BJ's Restaurants Inc (BJRI) 2014 Q3 法說會逐字稿

Good day and welcome to the BJ's Restaurants, Incorporated third quarter 2014 results conference call. Today's conference is being recorded.

At this time I would like to turn the conference over to Greg Trojan, President and Chief Executive Officer. Please go ahead, sir.

Thank you, operator. Good afternoon, everybody, and welcome to BJ's Restaurants' fiscal 2014 third quarter investor conference call and webcast. I'm Greg Trojan, BJ's Chief Executive Officer and joining me on the call today is Greg Levin, our Chief Financial Officer. And we also have Greg Lynds, our Chief Development Officer, on hand for the Q&A session.

After the market closed today, we released our financial results for the third quarter of fiscal 2014 that ended on Tuesday, September 30. You can view the full text of our earnings release on the website at www.bjsrestaurants.com

Our agenda today will start with Dianne Scott, our Director of Corporate Relations, providing our standard cautionary disclosure with respect to forward-looking statements. I will then provide an update on our business and current initiatives and then Greg Levin, our Chief Financial Officer, will recap -- will provide a recap of the quarter and some commentary regarding the rest of 2014 and some preliminary views on FY15.

After that we will open it up to questions. So Dianne, 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 23, 2014. 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. Our third-quarter results demonstrate that our initiatives to build sales and enhanced margins are taking hold and helping BJ's improve our competitive positioning and overall financial performance. Organization-wide we are keenly focused on driving top-line sales by improving our value, our affordability, our food quality and innovation, speed, hospitality and brand awareness. While our 0.3% comparable sales for Q3 were relatively in line with the Knapp-Track measure of casual dining sales, our increase in traffic outpaced the industry by approximately 300 basis points; a wide margin.

We are committed to growing sales consistently and sustainably by driving more guest traffic through our restaurants. Our traffic momentum combined with a double-digit expansion related to our new restaurant openings, means we are taking share where it matters most and that is guest visits. We are building traffic on top of our already number one position in our industry in terms of guest traffic per square foot. And what makes this momentum even more encouraging is that we accomplished our traffic growth even as we lapped two weeks of television advertising in most of our major markets last year versus no TV this year while curtailing promotional discounting as well.

We have been enhancing our core value proposition by leveraging the success of our newest menu items, while moderating price increases, even in the face of labor and commodity costs inflation. Introduced earlier this year, our newest menu items are delivering great value, thanks to price points that are in many cases below $10, while also addressing heightened guest demand for later and healthier food choices. The combination of limited price increases and new menu items at lower-price points, led to a 40 BIPS decline in our guest check year-over-year, roughly consistent with our previous quarter.

Overall our effective pricing as measured by average check lags our competitors by about 300 basis points, extrapolating the Knapp-Track data. This important investment in our concept that is making BJ's even a better value for our guest, requires an equal if not greater effort to find operating costs efficiencies so that we can expand margins even as guest checks and commodity and labor costs work against us.

I'm happy to say that is exactly what our team accomplished in the third quarter. We improved restaurant level margins about 130 BIPS year-over-year by reducing costs through the middle of the restaurant P&L. We discussed many of these initiatives on the last few calls and at our Analyst Day earlier this year.

And our bottoms-up initiatives ranging from linen usage to oven repair contracts to takeout packaging and janitorial supplies, they add up to significant savings. In addition, we positively leveraged labor costs by 20 BIPS, despite a significant increase in minimum wage in our home state of California where, as you know, 63 of our 154 restaurants are located and where we don't benefit from a tip credit offset. Importantly, virtually all of this labor efficiency is being derived from our Project Q efforts, which are effectively and consistently reducing complexity in our menu and kitchen processes.

We are asking our team members to work smarter not harder. And their valuable input has allowed us to reduce average kitchen hours in comparable restaurants by 3.4% year-over-year this quarter, even as we slightly increased hours for front-of-house servers and hosts to improve speed of service and overall hospitality and guest experience.

Notably all of our kitchen metrics improved as we implemented these changes and made BJ's more efficient. Our theoretical food cross variants, cook times, guests duration, and comp food percentage all improved year-over-year. The point is we are not cutting costs at the expense of our quality or service. We're actually improving speed and quality by eliminating unnecessary processes.

The third quarter also marked an important milestone in our real estate development strategy, as we opened the first restaurant using our new smaller footprint in Oviedo, Florida. With initial sales at this restaurant eclipsing $160,000 per week, we clearly have the capacity to execute the same high sales volumes despite a smaller footprint.

This successful opening was followed by three additional openings featuring the smaller, higher return prototype including two in Texas, and one in Richmond, Virginia, which opened in the fourth quarter. We still have refinements to make, but our operators love the new layout and the guest response has been very, very positive. We expect to achieve our goal of reducing our average unit investment by 20% or $1 million through the use of this new smaller prototype.

Looking ahead to the fourth quarter and into 2015, we intend to further execute our strategy that is delivering results. That is to continue to drive traffic by accentuating our value proposition and new unique menu items. And we'll continue to improve operating margins by leveraging our scale and working smarter throughout our restaurant operations.

Furthermore, we expect to generate improved returns on our investment by building right-sized restaurants, enabling more efficient operations and profitable guest traffic. With respect to the menu, in Q4 we will be focusing on our outstanding seasonal beers. Our Oktoberfest and Pumpkin Ale are off to great starts this year, for example. Our new seasonal pumpkin Pizookie is exceeding our initial forecast by almost two to one.

In addition, we will feature menu combinations to build check in the holiday season. And feature several new appetizers and a lasagna entree, which leverages the BJ's brand equity and legacy as they will be cooked and served in our deep-dish pizza pans. We continue to look to optimize our media spend by continuing to get more efficient with our digital, using our targeted loyalty campaigns, along with television in markets where our restaurant density allows us to generate the right return for our spend.

Last but certainly not least, we will continue to work hard at attracting, developing, and retaining the industry's best talent. Today's challenging macroeconomic and competitive environment demands the ability to embrace continuous improvement in addition to our long-term organic growth strategies. And I'm proud to say that the team members working in our restaurants are responsible for a majority of the ideas that then become tests, then projects, and ultimately initiatives rolled out across our operations that lead to new levels of efficiency and guest satisfaction I just talked about.

