BJ's Restaurants Inc (BJRI) 2015 Q1 法說會逐字稿

Good day and welcome to the BJ's Restaurant Incorporated first-quarter 2015 results conference call. Today's conference is being recorded. At this time I would like to turn the conference over to Mr. Greg Trojan, President and Chief Executive Officer.

Thank you, Operator.

Good afternoon, everyone, and welcome to BJ's Restaurant's FY15 first quarter investor conference call and webcast. I'm Greg Trojan, BJ's Chief Executive Officer. And joining me on the call today as Greg Levin, our Chief Financial Officer. We also have Greg Lynds, our Chief Development Officer and Kevin Mayer, our Chief Marketing Officer on hand for Q&A.

After the market close today we released our financial results for the first quarter of FY15, which ended on Tuesday, March 31, 2015. You can view the full text of our earnings release on our website at www.bjsrestaurants.com.

Our agenda today will start with Rana Schirmer, our Director of SEC Reporting, 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 the remainder of FY15. After that, we will open up to questions. Rana, please go ahead.

Thanks, 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 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 guaranteed future performance and that undue reliance should not be placed on such statements. Our forward-looking statements speak only as of today's date, April 23, 2015. We undertake no obligation to publicly update or revise any forward-looking statement, or to make any other forward-looking statements, whether as a result of new information, future events or otherwise, unless required to do so by the securities law.

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, Rana. Our record Q1 results again demonstrate the progress we are making against our strategic plan in terms of driving top-line sales while continuing to improve our operating margins. Comp sales of 3.2% represented our best comp sales performance since Q2 of FY12 and were once again driven by a positive traffic gain of 1.5%, which outpaced the industry by approximately 200 basis points.

We also achieved the Q1 comparable restaurant sales and traffic growth despite lacking the significant value menu introductions of last year, which were supported by higher than normal media spend. Lapping our value menu introductions of last year contributed to continued guest check growth, which approximated 1.7% for the quarter, building on the similar growth we saw in Q4 of 2014.

In February, we introduced our thin crust, Tavern-Cut pizza category, which replaced our hand-tossed pizza line. The new Tavern-Cut pizza is simpler and faster to prepare than the hand-tossed product it replaced and is being very well received by our guests.

We also introduced three new, limited time only flavors for our renowned deep dish pizza category: Spicy Hawaiian Chicken, Cajun Andouille Sausage, and the Prime Veggie. These new products, combined with marketing support, drove a healthy increase in our pizza mix in the first quarter. This led to some guest check headwind as we carried around 3% pure menu pricing in the quarter, while our average check was up by about 1.7%, that is consistent with our value strategy. We continue to improve the everyday affordability of BJ's with, as best we can tell, average check growing about 2/3 the pace of the casual dining industry.

Besides the introduction and promotion of our new Tavern-Cut pizza, our restaurant teams continued to do an excellent job identifying efficiencies in almost every aspect of our operating model. Specifically, Project Q continues to refine our back of house kitchen processes as we are able to improve overall labor by70 basis points in the first quarter compared to last year.

More recently, we began rolling out some additional changes to our kitchen processes that we believe will lower kitchen waste and, therefore, help improve our theoretical variance and thus cost of sales.

Effort from Project Q, but as important is our goal to reduce operating and occupancy costs. While Greg Levin will go into more detail, operating in occupancy cost as a percent of sales for the first quarter were 20.7% compared to 21.9% last year. This 120 basis point improvement is a result of cost-containment initiatives and leverage from our 3.2% increase in comp restaurant sales.

During the quarter we opened two new restaurants: Nanuet, New York and Slidell, Louisiana. And just last week we opened our third new restaurant this year in Albuquerque, New Mexico. While we continue to refine our new restaurant prototype, overall we are very pleased with the look, feel and performance of our new restaurants. As we've mentioned before, our new restaurants cost about $1 million less than the prior prototype and we believe will generate an even better return on invested capital.

In fact, one of the things we monitor is how quickly a restaurant achieves mature margins. We are seeing our new restaurants open with sales volumes on par with restaurants with restaurants built using the prior prototype in those same regions. However, our new restaurants are achieving mature margins faster, as we are seeing less food waste and re-fires and improved labor productivity.

Some of this is because of the smaller restaurant footprint and some is due to the work on the menu size and initiatives around Project Q. Our new prototype is truly a case of where spending less is delivering a better product, and the importance of this is significant given we are only a little over 1/3 our way to our stated potential for 425 domestic BJ's Restaurants.

