good shape and a good position to share more details about our expansion plans for next year on our third-quarter investor conference call in October.

While the ongoing recession and the credit crunch has caused many real estate developers to postpone or cancel most of their new retail projects, there are still some attractive locations available for the new BJ's Restaurants in established retail projects. Our new restaurant development strategy has always been centered on triple-A, quality locations in densely populated, more mature trade areas with proven levels of retail sales, all within our current 13-state footprint of operations. We will maintain this discipline as we analyze and secure our future pipelines and we're looking forward to another relatively robust schedule of new restaurant openings for 2010.

Longer term, we continue to believe that we have room to open at least 300 BJ's Restaurants across the country over time. With only 85 restaurants open today, we have plenty of quality growth opportunities 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.

Jerry, back to you.

Hey, thanks, Greg.

We continue to believe that BJ's four-wall economics are very sound and they currently support a continued steady pace of new restaurant expansion. As Greg mentioned, there are certainly not any lack of sites in general to support our longer-term expansion plan, but currently as a result of the recent slowdown in retail project development, there are less visibility of high-quality sites available in the trade areas where we want to develop that will best leverage our supply chain, our field supervision infrastructure, and our overall brand awareness with consumers. We're always going to pick quality over quantity when it comes to our new restaurant locations, so we'll keep you informed as to the status of our potential 2010 new restaurant development pipeline, as the rest of this year unfolds.

Now, one benefit of our reduced pace of planned expansion this year is that we should be able to finance our new restaurant expansion this year primarily with internally generated cash from operations and our committed landlord construction contributions. And we believe that's a pretty favorable position to be in.

Now, before I turn the call over to Greg Levin, I'd just like to reemphasize that here at BJ's we have a sales building mentality first and foremost. It's clear that, while the current recession presents some definite challenges in retaining sales, much less building sales, our fundamental operational mindset at BJ's is to work hard to try to overwhelm the events instead of letting the events overwhelm us. By doing so we believe that BJ's can be a high quality, early recovery opportunity for even more consumers and more investors when the current recession eventually begins to abate. Until then we have to be very, very careful to maintain a very balanced focus on the achievement of both our short-term and long-term key initiatives and expansion plans, as we continue to do our best to navigate our business through the current recession.

Now I'm going to turn the call over to Greg Levin, our CFO, for his comments. Greg, go ahead.

All right. Thanks, Jerry. I'm going to take a couple minutes and go through some of the highlights for the second quarter. And I'll also provide some forward-looking commentary for the rest of 2009.

As Jerry previously mentioned, our total revenues for BJ's second quarter increased 17% to approximately $107.7 million from $92.2 million in the prior year's comparable quarter. This increase is the result of approximately 19% more operating weeks, offset by about a 2.2% decrease in our weekly sales average.

As Jerry mentioned, our aggregate comparable restaurant sales for the second quarter decreased 1.3%. While we do not give out monthly comparable restaurant sales, in general we started to see softer comparable restaurant sales really in mid-May, as we began to lap the benefits from last year's tax rebate stimulus checks. This weakness persisted really throughout the month of June. However, special occasions such as holidays like Father's Day and Mother's Day and graduation events continue to do extremely well for BJ's. In fact, over the Father's Day week we had many restaurants set weekly sales records. However, absent any really special occasions, the consumer continues to be challenged in this very difficult economic environment.

For those of you that have been following BJ's over the last year, we have mentioned that our softness in the comparable restaurant sales metric primarily began in the Sacramento, Central California region, the Inland Empire areas of California, and the Phoenix, Arizona market. These were regions of high growth over the last several years and the housing meltdown and related slowdown in overall construction activity has taken their toll on these local economies. As we stated before, we have 10 restaurants in the Sacramento, Central California region and the Inland Empire area of California, and three restaurants in the Phoenix, Arizona market, that were in our comparable restaurant base since the beginning of 2008. These 13 restaurants had comparable restaurant sales decreases in the 6% to 8% range beginning in the first quarter of 2008 and then gradually improved through all of last year.