Our team's ability to take on new ways of doing things has been fundamental to the progress we have achieved to date and to our expectations for ongoing improvements.

Before turning the call over to Greg Levin, I want to comment on the 8-K filed this afternoon regarding the resignation of our Chief Restaurant Operations Officer, Wayne Jones. Wayne resigned to pursue a new leadership position opportunity in the restaurant industry, which has been a long-held career goal for him. Myself, our senior leadership team, and everyone at BJ's thanks Wayne for his contribution to BJ's over the last 5-plus years. While we'll miss Wayne, I believe we have tremendous operations bench strength and the best restaurant operating team in the industry. We are confident that our teams will carry onward in driving additional sales, operating improvements, and expansion in the coming quarters and years ahead. Greg?

Thanks, Greg. As we note in our press release today, our revenues for the 2014 third quarter increased by approximately 9.7% to $206.5 million, while our net income and diluted net income per share rose approximately by 77% to $6.5 million and $0.23, respectively. The 9% or 9.7% increase in third-quarter revenues reflects an approximate 10.4% increase in total operating weeks, partially offset by an approximate 0.6% decrease in our weekly sales average. Our comparable restaurant sales increased 0.3% during the quarter compared with a decrease of 2.2% in last year's third quarter. This represented a first increase in comparable restaurant sales since the first quarter of 2013.

The 0.3% increase in comparable restaurant sales in the third quarter is attributable to a traffic increase of about 0.7%, which Greg Trojan touched upon. And it more than offset an average check decline of approximately 0.4%, and again that was driven primarily by our menu mix and incident rates. In the third quarter we had a little over 2% in menu pricing. As we mentioned on our second quarter call, with the July 4 holiday moving to a Friday this year from a Thursday last year, the restaurant industry, and in particular casual dining at BJ's, had a challenging start to the third quarter. As a result, our comparable restaurant sales for the first week of July were down a little over 5%.

However, since the first weekend of July, our comparable restaurant sales throughout the quarter generally fluctuated between down 1% and positive 1%, driven by a positive guest count that were partially offset by menu mix and incident rates as we continue to deliver everyday affordability.

From a monthly standpoint, August was the strongest month of the quarter as well as the most consistent month for us. We did experience more choppiness in our business in September, as we were up against TV advertising last year in markets, which we have approximately 75 restaurants. Including our core markets of Southern and Northern California and the Dallas-Fort Worth and San Antonio, Texas markets.

From a margin perspective, our third quarter is typically our most challenging quarter of the year as we generally experience our lowest weekly sales averages due to seasonality and some of our highest operating costs due to summer utility rates. However despite these seasonal headwinds, the benefits we are seeing from Project Q around labor and our cost-containment and expense management initiatives, coupled with the slight improvement in comparable restaurant sales, allowed us to achieve the four-wall restaurant level margins of 17.6% this quarter. That's an improvement of over -- of 130 basis points versus last year.

Specifically, our cost of sales was 25.1% which was up 30 basis points compared to last year's third quarter and flat sequentially from the second quarter. The increase over last year is primarily due to an approximate 2.5% increase in commodities as well as some menu mix changes. The commodities increase of about 2.5% were higher than we originally projected as both cheese and ground beef remained stubbornly high throughout the quarter.

Labor during the third quarter was 35.5%, down 20 basis points as Greg Trojan mentioned from last year's third quarter. This decrease is the result of improved hourly productivity related to our Project Q initiative as Greg described. In fact, when we analyze our hourly labor productivity, if we exclude the impact from California minimum wage, which we estimate to be about 30 basis points, our hourly labor would've actually been down to 35.2% of sales which would've been a 50 basis points improvement versus last year compared to the 20 basis points.

Our operating occupancy costs were 21.7% of sales for the third quarter, a decrease of 150 basis points from last year's third quarter. Included in operating occupancy cost is approximately $4.5 million of marketing spend, which equates to 2.2% of sales. Marketing spend in the prior year quarter was about $4.1 million, also about 2.2% of sales last year.

Excluding marketing, our weekly operating occupancy costs in the third quarter averaged approximately $20,600 compared to $22,200 for the same quarter last year. This decline of a little over 7% highlights the benefits of many of the initiatives we began implementing earlier in the year, which were more fully realized in this third quarter.

Our G&A was $12.8 million in the third quarter representing a 6.2% of sales. G&A came in at about $700,000 better than anticipated. And this was primarily due to lower training costs for new managers, less incentive compensation and equity compensation expense, and lower legal and other corporate expenses. Our depreciation and amortization was approximately $14 million or 6.8% of sales. It averaged a little over $7,100 per restaurant week and that's been pretty much in line with our most recent appreciation and amortization trends. Our pre-opening cost was $1.3 million during the quarter and that primarily represents the cost for the three restaurants we opened during the quarter.

Our tax rate was only 21% or so for the quarter and it was lower than the anticipated 27% rate. And this was primarily due to increased federal tax credits coupled with our tax planning initiatives. The variance in the actual rate versus the anticipated rate amounts really to only about $0.01 during the quarter.

With regards to liquidity, we ended the third quarter with a little over $24 million of cash and $32 million of funded debt on our line of credit. During the quarter, we expanded our line of credit to $150 million from $75 million to provide more flexibility as we continue our national expansion program and return capital to shareholders through our share repurchase plan. This new facility does not expire until September 2019.

As noted in our release today, we allocated approximately $61.6 million towards the purchase of approximately 1.7 million shares of our common stock in the third quarter. In total, we have purchased and retired approximately 2 million shares of BJ stock for approximately $71.4 million since the authorization of our initial share repurchase program in April. This leaves us with approximately $78.6 million remaining under our current authorized share repurchase plan.

In regard to CapEx, to date we have spent approximately $68 million and continue to expect our gross CapEx for this year for fiscal 2014 to be around $90 million before expected tenant improvement allowances and sale-leaseback proceeds. As we mentioned in the past, our expansion strategy and overall business model is predicated on leasing our restaurant in locations. However from time to time we may purchase the underlying land for a new restaurant if that is the only way to secure a highly desirable site.

