BJ's Restaurants Inc (BJRI) 2013 Q3 法說會逐字稿

Good afternoon, ladies and gentlemen, and thank you for standing by. Welcome to the BJ's Restaurants, Inc. third-quarter 2013 results conference call. (Operator Instructions) This conference is being recorded today, Thursday, October 24th, 2013.

I would now like to turn the conference over to Greg Trojan, President and CEO. Please go ahead, sir.

Thank you, Operator, and good afternoon, everybody. Welcome to BJ's Restaurants' third-quarter 2013 investor conference call, which we are also broadcasting live over the Internet. I'm Greg Trojan, BJ's Chief Executive Officer, and joining me on the call today are Greg Levin, our Chief Financial Officer; Greg Lynds, our Chief Development Officer; and Wayne Jones; our Chief Restaurant Operations Officer.

After the market closed today we released our financial results for the third quarter of fiscal quarter 2013 that ended on Tuesday, October 1st, 2013. You can also view the full text of our earning release on our website at www.BJsrestaurants.com.

Our agenda today will start with Greg Levin, our Chief Financial Officer, providing a financial review of the quarter and some commentary for the rest of 2013 and some preliminary commentary for 2014. I will then conclude with an overview of our business and strategies going forward, and after that we'll open it up to questions.

But before we begin with our prepared remarks, Dianne Scott, our Director of Corporate Relations, will provide our standard cautionary disclosure with respect to forward-looking statements. So, Dianne, go ahead, please.

Thank you, Greg.

Our comments on the conference call today will contain forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. Forward-looking statements involve known and unknown risks, uncertainties and other factors that may cause the actual results, performance or achievements of the Company to be materially different from any future results, performance or achievements expressed or implied by forward-looking statements. Investors are cautioned that forward-looking statements are not guarantees of future performance and that undue reliance should not be placed on such statements.

Our forward-looking statements speak only as of today's date, October 24th, 2013. We undertake no obligation to publicly update or revise any forward-looking statements or to make any other forward-looking statements whether as a result of new information, future events or otherwise unless required to do so by the securities laws. Investors are referred to the full discussion of risks and uncertainties associated with forward-looking statements contained in the Company's filings with the Securities and Exchange Commission.

Thanks, Dianne.

As we noted in our press release today the overall sales environment for the casual dining industry continues to be very challenging. The casual dining industry data book from Knapp-Track and BlackBox showed negative comparable restaurant sales in July, August and September. Our sales more or less follow this pattern and, while our sales were not as strong as we expected, we were pleased with our restaurant teams executed in terms of both cost management and delivering great service to our guests.

Our revenues increased approximately 7.4% to $188.2 million from $175.2 million in the prior year's comparable quarter. This increase is due to an approximate 11% increase in total operating weeks, partially offset by a decrease in our weekly sales average by about 3.2%. Our comparable restaurant sales decreased 2.2% during the quarter as compared to a positive 2.3% in last year's third quarter. Therefore, on a two-year cumulative basis our comparable restaurant sales were approximately flat. Our 2.2% decrease in comparable sales for the third quarter consisted primarily of an approximate 2% benefit from menu pricing, offset by a decrease in guest traffic.

As you may recall, on the last quarter conference call we noted that our comp sales were trending around a negative 2% for the first few weeks of July. This sales trend continued through the rest of July and into August and September. From a quarterly perspective August was our softest month. Of late our comparable restaurant sales have improved, which I will comment on shortly.

There are a couple things that impacted our comp sales for the quarter when compared to last year. From a marketing perspective, in last year's third quarter we ran one of our strongest promotions of the year, our two-can-dine pizza special, which we ran in both August and September, while this year we are running that same promotion in September and October. Instead in this past third quarter we introduced a seasonal barbecue offer that began in July and ran through all of August. As part of this barbecue offer we had a two-can-dine barbecue platter, which while well received by our guests had a lower incident rate than our traditional deep-dish- pizza-for-two offering.

Also, in last year's third quarter we introduced our loyalty program in July and our new fall menu, which included our new line of hand-tossed pizzas in late September. While both of those initiatives last year impacted our cost structure, they did help drive sales as they provided a promotional vehicle to keep BJ's top of mind for the consumer.

As we mentioned in our press release today, we have intentionally focused less on new menu development this year, so that we can operationally digest our past initiatives and make investments in refining our menu and kitchen operations to improve our capacity going forward. As a result, our fall menu update will be rolling out in mid-November, which Greg Trojan will comment on shortly.

In addition to the impacts of the calendar shifts around our promotional items and new menu rollout, we continued to see our comp sales impacted by three other factors -- an unusual level of new competitive intrusions; some sales cannibalization by new BJ's Restaurants as we fill in gaps in certain trade areas to both protect and strengthen our overall position in those markets; and the mathematical impact of extended honeymoon sales periods for some of our stronger opening new restaurants when they first enter the comp base after 18 months of opening.

During the quarter we had 116 restaurants in our comp sales base, of which 41 restaurants or roughly 35% of our comp sales base had some unfavorable impact from one or more of these factors on our overall comp sales calculation for the quarter.

Competitive intrusions are a fact of life in the restaurant business, and some cannibalization from filling out markets is also not that unusual. The good news is that all of these impacted restaurants are solid, long-term performers for us. Our own cannibalization, while dampening our comp sales somewhat is turning out solid new restaurants, which will drive strong returns net of any cannibalization impact. And in the past we have seen sales comparisons flatten out and eventually show some sales recovery. So we think it is important to have patience and confidence to cycle through these impacts.

Geographically our comparable restaurant sales in California were slightly less than our Company average for the quarter. First, as I have discussed, most of our cannibalization has occurred in California. Secondly, we are seeing greater competitive intrusion than in the past throughout all of the US, but in particular in our core California market. Now this could just be due to the fact that we are already in most of the mature trade areas here in California and have been in those trade areas for some time now, so we see more of this new competitive intrusion than in our other newer markets.

In regards to the middle of our P&L, our restaurant level margins reflected the expected deleveraging impact that occurs with negative comparable restaurant sales. While our restaurant operators did a good job of controlling everything that they can control, the fact is that in the restaurant business, and probably more so at BJ's with our relatively large menu, large kitchen and restaurant facilities in general, there is a certain amount of fixed cost that just can't be leveraged and unfortunately deleverage with negative comparable restaurant sales. And while you want to optimize your variable costs as much as you can, you do not want to do so at the expense of constricting sales building. At BJ's we always make a conscious decision to staff our restaurants to build sales first and foremost and take care of our guests.

Our cost of sales of 24.8% of sales was up about 10 basis points compared to last year's third quarter and sequentially up about 40 basis points from the second quarter. This increase sequentially was primarily due to changes in our menu mix as we promoted our barbecue menu in July and August. And we also rolled out two of our higher cost seasonal beers in the third quarter, our Fresh Hopped Field Day IPA in August and then our Oktoberfest lager in September. This resulted in slightly higher beer cost of sales than the prior quarter due to some additional freight costs.

Labor during the third quarter was 35.7%, which was up 70 basis points from last year's third quarter. While we were able to effectively react to the soft sales environment by adjusting our hourly labor scheduling as best we could, we deleveraged on our fixed management wages and taxes and expenses. In fact, hourly labor was up only about 10 basis points in the quarter, despite the negative comparable restaurant sales trends.

While operating and occupancy costs were 23.2% for the third quarter, an increase of 130 basis points from last year's third quarter, out of the 130 basis point increase from the prior year approximately 80 basis points are related to increased marketing spend and the remaining 50 basis points due to deleveraging based on our sales results.

In regards to marketing specifically, we spent approximately $4.1 million, which came in at about 2.2% of sales. This compares to approximately $2.5 million in marketing spend in the same quarter last year or 1.4% of sales. Included in our marketing costs for Q3 this year was approximately $675,000 related to additional TV testing, which occurred in mid-September, and we also increased our promotional activity on a year-over-year basis, where currently about 1.4% of our gross sales are discounted compared to about 0.9% of our gross sales in last year's third quarter. While this constitutes a significant increase in discount activity from last year, we believe it is still well behind our typical mass casual competition.