In the first quarter of 2009, these same 13 restaurants were only down approximately 0.6%. In the second quarter these 13 restaurants had flat comparable restaurant sales and therefore they actually exceeded the Company's comparable restaurant sales for the second quarter. However, as I mentioned before, and as to be expected, we continue to see pressure on our comparable restaurant sales from our newer restaurants as they come into the comparable restaurant sales base. These restaurants were opened in 2007 in the pre-recessionary environment and are just now becoming part of the comparable restaurant base after the first 18 months of operations. If we exclude these 13 restaurants that recently came into our comparable sales base that opened really in this pre-recessionary period, our overall comparable sales metric for our other 54 comparable restaurants would have been negative 0.6%.

I do want to be clear on this. Even though the class of 2007 restaurants are pressuring our comparable restaurant base, we are pleased with the aggregate overall average unit sales for these restaurants. The fact of the matter is, as I mentioned before, these restaurants were simply opened in a pre-recessionary environment and are coming into the comparable restaurant base in a very challenging economic period for our country. Additionally, the class of 2007 is very geographically dispersed, so there is not one specific region or area that is driving the negative comparable restaurant sales for this class. In 2007 we opened restaurants in Florida, Oklahoma, Ohio, Texas and California.

During the second quarter our estimated menu pricing factor was approximately 3%. We did not add any meaningful pricing when we implemented our new menu earlier this quarter. At the current time, we expect menu pricing to be around 2.8% for the third quarter. Any additional menu pricing will be evaluated before we implement our next menu update, which will probably come in the mid-October time frame.

In regards to the middle of our P&L, our cost of sales of 24.9% of sales was 10 basis points lower than last year's second quarter and 10 basis points higher than the first quarter of 2009. The slight decrease compared to prior year is primarily due to higher dough, bread and chicken costs compared to the second quarter of 2008, offset by lower cheese prices and menu pricing that we implemented in the second half of 2008.

As you may recall, the majority of our commodity cost increases in 2008 occurred in the middle of the year and then subsided towards the end of the year. Sequentially compared to Q1, our commodity costs were pretty consistent. The slight uptick was really a result of some higher costs related to the introduction of our new menu.

Our labor and benefits during the second quarter were 50 basis points lower than last year's second quarter. This reduction was primarily due to lower workers' compensation expense and management labor as a percent of sales, offset by higher hourly labor compared to last year. The higher hourly labor resulted from the additional training for our new menu that rolled out during the first week of June. At BJ's we continue to staff our restaurants to take excellent care of our guests and to capture every sales dollar that we can in a productive and efficient manner. We have not specifically put in place any changes to our labor staffing metrics that would result in less hours per guest served in our restaurants. We believe in these difficult times, when consumers are going to use more prudence in determining where to eat, that now more than ever we need to exceed the guest dining experience on all levels. And frankly, that starts with service and hospitality. We are not sure how restaurants can ever expect to grow their comparable restaurant sales by reducing the guest dining experience.

Sequentially, labor and benefits decreased 70 basis points from the first quarter of 2009. This decrease is primarily a result of lower payroll taxes, since we incur higher payroll taxes at the beginning of each year as we work through many state and federal minimum employer tax requirements. Additionally, our management labor costs as a percent of sales were lower in the second quarter compared to the first quarter, really resulting from sales leverage over higher weekly sales averages. This savings was offset by higher hourly labor as a percentage of sales, again related to the training and implementation of our new June menu. On an overall basis, hourly wages have been flat over the last few quarters and they're really only up about 0.5% compared to the second quarter of 2008.

Our operating occupancy costs as a percentage of sales increased 70 basis points to 21.4%. The majority of this increase is due to planned higher marketing costs as a percent of sales. As we previously mentioned, beginning in the second half of 2008 we made a business decision to increase our marketing costs closer to 1%-plus of sales compared with about 0.4% in prior quarters. We believe that our incremental investment in marketing has generated a good return, as evidenced by our continued out-performance on comparable restaurant sales compared to the industry and our overall profit margin trends.