In these cases we generally will sell the underlying land once the restaurant is opened. So in 2014, we expect to receive proceeds from 10 allowances and sale-leaseback transactions of approximately $10 million and therefore our plan, net CapEx, continues to be in the $80 million range. We currently expect to fund our ongoing expansion, our capital expenditures, and our share repurchases from our cash on hand, cash flow from operations, proceeds from tenant improvement allowances, our sale-leaseback transactions, as well as through our line of credit.

Before we open the call up to questions, let me spend a couple of minutes providing some commentary on our outlook for the rest of FY14, as well as some preliminary commentary for FY15. All of this commentary is subject to the risks and uncertainties associated with forward-looking statements as discussed in our filings with the SEC.

Our comp sales trends to date in October are running in the 0.5% positive range. Much like we experienced in September, we continue to see choppiness to date, which we believe is primarily due to the continuation of the television testing in 2013, which ended on October 13th of last year. We currently have around 2% of menu pricing, as I mentioned. And we actually expect to be adding somewhere in the neighborhood of about 0.5% of pricing in the November timeframe to get ahead of commodity costs and other inflationary pressures going into fiscal 2015.

In modeling sales trends in the fourth quarter and into the first quarter of next year, I expect continued pressure on average check levels until the end of the first quarter when we will anniversary our new menu that was launched February 25, 2014.

Also, in this year's fourth quarter, Halloween moves to a Friday, compared to a Thursday last year, and New Year's Eve will be on the first day of FY15 as opposed to the last day of FY13. The last time this occurred was in FY08, ended up negatively impacting our comparable sales by 50 to 60 basis points in that quarter. Therefore I am anticipating that the movement of those two holidays will have the same 50 to 60 basis points negative impact on our comp sales for this year's fiscal fourth quarter. However the first quarter of 2015 should get off to a stronger start.

For the fourth quarter, I would expect approximately 2,014 restaurant operating weeks based on the construction of three new restaurants to be opened in the fourth quarter. I would expect our cost of sales to be in the mid-25% range, which would be a little higher than this past quarter.

As I mentioned, commodity costs were up about 2.5% compared to last year despite lower grain prices. And currently we have really not seen the lower grain prices translate into materially lower commodity costs. Based on our recent sales trends and the benefits that we are seeing from initiatives around Project Q, labor should be in the mid-35% range in the fourth quarter. However, labor is also significantly influenced by comparable sales increases or decreases.

During the fourth quarter, I'm expecting total operating occupancy costs to be in the range of $23,500 a week. Included in this number is the total of about $4.8 million in marketing spend and that approximates about $2,400 per operating week. Total operating occupancy costs last year were approximately $25,000 per operating week.

I would anticipate G&A in Q4 will be up on a quarterly sequential basis to approximately $13.5 million as we are expecting more managers and training to get ready for our 2005 openings as well as additional travel related to our newer restaurants. Pre-opening costs should be in the $1.5 million range to slightly higher in the fourth quarter. And that's going to be for the opening of the three restaurants plus some costs associated with several new restaurants that we expect to open in the first quarter of 2015.

Based on our tax planning initiatives, as well as credits expected to be realized in the fourth quarter, our effective tax rate for Q4 should be around 24%. Based on our share repurchases to date, I would anticipate our diluted shares outstanding will be in the low 27 million range.

Now looking ahead to 2015, we're currently putting together our 2015 financial plan and operating plan and that gets presented to our Board of Directors in December for approval. Therefore, while I do not have an approved plan to review with the investment community today, let me provide you with some of the management's preliminary expectations for 2015. Based on our latest information, this is still very preliminary, we currently anticipate the cost for our aggregate commodity basket to increase about 2.5% next year. This estimate is primarily based on chicken and beef prices staying high despite the lower input costs from grain.

With regard to labor next year, our open enrollment for benefits does not take place until mid-November. So as of today we still do not know the expected total impact on our business from the Affordable Care Act. However, based on preliminary planning we believe it can be managed through prudent menu pricing, menu design, and cost-saving initiatives currently underway.

As we already noted, we are seeing improved labor productivity from our Project Q initiatives. And we do believe there is additional labor savings and improved productivity as we continue to implement many of these Project Q initiative, as well as testing our smaller menu. We do believe some of these savings may be able to help offset some of the costs from the Affordable Care Act.

In regards to our operating and occupancy cost for next year, our cost-saving initiatives have significantly reduced this cost this year and our goal is to hold the line on these savings and use additional savings to offset some of the normal inflationary pressure we get each year.

While we have not yet finalized our marketing plan for FY15, I expect our marketing to be somewheres in the neighborhood of 2% to 2.3% of sales. Again this is very preliminary and I note that we do not target marketing from a top-down perspective. We will build our marketing plans from a bottoms-up approach and therefore marketing may be lower or higher than this range.

We will do our best to manage through these cost pressures using a combination of marketing and operational initiatives, coupled with prudent menu price adjustments and menu mix management. We will also have to watch the menu pricing actions of our competitors in the current and tense promotional environment.

In November, we will be adding some additional menu pricing as I mentioned, and therefore I expect our menu pricing to be in the upper 2% range to begin FY15. At the end of February, at the end of February 2015 that is, we will be lapping the 1.4% of menu pricing that we took this past year when we launched our new menu and branding campaign.

Therefore I see menu pricing in the mid-1% range beginning in March and running through July. Please note that this is as of today and is based on commodity pressures, labor and other inflationary factors and therefore this can change in either direction, as we get more information going into 2015. I expect that our menu mix should begin to normalize next year as we anniversary the November 2013 introduction of the Brewhouse burgers and the new menu we introduced in February of 2014 which focused on everyday affordability and introduced a number of lower-priced menu items. This may give us some positive momentum on top of our already positive guest counts as we have seen in Q3.

In regards to G&A for 2015, our continued goal is to gain leverage as we grow. As such, we will strive to ensure that our G&A costs for 2015 grow at a rate less than our expected revenue growth, which will benefit from an expected 10% increase or so in total restaurant operating weeks plus increased comparable restaurant sales.

Our expected income tax rate for 2015 should be in the 27% range and we expect that diluted shares outstanding for 2015 will likely be in the mid 27 million range. Also for those of you building your models, I would anticipate around $500,000 or so of interest expense for next year based on kind of our current funded debt balance.

