BJ's Restaurants Inc (BJRI) 2014 Q4 法說會逐字稿

Good day and welcome to the BJ's Restaurants, Inc. fourth quarter and FY14 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.

Thank you, operator. Good afternoon, everyone, and welcome to BJ's Restaurants FY14 fourth-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. We also have Greg Lynds, our Chief Development Officer, and Kevin Maher, our Chief Marketing Officer on hand for Q&A.

After the market closed today, we released our financial results for the fourth quarter of FY14, which ended on Tuesday, December 30, 2014. You can view the full text of our earnings release on our 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 provide a recap of the quarter and some commentary regarding FY15. After that we will open it up to questions.

So, Dianne, please?

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, February 18, 2015. 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. Before I get into my formal remarks for the quarter, I'd like to mention that this will be Diane's last conference call with us as she is set to retire. On behalf of everyone at BJ's we would like to thank her for her 19 years of dedication and loyalty to BJ's. We're going to miss Dianne, as in addition to taking care of the investor calls for us, she heads up our licensing and corporate governance areas, and is largely responsible for obtaining the licenses for the majority of our 158 restaurants. We are all going to miss her and wish her the very best.

Thank you, Greg.

Our Q4 results again demonstrate the important strides we are making against the key components of the strategic plan outlined last year to drive our top line and reignite comp sales, while also maintaining a focus across the enterprise on managing costs and driving efficiencies. Our 7.1% sales growth in Q4 was the result of our continued methodical new restaurant growth, along with positive comp sales of 1.2%. A nice acceleration, particularly considering we were lapping higher levels of TV advertising, promotional discounting and overall marketing spend last year.

Our significant restaurant level margin improvement of 330 basis points to 18.4%, and the substantial increase in net income to $8.3 million, was driven by our positive comp sales, coupled with our success in eliminating or reducing costs that do not directly affect the quality and overall value of the BJ's dining experience. We were also more targeted with our promotional efforts versus FY13, which slowed our traffic momentum a bit but created a much more profitable sales mix in our restaurants. While our guest traffic was relatively flat for the quarter, we still outpaced our competition.

Our teams' cross management efforts led to some of the best per restaurant weekly operating cost performances we have seen over the past several years, and touched every significant cost center of our business. Notably, we overcame significant minimum-wage increases in California, a state where we also do not benefit from tip credits and actually improved overall labor efficiency by 150 bps, which was driven primarily from lower hourly labor costs. Equally impressive is our teams' diligence in driving efficiency in kitchen supplies, repair and maintenance, and other operating occupancy costs, excluding marketing spend, where we improved by approximately 140 basis points versus year ago.

Over the last year we looked at every aspect of our business to see how we could reduce costs and improve processes to achieve efficiencies, while maintaining our focus on our guests, hospitality and our reputation for great food. I cannot emphasize enough that the majority of the successful changes we've implemented have come from team member ideas in our restaurants. And we have guarded food quality and the overall guest experience with utmost priority throughout this journey.

Reflecting this focus, our NPS metrics, which are our internal net promoter scores from guest surveys, have improved from the already impressive levels at the start of 2014, while we've also maintained our well-above-average manager and team member retention rates. It was critical when we began this process that we not gain efficiencies at the expense of our guest experience or our team members' engagement with our Company. I am proud that we delivered on this challenging task which, in conjunction with the solid sales performance, contributed to the strong fourth-quarter financial results.

As important as the progress we are making on cross structure has been, we internally think of these efforts as another means of just driving traffic and sales. As I have mentioned previously, BJ's needs to be a leader in price-value to maintain and grow our industry-leading guest traffic volumes. We invested heavily in value last year with both our Brewhouse burger introduction and the EnLIGHTened health and value-focused menu introduction late last February. Our Project Q cost and efficiency work allowed us to invest in value in 2014.

Our overall guest check was essentially flat versus last year, compared to an industry average as measured by Knapp-Track of around 200 basis points. Without our work on the cost and efficiency side of our business, there is no way we could have effectively taken zero pricing for the year. In other words, the combination of compelling, innovative items at fantastic price points was key to our traffic outperformance last year, and our successful work on reducing costs funded these efforts.

Notably, shortly after we introduced our new menu last February, approximately 25% of our guests ordered one of our EnLIGHTened menu items, such as the kale and roasted Brussels sprouts salad, our Mediterranean chicken pita tacos or our cherry chipotle salmon, for instance. Importantly, in Q4 of 2014, and despite the relative levels of advertising and in-restaurant promotion of these items, they are still selling strong at about the same levels as when we were more actively marketing them earlier in the year.

Our guests sent a clear but not surprising message: Give us great taste with great value and we will come back. BJ's is clearly delivering on this request. Even with our new offerings, our base menu items were reduced from about 153 to approximately 137. Although we never want to disappoint a guest when one of their favorite menu items disappears, we continue to fine-tune the menu, knowing that our improved overall quality, the cravability of our new menu items, and the overall improvements in speed will more than offset any short-term disappointment related to a menu item being discontinued.

This year's agenda is to capitalize on our current momentum and to extend the successes we are having with the initiatives introduced over the last 12 to 18 months. As such, we remain hard at work to further simplify our menu and kitchen processes under Project Q, and believe there remains a runway for continued success on this front.

We have several upcoming product introductions which we believe will continue to build our brand in terms of high quality and innovative food, while exciting our guests and our team members. For example, our new tavern-cut thin-crust pizza debuted early this month and is off to a great start. Not only do our guests love it, but it is much simpler and faster to prepare than the hand-tossed product it replaced. We are also looking forward to promoting our award-winning deep-dish pizza by introducing some new flavors, particularly in our newer markets that are not as familiar with our significant pizza heritage.

We continue to strengthen the effectiveness of our marketing efforts as we learn from our branding, digital and media experiences. As a result, the positive impact on TV in 2014 was even more successful in our core Southern California market than in prior periods, reflect ongoing tweaks to both our media strategies and spending.