Excluding the marketing expenses that I just mentioned, our operators continue to control the operating costs in our business. In fact, if you exclude marketing expenses from operating occupancy in both years we averaged about $22,300 per operating week this quarter compared to $22,400 last year, so it was down about $100.

Our general and administrative expenses for the second quarter were approximately $11.4 million or 6% of sales. G&A came in at about $1.5 million lighter than anticipated due to lower equity compensation, as well as a reduction in accrued incentive compensation based on performance to date.

Depreciation and amortization was approximately $12.5 million or 6.6% of sales and averaged about $7,000 per restaurant week, in line with our most recent trends regarding depreciation and amortization.

Our effective tax rate for the third quarter was unusually low at approximately 4%. This was primarily due to the recognition of our Watsi tax credit for 2012 and lower than expected pretax income. In regards to the Watsi tax credit, as many of you probably know, this credit was suspended for all of 2012 and then reinstated as part of the American Taxpayer Relief Act on a retroactive basis. Therefore, we picked up the entire 2012 Watsi credit in this past third quarter provision.

Now, before I turn the call over to Greg Trojan, let me spend a couple minutes providing some forward-looking commentary for the rest of 2013 and also some preliminary commentary for 2014. All of this commentary is subject to the risks and uncertainties associated with forward-looking statements as discussed in our filings with the SEC.

Based on the continued sluggish economy and the industry data we have seen to date, we expect the casual dining industry in general to remain challenging through at least the end of this year and most likely into early next year. However, as I've previously mentioned, we have seen our recent comparable restaurant sales trends improve. To date, through the first three weeks of October, our comparable restaurant sales are down just slightly at minus 0.5% or so.

More importantly, we have seen this improving trend despite having less menu pricing in October than we have had all year. Our current menu pricing is a little over 1%, so for the first three weeks of October we are seeing about a 200 basis point improvement in our guest traffic compared to the third quarter. I do want to remind everyone that this is only for the first three weeks of October, and it is always difficult to ascertain a trend in the restaurant business after a few weeks. Also, our most productive sales time in the fourth quarter starts in December, and October tends to be a slower overall period for us.

For the fourth quarter I would expect about 1,875 restaurant weeks, and we do not plan on taking any menu pricing with our November menu, so menu pricing will be a little over 1% for the quarter. I would expect our cost of sales to remain in the upper 24% range, pretty consistent with what we saw in Q3.

As I mentioned before, labor is significantly influenced by comparable sales increases or decreases. While our teams have done a solid job of executing in the current environment and adjusting their hourly labor scheduling based on our new productivity system, it is difficult to provide an estimate of total labor as a percent of sales in this soft, but volatile environment. Therefore, based on current comparable restaurant sales trends, as well as the increases we are experiencing in workers' compensation and some higher FUTA taxes, labor in the third quarter may be in the 35% range. Again, this is based on our current sales trends.

We're going to make sure our labor, frankly, is set up to take care of our guests because the bottom line is great food and great service and hospitality will ultimately result in improved top-line sales. We have said this many times -- the guest sees our brand through our team members that take care of them every day. Therefore, we must and will hold our line in labor so that we continue to provide great service to our guests and not make rash labor decisions that could tarnish our brand going forward.

In the fourth quarter we plan on spending about $4.6 million in marketing, which will be included in our operating and occupancy costs. Included in this is another $650,000 for television testings.

And just so everyone understands our TV testing, it's comprised really of two weeks on air in September, covering about 75 restaurants. We then went dark for two weeks, and then we ran a second wave of TV commercials through the first two weeks of October for those same 75 restaurants. Therefore, our total TV costs were approximately $1.3 million, of which half of this was expensed in Q3, and the other half will be expensed in Q4.

Therefore, including the marketing costs I am anticipating our total operating and occupancy costs to be around $25,500 to $26,000 per week, of which about $2,400 per week is related to marketing.

Obviously, operating and occupancy costs will vary as a percent of sales based on top-line comparable sales, much like we saw this quarter. Therefore, I think it is better to think about operating and occupancy costs on a cost-per-week basis versus trying to model it as a percent of sales.

Our absolute G&A dollars spend in Q4 should be around $13 million, and that is inclusive of equity compensation. I do want to remind everyone that G&A can vary from quarter to quarter due to the number of managers in our advanced management training program, travel, and other related costs, due to the timing of the openings of new restaurants, incentive compensation accruals and other factors.

I would expect pre-opening costs to be around $3.5 million for the quarter. We expect to open six restaurants in the fourth quarter, plus we saw some carryover costs from the restaurants that opened at the end of the third quarter. And I also anticipate some preopening rent for restaurants expected to open early next year.

We currently anticipate our income tax rate for the remainder of 2013 to be around 27% or so, and our diluted shares outstanding to be around 29 million.

In regards to our liquidity, we ended the third quarter with a little over $37 million of cash and investments. Our line of credit, for which we have no funded draws, is for $75 million and does not expire until January 2017.

Our total gross capital expenditures to date are approximately $93 million, and we continue to expect our gross capital expenditures for this year to be between $115 million and $120 million. We plan to receive TI allowances and proceeds from sale leasebacks in the $15 million range. Therefore, our planned net CapEx is currently expected to be in the $105 million range. We anticipate funding our expansion and capital expenditures from our cash and investments on our balance sheet, our cash flow from operations, and from the proceeds from our tenant improvement allowances and sale leaseback transactions.

We are currently putting together our 2004 (sic) financial plan, which we'll be presenting to our Board for final approval here in December. Therefore, while we do not have an approved plan to review with the investment community at the current time, let me provide you with some of Management's preliminary expectations for next year.

In regards to margins and inflationary costs for next year it is still very difficult for us to comment with a high degree of certainty as our supply chain department is currently in the middle of negotiations for many of our key commodities. Based on our latest information, and this is still very preliminary as we are continuing to negotiate with our suppliers, we currently anticipate the cost of our aggregated commodity basket to increase around 1% to 2% next year.

While we will do our best to manage through this input cost pressure using a combination of marketing and operational initiatives, coupled with prudent menu price adjustments and menu mix management. However, there can be no guarantee that we will be able to effectively do so. We will also have to watch the menu pricing actions of our competitors, including the intense promotional environment.

We currently expect to roll out a new menu in February of next year. This new menu will have a new format, which we believe will make it easier for our guests to order and will include an array of new menu items in the $10 range. While we have not yet determined the amount of pricing we may take on this new menu, I would expect it to be in the 2% range or so. We do have a little over 1% of menu pricing that will roll off at the end of January next year.

In regards to labor next year, California, where we currently operate 63 restaurants will be taking the first of a two-step increase in minimum wage beginning July 1st, 2014. The minimum wage in California will go up from $8 an hour to $9 an hour. We estimate that about a 1% increase in our menu pricing nationwide would cover this cost from a dollar perspective. We also have the option, if we choose, to just take the pricing in our California restaurants, which would equate to about 2% increase in California menu pricing. Again, these are just estimates.

And just to put this in perspective, the City of San Jose, California enacted a living wage ordinance effective March of this year, increasing minimum wage in that city to $10 an hour. We currently operate two restaurants in San Jose; the first restaurant was opened in 2003, and the second restaurant we just opened earlier this year at the end of September. To compensate for the increased hourly wage rate we took some menu pricing earlier there at our existing San Jose restaurant, as well as a higher menu pricing when we opened the new San Jose restaurant in September. Currently, both of these restaurants do very well for us, and our first San Jose restaurant, which is in our comp base, has seen comp sales up in the 2.5% range this year.