Finally from a very high-level perspective. In February at the Investor Day and our Analyst Day that Greg Trojan referenced earlier, we reviewed with the investment community a comprehensive three-year plan to recapture restaurant level margins in the 19% plus range. Year to date we are currently in the mid-17% range and have made some good progress on our operating occupancy line and more recently, our labor line.

As I think about next year, I believe we have an opportunity to see further margin expansion into the 18% range on a full-year basis. This should set us up nicely going into fiscal 2016. Again, some of this is predicated on comparable restaurant sales but I believe based on the progress we have made to date, we are on track to achieve that plan that we laid out in February of this year.

In summary, our operating initiatives are bearing success. Restaurant margins are headed in the right direction, guest traffic per square foot is solid and is increasing, and our organic restaurant expansion plan is on track. In addition, our balance sheet is strong.

Our repurchase activity is prudent, a complement to our restaurant expansion and operating initiatives. And we have a great senior management, corporate staff and restaurant level operating teams, which together have fostered a collaborative workplace environment that prioritizes a deep appreciation for our guests and supports our efforts to generate enhanced shareholder value.

That's it for our formal remarks. Operator, let's please open up the line for questions.

Thank you. (Operator Instructions)

Nicole Miller, Piper Jaffray.

Thanks good afternoon. Could you tell me a little bit about the unit openings for next year, 10% operating week growth? Is that still close to 15 stores and if that's right how do they fall our by quarter approximately, please?

Hey, Nicole, it's Greg Levin.

So we're still targeting the 15 as of today. Our pipeline is significantly deeper than that, and so there could be some movement. So as I look at what we've got lined up here. It looks like we'll get three in, in the first quarter or so and then maybe another six or so coming in, in the second quarter.

So it will be somewhere in the neighborhood about fine nine in first half or so. And then I'd say about six in the second half and that's always subject to change. But we usually know obviously the current quarter and maybe six months out a little bit better. You can run into construction delays and other permitting delays.

I think a good way to look at it also, Nicole, is if we think about 15 restaurants and opening evenly throughout the year for our operating team. So that's our goal as a development team is, I think, about 26 operating weeks per restaurant over the15 restaurants.

And I just, obviously, quick back-of-the-envelope math, that's about 2X pre-opening dollars versus this year. Is that about right?

2X pre-opening dollars --

Yes this year. Pre-openings are around $5.5 million, so it should be $10 plus million opening next year?

I think the way we continue to look at it is, it costs about $500,000 or so in pre-opening -- we're actually doing a little bit better than that this year with some of the changes we've made and we could maybe get better than that going forward because of the new prototype.

But for now it's still looking at about $500,000, and, again, 15 restaurants. That puts you at about $7.5 million this year, 11 on $500,000 would be about $5.5million

Excellent and just a final comment can you just tell us the main commodity items in your basket? I know as prices change and mix shift changes it can move around, but the last I had was grocery, meats, produce, seafood, poultry being all above 10%. Can you just let us know if anything's changed? Thanks again.

Yes nothing has too materially changed there. I do think with the introduction of our newer menu in February we've seen higher seafood. Salmon is a bigger category for us that it was maybe a year ago or so. And obviously, we continue to see higher beef prices again somewhere in that 8% to 10% range.

So there's really been no changes. Again chicken breasts would probably be the largest at about 12% to 13%. Ground beef is in that 8 to 10% range. Same thing with cheese that we use for pizza, which, unfortunately has been higher this year than we were anticipating.

Thanks again.

You're welcome.

Matt DiFrisco, Buckingham Research.

Looking at your average check Greg, either Greg, it looks as though you -- I realize you didn't do the Brewhouse until February of 2015 with the new menu introduction. But you did some discounting in the fourth quarter of last year that impacted your average check negatively.

Do you by guiding to not recouping some of that average check, how should we read into that? Is that your -- wouldn't that offset the incremental check degradation that you're getting from the brewhouse, or are you expecting to return to some of that level of discounting?

First of all, no, I don't think we expect to return that level of discounting in this year's fourth quarter. Those are some of the things that we tested last year and we've got good information on their return. Some of them worked in maybe they're part of our arsenal to use in the future.

But when I think about it going into the fourth quarter, and I line up the numbers here, we probably might get some check improvement over that time frame. Again last year we didn't have the February menu rolled out. So if you think about some of the discounting and other things that dropped down that check that would technically be gone this year.

To some degree it might get offset by the February 2014 menu. I also think that as we look at the fourth quarter, the ability to get some check improvement and maybe that drives comp sales, some of that is going to get, unfortunately, offset just by the way the holiday shifts.

Understood.

Matt, it's Greg Trojan. I might have misheard you, Brewhouse burgers just rolled out in November of last year prior to the February menu. I thought I hear you say they weren't until February, but just to clarify that.

Right. But they were at a lower price point, I think by $1 and then you lowered them to $7.99 later in February?

No. The Brewhouse burgers came out in November and they were, let's call it $2 or greater than our traditional burgers. And in February of 2014, end of February, we rolled out 15 new menu items, all basically priced around $10 or less.

Some that were little bit more were less expensive than other entrees. So, really, when I think about the check, our average check, once we get past the February timeframe, I think that's where you started to see our check normalize or maybe even increase.

And then since then, we've been continuing to push on the value with things like starter salads and appetizers some lower priced appetizers here and there. But two major impacts have been the Brewhouse burgers and the February menu. But we're continuing to push in that direction in some other categories as well.

And then just as a follow-up to your marketing comments, can you talk a little bit about we heard that you'd pulled some advertising weeks. Is it correct to assume that you did not have as much advertising in the full quarter of 3Q then you did last year in your -- just in aggregate?

Because your spend stayed the same as a percentage of sales, it appears, yet your -- I heard some comments about September being choppy. And all I'm hearing is the taking away of weeks. So where is that spending going, or where did that extra marketing dollars get directed to that wasn't put in September?

Well look the shorter answer to that question is we're looking at becoming both more targeted and local. So our digital spend rate was higher year-over-year. And our targeted -- part of our discounting and using our loyalty program also where that part of -- even though our overall discounting was less, we used our loyalty program to become more specific and targeted in markets, as well.