Although we still have opportunities to pursue, I am pleased that offering improved value and furthering our menu innovation seems to be contributing drivers to better top-line momentum and traffic. Our ongoing complexity reduction work is more than offsetting the structural labor and other increases in our cost structure to improve margin performance.

Our new unit pipeline is in excellent shape, as we are on track successfully launch 15 new BJ's this year, the majority of which further diversify our base outside of California and Texas markets and leverage our newer hubs in Florida and the mid-Atlantic, while costing us on average $1 million less than a prior prototype.

Greg Levin will provide more detailed insight into our thoughts on the remainder of the year. But I will conclude my remarks with a few high-level thoughts regarding 2015. First, we are pleased with our strong start of the year. I believe the combination of our ability to grow average check, coming off our price investments of a year ago and our ongoing progress in driving efficiencies will allow us to continue to make progress on our quest to improve restaurant level margins as we move through 2015 and beyond. The question as always is what kind of top-line momentum will there be to drive those improvements?

In line with the industry, sales came down from the very strong comps of the first 5 to 6 weeks of the year. We feel like January and early February mid- single digit comps were a function of favorable tax return timing, weather, and to a lesser extent, lower gas prices.

More recently we saw some weather issues in March, and the shift of Easter and spring break in April, which together have made it difficult to discern a clear trend. Our early April comp sales are slightly positive, but we believe the calendar shifts are driving a good part of the slowdown as our post-Easter, flip-flop momentum has improved.

In the second half of the current quarter, we will leverage our strength in the better-for-you items category with new additions to our very popular lineup. We will also continue our success in the burger category with some exciting new additions there as well. Also, besides adding new and exciting items, our next national menu launch, at the end of May, will further consolidate the number of menu items down to approximately 136 items from about 150 items in the current menu and 184 items when we started this Project Q process. As a result, we are methodically pruning our menu to keep it current and fresh while providing our guests with some strong new items to sample and enjoy, all the while making it possible for kitchen teams to deliver more consistent fabulous food quality.

As you can see, we are sticking to the plan we laid out and began implementing almost two years ago. We believe that focusing on fundamental value in terms of pricing, food quality and innovation, along with our efforts to aggressively manage our cost structure and drive further investment in new restaurant growth, is serving us well and will drive value gains for our shareholders. As such, given the continued choppiness of the retail sales environment, our focus on our efficiency and cost containment programs will continue to be a meaningful part of our earnings growth this year.

Greg will now take you through more of the specifics regarding Q1 and talk a bit more about our 2015 outlook. Greg.

Great. Thanks, Greg.

Revenues for the 2015 first quarter increased approximately 9.4% year-over-year to $225.1 million, while our net income and diluted net income per share increased to $9.6 million and $0.36, respectively, both of which are record first-quarter levels.

As reflected in our earnings per share outperformance in Q1, and as Greg Trojan noted, we continue make solid progress on our initiatives to create a more efficient organization while leveraging our industry leading guest traffic levels, long-term expansion program and driving modest comp sales gains. Our efforts to create a more efficient organization also resulted in restaurant level margins of 18.9% compared to 17.1% last year, a 180 basis point increase over the prior year.

In addition, our emphasis on improving return on invested capital resulted in continued leverage in G&A, as well as in depreciation and amortization, leading to income from operations of $13.1 million, or 5.8% of revenue compared to 2.8% last year. The 9.4% increase in first-quarter revenues reflects an approximate 7.1% increase in total operating weeks and a 2.1% increase in our average weekly sales.

Our comparable restaurant sales increased 3.2% during the quarter compared with a decrease of 2.9% in last year's first quarter. While we do not report monthly comparable restaurant sales, as Greg Trojan mentioned, our trends were very similar to what we have seen reported by our peers and what has been publicly reported by Knapp-Track and Black Box. That is, January came out of the gate very strong for us and the industry before comparable restaurant sales slowed in February and March. Without getting into too much detail, I would say that all of January, February, and March were all positive for us.

The 3.2% increase in comparable restaurant sales for the first quarter reflects a 1.5% increase in traffic and a higher average check of approximately 1.7%. In the first quarter, as we mentioned, we had about 3% in menu pricing. However, our average check only increased by approximately 1.7%. And that's due to our investment both in the value in 2014, and as Greg Trojan mentioned, some of the menu mix shift toward pizza in the first quarter.