Our segmented loyalty program offers also continue to generate solid results, including the ability to reactivate lapsed or infrequent guests. In addition, our digital execution has been improved and is delivering consistent improvements in core performance metrics in terms of organic and paid search efficiency, Internet and mobile traffic, and so on. While in March we will begin lapping heavier than normal marketing spend related to last year's menu launch, we believe the improved efficiency of all of our spend, along with some focused TV, will lead to another quarter of positive top-line results comparisons.

Although our cost work has helped us become more efficient, our approach all along has been to implement highly effective processes and create a permanent mindset among our team members. We will continue to focus in 2015 on identifying areas of opportunity that can allow us to widen our value advantage in our markets.

While we do not contemplate another year of major guest check investment like last, we are committed to continuing to improve our everyday value and affordability. Overall, we expect to drive more operating efficiencies as we've demonstrated the success of this approach in offsetting as much as possible anticipated fundamental cost increases ahead.

Last, but perhaps most important to our future, given the broad runway for US growth ahead of us, with every new prototype restaurant opening, we have confirmation that our new design is a better layout, a better look and feel for our guest, and more efficient for our team members and our shareholders. As you'll recall, our new 7,400 square-foot restaurants are being built for approximately $1 million less than the larger predecessor formats. It's one of the few times in life that spending less results in actually a better product.

Our guests have responded positively, which is priority one, but our team members are also enthusiastic about the new prototype as it makes serving guests at a high level more consistently attainable. With the first several restaurants built under the new proto performing in line with our expectations, we expect the vast majority of our new restaurant expansions to feature the new design with, of course, some fine-tuning that we've identified since opening the first of these new formats last August.

In summary, the playbook is working very well and we will be building on 2014 successes throughout 2015. BJ's is still a relatively young and developing concept and, as such, we believe there is a lot of upside as we continue to push these same levers this year. We are encouraged that they have us headed very much in the right direction as we drive solid guest traffic with consistently improving economics.

I'm delighted to report that with half the quarter under our belt, 2015 is off to a very encouraging start. And we are seeing some of our best traffic gains in major markets such as California, which are not benefiting from the improved weather relative to last year.

Greg will now take you through more of the specifics regarding Q4 and talk a bit more about our 2015 outlook. Greg?

Thanks, Greg. As reflected in our results and noted in this afternoon's press release, throughout 2014 we made excellent progress against our initiatives to create a more efficient organization, while leveraging our industry-leading guest traffic levels and long-term expansion program, all of which contributed to the significant earnings-per-share outperformance in Q4. Revenues for the 2014 fourth quarter increased approximately 7.1% year over year to $213.9 million, while net income and diluted net income per share increased to $8.3 million and $0.31, respectively.

The 7.1% increase in fourth-quarter revenues reflects an approximate 7.5% increase in total operating weeks and a slight decrease in average weekly sales of about 0.4%. Our comparable restaurant sales increased 1.2% during the quarter, compared with a decrease of 2.7% in last year's fourth quarter.

As mentioned on our third-quarter conference call, with Halloween moving to Saturday night and New Year's moving into the first quarter of 2015, our comparable restaurant sales in the fourth quarter were negatively impacted by about 40 basis points. The 1.2% increase in comparable restaurant sales in the fourth quarter reflects a higher check of approximately 1.4%, which is more than offset by a slight decrease in traffic of 0.2%. The average check increase reflects better menu pricing and comparatively less discounting relative to last year's fourth quarter.

Recall in the FY13 fourth quarter, we discounted through the holidays, which reduced our average check and led to deleverage margins and revenue flow-through. This year, we were successful in offering targeted promotions on select items, which built the average check during the holidays.

In the fourth quarter, we had about 2.5% in menu pricing. However, as I just mentioned, our average check increased approximately 1.4% due to our investment in value this past year.

From an overall margin perspective, as Greg Trojan mentioned, and we noted in our press release today, the benefits we are seeing from Project Q around labor and our cost-containment and expense-management initiatives, coupled with the improvement in comparable restaurant sales, allowed us to achieve four-wall restaurant level margins of 18.4% this quarter. This improvement of 330 basis points over last year resulted in outperformance even relative to our internal projections. xxx

Specifically, cost of sales of 25.6% was in the range I provided during our third-quarter conference call. The 25.6% represents a 30-basis-point increase compared to last year's fourth quarter and a 50-basis-point rise on a quarterly sequential basis. The increase over last year primarily reflects an approximate 2.8% increase in commodities, as well as some impact from menu mix.

Labor during the fourth quarter was 34.7%, and was down 150 basis points from last year's fourth quarter. This decrease is the result of improved hourly productivity, largely being driven from our Project Q initiative, and a slight increase in average check over 2013. This helped offset the impact from California minimum wage.

Operating occupancy costs were 21.2% of sales for the fourth quarter and that's a decrease of 220 basis points from last year. Included in operating occupancy cost is approximately $4.6 million of marketing spend which equates to 2.1% of sales. By comparison, marketing spend in last year's fourth quarter was $5.8 million, or 2.9% of sales.

Excluding marketing, our weekly operating and occupancy cost in the fourth quarter averaged approximately $20,300, compared to $21,800 for the same quarter of last year. This is a decline of about 7% and puts us on target with our initiative to reduce operating and occupancy costs by at least $1,000 a week, a target that we highlighted last year at our February 2014 Analyst Day.

G&A in the fourth quarter was $12.3 million, representing 5.8% of sales. G&A came in about $1 million better than anticipated, primarily due to lower training costs for new managers, lower than anticipated equity compensation expense, and lower legal and other corporate expenses.

The lower than anticipated manager training expense is really due to three things. First, our retention rate continues to be extremely high resulting in lower new-hire training. Second, we opened fewer restaurants in the fourth quarter this year compared to last year. And, third, as we've discussed, our new restaurant prototype is smaller, and with the results of Project Q, we are opening new restaurants with a lower management par and less hourly team members.

Depreciation and amortization was approximately $14.1 million or 6.6% of sales, and averaged a little over $7,000 per restaurant week, which is in line with our most recent D&A trends. More importantly, depreciation and amortization per restaurant operating week of $7,000 was basically flat with last year's fourth quarter, and highlights progress against our goal to increase return on invested capital by working the numerator through margin expansion while more efficiently deploying capital.