So --

So you're right. The aggregate spend was the same but it was - -

It was spent differently. Where last year we had a little bit more in Q3 related to television some of that television by the way and cost of that television went into Q4. In that regard.

This year as while the dollars seem as a percentage of sales, seem about the same, obviously we have more restaurant weeks. But it was just allocated differently more towards digital, more towards some local restaurant marketing, as well.

I guess am just trying to measure the optimism as far as the success or the lack of degradation that you're seeing in some of your major markets when you shut off the TV or lapse some of those TV advertisements from the year ago. Is it overly optimistic to assume that you might be able to cut deeper into marketing while continuing to improve traffic trends?

I don't know if we know the answer to that, because we still continue to work through marketing looking for the best ROI. If I had to look at our trends, which actually were a little bit different than Knapp-Track's, where I think September improved over August, as I mentioned September wasn't as strong as August in that regard.

So I'm not sure I can draw quite your conclusion that you can reduce marketing per se and generate maybe the type of top line sales. Obvious it's going to have to have the right ROI. But again looking at my formal comments August was stronger than September a little bit different than the industry.

We know specifically in September that we went over some big marketing spends last year in regards to the television side of it. And we did see more choppiness there. So it's not quite as black and white as I made it sound or you're thinking.

Okay and last question I promise. When you start opening up in the Northeast, I heard that comment in your press release where you say you sort of have a platform now from the mid-Atlantic to go into Northeast. I think your first store might be maybe come in soon in Nyack, New York. What type of margin structure would those stores be coming into the base?

Obviously your core, California, has high labor already. You do have a high Texas presence. They have very favorable business environment. How should we -- is there anything that you want to call out that we should know when you model in some of these stores coming in?

The obvious would be volumes, I think would be big, considering they're coming into high-income areas. Is there anything else that we should consider, whether it's travel expenses with pre-opening or G&A or anything of that nature that might be different?

Matt, not at this current time. As we continue to push through our annual operating plan for next year, we'll layer in travel to those locations that might impact G&A, per se. But our goal as we've always said is to continue to leverage G&A as we grow the business.

When we lay out these new restaurants, we sit down with supply chains we sit down with talent development. We sit down with the brewery's team and model out all those costs. And frankly they're not that significantly different than the cost of our other restaurants.

In fact, Matt on unbalance, our proportion of tip credit state development versus since we're doing less in California, actually we're doing none in California in the next year, is going to help us unbalance from a marketing structure perspective.

Has the no development California helped your comp, as well, as far as cannibalization or lack thereof?

I'm sure based on the fact that those restaurants that were cannibalizing other restaurants have slowly moved on from there initial honeymoons, of the opening of new restaurants that we got the benefit there.

But when I look at California we've talked about before, when we rolled out the new menu and we did our television advertising back in the March timeframe with the new branding, we saw a market improvement in California, and that has seemed to have held up throughout the rest of this year.

Thanks very much.

Brian Bittner, Oppenheimer.

Thank you. Congratulations on the strong margin performance.

You have a 6% operating margin target for 2016. It sounds like you're pretty darn comfortable with that as we stand here today. But, when I think about the strong leverage that you got, particularly this quarter on such a strong same store sales increase, I want to think about 2015. And is there a path to get to that 6% operating margin goal that you have in 2016 to pull it forward a year under a certain comp scenario?

Will I think Brian you hit upon it at the very end there. It's that comp scenario area. When I look at our numbers and I don't want to go through a pure history lesson here but if you look at BJ's and go back four or five years ago, you can see the air -- you can see how we're actually performing versus maybe 2008 and 2009, which were the recession years, when we did kind of flattish comps, which is where we are today.

And we're pretty similar in regards to some of those things. We obviously have the higher marketing spend, so that's a little bit of an impact there. And we've had the higher depreciation and amortization, which we're addressing through this smaller restaurant, and that's going to take some time to come through.

You pull that aside though and you start to think about the fact that if we can get some comp acceleration going through here with our Project Q and the cost containment initiatives that we put ain place here, there is the ability to enhance margins even greater. And I think even Greg Trojan mentioned that in the formal remarks as well as in our press release today.

So there is that capacity there. It really comes down to what people think about comp sales for next year. I still take a very conservative visit approach. We're still seeing a slower growth maturing industry. As much as we're seeing some nice comp sales by some of our peers out there, they seem to be doing it all on pricing.

We want to be doing it by growing guest traffic and minimizing pricing as best we can. We've always said that pricing is the last lever we want to go to. And I think there's opportunity still in our business to continue to be more efficient. And then we'll look towards pricing if we can drive comp sales, I think the maybe there's an ability to move these things up further.

And get to our numbers maybe quicker than we anticipated. But I think where we are today and what we laid out in February, we're executing against, and, frankly, we're executing against it maybe a little faster than people thought. So we're pretty happy with where going we're going. We're definitely not satisfied.

So let me -- that's helpful. Let me just ask a little more directly. You know what pricing's likely to be in 2015 and you know what mix is probably going to be in 2015. What type of traffic would you need to hit your 6%, 2016 margin goal in 2015?

I don't know the answer to that one. As of today. I mean I really don't. We're not putting a big comp sales on next year. I think we still are in this kind of mature marketplace right now. We're not seeing huge casual dining traffic growth.

So Brian, just reinforce what Greg said, is we'd rather be in a position of planning for continued, frankly difficult customer, core customer economy. It's still very choppy out there. If you look at consumer segments and our price point in our core middle American consumer.

Though we'd rather stay a little conservative and pessimistic and work hard on growing our business the harder way, frankly. And if the headwinds surprise us, we will get there sooner to your point, but we're not counting on it.

And a couple of things to think about Brian as well. We bump up next year in regards to opening 15 restaurants from 11. You're going to have -- pre-opening is going to be a higher percentage of sales than it was this year, that's going to impact margins.

Depreciation and amortization, that number's going to take a while to go down. I think if you start looking at BJ's on an EBITDA basis on that cash flow, you'd probably be more impressed maybe of how the margins are moving.

Makes sense, thank you.

Jonathan Copp, Robert W Baird.