Cost of sales of 25% was about 30 to 50 basis points lower than our expectations and reflects a greater than expected benefit from our menu mix combined with lower anticipated commodity cost pressures.

Labor during the first quarter was 35.4%, a reduction of 70 basis points from last year's first quarter and this decrease is a result of improved hourly productivity, as Greg mentioned, and that's largely due to our Project Q initiative along with the leverage from our 3.2% increase in comparable restaurant sales. And that was slightly offset by higher benefit costs for hourly medical insurance from the Affordable Care Act. More importantly, this leverage occurred despite the increase in our home state's minimum wage increase in the back half of FY14.

Our operating occupancy costs were 20.7% of sales for the first quarter, a decrease of 120 basis points from last year. Included in operating occupancy cost is approximately $4.8 million of marketing spend, which equates to 2.1% of sales. By comparison, marketing spend in last year's first quarter was $5.2 million or 2.5% of sales.

Excluding marketing, our weekly operating occupancy costs in the first quarter averaged approximately $20,500 per week and that's compared to $20,900 per week for the same quarter last year. This decline of about 2% puts us in line with our averages over the last couple of quarters.

More importantly, at our February 2014 Analyst Day, we laid out a plan to reduce operating and occupancy costs, excluding marketing, by at least $1,000 a week. Our goal was to pick up about 100 basis points in this line. To give you some context, we finished FY13 averaging $22,400 per week; again that is excluding marketing. In FY14, we averaged about $20,800. And as I just mentioned, we finished Q1 2015, this first quarter, at $20,500.

As such, our overall operating and occupancy costs have gone from 22.4% of sales, and that was in 2013, to 20.7% in the most recent quarter. This is mostly for accommodation of the cost savings initiatives we have implemented and more recently the leverage from positive comparable restaurant sales.

Our G&A was $13.5 million for the first quarter, representing 6% of sales and that was in line with our expectations. Our depreciation and amortization was approximately $14.4 million, or 6.4% of sales, and averaged a little over $7,000 per restaurant week, which is in line with our most recent depreciation and amortization trends. More importantly, depreciation and amortization per restaurant operating week, up $7,000, was down slightly compared with last year's first quarter and highlights the progress against our goal to increase return on invested capital by working the numerator through margin expansion by more efficiently deploying capital.

Pre-opening was $1.2 million, which primarily represents the cost for the two restaurants we opened during the quarter, plus opening costs for restaurants that will be opening here in the second and third quarters.

Our tax rate was 27.1% for the quarter, slightly below are targeted rate of about 28% for the year and that was due to some additional WOTC tax credits.

In terms of capital allocation, we continue to use our strong cash flow from operations to execute on our national expansion plans, while opportunistically repurchasing shares.

Total capital expenditure for the first quarter was approximately $16 million and we still anticipate our gross capital expenditures for FY15 to be approximately $100 million and that's covering the construction of at least 15 new restaurants, as well as maintenance CapEx and other sales building initiatives. Also included in the gross cost is approximately $2 million for the construction of our new Temple Brewery brew pub locations, which by July 1 will be supplying all of our Texas locations with BJ's proprietary beer.

We also continued our program of returning capital to shareholders, allocating approximately $6.8 million toward the purchase of 133,000 shares of our common stock in the first quarter. Since the authorization of our initial share repurchase program in April, 2014, we have repurchased and retired approximately 3 million shares of BJ's stock for approximately $107 million. This leaves us with approximately $43 million remaining under our current authorized share repurchase plan.

With regard to liquidity, we ended the first quarter with approximately $26 million of cash and $38.6 million of funded debt on our line of credit, which is in effect until September 2019. Our line of credit is for $150 million and provides us the flexibility to continue our national expansion program while returning capital to shareholders through our share repurchase plan.

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

As Greg Trojan mentioned, April started off a little soft. April is always the toughest month to get a read on the business due to the shift of the Easter holiday and related spring breaks. In looking at our trends, we got a little boost the last week of March from an earlier spring break-Easter holiday and then, as we lapsed 2014's mid-April's spring break timeframe, we experienced softer comparable sales. Overall, as Greg Trojan mentioned, comp sales in Q2 to date are slightly positive and in the past few days, we've seen sales normalize in the 1% to 2% range as we move further away from spring break and Easter calendar.