Before I move on to G&A, I do want to point out that over the last four quarters we have gradually improved our restaurant-level cash margins to just slightly under 19% as of the end of this second quarter. While a 19% of restaurant-level cash flow number is a top quartile number compared to many of our peer restaurant companies, at BJ's, as we've said before, our goal is to continually move this number closer to its historical average, which is around 20%. We believe we have the concept, the people and the technology to continually enhance the business to become more productive within the four walls of the restaurant. We understand that the margins and returns in this business are determined by revenues and, therefore, our focus is to continue to drive top-line revenues and not save our way to success. Therefore, as Jerry mentioned, we will continue to invest in our business to enhance the differentiation, quality, and four-wall productivity so that we can continue to be a market taker in the casual dining industry.

Moving back to our results for the second quarter, our general and administrative expenses decreased 50 basis points from the prior year to 7.1% of sales. Included in G&A for both 2009 and 2008 is approximately $600,000 of equity compensation, which is really about 60 basis points in 2009 and 70 basis points for 2008. On an absolute dollar basis, G&A increased about $600,000 and this increase in G&A is the result of increased costs for field supervision and support costs, plus some additional costs related to marketing research and other consulting and legal costs.

Our depreciation and amortization was 5.5% of sales, which was pretty much in line sequentially. Our restaurant opening expenses were approximately $700,000 during the quarter in 2009, which is primarily the cost to open our new restaurants in the second quarter, plus about $225,000 of non-cash pre-opening rent, for the seven additional restaurants expected to open this year.

Our tax rate for the second quarter was 30.5%, which is in line with our expectations of an annual effective tax rate between 30% and 31% for the year.

Before I turn the call back over to Jerry, let me spend a couple of minutes commenting on our liquidity position and also providing some forward-looking commentary for the rest of 2009. In regards to our auction rate securities, we were able to redeem an additional 1.1 million of these securities during the second quarter and they were all redeemed at par. As such, we currently own 33.3 million in face or par value auction rate securities. The auction rate securities as we mentioned before 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, or FFELP.

I do want to remind investors that the interest we earn on our auction rate securities is tax exempt and, 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 -0- for any period of time unlike some of the other student loan auction rate securities. However, as credit spreads have come down for LIBOR and other municipal indices, so too have our interest rate returns for our auction rate securities. We are currently generating a return of approximately 1% before taxes, or 1.4% on a tax-effective basis on these auction rate securities.

Again, because of the illiquidity of these investments at the current time, in accordance with FASB 157 we continue to obtain third-party valuations for our investments. Based on these valuations, we have currently recorded a temporary impairment in the value of these investments of approximately $3.5 million, or about 10.6% of the face value. 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 in Debt and Equity Securities.

In regards to our liquidity, we have generated approximately $23 million in EBITDA through the second quarter and paid down $2.5 million on our line of credit to date. We ended the second quarter with just under $13 million of cash and $7 million outstanding on our line of credit. Our line of credit is for $45 million and does not expire until 2012.

Our CapEx to date is approximately $21.7 million and that is gross with any tenant improvement allowance. And we still anticipate our CapEx to be approximately $56 million to $60 million, before any tenant improvement allowance. We anticipate tenant improvement allowance to be about $12 million in 2009, reducing our net use of cash for capital investments to be in the $45 million to $48 million range, which is in line with our original expectation for the year. And, as Jerry mentioned, we anticipate funding our capital expenditures primarily from our cash balances, operating cash flow and our landlord allowances. At the current time, we do not expect to draw meaningfully on our line of credit in order to achieve our growth plans and initiatives for 2009.

I'll now provide some forward-looking commentary on sales and margins for the rest of 2009. And this information is based on our expectations as of this date. All of this commentary is subjected to the risks and uncertainties associated with forward-looking statements as discussed in our filings with the SEC.