Hi, thank you. Greg Levin, if I could maybe just ask one more question about the margins? I look at the year-over-year improvement for the labor and the other operating lines, both of those seem to be improving where the rate of change is even improving in the most recent quarters. And I know the traffic has improved.

Can you maybe just talk a little bit more? Are you seeing additional layers of some of the cost containment efforts that you're doing starting to shine through? Are the teams just getting better at operating some of those or what's going on there?

I think it's a combination of both. If I took labor specifically, a lot of the Project Q initiatives really didn't start rollout here until the third quarter of this year. By our nature we're a conservative group. And I know that it can be frustrating from a Street perspective at times, but we're not going to do anything that degregates our business to our guests.

Ultimately it's about driving guest counts. So as we work through some of the things on Project Q we test them in our restaurants. We make sure they work, will work the right way and they can be executed the right way and don't have any impact on our guest dining experience. So some of those start to come through a little bit here in Q3 and we're able to make some efficiencies in that labor number from that standpoint.

On our operating occupancy costs I don't think there's any -- I don't think it's accelerating or anything from that standpoint. I think it's kind of where we planned it maybe gotten a little bit better but there haven't been any major ah-has differently than what we've expected.

Got it. Helpful perspective, thank you. And then another question for Greg Trojan maybe just piggybacking on some of the earlier discussion on pricing. But when I looked at your traffic performance it was encouraging to see it turn positive this quarter after a couple of years of being negative. And that follows four quarters where your check is significantly lagged the overall industry check growth.

So I wonder as you look at the results of the last few quarters and the traffic inflexion that you've seen, does that at all change your view on the check growth going forward? And is there any internal discussion or thought about maybe further limiting the check growth for a more extended period?

Well I'd say we are committed to continuing to improve the value equation for BJ's as a concept. We will be lapping two of the major guest check events if you will being Brewhouse burgers and the cumulative number of items that we rolled out in February, Jonathan. So that will help in terms of our future our future ability on guest check growth.

And we're going to continue to look at other opportunities to improve value, however. But I think those were rather significant in terms of scale in major categories. So it, if anything, it reinforces our commitment to continue to be leaders in value if anything else.

And we'll always try to strike that balance -- look we're trying to grow guest check in an absolute basis. But we knew we were going to be sacrificing effective pricing, or guest check growth with these significant rollouts. But they've been tremendously popular and successful. And we'd rather grow traffic at the end of the day than grow it through pricing or guest check.

Got it. Thank you.

Will Slabaugh, Stephens Incorporated.

Yes, thanks. I wanted to ask you about the traffic that you saw turn positive in the quarter. And I know it's maybe tough to break down, but did you feel like it was more to do with the menu item introduction is really taking hold? Is it an execution, speed of service issue or some combination of that, that you may be able to break down for us?

Yes, we don't -- all we can tell you, Will, is we'd have to interview every guest, obviously, so it's tough to determine what's driving frequency or new use, obviously. But I can tell you the way we're committed to getting here is by complexity reduction. And the reason I say that is we're not degrading fundamental -- in fact we're improving on fundamental guest service metrics here. So, I do think it really is a combination of both.

So our speed of service we know our average duration is getting shorter, our average cook times are getting quicker. So, and were actually -- I mentioned, but I'd reinforce, we put a little bit of labor back into the front of our house of our restaurants, as well. So I do think our service and quality are improving, but I think value leads the way, if you were to ask me.

I think value combined with -- the thing that a lot of folks don't talk enough about is the items we've rolled out truly are compelling from a taste profile perspective. And they're differentiated. In terms of our chicken Mediterranean tacos continue to build, and are probably at their highest incident rate since we rolled them out last February.

So our new salads are continuing to do really well. So that tells me that guests are coming back and they're ordering these new items because they can't get them elsewhere and that they are very compelling values. So, again it's hard it's impossible to allocate between the two, but I think those are the -- that's the most important reason, is value in compelling offerings.

That's helpful and just a quick follow-up if I could? Do you know what the mix is of those new items you've introduced over the past year is the lower price under $10 items?

I don't know if we actually have it to say it'd be 20% of our --

We don't know them in a combined way.

We tend look at them in categories, so for instance as Greg was talking about the Mediterranean chicken tacos it actually leads its category. I think our kale and Brussels sprouts salad is number two in that category of salads. We actually haven't looked at how they are within the entire menu mix of the Company.

But you know --

Thanks. Congratulations on the quarter.

Thank you.

Jeff Farmer, Wells Fargo.

Thanks, good afternoon. Wanted to follow up on some of the commodity questions. Most of them you performed pretty well. I think there was a little bit of a fear even going into this print that there might be something to be worried about; clearly there was not. But in terms of understanding that a little bit, so I think you pointed to 2.5% commodity inflation. I think you made a reference to ground beef and cheese.

But looking at your deck, your analyst day deck, it looked like cheese was roughly 7% of COGS, dairy another 4%. I think they're both spots. You obviously had a little bit of beef exposure. So you put all those pieces together and to that roughly 2.5% commodity inflation on the basket just seemed like a pretty low number.

So just out of curiosity how were you able to sidestep some of that pretty dramatic inflation that some of your peers had seen in the Q3? Or at least largely sidestep.

Actually Jeff I don't think we sidestepped it to be perfectly honest. Don't forget we took menu pricing at around July 1, 2014 or so. And if you think about it we took that menu pricing and we didn't see it really come down to the bottom line. We held our own, in that regards.

So it did come through. I think one of the bigger items that we don't mention as much, I did mention, I think, when Nicole asked the question about our total mix, we have a higher seafood mix then we had a year ago because of this menu that rolled out in the February time. Things like cherry chipotle salmon are just rocketing up in regards to number -- rocketing up as in regards to entrees, and being a high seller for us.

That's got a little bit higher food costs maybe then certain other items. So there's a couple things that play in there. Salmon's a little bit more expensive then I think chicken is year-over-year from us in that standpoint. Still a bit higher than shrimp costs; I know they are coming down, but we locked in a lot of shrimp at the end of fourth quarter of last year.