We currently have approximately upper 2% of menu pricing in Q2, and I would expect about the same amount of pricing in Q3. However, based on the latest trends, we continue to see only about 1.5% of absolute guest check increase based on the menu items guests are ordering. While overall we remain optimistic about the advantages we've created for ourselves through our operating, cost and management disciplines, we remain slightly regarding the consumer until we see clear evidence when clean comparisons that the consumer is back and that early April softness is really timing at the Easter and spring break holidays.

Additionally, this year, we'll be lapping the World Cup Soccer Tournament, and while we are not a sports bar that relies on the external sporting calendar for our business, our restaurants with their large televisions and bar area do provide great sports viewing for our guests. In fact, last June our guest traffic was positive as we had a very successful graduation and Father's Day season, along with the benefit from the World Cup. Therefore, from a modeling perspective I would continue to suggest conservatism in building sales forecasts. While this week is looking better, and I believe more normalized as we get further from Easter and spring break, it is still somewhat early to discern a distinct trend in comparable restaurant sales.

Moving past comps for the second quarter, I would expect approximately 2,075 restaurant operating weeks. That's going to be marking an approximate 6.5% increase from the 1,948 operating weeks in last year's Q2.

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 carry-over weeks from the class of 2014 restaurants.

I would expect our cost of sales to be around 25%, as of today we have 60% of our commodities locked for the year. And we expect the overall commodity baskets will increase somewhere from a 0.5% to 1% range. I would expect labor to be in the upper 34% range in the second quarter as benefits from Project Q help offset some of the costs related to the Affordable Care Act, California minimum-wage and other employer-related costs.

Additionally, Q2 is seasonally our highest sales average of the year and, therefore, with a high weekly sales average we should be able to achieve greater leverage in labor this quarter as compared to the rest of the year. However, we will still have some work to achieve our overall goal of labor being in the upper 34% range on a full-year basis, assuming reasonable comps. As such, we continue to work through our labor productivity initiatives, which we believe over time will help us achieve our target.

We are targeting total occupancy and operating costs to be around 21% or so in the second quarter and included in this total will be approximately 2.2% of marketing spend, which is consistent with the levels of marketing spend in the second quarter of FY14. Our G&A expense for the second quarter should be in the $13.7 million to $14 million range, as we still expect total G&A for FY15 in absolute dollar terms to be approximately $55 million.

Pre-opening costs should range in the $2.5 million to $2.7 million, and that's for the second quarter and that's based on five restaurant openings plus some pre-opening costs for the brewery brew pub locations in Texas. As we reviewed previously and as disclosed in our filings, changes to the Texas Alcoholic Beverage Commission laws have allowed us for the construction of these brew pub locations, which will allow us to more efficiently produce our beer for our Texas restaurants. These two small Texas brew pubs will begin producing all of our beer starting in the third quarter and this should ultimately lead to lower beer costs once we work through the opening expenses and get fully ramped up. As such we are estimating about $300,000 in pre-opening related to these brew pubs in Q2 and Q3.

I'm expecting our tax rate in the second quarter to be in the 28% range as I'm expecting a little bit less WOTC tax credits this quarter than what we realized in Q1. As such I'm still expecting our full-year tax rate to be around 28% for FY15. However, this does assume that the WOTC credits for 2015 are reinstated. Currently the WOTC credits right now that we are realizing are related to FY14 and we only recognize those WOTC credits as we apply -- upon confirmation from the government.

I anticipate our diluted shares outstanding will be around 27 million for the year, and again, we still have $43 million available under our current share repurchase authorization.

Before I open the call up to questions I do want to reiterate our accomplishments to date. For those that have followed BJ's, we laid out a three-year plan at our Analyst Day in February 2014. That plan was predicated on three major initiatives: reignite sales, improve operating margins and elevate the investment returns for our new restaurants. With another quarter of reported strong results, I think it's evident we continue to make tangible progress on every one of those initiatives.

While our pursuit of affordability led us to incur some negative menu mix as it relates to top-line sales, our guests are enthusiastically embracing the new menu items as evidenced by the fact that our guest counts have consistently out-paced the industry. We are also 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 last year and these factors continue to provide us the operating leverage this year. We also laid out a plan to eliminate $1,000 a week from our operating occupancy costs and we succeeded in achieving that target. And we believe there are additional opportunities for us to get after in this area of our business.