We currently continue to believe the environment will remain challenging for the consumer at least for the remainder of this year. We expect that the national unemployment rate will continue to increase, not to mention the fact that over two-thirds of our restaurants are in states with unemployment rates above the national average. Additionally, consumers are now increasing their saving rates to levels not seen over the last several years, and being very prudent in their discretionary spending. While most experts believe this will make our country stronger in the long term, it will cause some short-term pressure on many consumer-discretionary companies.

Also, as we previously mentioned, we expect our class of 2007 restaurants that were opened before the current recessionary environment will continue to pressure our overall comparable restaurant sales metric for the rest of 2009. Therefore, until we begin to see some improvement in general economic conditions in those states and trade areas where we have significant concentrations of restaurants, as reflected by a topping out of the unemployment rate and/or an uptick in consumer spending, it will be very difficult to drive meaningful increases in overall guest traffic, which in our view is really the key to not only taking pressure off our restaurant level margins, but also giving us an opportunity to gradually improve those margins back to pre-recession levels.

As Jerry mentioned, our comparable restaurant sales three weeks into July are running around negative 2%. The first two weeks of July started off relatively slow due to the 4th of July holiday weekend and still some overlap of last year's stimulus checks. This last week our comparable restaurant sales were essentially flat, which is more consistent with our recent trends over the last year, which have been in the flat to negative 1% range.

In regards to restaurant weeks, I would anticipate an increase of approximately 12% or so, both for Q3 and Q4. And as we previously mentioned for 2009, we continue to anticipate a decrease in our absolute weekly sales averages in the 2% to 4% range.

In regards to cost of sales, our supply chain group has secured about 70% of our commodities under contract for the remainder of 2009. The majority of items -- the major items not entirely under contract right now are cheese, which is about 9% of our cost of sales, and Angus beef, which is about 6% of our cost of sales. On both cheese and Angus beef, about 30% of our usage is under contract, with the remaining 70% on the spot market.

Based on these contracts, as well as the current spot market for our items that are not contracted, we expect our commodity costs to be relatively flat with where they've been for the first part of this year. Therefore, I would anticipate our cost of sales to remain slightly below 25%. I do want to mention that in the fourth quarter we anticipate opening up to five restaurants and therefore we could see a slight increase in cost of sales in Q4, due to inefficiencies from the new restaurants compared to prior quarters.

Our supply chain group is currently working on contracts for 2010 and we anticipate having some of these contracts fully negotiated before our Q3 conference call. At that time we will update our investors regarding our expectation for 2010 food inflation.

I anticipate labor slightly increasing from its 34.7% range in Q2 to the low 35% range for the second half of this year. The pressure of labor sequentially is primarily due to the increased restaurant openings, especially in Q4, which we anticipate opening five new restaurants, as I mentioned.

Operating and occupancy costs should continue to be in the mid-21% range. That's based on our current marketing plan and the current cost of energy. In regards to pre-opening costs for Q3, I would anticipate about $1.2 million or so related to the opening of two new restaurants and pre-opening rent for restaurants expected to open in Q4. In regards to Q4, I would expect pre-openings costs of about $2.3 million to $2.5 million, related to the five restaurants we expect to open, as well as pre-opening rent for restaurants expected to open in 2010.

And as I previously mentioned, we expect our tax rate to be in the 30% to 31% range for 2009. And our diluted shares outstanding for 2009 will likely be in the 27 million range as well.

And Jerry, back to you.

Hey, thanks, Greg, for a very detailed review. And now what we're going to do is open up the call for our question-and-answer session. And then after that, we'll have a concluding comment for everybody. So operator, we're ready for some calls -- for some questions.

Thank you, sir. We will now begin the question and answer session. (Operator instructions.) Matt DiFrisco; Oppenheimer.