So I'm not sure we've survived it any better than anybody else. Might have just been coincidence, when we rolled out some menu pricing. And when I do look at the numbers I've seen it sequentially go up through the quarter. Meaning July, August, September. Our cost of sales have come up and that's one of the reasons that as I think about the fourth quarter, I can see that number up a little bit.

Also due to the fact that in the fourth quarter you tend to peak at people that want to try entrees or the celebratory type items, so the center to plate protein items. That'll increase our cost of sales a little bit, should increase our per-person average, maybe, a little bit in that regards versus Q3.

So it might help labor a little bit when I think about margins for the fourth quarter. But at the end of the day, I think we saw that pressure and I think we may be just a little bit of benefit of when we rolled out pricing.

Alright that's very helpful. And then on a completely different topic. I think, and correct me if I'm wrong, I think your loyalty program, did that account for about 11% to 12% of your transactions right now? Is that in the ballpark?

That is somewhere in that area, but I don't think we're that specific.

Yes, so that's about right, I'm just curious about the evolution of that program, future opportunities as you move forward that seems like a pretty big number. It seems like you could do a lot with that group, so just curious what your thoughts are there?

Well, Jeff we're continuing to we're using loyalty more as -- we have a lot of email addresses to work with. And we see great activation when we do everything from advertise our beer dinners to offer free Pizookie's to a variety of both incentives and thank yous.

And I love being able to do that, to thank our most loyal guests. So we're seeing good activation rates and we're also happy that the number of loyalty guests continues to increase, rather dramatically actually. And we have nearly doubled the number of loyalty guests versus where we were at last year. So we don't -- there's a ways to go on really optimally utilizing the program. But we think of it much more as an ability to target and to even more specifically market to guests, given their preferences and demographics.

And we're going down that road and we're optimistic about using it more and we love the fact that we continue to pick momentum up in terms of people engaging with the loyalty program, which is helped by the way with our app and our the technology that we've unveiled this year. I think has been instrumental in that.

All right thank you.

Jeffrey Bernstein, Barclays Capital

Great thank you very much. Two questions maybe. One just specific to the quarter just ended. On that operating and occupancy line, I know you gave some color, but it seemed like, again, just breaking into components: if the marketing dollars are relatively stable, and I think, Greg, you mention there were no big drivers to that line in terms of savings.

I think you mentioned if it was down 7% in terms of operating week year-on-year, so I'm just wondering with the comp relatively flat it just doesn't seem like enough to drive huge leverage. So what was the big driver of that 7% reduction? Is that something you think is sustainable, or were there things in the perhaps year ago period that led to it looking still favorable this go around.

Jeff, we kind of mentioned a little bit on the formal remarks that it's a bottoms up, basically a bottoms up small dollar approach. There's not many home runs out there. We're playing singles and moving the runner over from first base to second base.

We put in demand management systems around electricity. We've gone and looked at, and we talked about this at our analyst day, we're rolling out new China and glassware and silverware, and that was the fact that we were sourcing it domestically. We can source it outside of China and bring it over, but it was going to take a while to come in place there.

We put in some centralized planning around facilities and repair and maintenance, up in that regard. We've worked with our vendors in regards to linen napkins, janitorial contracts. It's a lot of small things. There's not, gee, last year we incurred X dollars and we were able to get rid of it this year.

So I think there is it ability to hold it. As I mentioned that's our goal there. Is to make sure we hold it moving forward, continue to monitor it. One of the big things that we do at BJ's, we've always done it, and it's the best way for us to look at is, we don't get caught up on percent of sales. We look at the linen costs per guest. We know when the guests come in and we know what we pay for linen.

So we can line up all those restaurants and see which restaurants seem to be using too much linen based on the guest counts coming in here. We know how much janitorial chemicals should be per guest, in that regards. So it really kind comes down to a lot of hard work by our operators. They suggest a lot of great ideas to us.

One of the things that we've really worked on this year is to get with our operators and have them come back to us and say hey why we do this? Or have we thought about this? And it's worked out well for us. I think as we've said earlier as well, we go through and we test these things.

We want to make sure we're not taking anything away from the guest. So it's probably why we got maybe a little bit more acceleration in Q3 versus prior quarters because we're going to test some of the stuff in the restaurant first.

I know for a lot of small things that was 150 basis point of leverage: that's very impressive. The other point I was going to ask in terms of, I know you haven't finalized your plans for next year, but you gave a tremendous amount of detail for having not finalized it. But just wondering, you mentioned you want to do it the tough way. You're going to assume the consumer environment remains challenged into next year, which seems like the prudent approach.

But based on those line items of detail what's -- at the top of that model what's the comp assumed to arrive at all that granular line item detail? I mean presumably you have something in there, I'm just wondering whether it's sustaining 0.5 a point? Or, ballpark, what's the comp assumption that leads you to the granular detail for each of those line items?

Well I think the way we continue to look at it is we're thinking we're going to be somewhere like we are right now, as we think about our Business.

Okay. So in that, you're very modest.

Yep.

Very modest sub 1% is where you are now is the assumption that generates all the detail?

It's something that we go into where the difference comes in is we look at all that stuff and look at it versus mix, versus guest traffic versus pricing. Look, as much as I would love to be able to sit here and talk about getting comp sales of 3% all on pricing, because, guess what, on pricing about 90% of that should flow down to the bottom line. 85% of it.

So you've got very different metrics in regards to how your margins play out based on how comp sales come through. If we get comp sales like we're getting it today, we have to do it by being more efficient and more effective in the middle of our P&L to get the throughput, which we've been able to accomplish. If we had pricing, tier pricing in the sense that our average check was growing, you'd see margin expansion on top of the fact that we're getting the efficiencies of what we're doing.

So as I put together our plan, I work with my finance team which is the, frankly, the gold standard in regards to people I work with. We put through all of those assumptions in regards to how it's going to flow through. And ultimately, I think in today's environment, you still want to take a very modest approach. And that's what we lined up on our three-year plan and we're sticking to that approach, really.

Understood. No thank you very much.

You're welcome.

John Glass, Morgan Stanley.

Hello. It's Courtney on for John. Just two quick questions. First I think you had previously said that the California minimum-wage impacts would be about 70 BPS on a run rate. And then you mentioned today there was only 30 BPS. Are you seeing less pressure than you were expecting, or is that just from some of the productivity initiatives?