Pre-opening was $1.2 million during the quarter, which primarily represents cost for the three restaurants we opened during this quarter. We had a little pickup here, as well, relative to the expected range of $1.5 million to $2 million, as we have seen our pre-opening costs come down a little into the upper $400,000 range this year. And we did not incur as much pre-opening expense related to restaurants expected to open in the first quarter of 2015.

Our tax rate was about 25% for the quarter. It was slightly higher than my 24% projection, but it was in line with our expectation for the full year of about 25%.

In terms of capital allocation, and as noted previously, in the FY14 fourth quarter we opened three new restaurants. They were in Fort Myers, Florida, Laurel, Maryland, and Richmond, Virginia. We also continued our program of returning capital to shareholders. And during the quarter we allocated approximately $29 million towards the purchase of 800,000 shares of our common stock.

Since the authorization of our initial share repurchase program in April of 2014, we've repurchased and retired approximately 2.8 million shares of BJ's stock for approximately $100 million. This leaves us with approximately $50 million remaining under our current authorized share repurchase plan.

With regard to liquidity, we ended the fourth quarter with a little over $30 million of cash and $58 million of funded debt on our line of credit, which is in effect until September 2019. Our line of credit is $450 million and provides us the flexibility to continue our national expansion program while returning capital to shareholders through our share repurchase plan. In regards to CapEx, we spent approximately $90 million this past year, and that excludes tenant improvement allowances and sale-leaseback proceeds.

Before we open the call up to questions, let me spend a couple of minutes providing some commentary on our outlook for 2015. All of this commentary is subject to the risks and uncertainties associated with forward-looking statements, as discussed in our filings with the SEC.

Through the first seven weeks of the quarter, our comp sales are in the mid single-digit range. A good portion of this increase is being driven by increased guest count. As we noted earlier, New Year's Eve moved to Q1 of this year from Q4 last year, and, as a result, the first week of January was very strong, with more recent trends in that mid single-digit range.

While we won't review of the specifics of each restaurant and market, when reviewing our comp sales in California, Texas and Florida, where we have the greatest concentration of comp sales, we continued to do better than the industry in driving guest traffic based on the data we are seeing from Knapp-Track and Blackbox. Also, please remember that when comparing BJ's to some of the industry data, we don't have the benefit of comping against adverse year-ago weather for the majority of our markets and restaurants.

We currently have around 3% of menu pricing in Q1 and are expecting mid-2% range in Q2 of menu pricing. And modeling sales trends for the first quarter, I expect continued pressure on average check until we lap our new menu rollout from last year starting in about a week. As a result, about two-thirds of the quarter will reflect this impact.

Additionally, while quarter-to-date sales trends have been in the mid single-digit range, we will soon begin to lap the higher media spend we did last year as we rolled out our new menu. In fact, beginning March 10 through March 30 we ran television in about 11 markets, including all of California where we have the most restaurants. As Greg Trojan mentioned, we will have some TV in March of this year but it will be very limited compared to last year. Therefore, and based on how comp sales trended during the quarter last year, I am anticipating that comp sales will moderate in the later part of the quarter as we lap this marketing spend.

Also, while the industry has gotten off to a nice start, we believe we need to see how the overall industry performs as it cycles through the weather comparisons and as we begin to normalize against the tax refunds which have come on time in 2015 compared to last year's delay. So while we remain optimistic about the advantages we have created for ourselves through our operating, cost and management disciplines, we remain slightly guarded regarding the consumer until we see clear evidence with clean comparisons that the consumer is back.

Moving past comps, for the first quarter I would expect approximately 2,040 restaurant operating weeks, marking an approximate 7% increase from the 1,908 in last year's Q1. While our long-term increase in annual capacity target of 10% has not changed, as evidenced by the 15 new restaurants we plan to open this year, our annual increase in operating weeks this year will be slightly less due to less carryover weeks from the class of 2014 restaurants.

I would expense our cost of sales to be in the mid-25% range, or pretty consistent with what we saw in Q4. However, we think that our overall commodity basket will only increase in the 1% to 1.5% range, and that's down from our last forecast when we reported in Q3. I do believe as we progress through the year we can move cost of sales back down into the low 25% range.

With regards to labor, we will see higher medical insurance costs as a result of the implementation of the Affordable Care Act. In fact, based on our estimates, Affordable Care Act will impact labor by about 30 to 40 basis points, all else being equal.

Additionally, we continue to expect higher state payroll taxes as many states have increased their payroll taxes to help fund unemployment deficits. The higher unemployment taxes will primarily occur in the first and second quarters of the year, after which time we will have hit many of the state tax caps or limits.

Fortunately, the benefits we are seeing from Project Q, some of which will be more fully implemented in the first half of FY15, should help offset some of these cost pressures. Therefore, with reasonable comp sales, the benefits of Project Q to help offset some of the costs related to ACA and other employment-related costs, our goal, over time, is to move labor on a full-year basis back down into the upper 34% to right about 35% range this year.

As is historical in our business, I expect Q1 of 2015 to be higher than the remaining quarters in the year due to the reset of taxes in Q1, as I just mentioned. Also, specifically for Q1, I would expect incentive compensation at the restaurants to be slightly greater than planned based on sales to date.

Taking all this into consideration, I expect labor in Q1 to be in the mid to upper 35% range. Of course, labor as a percent of sales could vary from my current estimate based on the weekly sales averages in the actual comparable restaurant sales' results.

With regard to occupancy and operating costs for the year, our expense management and margin enhancement initiatives have significantly reduced these expenses, and our goal is to hold the line on these savings while using additional savings to offset some of the normal inflationary pressure we get each year. As such, we are targeting total occupancy and operating costs to be in the low to mid 21% range. Included in this total occupancy and operating cost will be approximately 2.3% of marketing spend, which is consistent with the levels of marketing spend in 2014.

Our G&A expenses for 2015 in absolute dollar terms are currently projected to be approximately $55 million. The mean increase in G&A is primarily in managers and training as the number of new restaurant openings increases from 11 in 2014 to 15 and 2015.