Hi. This is [Rachel Schracter] in for Matt Difrisco. Just a quick question -- has the percentage of to-go sales increased at all with the delivery and curbside initiatives that you've rolled out? And in terms of same-store sales by day parts, specifically lunch, have you seen any change as a result of your marketing spend?

In regards to the take-out and delivery side of our business, we have continued to see that number grow. Specifically the take-out has grown probably about 1% or so since we started the initiatives really kind of end of the first half of 2008.

And the second part in regards to the marketing, have we seen any major changes in our day parts? We really haven't. You know, a lot of our marketing last year and earlier this year was to talk about our lunch menu, the value portion side of things. We've seen people gravitate to that. It's now about a third of our lunch menu overall. But when we look at the overall shift, or overall part of our business between lunch and dinner, it's remained pretty consistent from period to period.

Okay. Thank you.

Tony Brenner; Roth Capital Partners.

Thank you. As I recall, a major reason that your new store expansion rate slowed from 20%-plus to about 15% for this year was the lack of new commercial development in mature market areas. Given the current state of the commercial real estate market, is it reasonable to conclude that your expansion rate will remain at 15% or less for a while?

Tony, this is Jerry Deitchle. We're in the process of putting together our pipeline for next year. I think we previously mentioned on our last conference call and perhaps some other investor meetings that we've had over the last quarter, that we have as many as 50 to 55 different sites that are in various stages of evaluation in our real estate pipeline today. All of these sites meet our general requirements for new restaurant development in terms of demographics, income levels, co-tenancies and so forth.

The real challenge is, is to get the various developers that are -- that we're in conversations with on a lot of these particular sites to really come up with firm commitments as to when these sites could be made available to us for our development. That's really been the big change over the past year or two, as we've been trying to really get our developers to be much more specific with their timing of their delivery to us so that we can properly sequence all of the available sites and get them into our development plan and line up all of the resources that we have to line up on our side from a construction and pre-opening side of it.

So what we're trying to do is to take all of these particular sites that we're in various stages of negotiations with -- we're trying to really focus on filling in our established trade areas this year to really work on leverage in our overall business models. So we're trying to stay very disciplined within our 13-state footprint. And as the pipeline becomes more and more definitive and we get more and more specific landlord commitments over the next three or four months, then I think we'll be in a position to announce a very definitive new restaurant development plan for 2010.

We've just been very, very careful about trying to get ahead of it before it's really finalized, Tony, because one thing in the five years, almost five years, that I've been involved with BJ's, and Greg Lynds just had his sixth anniversary with our company yesterday, one thing that we have been very, very proud of is that we have consistently delivered and said -- and done what we said we were going to do with respect to the number of new restaurants and the number of operating weeks that we were committing to at the beginning of each year. And we're not going to start breaking that record anytime soon. Greg, do you want to add any comments to that?

I think you've covered it pretty well, Jerry. I mean, as the landlords and the institutional investors start to take back some of the vacancies, vacant restaurants and large big boxes, we believe there will be more available high quality sites available for us.

As you move closer to 100 restaurants and over 100 restaurants, does scale become a factor in your ability to sustain 20% to 25% increases in operating weeks?

Well, in terms of our infrastructure, we opened 15 restaurants in 2008 with a very solid infrastructure that, frankly, was capable of opening even more restaurants. During this year, we made some slight adjustments to that infrastructure, but, frankly, the vast majority of that new restaurant opening infrastructure that we have is still in place and still intact. We have not significantly reduced it. So I think our infrastructure is in pretty good shape to flex back up to 15 or 16 restaurants, given where it currently stands today. And I think beyond that you would see a normal ceiling of additional investment if we were going to commit to opening even greater numbers of restaurants in the future.

Fair enough. Thank you.

Brad Ludington; KeyBanc Capital Markets.

Hi, guys. This is [John Dravenstat] in for Brad Ludington, actually. I had a question on the new distribution agreement. Are you able to comment, were you able to bring down fuel surcharges, or were there any other material changes that we should be aware of?