It's two-fold there Courtney. I think we talked about it being 60 to 70 basis points prior to menu pricing. And then I'd have to pull up my transcript from the last call, but I think we said the menu pricing would offset about 30 BIPS of that.

So, I think even when I guided last in the second quarter I thought labor would be closer to 36%, because I didn't know all the Project Q initiatives coming through. And that was based on about a 30-basis point increase or so after pricing.

Okay. And then just in terms of the buyback, I think you guided to low 27 million shares for next year. Should we expect a similar pace as you did this quarter, or will it be a little bit lighter?

Yes, we don't discuss what we're doing in regards to our buybacks, except on these quarterly calls. We think it's a good use of shareholder capital. We think where our stock price is, it makes sense for us to be opportunistic. So we don't necessarily have a plan in place saying that every year we're going to get 5% of our earnings growth by returning capital back to our shareholders.

In us, it's more about the things that we're doing: we believe in our strategy. I think it's proven itself this year. And we know based on that strategy where we plan to get to. I mean we laid that out back in February. And I think we're executing against that. And frankly, the market doesn't want to believe in that strategy, that's fine. We'll go ahead and be a buyer of our stock.

Okay great. Thanks.

Chris O'Cull, KeyBanc Capital Markets.

Thanks. Greg, I know you were looking at reducing cook times for some of your core items. Can you give us an update on maybe that project? And if there are any initiatives right now that are improving throughput?

Yes, there are quite a few Chris. I mean this isn't a one change thing. I mean we're reviewing the process of everything on our menu. And I meant what I said that at the conclusion of my remarks most of these ideas have come from folks that are working in our restaurants every day. So that continues to be the case.

We are looking at what we think to be a big help in terms of our pizza process that is in test. And are looking to reduce oven cook times with obviously one of our most important products. So it really is spread throughout our menu. And as we introduce new items we're being very conscientious about -- one of our criteria of looking at product introductions is, okay, how complex is this?

Is it using first of all new ingredients? Are we going to bring new items to the line? And then from a process perspective, does it use different multiple stations on our line. An overall grade our culinary development on a complexity index, so to speak. So it's not just our existing items it's what we're introducing and changing as well as we introduce new items.

Will the changes, I mean some of the pizza you mentioned or any of these changes, will they require new equipment or any type of major investment to rollout to a larger group of stores?

No. We are not contemplating any changes to our line other than you we're looking hard at that in terms of our new prototype and being more efficient in the line. But we're not altering cooking methods here. And at this point and that's not something that -- we're looking at different alternatives there. But that's not part of the thinking today in terms of what we're going after in the near-term.

Okay and then one last one. What markets benefited from TV last year? I thought you mentioned some Texas markets. And then are there any other mismatches through the balance of this year you're anticipating because of TV being on last, not on this year?

Yes there were California and significant Texas markets were overlapping a year ago.

And we're past that now through October, right?

That's correct.

And there's no more in November or December?

Not in terms of overlap we're looking at some limited TV in a market or two that would run incrementally. So would lap in the 2014 over 2013 version. But there are no negative overlaps for the remainder of the year.

Okay great. Thanks.

Sharon Zackfia, William Blair.

Hi, and under the wire. Just a couple of quick questions. I was curious, I didn't think I heard this, but I was wondering if the app had helped your lunch day part at all, or if you saw the improvement in traffic similarly across dinner and lunch?

The -- I would describe the upturn as helping us in our core customer group and then on the loyalty front. It is not at this point a driver of -- it's not driving our traffic increases at this point. We're pleased with the base and where we've started here. But we're in a lot of ways changing fundamental behavior. The idea of people ordering ahead and using an app and then dining in the restaurant is still -- is still a different way of thinking about how to use casual dining.

So it has helped our engagement tremendously and the recruitment on the loyalty front. We have some very heavy users of that app, but we're still working on and anticipate steady penetration on that front. I'm not sure I'm answering your question, but that would be my general thoughts on where we are.

That's helpful. So you would expect it to be a relatively slow adoption is that fair?

I think so. I think it's a benefit of to everyone as more of a alternatives are out there and it becomes more commonplace for people to think about the option of even paying with their phones et cetera. So we're happy to be ahead of the curve on this front. But it wasn't our expectation that it would be a significant driver in a near-term.

And we're going to continue to add some pretty interesting functionality. We're in the test phase of that currently, that we think will make some of these features even more compelling. So again we don't have you no outsized expectations, but we like how people are engaging with it. And we think it's great for the brand and overtime will be a driver of efficiency.

I mean one of the benefits we have given the capacity constraints at times that we have in our busy restaurants is, I think we stand to benefit more than other concepts, in that it will speed, it does, we know it does speed the duration of service here. So there's more upside for us for getting this penetration, increase in apps like this then perhaps others.

Okay and I just a quick question for Greg and I apologize if this was already asked, I had to hop off for a minute. But I heard the comp was up, I think, 0.5% so far quarter to date, and I heard what you said about Halloween and New Year's. But I also remember your sales really fell off last year after October.

So I don't remember if you quantified a weather impact last year I mean are the things that work in your favor after October? In terms of the comparisons or weather or anything of the like?

I don't have the specifics. I think if I pulled up the Q4 call I probably do. The first two weeks of December, I think, we commented a lot about in our Q4 conference calls. There's two things there, I think some storms came through Texas. And just the shift of Thanksgiving later last year, everybody was expecting that real holiday rush that you get, and it never really came.

And those were the two weeks that were probably the biggest challenge to us in Q4 of last year. To your point, I think at this time last year we were only down about 0.5% or so in October, three weeks through, and then you know we finished down in the 2% range. So it does get little bit easier if you talk about it from a year-over-year perspective. To me when I look at that, I think you have to get easier and then it all of a sudden unfortunately, gets flipped by this two big holiday flip-flops.

Okay. Thank you.

You're welcome.

That does conclude today's question and answer. I'll now turn the call back to Greg Trojan for any additional or closing remarks.

Thank you operator, Just thanks everybody for your time, and as usual if there is any follow-up you can get a hold of Greg in the next couple of days or into next week.

Thank you everyone.

Thank you.

That does conclude today's conference. We thank you for your participation.