Preopening costs should be in the range of about $7.7 million for the planned opening of 15 new restaurants this year and the opening of two small brewpub locations in Texas. As we have mentioned in the past and disclosed in our filings, changes to the Texas Alcoholic Beverage Commission laws have allowed for the construction of these brewpub operations, which will allow us to more efficiently produce our beer for our Texas restaurants.

These two small brewpubs will begin producing all of our beer in the state of Texas starting in the third quarter. And they will also have just a small tasting room per the requirements of the Texas Alcoholic Beverage Commission. Ultimately, this should lead to lower beer costs in Texas, after we work through the opening expenses and get fully ramped up.

As such, I'm including about $300,000 in pre-opening related to these brewpub locations in my estimate. Overall, the CapEx for this initiative amounts to around $5.5 million, including the land that we purchased in Texas, of which $3 million was expensed in 2014 or capitalized in 2014, with the balance to be recorded in 2015.

From a quarterly perspective we are currently targeting two restaurants to open in the first quarter, which have already opened, and up to six restaurants in the second quarter. Plus we will have opening costs for the two new Texas brewpubs in the second quarter that I just mentioned.

Based on our tax planning initiatives, and also assuming the WATSI credits are reinstated, we are targeting an effective tax rate for 2015 of 28%. This is higher than our 2014 rate because of additional tax credits we received this past year and higher planned pretax income for 2015. However, depending on the timing of credits or changes to actual results, our rates could vary from quarter to quarter.

Reflecting the weighting following the 2014 repurchase activity, I anticipate our diluted shares outstanding will be around 27 million for the year. And, again, we still have $50 million outstanding under our current share repurchase authorization.

CapEx for 2015 is expected to be around $100 million before any tender improvement allowances or sale-leaseback proceeds. We currently expect to fund our ongoing expansion, capital expenditures and share repurchases from cash on hand, our cash flow from operations, proceeds from tenant improvement allowances and sale-leaseback transactions, as well as through our line of credit.

Our unsecured revolving line of credit, as I mentioned, is for $150 million, and its current rate is around 1.5%. So we are presently budgeting about $1 million of interest expense in 2015. However, this could change based on our additional share repurchase and timing of new restaurants or other initiatives.

Before I open the call up to questions, I want to sum up 2014's accomplishments and acknowledge the contributions of our field team and corporate team and their superb execution against our strategies to enhance shareholder value. For those that have followed BJ's, we laid out a three-year plan almost a year ago at our Analyst Day. This plan was predicated on three major initiatives: reignite sales, improve operating margins, and elevate the investment returns from our new restaurants.

I think it's evident that we made tangible progress on every one of those initiatives throughout the year, and our results are reflected in our second half of 2014 financial growth and expectations for further growth this year in 2015. While our pursuit of affordability led us to incur some negative menu mix as relates to top-line sales, our guests have enthusiastically embraced the new menu items, as evidenced by the fact that our guest counts have consistently outpaced the industry at large. This started with our February 2014 new menu and continues to move in the right direction.

Over the past year we also began implementing a wide range of ideas that came from our operators as a result of the Project Q initiative in successfully eliminating some of the complexity in the kitchen, while improving both the quality and consistency of our menu items. As noted earlier, these changes allowed us to leverage labor in the second half of the year and overcome significant minimum-wage increases in California where we have about 40% of our restaurants. We also laid out a plan to eliminate $1,000 a week from our operating occupancy costs, and succeeded in finishing FY14 averaging about $21,000 a week compared to a little over $22,000 a week in FY13.

Finally, beginning in August of this year, we rolled out our new prototype restaurant that cost approximately $1 million less than our prior prototype. This restaurant not only costs less, but requires less staffing, is more efficient and collectively is elevating our returns on invested capital. With our enormous growth runway and expectations for up to 425 BJ's Restaurants over time, this is a very significant accomplishment and one which will pay dividends over the near and long term. Our new restaurant prototype, over time, will also lower depreciation and amortization costs, which, coupled with our prevented restaurant margins and G&A leverage, should set BJ's up for many years of margin expansion.

As communicated previously, our goal is to get our restaurant level cash flow margin into the 19%-plus range. This past year we finished at 17.9% and we are working hard to get that into the low to mid-18% range this fiscal year, putting us on target to get to 19% in 2016, which is the timeframe we identified a year ago. And remember, our restaurant level margins include marketing, while many of our peers do not include marketing in the restaurant level margins but include it in G&A.

The bottom line is, that we set out a very specific plan and we are making measured, visible progress toward achieving the plan. While we are not yet where we want to be, and believe that there is still a lot of work to be done, the fact is we are well on our way. I want to again express Management's appreciation for the innovation and commitment to food quality and guest service and hospitality that our team has delivered every day, while reiterating the commitment to leveraging our operational improvement, balance sheet liquidity, and focus on growth to deliver new long-term value for our shareholders.

That is it with our formal remarks. Operator, let's open it up for questions.

(Operator Instructions)

Brian Bittner with Oppenheimer.

Congratulations, guys. When we go back to February, 2014, you talked about it, you laid out a goal to get to 6% EBIT margins by 2016. Would you say where you stand today, a year later, are you ahead of that goal internally?

And, on top of that, when you think about your comps, we just saw incredible leverage off of the low 2% comp. What type of comp do we need, maybe, going forward, to possibly hit that target earlier than the end of 2016 in an optimistic situation?

Brian, first of all, thank you. In regards to our plan, we still continue to look at the three-year plan that we are going after to achieve.

If you remember that February plan, one of the things that we talked there was getting reasonable comp sales. I think we used 2% in the number there. And I think that is still something that we look at in regards to trying to leverage our business and grow the overall margins up into that 6% operating number and getting the restaurant level margins to 19%.

If you look at the fourth quarter, yes, we are happy with 18.4%. It was on a 1% comp. So, you could probably see if we can get additional comp sales there, there should be additional leverage to come through.