There really aren't any really material changes to the agreement. It does give us an increasing ability to leverage as we begin to cluster within certain trade areas and within certain distribution houses within the network that services our restaurants over time. The fuel surcharge formulas have been adjusted. We believe that it will certainly benefit us going forward. But when you look at the overall economics of the new distribution agreement, it does -- the major advantage that it provides BJ's is the ability to leverage as we continue to cluster and really add more velocity in terms of purchases from certain distribution houses as time goes on as we continue our development.

Okay, great. And if I could ask one more. Could you give us a little more color on marketing costs and the timing of when we can expect that to hit in the second half?

Well, I think our overall goal is to run our overall media expenses at roughly 1% of sales. Again, as I mentioned in our conference call comments, it could be a little more or a little less in any given quarter. We are not anticipating any material changes for the second half of the year. So I think probably sticking with a 1% overall assumption is the best that we could advise you at this time.

Okay, great. Thanks.

Jonathan Komp; Robert W. Baird.

Yeah, hi. Thanks for taking my call. This is Jonathan Komp in for David Tarantino. If I could ask you quickly, it looks like the spread between the average weekly sales and the comps narrowed a bit this quarter compared to the recent trend. I'm wondering if you could just talk about what's driving that shift and if you expect that to continue in the back half?

Yes. In regards to thinking about how that's shifted, or why that spread is narrowing, some of it really has to do with our -- or most of it has to do with our development strategy, frankly. Back in 2007 we started making those decisions to move nationally. We opened up in new markets and did not have brand awareness in those markets. Over the last year we continued to cluster, as Jerry mentioned, and really want to fill in existing markets. As a result we got more restaurants in our development pipeline that are going to be in California and Texas. Those are areas that end up having a little bit higher weekly sales average, again, because of that branding. And I think as we continue to fill in in certain areas, that will help us again with those weekly sales averages versus sometimes going into brand new markets.

Okay. So is it safe to say that we could expect something similar in the back half of the year?

I think that's reasonable. Again, I kind of talked about a 2% to 4% average weekly sales absolute decrease in regards to thinking about modeling. I think the first quarter we were down 1.5%; this quarter we were down 2.3%. I remember on the first quarter everybody going, "Hey, you just finished down 1.5%. Why are you saying down 2% to 4%?" Well, unfortunately, it's still choppy out there. We don't have a great crystal ball and I think honestly it's probably going to be somewhere in that 2% to 4% reduction on absolute average weekly sales.

Okay, thanks. That's helpful. And then if I could just clarify, did I hear you correctly that you're expecting labor in the back half of the year to be in the low 35% range?

Well, when I say low 35% it's probably about anywhere from 35% to 35.3%. We do have five restaurants that are opening up in the fourth quarter. There's going to be inefficiencies with that. There's no doubt about it, that us, plus a lot of other restaurant companies, are getting productivity enhancements in this first half of the year as the development has slowed down. But in our case, five restaurants in the fourth quarter will actually be more restaurants than what we opened in last year's fourth quarter. And I think you have to take that under advisement.

Okay, thank you.

Robert Weiler; Piper Jaffrey.

Hello, guys, this is Rob Weiler in for Nicole Miller-Regan. First question, regionally speaking, you guys made comments during the call about California and Inland Empire improving since the first half of 2008. If that's the case is there any regions that you guys have been able to identify that are dragging down restaurants? Or is it just all your new stores that I know are diversely -- or geographically diverse across the country? Is there any one region, I guess, that's dragging on same-store sales?

Not really. It's really the new restaurants. It's pretty geographically dispersed. We do have areas, like the Bay area continues to do well for us. Certain areas of Texas continue to do well for us. But I don't see anything myself that's specific from a region standpoint. It's really the class of '07 right now coming into the comp base, again, opening in kind of that pre-recessionary time.

Okay, great. And then are you guys able to quantify in any way the impact of the stimulus on both your EPS and same-store -- or same-store sales for the second quarter?

Really can't. I -- Jerry, any -- ?