Finally, and probably one of the most exciting areas for a company like BJ's that has so much growth ahead of us, is that we've rolled out a new prototype restaurant that costs approximately $1 million less than our prior prototype. As we had mentioned, 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 in expectations for up to 425-plus BJ's restaurants over time, this is a very significant accomplishment and one which will pay dividends over the near, medium, and long term. Our new restaurant prototype is also lowering our depreciation and amortization costs, which coupled with our investment in restaurant margins and G&A leverage should set BJ's up for many years of margin expansion.

The bottom line is we set out a very specific plan and we are making measured visible progress toward achieving this plan. While we are not yet where we want to be, and believe there is still much work to be done, the fact is we are well on our way. With that, Operator, that is our formal remarks and we will open it up for questions.

Thank you.

(Operator Instructions)

We will go first to Brian Bittner with Oppenheimer.

Hi. Great. Thanks. This is Mike Tamison for Brian.

You guys talked about, I think last quarter, low to mid-18% restaurant margins for the full year. I was just wondering is there was any sort of update to that? It just seems like with what happened in the first quarter and so far the guidance for the second quarter that could prove conservative.

So is there anything I'm missing there? Or can you walk us to those dynamics? Thank you.

Mike, I don't think there's any change in the way we are looking at our business. That continues to be predicated on comparable restaurant sales. I would tend to tell you that Q2, and for people that have obviously followed us, Q2 is our strongest quarter.

So I would expect our restaurant level margins in Q2 to reach into the 19% range just in all the things we've worked in that regards. But as we go into Q3 and Q4, not really knowing where top-line sales are going to be, we're still taking the view that this year margins will still be in that kind of mid to upper 18% range with our three-year target in the 19% range.

Again depending on where comp sales go that could come sooner or it could be right online with our current estimate and current target.

Great thanks. Just one more. It's sort of related regarding Project Q, other cost initiatives and your overall efficiency initiatives.

What inning would you say that you're in with those? If you can just kind of update is there. Thanks.

We don't think of it as a start and stop. You know it's what I think is -- been important and impressive from our team is, you now, it's becoming a constant way of doing business. And look the cost pressures on a business like ours are not going to subside. There's going to be more labor pressure, you know, more utility costs, and our anticipation and mindset is we have got to always be out there looking for ways to get better.

And we have a major advantage, and that is we are still a young company we're building a lot of scale to take advantage to drive those costs down. So I hesitate to put an inning on it because we view it as an ongoing, significant weapon that we need to have if we're going to still maintain -- continue to maintain value and keep our pricing at a reasonable level.

Great, thanks guys.

We will move next to John Glass with Morgan Stanley.

Hi, it's Courtney on for John. Just couple of questions about your comp trends.

I think you mentioned that they were positive in January, February, and March. Just curious on what the traffic trends were sequentially? And then also what your (inaudible) rate was in April for that?

Without getting into too much specific there. Traffic in March bumped a little bit negative, more so due to the first couple weeks of March were, and I don't have it -- I have to look at it specifically, but I think the first couple of weeks of March without weather impacted us pretty hard.

One thing you have to think about with BJ's is to some degree were dominated by two states, California and Texas. And that North Texas area in the Dallas and up into Oklahoma hit us pretty hard for about two weeks in regards to comp sales.

I think as we came out of that we started seeing a little bit better traffic trends coming through. But really got hit hard for those two weeks in that standpoint.

Frankly, as I said this on the call that you could probably look at my transcripts in the past, Courtney. March and April with the way Easter flips around makes it really challenging.

While a lot of schools continue to keep their spring breaks where they are, you see a lot of families take vacations that maybe have younger kids, not in schools based on when Easter falls. So we got a little bit of a benefit in the last week of March with Easter falling a little bit earlier this year and that brought guest traffic back up. Not enough to make up for some of the weather hits in the middle of March.

And then this April, getting into it as I mentioned, again a little bit of a flip flop there. And as we've seen ourselves now get over Easter of last year, which is I think around April 20 or April 19, we are starting to see more normalized trends in that 1% to 2% range.

And as I mentioned on the call, if you think about, kind of 1.5% effective average check, it tells you that guest traffic is kind of flattish right now. I would expect it to probably go up from there.

Okay, got you And then just on your new prototype.