At the same time, we faced maybe some headwinds that weren't fully -- I don't know if I would say contemplated -- but you didn't understand how the market was going to react over time. What I mean by that is, we saw higher food cost inflation, but you know as we put together our three-year plan we expected cost of sales, frankly, to stay closer to 25%. It bumped up to 25.6%.

We've got to work through that this year with some of the other initiatives going on. That's one of those things that will help us get closer to the 19% margin. I think the other things that we're working on will continue to drive the cost side of our business.

And then, as I said, the most important part of that is driving top-line sales. We are still going to stick to the fact that we need reasonable comp sales, probably in that 2%-plus range, to continue the leverage that we are seeing throughout our entire P&L.

Thank you.

David Tarantino with Robert W. Baird.

My congratulations again on great results. My question is about the sales strength you're seeing in the first quarter. Just wondering if you kind of step back and think about all the reasons why sales might be accelerating the way they are?

What are your thoughts on why you've seen such strong comps so far? I think you mentioned, Greg, that you're not seeing the weather benefit. So, is it something you're doing you're doing internally, or do you think maybe the economy is getting better, or is it some combination of those?

This is Greg Trojan. We are seeing some weather benefit. We just don't see it to the same extent given the high percentage of our restaurants in California, in particular. Texas was hit hard last year by ice storms, and Oklahoma, et cetera, and our Ohio restaurants.

Please don't misunderstand us. We are seeing some of that benefit, just not to the same extent, perhaps, of others.

I think the biggest driver on a macro basis, because we're not the only ones out there seeing this momentum, the entire industry is seeing better results early this year, it seems. Fundamentally, the consumer seems to be in a more confident place, overall.

We do think this tax return dynamic is an interesting one, where you look at the data and clearly, the timing and the acceleration of returns versus last year is pretty significantly different. So, we do think that was a benefit to the early parts of the quarter. Obviously between now and April that will even out. But that, we think, has helped.

Gas prices have helped. And we've said all along we didn't see, perhaps, that affecting our business quite as much as other people were forecasting, and the latest retail numbers sort of bear that out. But it certainly hasn't hurt. That's been another help.

So, all those macro factors together, have been a big benefit. Then, we have hammered for quite a long time on focusing on this traffic through value and innovation and the venue and speed and getting better end marketing. So, as is usually the case, it's a combination.

We think our traffic numbers particularly bear out that we are outperforming even the rising tide because of the things that we're doing, particularly menu and through speed, et cetera. But, at the end of the day, we're happy to have a combination of both working in our favor.

Great. That's helpful. Maybe one for Greg Levin.

You gave some fairly detailed assumptions on the cost ratios across the P&L you're making for this year. What does that assume as far as comps? I think maybe you alluded to it on the last question, but where do assume comps settle into after the first quarter?

David, as you know, we don't give specific comp guidance from that standpoint. As I mentioned, while we're seeing mid-single digits, right now, I do expect it to come down a little bit. I think we are still thinking somewhere, hopefully, in that low single digits from that standpoint.

Okay. Great. Thank you very much.

John Glass with Morgan Stanley.

Can you talk a little bit about what your expectation for mix is in 2015? As you lap over that menu rolloff from last year, does mix flatten out, or do you think you still have to see some more value promotions to drive mix down? Then I have a follow-up on advertising, as well.

John, this is Greg Trojan. In general, we are not looking at anything at the level of last year, for sure.

We do have some menu innovations that we think will be great additions to the menu throughout this year, but, they don't represent a change from overall guest check perspective, like we experienced last year. So, in general, I would answer that question as more flat than driving it or negatively impacting it from that perspective.

And your current advertising level as a percentage of sales, do you think that's sustainable or over time? Do you think that goes higher, given that to increase your share of voice you need to do that? Or do you find this to be the right level for the brand for the next couple of years?

I think we're still a young enough concept where we are generally feeling our way to ultimately where that balances is. But, in the near term, 2015, we are thinking about it at about the levels that you've seen us spend at in the last year or so.

Thank you.

Jeffrey Bernstein with Barclays.

Two questions. Just one on the unit growth side. Just wondering, conceptually, one, if you can tell us maybe your percentage of stores in the universe of existing markets.

But is it safe to assume that when you first go into these new markets, the AUVs -- are you saying AUVs would be a little lower because of a lack of brand recognition and the costs higher because just lack of efficiency when you first go into a new market? Or perhaps the opposite, that the AUVs are actually stronger because it's a new brand and it drives some initial excitement.

I'm just wondering, one, what the mix of new and existing in, and then what you see from an AUV and a margin standpoint in a new market? And then I had one follow-up.

Jeff, this is Greg Levin here. A couple of things there.

One is, the majority of our restaurants going forward, you can quantify them, or say, I guess, that they are in new markets. And what I mean by that is, as we've talked about over the last year, we currently aren't building, really, any in California, and very little in Texas, our two biggest markets that are basically 90 of 158 restaurants or so, are those two markets.

While we're still adding some restaurants in Florida, the majority of our restaurants are going to be in the Mid-Atlantic and going up the East Coast. There's going to be a few restaurants in the Ohio Valley. And then also connecting Texas and Florida in the southeast area.

And while we already have some restaurants in those areas, so we don't consider them entirely new markets, we're building out the cluster in those areas versus maybe three or four years ago when it was really very California, Texas and beginning of Florida from a buildout standpoint. So, here's a little change there now.

What that means and what we are seeing out of that is, with the lack of brand awareness, the restaurants coming out of the gate are probably, maybe, a little less than what we've seen in the past from a top-line sales perspective. However, the hard part about that, and I've talked about this before, is the fact that they're just not California restaurants. And what I mean by that, for those that have followed BJ's, we have consistently said that in California our restaurants are going to open up at 170% of volume, and they're going to settle in at 120% to 130% of volume. And, frankly, they have to because of the cost structure in California.

So, when we open a majority of restaurants in California, you tend to see our weekly sales average greater than our comp sales because of the honeymoon out of those newer restaurants. Going forward, we're going to see that weekly sales average probably be a little bit less because of these newer markets in that regards, and then over time start to drive up comp sales. And that's, frankly, what we are seeing there going forward.