In regards to our operating costs for next year, much like labor, we are seeing some increases in our general liability and other insurance programs, and I do anticipate some normal inflationary pressure for some of our other occupancy and operating costs. At the same time, we do have a cost savings initiative underway, and we do believe over time we can reduce our operating and occupancy costs per week. Our goal would be to [fund] some of the savings into incremental marketing spend to continue to enhance our awareness with the consumer.

After we finalize our plans for next year I will be able to share our overall cost savings target for 2014. This cost savings does exclude any incremental spend we may see in marketing. While we have not finalized our marketing plans for fiscal 2014, I would expect our marketing spend to be somewhere in the 2.2% to 2.4% of sales range.

In regards to G&A, our continued goal is to gain leverage as we continue to grow. As such, the only way we can do this is by making sure that our G&A costs do not increase at a rate greater than our top-line growth. Therefore, our G&A costs for 2014 should grow at a rate less than our expected growth rate and total revenues, which will consist of an expected 12% increase in total restaurant operating weeks plus increased comparable restaurant sales.

Our expected income tax rate for 2014 should be in the 29% to 30% range, and we continue to expect that diluted shares outstanding for 2014 will likely be in the mid to upper 29 million range.

In regards to revenue for next year, I would err on the side of conservatism. We expect our operating weeks to grow around 12% and this is based on a target of 17 to 19 new restaurants for next year. We expect our menu pricing to be around 2% for fiscal 2014. However, based on the macro environment it is difficult to precisely predict guest traffic for next year and, therefore, difficult to predict overall comparable restaurant sales. As a management team, we will certainly be striving to achieve at least modestly positive comparable restaurant sales for 2014.

And, finally, one of our goals is to preserve our 19% to 20% four-wall operating cash flow. While I know we did not achieve that target this quarter, as negative comparable restaurant sales deleveraged the fixed costs inherent in the restaurant business, I firmly expect us to get back to this level as we continue our national expansion. Q3 is always one of our toughest quarters. It tends to be our quarter with the lowest weekly sales average and it also tends to have some of our highest costs due to summer utility rates and expiring semiannual commodity contracts, as well as heavy new restaurant opening costs and related inefficiencies for those new restaurants.

However, the foundation we have put in place is strong and getting stronger. While we are not happy with our current sales, taking this time to digest our past initiatives has set us up for new menu introductions later this year and early next year, allowing us to effectively expand sales in a productive and efficient manner going forward.

Additionally, spending the time identifying some significant opportunities to reduce costs and operating occupancy costs will only enhance shareholder value over time and allow us to more effectively communicate the BJ's story.

Now let me go ahead and turn it over to Greg Trojan. Greg?

Thanks, Greg.

So clearly we're not happy about negative 2% comp sales for the quarter. Although our performance is better than the average of our industry peers slightly in Q3, and by a more significant margin for the year, we know there is opportunity for BJ's to be even better. Despite the challenges of the consumer economy, and despite the challenges of the casual dining sector, we feel like there are a number of opportunities within our control to drive sales going forward.

But before I get to those, let me take a few minutes to address a couple of questions you might be asking in this weak sales environment. Those questions being, is there something wrong with our concept or are we operating our restaurants at a lower standard of performance in some ways to cause our slowdown?

Let me address this operating effectiveness question first with some pertinent data, key metrics we look at every single day. The two best measures of guest satisfaction we have today are gold standard service scores, which are derived through third-party mystery shops, and the amount of food we give away to compensate our guests for less than great food or service. Our GSS scores, as we call them, are on a 100-point scale, are up 31 BPS for Q3 and 69 for the year. Keep in mind, our GSS scores are already at historically high levels to begin with.

The amount of food and beverage we gave away to our guests due to service issues is down 14 BPS for the quarter and versus a year ago, and 19 BPS for the year. We also track the average total time it takes our guests to complete their BJ's experience. This time has improved, that means decreased, by about 4.5% for the quarter and about 2% for the year.

Our food cost control, as measured by variance to theoretical was a bit higher in Q3 by about 13 BPS, due to the new items training for the barbecue promotion, but we're running better for the year.

Our effective labor efficiency has also improved this year. Our key labor productivity metric, items per labor hour, has stayed flat for the quarter and year, as well, in the face of negative traffic trends, something that's very difficult to do.

Although food costs and labor efficiency are not guest facing metrics, they are great indicators of overall restaurant operations performance. So our steady improvement speaks to our solid execution overall.

So although we never declare victory in these key operating metrics, and we know we can continue to improve, it is clear to me that our operators continue to do a great job serving our guests, and there has not been a decline in operating performance driving our slower sales.

For those thinking there is some other inherent weakness or problem with our concept, first of all, I'd suggest visiting one of our restaurants and remembering a few key facts about our concept. According to a survey conducted by RBC earlier this year, our sales per square foot are number two among established chains in casual dining. However, remember, we do these sales volumes on a lower check average than many, so our transaction productivity as measured by guest traffic per square foot is over 20% higher than our next highest competitor.

Also recall that we have grown our comp sales 15% over the past five years, while the industry as measured by Knapp-Track is down 7%, growing our average restaurant volumes during that time from $5.2 million per restaurant to $5.8 million per restaurant.

Another important measure of our concept's health is the strength of our new restaurant openings. We are very pleased with our 2013 class thus far. We expect our opening sales for new restaurant week to finish this year at the levels of the strong classes of the last couple of years. We just opened Corpus Christi, Texas a couple of weeks ago and are averaging over $180,000 per week. We opened in our own backyard here in Huntington Beach in Orange, California last month and are doing over $150,000 a week.

So, again, we believe BJ's continues to offer one of the most impressive consumer propositions and operating models out there. We happen to be climbing the comp sales mountain at a much steeper point than most concepts, already setting the industry standard for guest traffic per square feet.

Our comp sales arithmetic, as Greg Levin referenced, is also challenged by our own cannibalization, a greater level of competitive intrusion, and our newer restaurants entering our comp base still coming off their high honeymoon levels. Our core restaurants, not impacted by these factors, many of which are seven-, eight-, and nine-year-old locations, are comping positive for the year.

So all that being said, I and my fellow team members at BJ's know that regenerating top-line momentum is our highest single priority. Towards that end, the biggest thing we're doing to drive sales is creating more of what I describe as quality capacity in our restaurants. We need to be able to serve more guests more quickly and at an even better quality level than we are today.

Those of you who have followed BJ's over the years know that our comp restaurant sales have been driven by adding effective capacity in both front of house and in our kitchens. New seating, better labor deployment, workflow balancing, our technology investments, our design changes in our kitchens, all increased our ability to serve more guests.

We drove check through both pricing, as we elevated the BJ's experience, and we drove incidence by significantly expanding the number of menu items, a formula that has worked very well. But as a result, many of our kitchens are running at or near their peak ability to execute at the level of speed and, most importantly, the level of quality we demand of ourselves.

So a key [unlock] for us is to create even more effective production capacity in our back of house. This will enable us to do some essential things with our menu. First is create capacity to execute compelling limited-time offers, create more unique and craveable items, such as our Pizookie, improve our everyday food quality, and strengthen the value and add on-trend items in the middle of our menu.

As you guys know, over the past several years we have worked the ends of the barbells of our menu, as we call them, very effectively. Our snacks and small bites, our lunch specials on one end, and our higher-end, center-of-the-plate proteins on the higher end, have both been very, very successful.

Meanwhile, we have spent less time innovating our core middle-of-the-menu items. In addition, they have absorbed pricing along the way and do not represent the level of value offering as strongly as we would like in that middle of the menu. So our menu development folks are focused on more below-$10 price points in this middle of the menu, smaller portion, lower calorie options, and bolder, more on-trend flavors.

Frankly, we could have been addressing our sales slowdown by adding more menus to our menu this year -- more menu items, I should say -- but we have made the right decision for the longer term to focus first on taking a deep breath and decreasing the amount of complexity in our kitchens, creating the production capacity we need and setting us up for exciting additions and promotions going forward.