I think you mentioned that your achieving mature restaurant margins faster. How much faster are you getting there? And where do you see the ultimate target margin for those stores relative to your larger prototype?

A couple of things here on that one, Courtney. First of all, our first new restaurant in the new prototype opened in August of last year.

And we've always talked about the fact that restaurants were achieving mature margins somewhere -- I shouldn't say achieved mature margins and I use this football term a lot. They move the football down the field to about the 20-yard line in the first six months. And then it takes them another six months, another full six months, to get the football over the end zone. So it kind of takes a year plus to really hit the type of mature margins that we like to see.

So one is we don't have a restaurant that's been open for a full year. But I would tell you that generally we are seeing anywhere from 100 basis points to 200 basis points improvement in the ramp-up of our newer restaurants ahead of schedule.

So maybe about instead of six months it takes them to move the football down in 20-yard line we're seeing it in 3 to 4 months and we just don't know where they're going to settle in. Internally, and this is something we've talked about from the very beginning, we expect those restaurants to achieve sales volumes consistent with prior restaurants. And frankly achieve margins consistent with prior restaurants. So we've always talked about a 20% restaurant level cash flow margin and that is still where our targets are.

Okay great. Thanks.

Will move next to Jeffrey Bernstein with Barclays.

Hi, this is Tracy on for Jeff. My question was around the cost savings as well. Can you just kind of talk about what those initiatives are going forward and maybe bucket your biggest opportunities coming up?

And then is there any chance there might be upside to your 19% to 20% long-term guide just because of the brew hubs lowering some costs there, the Project Q initiatives and then, maybe, the smaller footprints of the new prototypes?

Let me start with a global answer because we don't have enough time to go through the long list. And I guess our major point would be, there's that old adage that the restaurant business is, you know, a nickel and dime kind of business, and that's really true. You know even if you look backwards on the cost initiatives that have resulted in the kind of efficiency gains, there's not one, too, or three big ideas that are driving those.

It's accumulation of amazing number of productive ideas. As we said before, most of which have come from our restaurants, not come from us at the restaurant support center. It's really more about the mindset and rewarding and cultivating this culture than it is around you're going to find a big idea around the corner.

Having said that, I think the continuing bigger idea though is how do we get simpler and drive a better guest experience? And how do we eliminate unnecessary complexity, particularly as it emanates from our menu and our kitchen operations, which we really think are the nerve center of our business.

So the biggest idea, if there is one big idea, is a focus around, you know, getting simpler. Even with our menu and recipes, we think simpler recipes and work better or more consisting are kind of fitting with the taste profile of our guests these days. And all that is working together. But it's really around the complexity reduction.

And then, Tracy, your second question about margins a little bit there. The hesitation I always have on margins is we're spending this time on the call talking about Project Q and the cost initiatives, and while those are extremely important for us, and as Greg Trojan mentioned, they are part of our DNA going forward, ultimately margins come through based on comp sales.

And depending on where comp sales are in the future and how does play out, that's going to be the ultimate driver of getting your margin above, let's called it the 19%, or above the 20 % in that regards. So we don't know where those are going to be.

I think the entire industry was slapping themselves on the back with January coming out and maybe we were one of the conservative companies going, you know don't take January as a trend yet, we're getting tax refunds earlier and other things.

So I think there's always the ability to outperform the industry and drive more guest traffic, which we are doing at BJ's and a positive 1.5% guest traffic that we just drove in Q1 is an amazing number there. And having that with menu mix going forward if that leads to significant comp sales about 2%, 3% or 4% I think you can see margins expand at a greater rate in certain of those quarters.

Great, that makes a lot of sense. Thanks so much.

Thank you

We will go to the next caller and that is Will Slabaugh with Stephens.

Thank, guys. I had a question on menu mix and sort of as you come off of this pizza promotion that you have now and as you lap over the value introduction from last year, do you expect the mix to be more of a flattish number as you work through 2015? Or how do you look at that internally?

Will, we do actually. You know right now, and we won't get into all the specifics of our menu mix, but if you and I walk into our restaurants together and we decide to share a pizza, that's probably going to be a lower average check if both of you and I walk in and each decide to have a sandwich or some type of entree.

So I would think as we get a little bit further into June and we roll out our new menu, which is kind of coming at the end of May, June time, plus some of the other items that we've got lined up for later this year that our menu mix ultimately will start to flatten out and you might see a little bit more expansion on the average check than where we are today.