In regards to the margins, though, and looking at our new restaurant performance, frankly, the new 7,400-square-foot prototype and the changes we've made to our menu, moving from 180 items down to 137 items, that the processes around Project Q in regards to simplification in the kitchen. We're actually seeing better ramp up from a margin perspective of our restaurants than what we've seen, really, over the last three or four years, including California restaurants where we have mature team members taking those things over. The fact is, smaller restaurants are a little bit easier to run, in that regard.

So, while maybe the sales volume isn't where we've seen them in the past because you don't have California levels, we're seeing better cost of sales efficiency, ramp-up to mature margins on labor faster, better use of operating occupancy costs. And overall very excited about the new markets and the new restaurants, together.

Got it. Then just the one other question.

You mentioned a couple of times on the call your comps and I guess you benchmark, I think you mentioned Knapp-Track, you actually mentioned Blackbox, as well. So, I'm just wondering, who do you define as -- are either one of those just the main competitive set?

And how would you think you'd perform versus those -- everyone's talking about an improving macro and everyone's seeing the early trends. But I didn't know whether you'd think that you would be outpacing that index, or whether, because of your volumes and whatnot, that you would perhaps not see as much of a bounce back in a recovery stage. We heard that from a Cheesecake Factory where they said it's just not as likely that we'd see as much upside as the industry because maybe we didn't lose as much or maybe our volumes are already so high. So, I'm just wondering how you think you'd perform in the improving macro versus the industry.

There's a couple of things there. First of all, we look at both of them. I think both of them are relevant and they give good information, both of them, from how trends are going. And we try to see, if there's obviously differences there, what's going on to analyze our business against them.

One of the most important things that we tend to look at is our comp sales are going to be dominated, really, by three main areas. That is California, Texas and Florida, to some degree. So, what we tend to do is try to look at those different indices -- or, indexes, I guess -- and look at them in those specific markets. And we look at them, really, both on top-line sales and guest traffic.

And right now, because of the decision we've made over the last year, where we are taking a little bit of a menu mix hit, we tend to look at what's going on with guest traffic and can we outperform it. Now, I will tell you everybody sitting in this room, and, frankly, I would venture to guess that's the same thing in every other office out there in restaurant space, that everybody is really damn competitive. Frankly, I want to be beating those indexes. I know Greg Trojan does, and everybody at BJ's does.

So, we look at it and we get very happy that we are beating them from a guest traffic standpoint. Frankly, I'd like to be beating them from a sales standpoint and I think we have an opportunity there.

In regards to our high average unit volume, it always makes it more challenging. But the fact is, that's what we are here to do -- figure out better ways to drive more guests into our restaurant. Whether it's using the mobile app, whether it's looking at things in Project Q to be faster in our kitchens to service more guests, those are all things that we'll continue to look at to drive more guests into our restaurants.

And we've shown that, just to add on to Greg's comment there. No one internally here ever utters the words -- well, we are already doing so much business, we can't grow comp sales. Our traffic numbers, which is really the limiting factor in terms of capacity, have shown that over the last few quarters and last year's trends on beating traffic pretty reliably, pretty significantly versus those indices.

As Greg mentioned, the factor has been on the same-store sales where we've lagged a little bit has been we've taken our guest check and kept it essentially flat versus some pretty significant pricing out there, as you guys know. So, John asked the question earlier. We don't see that same kind of guest check headwind in this coming year as we saw last year.

We should be able to leverage those traffic gains into the same kind of overall same-store sale gains even better or commensurate with what we're seeing in traffic. That's the medium- to long-term goal.

Understood. Thank you very much.

Jeff Farmer with Wells Fargo.

Greg Levin -- I'm trying to think about how I want to position this -- looking back to 2014, there are several periods where you called out some same-store sales choppiness as you shifted from both markets and time periods. I think you just called out potentially mid-March as a potential mismatch rolling over 2014 and the new menu introduction. Are there any other periods that we should be thinking about as we model comps Q2, Q3, Q4 moving forward?

No, I don't think so. Jeff, I don't have the full calendar in front of me but Easter still stays in Q2. I know it moves around from a week standpoint.

Spring breaks are when the colleges are, from that standpoint. New Year's Eve for Q4 will be again in 2016 from this standpoint. So, I think overall everything lines up the same.

In regards to really thinking about it from a media or marketing spend, March was our heaviest marketing of last year, really, with the launch of that new menu. We will always have maybe little overlaps here with some FSI or digital or other things we do but not to the extent really of March.

All right, that's helpful. And then you gave us a lot of color but bottom line was that, just looking at all four quarters of 2014, you pretty handily beat your guidance on both the labor occupancy and operating lines. I'm just curious if that's a function of delivering the Project Q initiatives or seeing the results from the Project Q initiatives more quickly than you had expected, or just a greater opportunity than you expected with Project Q?

I always want to clarify this point because we get this a lot. Project Q is really around labor, top-line sales and menu innovation and so on. And the operating occupancy is a separate project, per se.

So, when I look between those two areas, I think the Project Q changes that we've implemented really started to hit more towards the second half of this year. And some is being masked a little bit by California minimum wage and some of it, unfortunately, we get masked a little bit here by the Affordable Care Act in 2015. But not having Project Q out there would have put a lot more stress, I think, on the labor line in our restaurants.

In regards to the operating and occupancy cost, when I look at that and look at it from a trend standpoint, Q1 and Q2 both were around $21,500 per operating week. Obviously Q2 is our highest weekly sales average. In Q3 and Q4 we've been able to drop that down into the mid $20,500 per week. This excludes marketing.

So, I don't necessarily know if it came on quicker than what we were expecting. I think one of the things that people miss a little bit, Jeff, is, unfortunately, we had to go through 2013 to get the improvement in 2014. And what I mean by this, is we spent a lot of time in 2013 planning for these things. That's how they start to roll out into 2014.

For example, we brought in new plateware, as we've talked about, and new silverware. And we brought that in from overseas at a lower price. It took six months to get that to roll out so we were working on that in 2013 to get that to roll out in 2014.