Our November menu rollout, which includes the introduction of a smaller-sized, grill-top burger line, and thanks to our Project Q initiative, we'll have a net reduction of 24 items, about 15%, and just as importantly, incorporate over 50 changes to our prep, recipe, and ingredient processes, which will add speed, quality, and throughput to our kitchens.

Maybe the best example of the complexity change we are making is putting our deep dish pizza back in the pan. We had made a change to serve our pizza on plates because we thought it showcased the product better. Well, our guests didn't seem to agree, and it actually took longer for our cooks to remove the pies from the pans and slowed our service times. We have taken the number of cuts of our unused from nine to four. These kinds of changes may seem mundane, but when you extract them over the volumes we do every day across 143 restaurants they are very meaningful.

Our new burger line, which we will merchandise as BJ's Brewhouse Burgers, are a good example of what you will see more of early next year, new and interesting taste, smaller, yet plentiful portion sizes, lower calories, and fantastic below $10 price points.

Our other capacity addition initiative is improving the speed of the BJ's experience. Aside from our kitchen initiatives, we will be commencing testing this month of connecting guests' mobile and desktop devices to our current restaurant technology to enable our guests to speed-up their dining and take-out experiences, if they wish. While too early to declare ready for full rollout, we are committed to pushing the envelope on using technology to improve our guest experience. This speed should result in higher table turns and gain valuable greater quality capacity.

So while we are working hard on these critical kitchen and front of house capacity initiatives, we have been working just as hard on the demand generation side of the equation. Our three key levers here are getting to an efficient media spending mix, our loyalty initiative, and the foundation of all of our marketing, our brand messaging and positioning.

We continue to test and learn on media spend, and recently completed our second wave of TV in California and Texas markets. These tests continue to show that television will continue to evolve as a useful awareness driver in some of our markets. Our loyalty promotions continue to show good results, as well. We have just implemented our targeted e-mail capabilities and have begun to launch a series of targeted offers, which we believe will both drive sales and help us learn which promotions strike the best balance between traffic and discounting.

Lastly, I'm very pleased with the progress in our messaging and positioning work, and you will start to see the creative output of this work in Q1 of next year. This is an important platform to tell BJ's stories around our amazing array of taste under one roof, our food quality, and our amazing value. It will do so by adding a more contemporary look and feel and a more fun approachable personality to our media, our point of sale materials, and even our menu, itself.

So although sales building is our number one priority, our work on our middle of the P&L cost structure, as well as our design and construction team's efforts to build our restaurants at lower level of capital investment, are bearing important fruit, as well. We expect to open 17 to 19 restaurants next year, two-thirds of which will likely utilize our new design approach, which will save in the neighborhood of $1 million dollars per restaurant. Our work in the middle of the P&L has already identified several million dollars of annualized savings. Both are key steps forward to drive our growth with even higher returns, enable us to deliver both growth and ROIC at balanced levels and ultimately strong returns.

So before we take your questions, I would summarize with the following. While we are disappointed that our comparable restaurant sales are softer than we would like, I am confident that we are not only working on the right things to restore momentum, we have made good progress on the building blocks it will take to set in motion another sustained period of larger sales premiums to the industry. It is clear to me what our opportunities are, and we have been busy going after them as hard and as fast as possible.

These sales challenges are not new to BJ's, our five-year run of 15% cumulative comps started with slightly down years in the midst of the Great Recession. But we did not panic. We set out a course to expand capacity and the breadth of our menu, and we set off a multiyear string of breakout performance.

We're committed to using these same levers with equally strong results. We will continue to play offense, and at the end of the day we're not revolutionizing anything here in this concept, but improving on the basic formula that has worked so well and made BJ's so successful. That is offering the highest quality food and drink in our category at an amazing value; appealing to an incredibly diverse community of guests, who use BJ's for all kinds of different dining and drinking occasions; and deliberately growing our footprint by opening successful restaurants in a combination of new and existing markets. Remember, we're only 143 restaurants into a journey, and we'll roughly double our footprint over the next five years.

Thanks for joining our call today. Operator, please open the line for questions.

(Operator Instructions)

And our first question comes from the line of Brian Bittner with Oppenheimer & Company. Please go ahead.

Great, thanks. You guys said something earlier about how there are a certain group of stores that are comping positively, and you said the older ones. Can you just zero in on that a little bit more? Exactly what stores are comping positive, ones that are over five years old, over two years old? Just start with that, please.

I don't know if we said specifically what restaurants are comping positive. What we talked about is the fact that I believe there is 116 restaurants in our comp sales base. Out of that 116 restaurants in our comp sales base 41 of those restaurants are either impacted by cannibalization by us opening a new restaurant, competitive intrusion, or are in the class of 2011 and now some (inaudible) class of 2012 restaurants, just depending, that are coming into our comp base.

So outside of that we have about 75 restaurants that we consider to be kind of unimpacted restaurants where there's nothing going on there that we can identify as competitive intrusion or cannibalization. And those restaurants continue to do well for us. I think when you look at overall knowing that we were down negative 2.2%, those restaurants kind of came down. I think they're slightly negative, those 75 restaurants, and it's a mix of those restaurants, meaning there are some in California, some in Texas, some in Arizona. There's nothing specific towards those 75 restaurants.

Okay, but is that the same in conjunction with the same comment that the other Greg said about there are stores that are comping positive year to date? Because maybe I'm confused; I thought you said that there was some units coming off the honeymoon periods and the older stores, eight, nine years old, year to date are comping positives?

Yes, those -- what we're saying is that those restaurants that aren't impacted by cannibalization, competitive intrusion, and the honeymoon factor are comping positive for the year.

Okay. So October seems to, the trend has gotten a little bit better. How was September, because you said August was your worst month? I mean is it a quick change that you've seen in October? Was September better than the overall quarter's comp, quarterly comp?

Well, as I mentioned, August was the worst from that standpoint. September started getting better, but the difference between September and October is kind of night and day.

Night and day between September and October?

Yes, September was still a difficult quarter for us. Put it this way, we didn't end up with a negative 2.2% by having a negative 5% one month and then a flat next month. So all three periods were somewhere in that kind of low-single-digit negative.

Okay, okay. Thank you very much.

You're welcome.

Thank you. Our next question comes from the line of John Glass with Morgan Stanley. Please go ahead.

Thanks. Greg, just given you're talking about how your industry-leading volumes and high transactions per restaurant, there's a reality I think likely that you're going to always be in a very low comp environment going forward, which is probably at least is a good assumption. So can you talk about what is, remind us maybe what is the goal in terms of the new breakeven point for comps that you're striving for? Because it's got to be lower than it was before. And where are you in that process of simplification? You talked about cutting things differently and different kitchen preps. Where are we in that continuum of that process?

Good questions, John. Well, let me say initially we are in no way resigned to a point of view that our comps can't be back at trading at premiums, higher premiums than they are today. Like, I am very enthusiastic about the things that we're working on on the sales side. And, look, unfortunately, comp sales just don't, you know, are not a straight line, right? And we've had to take a little bit of a deep breath more on the capacity side.

But I think some of the things that we're addressing in this middle of the menu in terms of value and some more better-for-you offerings that have done very well for us, there are some things that we can do there that I think will have big impacts.

And this speed opportunity is a big opportunity for us. We haven't slowed down overall, but we've never been that fast a concept, you know? And my personal point of view as fast casual has grown and grown as an alternative, we've got to look at our market share perspective, not just around casual dining, but of all dining, particularly fast casual and casual. And it's my feeling that casual dining overall is losing share to fast casual for -- and one of those reasons is speed. And that's not really been an advantage of ours, given the complexity of our menu, and I think if we can successfully address that and improve that I think there's some real sales upsides to that. So that's the sales side of your question.