No, I don't think we have any way of knowing what that benefit would have been.

Okay. And then, just a more general question. Why do you think you guys are outperforming the benchmark in Knapp-Track of down 6% and you guys are -- is it the value? I mean, I guess I just want to understand the value message in the marketing. But it's not discounting. It's just the value you're getting for your dollar? Is that what you're conveying in the marketing, which seems to be resonating? That's what it is?

Well, again -- this is Jerry -- as I mentioned in our prepared remarks, we have a peashooter compared to our competitors' cannons when it comes to the ability to market in the mass media. We have a very small, limited budget. We're very opportunistic with it. We have the ability to rifle-shoot it a little bit, probably a little bit better with specific offers targeted to specific trade areas and specific restaurants versus having to rely on a mass market television or radio campaign. I think that does play to our advantage of being a little bit smaller, a little bit more nimble, a little bit more agile.

But I think when you look at our overall sales performance versus Knapp-Track, I think you have to look to the strength of the concept itself. We have a higher quality, more differentiated casual dining concept that's probably a little more contemporary, a little more relevant, with much more energy and appeal than most of the mass market casual dining concepts out there that have been around for many, many years and that have become a little tired and a little more commoditized, in fact, greatly commoditized over the past several years in terms of their overall presentation to the consumer.

And when you take a look at what we offer, the quality, the differentiation, the variety of the menu items, our signature menu items and the facility that we offer it in, at the price point that we offer at our average check of around $12, that's equal to or even less than some of the average checks of some of our mass market competitors.

So I really do believe that that's been one of the principal reasons why, despite our unfavorable geographical penetration here in California and Arizona and Florida and Nevada and some of the states that have felt the recession a little harder and a little bit faster than some of the other states in the country, I -- and plus we've also been working very, very hard to improve our overall ability to execute the concept within the four walls of our restaurants. And we've made significant investments over the past two and three years to enable our operators to execute the concept a little more productively and efficiently.

So when you combine the basic positioning of the concept and our average check with our ability to execute a little bit better, I think that has helped carry the day with respect to the vast majority of our competitors. And that's why we've continued to make these prudent investments in the menu and in our operating systems and in our technology and in our facilities, to maintain that competitive advantage going forward even though times are tough. So that would be, I think, our best explanation.

Okay, great. That's very helpful. And then I've just got one last question and then it's probably more for Greg and I apologize if I missed this in the prepared comments. On G&A what are our expectations for the second half of the year?

I didn't give anything specific on that, but I would tend to think that G&A is going to be pretty much in line with what you saw in Q2. It could bump up a little bit, just because with the restaurants being shifted a little bit to the back end here, we're going to end up having more travel and lodging costs that are going to come through than what you saw in Q2.

In line as far as dollar amount or percentage?

I'm sorry. In line as far as dollar amounts and then probably going to bump up a little bit from Q2 because of that travel and related housing and lodging costs.

Okay. Thank you very much, guys.

Thank you. (Operator instructions.) Greg Ruedy; Stephens Inc.

Good afternoon. California balanced their budget and it appears that they've pushed some of those -- they've used some accounting tricks to push it down onto the local municipalities. I know it's early, but is there anything anecdotally you're hearing from market-by-market stores on what that impact could be?

No, Greg. I think a combination of, one, it's early as you mentioned. It's obviously in the news here and people are aware of it, but I still think, and I've said this before, that really California is -- has been dominated really from the housing market and the related industries that came up from the housing market. And I still think the housing issues and the foreclosure rates and the unemployment rates in California are more important right now to our overall underlying business than the budget. The budget matters, don't get me wrong. But I think the core is still that unemployment related to housing and the housing market out here in California.

Okay. Last year you had an initiative where you began opening early on the weekends. How many units do you have that in place now, and what's that boost to same-store sales been?

I don't know the number to comp sales, but it's really only here in our Southern California restaurants. It's just a few of them. It's been -- it hasn't been anything significant in regards to comp sales.