So, I'm not sure it moved any quicker than what we expected. I think it's moving online. I think, really, the fact of the matter is that in the last two quarters, Q3 and Q4, we got some positive comps sales and that helped leverage the overall entire P&L.

Okay. Thank you, Greg.

Will Slabaugh with Stephens Inc.

I hate to beat a dead horse on the margin here, but as you hit 18.4% this quarter, and then thinking about that longer-term 19% level by 2016, and realizing there's some seasonality here. But wonder as we approach next year, in your mind, what the potential is for us to be able to go ahead and hit that earlier, and if you have a longer-term picture beyond that in mind at this point?

I guess the best way to answer that question is -- and we've always said this -- your 19% margin, that's on an annual basis. So, will there be a quarter or two where we are about the 19%? I think there's an opportunity there. In Q2 of this year, despite negative 1.7% negative comps, we had restaurant EBITDA 18.6%.

So, I could see us with solid comps getting above that from certain quarters. But I want to finish the year at 19% and then continue to drive it from there.

Once we reach 19%, it's not like we've got to the top of the mountain and we're going to roll out our picnic basket. We're going to continue to work and drive this business and become more efficient, and leverage our business as best we can.

Fair enough. One quick follow-up, if I could.

The longer-term unit growth picture, you've talked about that square footage growth in the 10% range for a while now. And I realize the math works out to you being only slightly below that for 1Q for 2015. But considering the improvements that you are seeing now, does that give you more confidence to maybe take that percentage growth rate up a little bit? Or, are you going to be comfortable longer term in that low double-digit range?

I will answer that. The limiting factor, ultimately, for us -- and there's some variability when we say low double digits -- but we're not going to be a 20% restaurant growth company unless we figure out how to mass produce people. The experienced managers and the folks that it takes to run our restaurants, where everybody thinks their concept in retail and restaurants is different. But the volumes that we run in our restaurant, we just can't hire folks in other concepts and make them a general manager at BJ's. So, that tends to be a limiting factor.

We do think we have the capability to open more restaurants on an absolute number and get somewhat more aggressive there. But, it's not going to be a quantum leap because of the people factor that it takes to do these the right way.

Got it. Thank you.

Andy Barish with Jefferies.

I'm wondering on marketing for 2015 if there are significant shifts following a couple of years of looking at TV and using a lot of print. And then, secondly, can you give us an update on the BJ's app and how that's performed versus your expectations?

Andy, I'd answer the media mix question in a way where that is something that we continue to test and evolve. We have a better idea of where, and are getting more efficient, as I mentioned in my remarks, around TV. And we are seeing even better results in some of our key areas that we've been running at. We see that being a continuing part of our mix.

And we're also seeing some encouraging results on the things we're doing on the digital side that range from traffic driving in the world of search but also in social, et cetera, all the usual areas you hear people talking about. That's obviously quite measurable and we're seeing some underlying dynamics there that are quite encouraging.

So, in general, much like you're hearing other people talk about, is our shift towards digital spend. I wouldn't call it, again, world changing, but we're definitely weighting more resources on the digital side overall.

And then, last but not least, we are working on and having success in mining the database through our loyalty program. And doing that in a more segmented, focused way where we're leaning our most active discounting to folks that we haven't seen in a while. That's driving some real traffic for us, as well.

So, that's in general how we're thinking about it. We're still testing all kinds of media outside of that, different forms within those umbrellas on a market basis. But, in general, that's how we're thinking about the trends.

And, Andy, in regards to the app, it's performing exactly where we thought it was going to be. We said we're early, too, we're not expecting somebody where your usage, meaning your amount of occasions and casual dining, is as great as, let's call it, QSR or in the coffee, from that standpoint. We continue to get great feedback from the guests that use it and love it, especially for the table side of things for takeout, for putting their name on the waitlist.

And mobile pay is phenomenal. If any of you guys have ever used mobile pay -- and I know we've got our new restaurant in Nanuet for those on the East Coast that can get out there -- mobile pay is an unbelievable changer in regards to casual dining. I do think over time it will catch on. It's different from that standpoint.

The other thing that we would say is, we're actually happy that we're seeing other casual dining concepts go into this area of the business because it provides a little bit wider adoption for consumers to think about it. It's still a small part of our business but something that we continue to like having out there and like having the first-mover advantage for it.

Joshua Long with Piper Jaffray.

I was curious if, as you've executed against Project Q and then continue to roll out the new smaller prototype, which is maybe easier or less complex on a relative basis to your older format, if that has changed your thinking in terms of what complexity means in terms of the BJ's menu. So, you've gone from 180 down to now 137 menu items.

As you've gotten more comfortable, and you've cut out a lot of the more complex things, does that maybe create more opportunity for reductions? Or maybe even go the other way with allowing some of these menu innovations to be net additions to the menu? Just trying to think about where the ultimate menu might shake out as you've gotten better at executing on complexity.

What I'd say, overall, Joshua, is we don't have a hard-and-fast number in mind here. But having said that, we don't feel -- and I don't believe -- that we are done in terms of getting our menu down a bit further. We've been quite cautious in our core legacy markets, particularly in California, where people are attached to the item. We don't have things on our menu today that aren't selling, we eliminated those long ago.

Just as a frame of reference, our new restaurants are opening with a menu that's closer in the low 120s. So, folks that aren't used to BJ's find that to be plenty of diversity and lots of variety on our menu. So, that may give you a sense of the range that we think is reasonable, somewhere in that range and that ballpark.

Then, in terms of new items, one of the reasons we're doing this is so we make space and effective capacity in our kitchen so that we can introduce new items. But, again, not a hard-and-fast rule. But for items that we are contemplating as permanent members of the menu versus LTOs, in general, we have a conversation around -- we're going to take at least the same number of items off the menu, if not a few more than we had. So that over time we are not back to where we were a year and half ago where we were basically maxed out.

So, we're trying to maintain quite a good discipline in regards to that. That doesn't mean menu to menu it's going to exactly work that way, but philosophically maintaining that level of discipline so that we can execute in the kitchen is important.