I think your other part of the question is, and I don't mean to put words in your mouth here, but is -- where are we in getting more efficient so we can drive down that comp breakeven where we can hold or improve margins? And I think we have made good progress on that. I think you look at, it's hard to see in this comp environment, but the work that we've done, particularly on the labor efficiency side of things, and I think the opportunities that we have on the operating cost side of the equation.

We feel like we're at a very -- a pretty different place in terms of that comp breakeven. I think on the last call, Greg, we talked a bit about that, and I think we've made progress. But we've got to continue to work hard on those middle of the P&L costs, and I think we're seeing some good opportunities there.

And remind me again, what was the number that you thought you could target? Do you think you could ever get cost leverage on a 1% to 2% comp, I guess, if you follow through or is that just never going to be possible given the inflationary pressures ambient in this industry?

I think there's a short-term opportunity to get some margin benefit on the 1% to 2% line, just because of some of the other things that we're looking at in the middle of the P&L, John. I do think that when we start talking about a 2% number we should be able to hold our own there, if not get some expansion, when I just think about the things that we're putting in place currently.

So I think before we've talked about BJ's needing somewhere closer to 4%, [maybe] 3.5%, 4%. And you look at some of the costs that we've built into this business, whether they're around just the things in the operating and occupancy side of things. As we go through what Greg Trojan, you've heard call Project Q, and look at everything we've done there, that also starts to look at some of the things that are a little bit more guest facing, meaning as we start to change some of the menu items, or we look to rationalize some of that, we might not need as much plateware as we're currently using. So there's some savings there.

We're looking at utility, in the demand side as well as supply side of utility. There's a lot of things within that operating and occupancy side of the business that we're going after that'll help give us some leverage going forward, frankly, at a lower cost.

And the other thing I'd add to that is as we drive the CapEx costs on the front end of our business down, primarily through investing less on our new restaurants, but also we've spent a good amount of capital in the past years, which has had very solid returns on improving and moving this concept up to the upper side of casual dining. We won't have to spend at that same rate because we've done that work, the heavy lifting on our current restaurant base. So our depreciation and amortization has been putting some pressure on our margins. And we're working hard; that should provide some leverage going forward.

And just a last question and then I'll leave it. Can you self-fund development next year given that your earnings base has now been reduced this year materially and it sounds like you still have some challenges in the near term? And I guess the implied question is -- why do you need to grow at the rate you're growing at given these challenges?

In regards to self-funding, I believe we can, while our, honestly, cash flow and earnings are not where we want to be this year, you start to think about next year and if things were put in place there where our investment costs on somewhere around two-thirds of restaurants will be $1 million dollars less. So if we build, take the middle there, 18 restaurants, 12 of them come in at $1 million dollars or less, that's $12 million of cash flow coming down to the bottom line. On top of that, we do have a target to reduce our traditional 8,500 square foot restaurant, as well.

So I think we're in a good position, actually, going into 2014 with our TI. We don't have any funded debt. We have a $75 million line of credit. So I feel pretty happy about our balance sheet overall as of today.

All right. Thank you.

And then, I know, John, I'm sorry, you asked about the continuing the growth side of our business. Everywhere we continue to open up a BJ's it goes really well. This is a concept that works in Tallahassee, Florida, Corpus Christi, to Irvine, California, to Dallas, Texas and Miami, Florida. I mean the opportunity and the white space out there is still really tremendous. Our goal when we talk about the growth is to do at a controlled pace, and we think about 12% is a controlled pace. I think if we were maybe sitting at 18% or 19%, maybe we would think about a little bit of a different view in regards to that growth rate.

Great. Thank you.

Thank you. Our next question comes from the line of David Tarantino with Robert W. Baird. Please go ahead.

Hi, good afternoon. Greg, I just wanted to follow-up on that last point. I guess you have a lot going on on the initiative side, both from a menu and operation perspective. And it just begs the question of whether you'd be better served to slow down the growth and let the system digest some of those initiatives and get the momentum back in the existing base rather than trying to grow so quickly. So has that thinking at all been considered at the Company or why wouldn't you try to slow it down temporarily to focus on getting the existing base in a better shape?

David, I'll address that. Hey, listen, if we felt differently, that there was something amiss or broken, if you will, that we had to fix -- I look at all the things we're working on as opportunities off already a strong foundation. And I look at, as Greg mentioned, the performance of our new restaurants this year and they're continuing to do very well. If I started seeing our new openings struggle and -- that would give us pause. But we're not seeing that. And as long as there's the quality of real estate available and we're continuing to do well there, and I think we want to continue to take advantage of those opportunities. And we're creating great returns for our shareholders in doing that.

I guess maybe I should refrain, and I guess the question I was trying to ask is is the growth inhibiting your ability to make the positive impact on the existing base by managing both at the same time, I guess is the question?

I hear you there, too. And let me address that more straightforwardly because it is a good question. But I don't feel like -- you know, we've got a veteran crew of operation team members that largely are responsible for opening those restaurants. And if I felt like it was distracting our culinary development team or our marketing team and our development team from pursuing these opportunities, again, I would have a different point of view. But they aren't. Our current pace of openings is not taking away from the work that we're doing on the sales side.

Okay, thank you, that's helpful. And then one other question, I think you mentioned that the value in the middle of the menu has not been as strong as it needs to be, and you're addressing that. Just curious to know kind of how you came to that conclusion, and maybe if you could elaborate on how you're going to attack that going forward?

Yes. Well, just let me be more specific with what we mean by middle of the menu. Because we're really talking about the categories around burgers, entree salads, sandwiches would be, pastas perhaps. And, look, we knew and we've mentioned this earlier this year that so much of the innovation and work on the menu has been on the other sides of that menu, and that we needed some refreshing and new news there, first of all.

And, look, we just are doing comparisons and looking at the market research that we've done and price comparisons competitively in the markets that we're in. And we don't think we are offering the same kind of value that we'd like to comparatively in those categories.

And so I use the example of the Brewhouse Burgers, but I think they really are kind of the poster children, if you will, of what you'll see more of along these other categories. I believe that, not all, but there are a number and a growing number of our guests out there -- as opposed to the heyday of the 1980s and the early 1990s, it's not about how much food you can put on the plate for a certain price point. People are interested in eating less in some instances, for sure. And so they would value a lower price point with a little less food on the plate, but that still doesn't compromise great distinctive flavors. So that's essentially where we're going in terms of offering more choice in that area to address value, better-for-you, and lighter portions all at the same time.

Great, thanks a lot.

Thank you. Our next question comes from the line of Jeffrey Bernstein with Barclays. Please go ahead.

Great. Thank you very much. A couple of questions. Just, first, we talked about the gap to the industry narrowing over the past few quarters, and you mentioned that part of that might be the lack of new products as you digest the ops changes. But you're also mentioning kind of the discounting and the intense promotional environment. Just wondering where perhaps you're seeing -- what part of the menu or what segment are you seeing the greatest weakness? Or what's changed over the past few quarters? What competitor or competitive set seems to be taking the most share in terms of relative to your menu?

Jeff, it's Greg Levin. That's an interesting question. I don't know if we have all the specifics. But I think as we look through and try to take a look at your day parts, you look at the weekday business versus the weekend business. As we mentioned before and it continues, that lunch continues to be a challenge for us. And I think as Greg Trojan had mentioned a little bit with the fast casual, seems to be an impact there. I know as we look through our competitive nature and the cannibalization that's happened in some of our restaurants, and competitive intrusion, a lot of what we're seeing is some fast casual concepts come into many more of our areas that we were in the past, so we tend to see that a little bit.

And then now when you look through our menu categories overall, I'm not necessarily seeing a decline in one category versus the other. Our incident rates when we look at them, which is kind of the items ordered per guest, still sits around 1.9 to 2, so we're not going to necessarily see a big change on incident rates from a guest standpoint. It really, again, looking through the numbers and looking over the summertime seem to be more of that lunch business. We did take a nick at dinner, and competitive intrusion seems to be a little bit more around the fast casual side of our business.