Okay. Jerry, you talked about expanding the guest tap program. Are there opportunities to maybe look at something like an expansion of import premium bottles?

Not at this time. I think we already have a very wide selection of imported bottle craft beer. I think our inventory level is manageable given the demand from our guests. Obviously, if our guests were to start pounding the table and start demanding more, we would obviously offer it to them in greater mass quantities. But the vast majority of our guests consume beer off tap. They love the fresh beer and that's really what I think we're going to continue to focus on going forward.

Okay. Any change to the mix from the -- the alcohol mix from the guest tap program to date?

No, not really at all. As we put in that expanded guest tap program into our established restaurants we have seen very little, if any, cannibalization of sales of our own BJ's beers. We've seen incremental consumption by consumers related to our guest beers. And obviously, when guests are increasing their consumption of beers at pretty attractive margins to us, that has a favorable impact on the average check per guest.

So we have seen nothing but favorable comments from our guests in terms of how they love the presentation and obviously from an economic perspective it's been a win/win for us. And it really further solidifies our desired positioning as the leading marketer and merchandiser of high quality craft beers in casual dining. That's very, very important to BJ's positioning as we continue to evolve the concept. And so far it's worked very, very nicely for us.

Last one and I'll pass it on. Social media appears to be accelerating as a marketing tool. What are you doing there that's different?

Well, we're pretty active on Facebook and Yahoo! and Google. And in fact, I think we did a survey recently of the number of followers per average restaurant in casual dining on Facebook. And I think we came in number two, if I'm not mistaken. So we have a very strong base of loyal fans in the social media networks. And we're going to use them, those particular networks, as we do our freestanding inserts in the paper and our other ecommerce advertising really to introduce new products and new services to our guests and to just keep overall top-of-mind awareness with consumers during these tough times. So that's really going to be our principal direction with the social networks. We're going to use them the same as we would use our other media opportunities.

Right. Thank you.

I think that's all of the questions that we have today. And I want to thank everybody for their good questions. You know, every restaurant operator in America would like to have better comp sales right now, and so would we. And we realize that it's necessary to focus on the shorter-term pressures that we're all currently facing in terms of reduced customer traffic and comp sales.

But it's also very important to keep an eye on the longer-term opportunities from each restaurant concept and company. Basically, when the economy does turn around which restaurant concepts and companies are going to be the ones that either, A, have not damaged their brands and operations by overreacting to the current recession, either through excessive cost cutting or deferring spending or excessive discounting; and B, are the ones that have a more leveragable business model in place that can better capture the benefits of sales increases when they do come?

When we look at our company and our competitive positioning, we think that BJ's is a pretty special casual dining company, with an equally special opportunity to gain market share in a very large and fragmented space that's absolutely begging for more innovation, for more freshness, for more energy, for more relevance and for more quality and differentiation and a good value for the consumer. These are the strengths of the BJ's Restaurant concept and we're going to maintain our unwavering conviction and courage to continue to play to these strengths during both good times and tough times.

There are three principal drivers of enterprise value in most chain store consumer companies -- unit expansion, four-wall unit economics, and overall leverage of the business model. So how does BJ's match up on each of those three key drivers? Well, we're continuing to open new restaurants with plenty of room for more, but we're doing it with strong discipline. We're also working hard to preserve our unit economics as we grow in spite of the recession, thanks to the investments that we've made, and we continue to make, in better operational talent and better operational systems. And finally, we've worked very hard during the past few years to get our infrastructure established and get our business model set up for steadily increasing leverage as we go.

So recession or no recession, we're going to keep moving forward. We believe the BJ's concept and business model is solidly intact. It's getting stronger over time and that's why we're in this, to build enterprise value over the long haul.

So thanks for listening and thanks for being on our call today. And operator, that will conclude our call.

Thank you, sir. Ladies and gentlemen, this concludes the BJ's Restaurant second-quarter 2009 results conference call. We thank you for your participation. You may now disconnect.