Understood. And thinking more about the off-premise sales opportunity, it's something we've talked about in the past, that we spend a lot of time talking about things going on in the restaurant in terms of menu innovations and then just easing the overall guest experience.

But was curious if you could provide an update around off-premise sales, whether that's catering or to go. And is there an opportunity to leverage some of these tech tools that you have invested in over time to drive that piece of the business, as well?

Josh, this is Greg Levin. First of all, as I mentioned, I think, earlier, the mobile app is great for off-premise and takeout, and we get a lot of guests that use it for that. The ability, as you can imagine, to place your order, pay for it, and then just pick it up, is tremendous. And that's going to help grow that channel, there.

We will continue to work off-premise, usually through local restaurant marketing events and other things. For last year, it wasn't one of the highest priorities for us, meaning we didn't necessarily have specific initiatives against it, but we continue to evaluate our catering offering from an off-premise standpoint. We're looking at, is there other ways on the mobile app to do things around party packs and other things.

So, it's something that we will continue to evaluate, especially with our deep-dish pizza. We think it can be more, so we will continue to work at. But it wasn't, at least for 2014, one of our major initiatives versus some of the other things we were working on.

Thank you.

Sharon Zackfia, William Blair.

You talked a little bit about the new prototype and how it seemed like it might even be more labor efficient. I was just wondering if you could give us any insight on what the restaurant level margin differential might be between the new prototype and the former format that you used?

Sharon, I can't. It's a great question and the reason I can't, is first of all, the restaurants are less than six months old. So, they haven't necessarily reached their full maturity from that standpoint.

The bigger thing that I've seen, and I've talked about this -- and forgive me if I rehash stuff that I talked about in the past -- and that is, I always describe our margins like a football game. That is, the first six months or so, you move the ball down the field, or you get down to about the 20-yard line, and it takes the remaining six months to a year to get over from the 20-yard line into the end zone. I would tell you, right now, based on our newer restaurants we marched the ball down the field to the 20-yard line faster than where we have in the past.

So, if it took six months, maybe it's taken five or four months right now to get down there -- all through a combination of many things, by the way. It's not just the new prototype. It's the fact, as Greg Trojan just mentioned, that our newer restaurants are opening up with 137 menu items, or less in certain locations. And then restaurants themselves being a little bit smaller makes it easy.

So, it's a combination of that and other things around Project Q. But until we get probably a year into this, meaning until next August, it's hard to see where they are exactly going to settle. But I would tell you, just the fact that getting to mature margins quicker, that in and of itself is worth a whole lot in regards to return on invested capital.

Okay. Thank you.

Nick Setyan with Wedbush Securities.

Congrats again on the great quarter. My question is more trying to clarify the brewpub locations.

Are those included in the 15 units for next year? I think there was a comment that they just have a small tasting room. Is that in addition to a restaurant, Greg, or is that -- maybe we should think about average weekly sales a little bit differently?

Nick, that's a great question. Those will just have a small tasting room. They will not be in our sales, from that standpoint. They are not counted in the 15 restaurants.

We are building basically two brewpubs that will have a small tasting room. Whatever we sell in that tasting room will basically be a credit against beer costs, so to speak.

Got it. Okay. Thank you so much.

Our final question is from Paul Westra with Stifel.

Just a couple follow-up questions. One is, on your commodity cost outlook, you've guided for the 2015 year to be a 1.5% versus your prior guidance of 2.5%. Maybe a little color where that savings is coming from and how much you contracted that we're into calendar 2015. And I have one more follow-up.

A couple of things in regards to that. Specifically about 60% of our commodities are contracted for the full year.

Where we've seen the comedown is two areas. One is chicken has come down a little bit from where we thought it was going to be, but, frankly, chicken is going to be more expensive for us, as well as continued beef in that regard.

Where we're expecting to get it to come down a little bit, really, Paul, is the dairy cost and cheese. We've locked in, I say, about 50% of our cheese for next year. So, that's the big area that's coming down as well as a couple of other areas going into next year. And seafood will be lower, as well. So, dairy and seafood come down, pretty much contracted, and then chicken and beef are up a little bit.

Great. Then the last question is, I think you said mid to low 18% range total margins you hit this calendar year. You just threw out an 18.4%.

Seasonally fourth quarter is usually one of your weakest, if not the weakest quarter. So, why not, perhaps a little bit more than that? Or, is maybe there some conservatism baked in that?

First of all, I'm always going to take the conservative route. But as I looked through just this last year, Q1 was at 17%. Q2 bumped up at 18.6%. Q3 was at 17.6%, and then we just hit an 18.4% in Q4. As you look through it, it's still up and down based on weekly sales averages through last year.

The other thing is, inflationary environment as we go into next year will get offset a little bit by Project Q and some of the other cost containment, but they are going to come through a little bit. For instance, the throughput that we just saw here in Q4, all of a sudden, come Q1 of next year, we are going to get that 30 basis points to 40 basis point increase from the Affordable Care Act. While I think we have abilities to offset it, we're not going to be able to get the entire Project Q savings dollar for dollar flowing through because some of it will be offset from the ACA.

So, that's why when I tend to look at how we are stair-stepping our business, I tend to think that we'll end up 2014 in that 18% range that I talked about on an annual basis, setting ourselves up for 2016 to get to the 19%-plus range.

Okay. Maybe one last question. Pricing, you said 3% here in the first quarter, then 2.5% in the second. Should we assume 2.5% the remainder of the year?

I don't know exactly know where the remainder of the year is going to be. But if you remember last year at this time, Paul, we rolled out our new menu of 1.4%. And that, for lack of a better term, rolled out March 1, let's call it, with the new menu.

We're sitting at about 3% right now, or so. And then the 1.4% rolls off, so it puts you down into the middle, whatever, 1.5% range, I guess. And then we're going to have about 1% or so come on right at the same time. That's how we get to the mid-2.5% range. And then as we get closer to the summer, we'll give you an idea of what we're seeing in regards to maybe additional pricing.

Great. Thanks. Congrats on a great quarter.

Ladies and gentlemen, that concludes today's question-and-answer session and today's presentation. Thank you for your participation and have a good night.

Thank you, everyone