I also think personally in the July, August, and September our marketing calendar that we talked about didn't give us quite the lift that we were looking from barbecue versus the two-can-dine. And it was just kind of a summer slump. There wasn't a reason to dine out as much as I think what we've seen in the past from a celebratory standpoint.

Got it. And then the talk about marketing in 2014, I think you said would be in the low 2% range. I'm just wondering if it is achieving a desired result, which is to drive sales or drive traffic, is there any concern that maybe you're driving traffic to stores that already have, like you said, maybe some capacity or throughput issues that maybe marketing, not that the marketing caused the problem, but marketing might accentuate the problem if you're really effectively marketing, if your stores can't handle it?

Well, we're pausing to kind of understand the question a little bit. I don't think -- I mean what you're talking about would be kind of what we call the leakage or people coming to a restaurant and going there's too long of a line because of the marketing message, and they go somewhere else -- is that what you're asking?

Well, it just seems like the goal of marketing is to drive traffic to your stores. And it seems like you believe it's working for you, but you've also talked about your speed of service is a problem, you have throughput issues. Driving traffic to your store when you have a throughput issue.

I think about it -- really what we're trying to say is, look, we didn't -- we're not capacity constrained from a -- there's room to do more business in a lot of different day parts and a lot of different parts of our business. But one of the ways that traditionally has worked and will continue to work is to innovate around the menu, right? And so the constraint is -- our kitchen capacity is somewhat of a constraint, and what we don't want to do is add new menu items to that menu until we've created the capacity to handle them.

So it's not really, we're not saying we can't take more guests in our restaurants. What we're saying is until -- as we continue to work and develop capacity in our kitchens, it will allow us to create more menu news than the pace than we are today, and that will drive traffic.

Understood. And then just lastly, the 17 to 19 for next year, can you break that down in terms of new versus existing? Just trying size up how much might cannibalize others versus how much are in new markets and maybe by quarter how you'd expect that to lay out?

I don't know if we have all that detail. We did say -- I'm just looking at some of the stuff here -- I'm not sure we have -- I don't think there's going to be much cannibalization next year to be perfectly honest, just kind of looking through it. I mean we're going to build out in Orlando, we're going to build out some more in Florida, but California has been the bigger area from a cannibalization standpoint. We just don't have that many lined up in California.

And by quarter is it roughly --

Well, the quarters, we're still working through the detail. I would plan on right now two in the first quarter, and then we're going to try be as even throughout the quarters after Q1, and not be as backend loaded as we are this year.

Got it. Thank you.

Thank you. Our next question comes from the line of Will Slabaugh with Stephens Inc. Please go ahead.

Thanks, guys. Wanted to ask you a follow-up on the middle of the menu, that you mentioned earlier. Are you concerned that as you add some of these lower cost items on that you talked about that you'll actually lower the ticket average, that some people might actually trade down from more premium items to one of those items you're talking about? And assuming so, would you be okay with that?

Well, look, that's a great question and, honestly, we're not going to know until we do it, but not doing it is not an option. Our first priority is to drive traffic. And if that ends up -- my feeling is even though the emphasis of these items is to add more items below a $10 price point, and you would be concerned about lower guest checks. Whenever we've done, even when we do our promotions our guests tend to order that extra beer or order a dessert or a Pizookie when they hadn't before. And it's incredible how frequently we see the guest behave in a way where that guest check really doesn't change that much. So it would be my expectation and certainly our goal is to offer a better value without decreasing our guest check appreciably, and our guests leaving even more pleased by the value.

And I think, Will, when we've done this in the past, when we rolled out snacks and small bites, frankly, we were concerned. What's that going to do to appetizer sales? Is it going to cannibalize average check? And we saw that as an add on in that regards. When we rolled out our lunch specials, as well, it ended up generating more [earn-out,] as we call it, or more turn versus earn, turn being more guests coming into our restaurants versus the decrease in our price as we put together those lunch specials versus some of the other menu items back in 2009. And I think we're kind of looking at this in the same way, in the sense that we're providing a new product with great value and great innovation that could drive additional frequency and guests into our restaurants and then allow them to kind of trade up with some of the other items, as well.

Got you. And looking over the restaurant-level margins, you talked about that goal of maintaining that into next year. And I'm trying to balance that with it sounds like if we think about conservatively, modestly positive comps next year and taking into account the comp breakeven point we just mentioned, that 1% to 2%, that that may be difficult to do. Could you help me rationalize that and kind of frame that as we look into next year?

That's a great question. I think next year the issue will be the challenge, at least in the first half of the year, on the marketing spend. If we move that marketing up to Q2, Q3, and Q4 versus kind of the [1.8], you're adding 60 basis points into -- frankly, it's what type of sales lift are we going to get from that marketing, which, gets to I think Jeff Bernstein's question a little bit earlier. We think that that's the right thing to do, especially as we roll out a new menu format. We want to tell the guests about that.

So I think as I look through at that first half of next year it gets a little bit more challenged from a margin standpoint. But I do think the things that we're putting in place, the labor scheduling system, the somewhat benign commodities market for next year -- [and I want to be clear,] not everything is locked in yet. But I think some of those things help on the middle of the P&L as well. Some of the cost savings initiatives that our supply chain team is taking on gives us a little bit of a tailwind in some of those areas. And, frankly, that tailwind is going to be needed to cover the additional marketing costs, assuming we don't see a tremendous increase in guest traffic based on kind of the, sort of the macro environment.

Got it. And just lastly on the quarter-to-date commentary you mentioned that was sort of night and day. Can you help us out with anything that may have driven that, from September to October?

You know, there could be a little bit with regards to the way our party-for-two can run. This year, as we mentioned, we've run it September to October; that promotion tends to build upon itself. Last year, as we said, it was kind of August to September, so we got that going in there. We also had TV that started in September. So we had two weeks of TV in September, then we went dark, and then we went two weeks here in October. We also had the Dodgers in the playoffs. I mean so some of those things that could help the Southern California market.

I do think to some degree we're hearing that in general casual dining has been a little bit better in October. What we like the most out of it is the fact that we're seeing that improved trend on less menu pricing, which means we're seeing a bigger hit on the guest counts, which to us is really the thing that we pay the most attention to.

Got you.

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

Thanks. Good afternoon. Can you please give us some idea of what the underlying comp is ex cannibalization?

You know what, Nicole, I don't have that one in front of me. I think what I had said, if you took out those 41 restaurants out of the 116 or so that are in the comp base, the 75 remaining were just down slightly, less than negative 0.5% or so in Q3.

Okay, so it's safe to say -- I'm trying to tie back to your comment about not a lot of California development for next year. So in what quarter do you lap cannibalization and we should see like 150 basis point lift then from rolling over the cannibalization?

I don't know if I have that in front of me, Nicole, because not only is it cannibalization, it's competitive intrusion of new restaurants that have opened up [of] all different kinds, where we talked about (inaudible) there.

Okay.

So it's not quite as black and white as what you'd like it to be, I guess.

That's okay. So, and it's also not going to be that static at one moment in time. So it's more that it should be a progression of improvement, given (inaudible) about those different opening times?

That's correct.

Okay. And then the comps, could you give us an idea for October, November and December of last year what was the best and what was the worst month so we can put the October comp in some context for what we're projecting?

I don't -- you know what, I only have the quarterly comp in front of me right now. Shoot, shoot, shoot, Nicole, I actually don't have it by month. I would tend to say that the December timeframe, I want to say was better for us last year, but I'm speculating a little bit. December is when -- frankly, when we make hay in this quarter.

Okay, I'll just follow up. Thank you very much.

Yes, I'm sorry about that.

No problem.

Thank you. Our next question comes from the line of Tony Brenner with Roth Capital Partners. Please go ahead.