Got it. And then on the other side for sales on the traffic side just given that tougher compared that your up against as the year progresses, are you expecting traffic growth to remain positive throughout the year in your guidance?

Well, we don't give specific guidance on comp sales. I have always said, you know, shooting par for this course is holding onto guest traffic and getting your menu mix and menu pricing through. And that's generally how I think about our business going forward.

Great. Thanks, Greg.

You're welcome.

We will move next to Sam Beres with Robert W. Baird.

Hi, good afternoon. Thanks for taking the question.

In terms of cost of sales outlook came in obviously lower than expected in Q1 here and a couple of different factors impacting that. So maybe you could just talk about the benefits between menu mix to cost of sales and then also lower commodity cost pressures. And as well what is driving that inflation up 0.5% to 1% for the full year versus I think the prior outlook was about 1% to 1.5%.

Sam, great question. You know it's interesting, when we came out of the gate in January we were seeing cost of sales pretty similar to what we saw in Q4 and that's why at that time we gave that guidance. In early February, we rolled out the pizza, the new Tavern-Cut, as well as the limited time on the three deep dish offers and did a lot of promotion around it. And it helped move that pizza mix and really was significant to helping drive cost of sales down a little bit.

We also took a little bit of menu pricing at that time because we knew we were going to be rolling off 1.6% of menu pricing from last year's February menu. I think those two things combined brought us down a little bit.

And then, frankly, commodities came in right now little bit flat. It's almost slightly down Q1. So that helped us also going forward a little bit.

However going into Q2, Q3, and Q4 looking at the 0.5% to 1% range, we're seeing poultry is going to be the big one for us. That's the one that is probably the highest cost increase, as well as meats, for us going into the rest of this year and kind of driving us up to the 0.5% to 1%. Poultry, we've locked in for the full year so I know it's pretty much a given. Meats, though, about 70% of our meats are on monthly or spot market but that's going to play a little bit of wild card and we're assuming that's going to continue to go up or stay elevated this year.

We currently have about 60% of our commodities locked in. And when I think about our guidance as well for the rest of this year, we're assuming our menu mix is going to normalize a little bit going into Q2 and Q3. And that will give us both the benefit of, obviously I think, a little bit higher average ticket by mixing up positively, as I was just talking with Will.

But it's probably going to have a little bit of impact on cost of sales versus maybe where Q1 is where we're getting that benefit. And that's why I think cost sales overall will be around that 25% range or so.

That makes sense, thanks for the perspective. Maybe just one more.

You are stepping up in terms of the unit development up to five openings here in Q2, six openings in Q3. In terms of, you know, inefficiencies with the new units. How does that impact your perspective on the ability to drive restaurant level margin whether it's on labor or other operating?

Sam, that is a great question. And actually one that we have not addressed previously. And I always think about it afterwards. I'm glad you brought it up. Moving from 10 to 11 restaurants and we were last year up to 15 or so this year, we will have some of that inefficiencies in there.

And as much as people keep coming back and saying well maybe you can get your margins up higher this year to 19% or 19.2% or 19.3%, there will be a little bit more of a drag this year versus last year because of the increase in new restaurants. I do think our new box and the way the we've got lined up will continue to help us get the ramp up a little bit further ahead. But I think this year versus 2014 there will be a drag because of the increase that we are doing.

And then once we get back to a stable, let's call it 12% increase in operating weeks, you'll won't see that drag year-over-year because you're bringing in just as many operating weeks in the current year versus the existing year. I don't have in front of me what I think that absolute drag is. But do I know that as part of our internal analysis, when we look at our margins going forward, that the amount of new restaurants coming on, they do come at a lower margin.

So while the entire restaurant business, or the entire existing restaurants could be running a 19.5% margin right now, those new restaurants coming on board could be running 14% in their first month and that's going to bring us down a little bit. And we will see that this year. I think we can manage it because I think about things around Project Q the other cost initiatives, but it will probably hold back margins a tad this year versus maybe where people were expecting.

That's great. Thank you very much.

We'll take the next question from Chris O'Cull with KeyBanc.

Thanks. Good afternoon, guys.

Greg, as a follow-up to the menu mix question how confident are you in the menu mix flattening out? Have you guys tested the better-for-you items and burger changes that are planned for this year and know where the shift is going to come from?