Thank you. I have two questions. First, you're adding items to the middle of the menu. You've recently added a number of the higher-end entrees where BJ's was under-represented in the past. You just mentioned a few moments ago that small bites were an add-on for you. So I'm wondering where these 24 menu items that are being eliminated are coming from? Hopefully, you're not reducing your Pizookie too much?

No, we're protecting the Pizookie, trust me.

Thank you.

But, Tony, actually, just to put it in perspective, the items you're talking about that we've added were over the last few years, right? But we are adding these middle-of-the-menu items, will take the place of existing items in some cases, so they won't all be incremental. I'll give you an example. We're redoing our turkey burger, for example. Our current turkey burger is 1,700 calories, right? And we think somebody ordering a turkey burger is not expecting a 1,700 calorie experience. So although we're developing the menu items with the objective that I discussed, they're not all incrementally new.

And then in terms of the reduction, we've just taken them from, frankly, all areas of the menu, from appetizers to sandwiches, some entrees. And of course we're taking a look at some of our slower moving items. But, honestly, the challenge is with a menu that is as large and varied and diverse as ours, we have a lot of menu items that people like and it's fairly dispersed. So if we had a bunch of items that no one was ever ordering it would be really simple, but it isn't that simple. And so we've tested these in a number of restaurants over the last couple of months, and we feel comfortable we're making the right tradeoffs.

Okay. And a second question is regarding the additional kitchen capacity. You talked about your new restaurants will be smaller, roughly 1,000 square feet smaller, I believe, with some of that space coming in the back of the house. So in terms of increased capacity I wonder if you could elaborate a little bit on exactly what you're going to be doing in the kitchen?

Yes. Well, look, the space is largely coming from front of house, but it also will include some back of house. I mean it's somewhat proportional. But the focus is -- we're not making reductions in number of burners or cooktop ranges. We're not making these stations smaller from a pure capacity. We're still going to have one or two deck pizza ovens, for example. So the pure machinery production capacity is not going to change. We're just laying them out and laying out the lines more efficiently so our stations can work together and workflow can work better together. And that enables us to get a little bit smaller in the back of the house, but still improve efficiency.

And the biggest way is what we're doing on the demand side, of what we're asking those kitchens to do, and making it simpler without sacrificing quality or taste. And that goes to, like I said, somewhat mundane sounding kind of things. But it's a lot of -- it's over 50 in the case of this coming menu of items that are, like, prep areas and how we're cutting onions and peppers and how we're having certain ingredients come in. We're looking at seldom used ingredients on the line and making substitutions in our products so that we don't have one-offs taking places on our lines and make areas. So it's a lot of manufacturing, engineering kind of stuff.

Thank you.

Thank you.

Real quick, Operator, just Nicole, follow-up to your call. It looks like, frankly, we finished a 3% comp in Q4 of last year, and we were fairly close through all the periods. October and December were about the same, they were kind of two of the higher, and November was the lower of the three periods in Q4 of last year.

So, Operator, back to you for the questions.

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

Hi, good afternoon. Just wanted to follow-up on a prior question on October. Greg, you mentioned the marketing impact potentially on October. Did you see the improvement sequentially outside of LA and Dallas in October? And was it of the same magnitude of the sequential improvement you saw in the two markets you did TV?

And then, secondarily, I think it was discussed before the breakeven rates for comps to hold your restaurant margins, but obviously at this rate of growth you're deleveraging D&A pretty heavily on these comps. And so could you give us any kind of rule of thumb going into 2014 on what kind of comp you need to grow earnings?

There's a lot in your questions there, Sharon. In regards to the October timeframe, we saw improvements, actually we saw improvement in just about all of our restaurants. I would tend to say, though, that the ones that saw the television, as we mentioned in our formal remarks, television does move top-line sales. So we did see improvement probably more so in like a California, Dallas market than maybe some of the other markets. But overall the trends, at least starting for a couple weeks in October, were better across all the restaurants.

In regards to kind of the earnings and depreciation and amortization, I tend to think that we're going to need to be on the slightly positive side in regards to comp sales next year to continue moving forward with earnings. And we're going to have a 12% increase in operating weeks for next year. So you kind of start with that and assume 12% increase in revenue, and then where does comps come in, positive or negative, from that standpoint. And I would tend to think that if revenues grow less than the weeks from that standpoint we should still be able to get some leverage in our business and grow our earnings. I mean that's our goal as a management team going forward. And, frankly, we'd like to see that number more in the mid teens; it's always been our longer term target in that regards.

As we continue to start to build our restaurants at a lower cost, it's very important for us to get the costs down in our restaurants, especially as we think about moving to 400 restaurants and doubling even over the next five years. We should get pick up on depreciation and amortization. A lot of those costs that we put into our restaurants were incremental costs over the years to drive the sales from that $5 million to $5.8 million, where we are today. But we've also overshot the target a couple places that we've talked about. And, therefore, we think we can get that price down in regards to building new restaurants, which should enhance shareholder return and, frankly, at the same time means that incremental restaurant that comes on is going to have a lower depreciation, and that should give us leverage in the business model.

Okay. And then just one last question on G&A, because it obviously has been outstripping revenue growth this year and you mentioned it would hopefully not do that next year. I mean, your G&A has kind of been growing at a double-digit clip in dollars for a really long time. Is there a possibility for that to come down to kind of like a mid-single-digit growth rate in terms of dollars? I guess I'm not clear if there's anything systemic that you're doing at the more corporate level that could create the opportunity for even greater leverage on a lower comp?

Well, we haven't formalized our plans for next year. And we always take into consideration kind of the top-line revenue growth and figure out from there how we can leverage G&A in that perspective. When we look at it and figure as a company that's still adding new restaurants and has a lot of white space in front of you, there's going to be a certain amount of costs that are just inherent to growth.

There are going to be our managers in training or what we call our AMP program here. There's going to be the recruiting costs, the relocation costs, all of those things that are built into our business that, frankly, represent about a third of our G&A. And then you start to get the leverage in the other areas of G&A, whether it's field supervision or myself, the infrastructure side of our business. When you tend to see companies all of a sudden get a tremendous amount of leverage in G&A, frankly, that's when they stop growth in that regards, because there's just a certain amount built into the G&A side.

For this year specifically, and we've mentioned this before, this is just a difficult year in the sense that we made a decision based on how we were growing our business that we needed to expand at our corporate offices or our Restaurant Support Center, as we call it. So we've taken on basically two more floors here. We've added or expanded our culinary test kitchen. We've had other kind of one-off G&A costs from that standpoint. We're spending some money to understand how we want to reposition and brand this company. So there's some additional things in G&A this year which won't be repeated next year, where we start to get leverage on that top line growth, which bring it down.

So I think we can continue to get that, but you're not -- I don't think we're going to see a 50 basis point reduction in G&A as a percent of sales unless we drive top-line comps above 2% or 3%. From a dollar perspective if we're still adding 12% new units next year you'd probably see G&A, we've always talked about this being somewhere in the neighborhood of about 75% of capacity growth. And that's kind of probably our target.

Okay, perfect. Thank you.

Thank you. Our next question comes from the line of Jeff Farmer with Wells Fargo. Please go ahead.

Great. Thank you. Good afternoon, guys. Another follow-up. I think you said -- I think this was during the webinar -- marketing 2.2% to 2.4% in 2014, I think that's the number I heard. And I believe you're at roughly 1.6% in 2013, so that's 60 to 80 basis point spread, again, I did the math quickly, but it looks like it implies about $6 million year-over-year increase, which all else equal would be about $0.15 per share. So, obviously, you're going to get some return on that, but I just wanted to be clear that that's sort of the order of magnitude you're talking about, would be almost a $6 million increase in your marketing expense year over year in 2014?

Jeff, I don't think that's right. Right now, we're running about a 2% marketing cost. We were 1.8% in Q1, 1.9% in Q2, and 2.2% in Q3, so we're not at 1.6% going to 2.4%; we're more at 2%, going to 2.3%, 2.4% in that regards.

Okay, so not nearly that order of magnitude? Okay.

Yes.

That makes sense. Then coming back to the 34 restaurants, so again just coming out of your prior comments [at a summit] in early October, again a little bit of a recap of what you said earlier. You had called out 34 restaurants that had been impacted by cannibalization, encroachment, extended honeymoons, et cetera. That was at the end of Q2, it was 34 restaurants. Now at the end of 3Q it's 41 restaurants. I know it's a little bit of a moving target for you, but as you get into 2014 do you sort of see a situation where, especially as those cannibalization units fall off, that this number could fall to 20? Or is this something that we're going to be sort of looking at for the next several quarters, maybe even into 2015?

That number should fall off. A couple of things, one is when I look through those numbers there's a decent amount in California. Some of those are the competitive intrusions, so they'll fall off. You start thinking about our cannibalization here in California, that falls off, and that's over the last couple years that we've seen that (inaudible) cannibalization. Additionally, in some of those other markets in California where we see it, they were newer centers or newer areas that people have opened in the last couple of years as they kind of pulled back from the development from the recession years. So those areas are more or less filled up. So I would expect that number to start to come down.

The reason it's gone up versus your (inaudible) is we've got more restaurants in our comp base. So when I presented the numbers as your comp base through the first six months, [these are some] of the restaurants that hadn't gone into that comp base yet.

Okay. And then just one quick clarification. So just to be clear, for 2013, sort of all in, all the quarters, assuming you start in a little bit lower in terms of ad spend in the first quarter, for 2013 what are you thinking you're going to spend on advertising all in, across all four quarters?

That's going to be what I said -- I think I said we're going to spend about $4.6 million here in the fourth quarter, so if that number plays out we're going to be somewhere in the neighborhood of about $15.8 million or so, yes, $15.5 million, $15.8 million or so for this year.

Okay. All right. Then I can use -- okay, I'll figure out the denominator part of that. Okay, and then just you're so far, so good, it sounds like, obviously, your decision to sort of accelerate TV that you think you guys are getting paid for this. Is that a fair assessment?

Well, what I'd say, Jeff, is we know we're seeing incremental top line. And what I've talked about in the past has held true here, which is we're still doing a fair amount of experimenting on the media buying front. So different markets we used different combinations of levels of TRPs, the mix of 15 versus 30, the actual day part mix of when we ran the TV advertising. So we're trying to hone in on a media mix that is the most effective and economically works the best. So we still have work to do there.

Overall, what I described is we're seeing pretty good incremental lift, but not yet on an immediate ROI basis paying off, and that's not true of all markets but in general or in aggregate I'd say that's where we are.

And then the other thing I'd add to the whole equation is this isn't all just about optimizing the media spend. It's also you've got to start with the right messaging and positioning to begin with, right? And we're using the same positioning that when we started testing TV a year or a year-and-a-half ago. And I am personally very excited about some of the work we're doing on the creative front, together with the optimized media, I think we'll have an even bigger impact.

But just to be clear we're not at a point where we can spend on an ongoing basis TV in larger markets and for it to be accretive immediately. Now we're generating enough incremental traffic there that you start factoring in sort of the lifetime or even longer term value, and we haven't even finished the tail period, the second TV test, to really fully analyze this current wave of spend, but I think that's where we would end up.

Okay, very helpful. Thank you.

Operator, we have time for one more call.

Thank you. Our final question comes from the line of Nick Setyan with Wedbush Securities. Please go ahead.

Hi, thanks, guys. Was I correct to understand that the TV testing has ended already in Q4 or is there some more TV airtime to come?

Not running, but we test the efficacy by looking at not only when it's running, but several weeks thereafter and comparing the pre and post comparative control, so that period has not concluded, but we are not on air.

And you don't plan to be until the end of the quarter?

That's correct.

Okay. So I mean it seems like since 2011 we were running that 2.5% or so as a percentage of sales in terms of the operating occupancy. We've had approximately 250 or 200 basis points increase in that expense line item. I think some of that is TV, obviously. I think most of the other is the loyalty, is that correct?

That is correct.

Do you think that sort of increase in the loyalty and the cost of the loyalty, given what the transactions have done, I mean is that a justifiable investment? Or is there, at some point, are you guys going to look at that and say maybe we should roll that back?

We are always looking at all the marketing spend and doing the best we can to look at whether it's working. The positive on loyalty is that we continue to see it move sales on a promotional capability. Greg talked about this, but even though our promotion spending is much lower than the average mass casual competitor out there, we did increase promotion from about 0.9% of sales to the neighborhood of about 1.4% of sales for the quarter. So that's a big increase for us. Some of that was because TV drove the two-can-dine-on-pizza so effectively, but also we used loyalty to -- we use the term internally here, Nick, of surprising and delighting our loyalty guests.

So it's not just as much about the points, it's about -- hey, we know that you're a loyal BJ's customer and here is a compelling offer to drive traffic through our restaurants. And that's what I'm most encouraged by. We just now have the capability to do that on an individual market, restaurant, and even profiling individual members of loyalty to even do it on a finer basis. So I think that tool is going to continue to be an important one for us. But I am less excited, and I think we've been consistent about this, is the basic point prospects of that loyalty plan I just think are certainly not that very differentiated. Everybody has kind of got that, right?

So I can tell you one of the things we're looking at, and I would emphasize looking at, is are there ways that we can look at the point element because that's a large part of the cost is the accrual base upon those unused points. If we could add more of the value on the promotional surprise and delight side, can we make it a more spend efficient program by making those points behave differently or that part of the program behave differently? So that's where we are in that thought process as we stand.

Got it. And when you guys talked about the new prototype, is that basically the Anaheim Hills type of prototype or is there something in between the 8,500 square foot and the smaller prototype?

No, you know, we learned a lesson at Anaheim Hills, and it's taught us things operationally, as well as from a design perspective. So it has informed what we're talking about here, but the Anaheim Hills Grill is now about, what, 6,500 square feet, I think, Greg? It started out smaller than that and we added a patio to it.

What we're talking about in these two-thirds of the new restaurants going forward next year is something on the order of magnitude of 7,300, 7,400 square feet, compared to 8,500 square feet. And it more mimics, if you will, some of the older designed restaurants that we have here in California that are about that size. If you can imagine that kind of size, but layering all the learnings from the new restaurants that we've built over the last couple of years at the same time.

Nick, since you're local, you're here in Los Angeles, if you ever get down to the Torrance restaurant in Del Amo, that's about 7,300 square feet. That's actually very close to the square footage and everything of what we're talking about.

But a lot of those restaurants have old kitchen lines, for example, Nick. And so we put, obviously, the newest thinking in terms of the best kitchen layouts in there, so a lot of the finish learnings, et cetera. But in terms of size, that -- Corona is another one. We have quite a few that we think are closer to the right sized restaurant for us compared to the 8,500 square foot version, 6A, as we call it.

Okay, thank you. And, by the way, I love the fact that I'm going to get my pizza in the pan again. It used to be, it got really hard cutting that pizza without it sliding off that dish.

All right.

Well, we're glad we could help you out there.

Internally people are very excited about that.

And just quickly, a last question on the mix this quarter, did you guys comment on that? I don't remember, just the mix versus the price this quarter?

The mix (inaudible) were pretty much neutral. And it was really because of menu pricing and it was just the lack of guest counts, to be perfectly honest.

Great, guys. Thank you.

Thank you. There are no further questions at this time. I'd like to hand the call back to Mr. Trojan for closing remarks.

Operator, we don't have any closing remarks, but we just want to say thank you, everyone, for spending the time with us.

Thank you, everybody.

Thank you. Ladies and gentlemen, this concludes the BJ's Restaurants, Inc. third quarter 2013 results conference call. We thank you for your participation, and at this time you may now disconnect.