Yes is the answer. We've tested them. But how they've performed nationally when they are out of test conditions is, you know, there's always a bit of a variation there, Chris. But we liked how they behaved in test.

I think Greg was more alluding to we're going to be heading towards less headwind on our guest check overall. And whether we actually get to flat or not, we can't test thoroughly enough. We don't have enough restaurants and time and tests to predict that mathematically. So that is a bit up in the air.

But we should, you know, versus driving pizza mix start to see some increased momentum on the guest check side. And look, we've seen it from where we were last year we were basically flat through the year, right? So we've made a jump into positive guest check growth of about a 1.5 points. And it's our expectation we will see continued improvement there, but any finer prediction than that will be tough to do at this point.

If it comes from within the same category, would that be a flat to the check? I mean if you see some shifts from burgers within the category?

If it comes within the category and your trading up to a more expensive burger it's still going to lift your overall check from that standpoint I would think.

So these are going to be more expensive items within their category?

They're going to be across the board actually on different things we are doing. So whether we work on some new items in the brew house burgers or other burgers or the better for you, they'll be across the board. We're not necessarily coming back let's put on a steak at X price and drive it from that standpoint. So we are working within our current categories.

Okay. And did you see much benefit in the first quarter reduced prep required when you replaced the hand tossed with Tavern-Cut?

You know I don't know that one specifically. We've probably got more high fives from our team members in that regard. But I don't know if all the sudden replacing the hand tossed with our Tavern-Cut resulted in 10 hours of less labor. I think it was more the fact were getting a more consistent product that we think is a better product.

Chris, it's difficult to ascertain how much would come from that versus our ongoing efforts and efficiency and a fair amount of that is on the prep side of what we are doing. So we are seeing better prep overall, but it would be impossible to say how much of it is from Tavern-Cur versus hand tossed. But it is helping.

Okay. And just in terms of the new prototype. You've talked about $1 million in savings from the previous prototype.

What is the average investment for this new prototype? And what is the target volume that you are looking for from these new units? And how many have you opened?

So the average cost that we've always talked about is about $4 million gross and we were averaging prior to that about $5 million gross. We still try to get TI in all of our deals and our TI is anywhere from $500,000 to $1 million.

I think we tend to average and when we think about target economics about receiving $500,000 or so. So we are bringing our net investment down to about $3.5 million versus what cost $4.5 million under the prior prototype in that regard.

As far as the sales volumes go, there's really no change. And when I say that, this was always the hard part and we talked about this before, if we were going to build a new restaurant in California with a higher cost in California we will set a target volume for that restaurant with the densities and what we've see in California it's probably should be 120% or 130% of our total overall average volumes.

If we're going into Texas or Florida or a state might have more tip credits, we might target the averaging to volumes to be 90% of the total company's averaging volumes. We generally always though look for about a 20% restaurant level cash flow. That's how we kind think about it.

If you thought about it globally, it's still somewhere in the $5.5 million averaging of volume generating $1.1 million, 20% on $5.5 million, generating about $1.1 million in cash flow. That includes of full load on marketing in there. I know a lot of other restaurant companies put marketing down to G&A. So we're assuming 2% to 2.5% of marketing in that margin of 20%. And therefore you got $1.1 million into $3.5 million or so.

So you're expecting a 30% cash on cash return in years two or three?

That's correct. Usually year two is where we kind of to get to it

Okay. Thanks, guys.

You're welcome.

We will take the next question from Matt DiFrisco with Guggenheim Partners. Matt, please check your mute function.

Hearing no response, we will go to Nick Setyan with Wedbush Securities.

Thank you. Quick question for Greg Levin, real quick.

Greg, you can you said you have some confidence that as the quarter progresses Q2 here, we can get the flat traffic to turn positive. Can we maybe talk about some of the drivers there of what's going to get that to turn positive?

Just remember we have positive trends before the quarter, so it's not a big shift we've run recent positive traffic in the last two quarters. So you know just to make sure we're starting from the same starting point there.

I think that's a good point. Positive 0.7 in Q3 of last year, Q4 we were slightly negative 0.2, still really outperforming industry from that standpoint. We just put up a 1.5% in guest traffic.

You think about the averaging of volumes that BJ's does and, frankly at the end of the day, we believe we do the most guest per square foot in casual dining. Were doing a $14 average check on the smaller box than some of our other peers in that regard. Through the things we've accomplished over last year in regards to speed and the items in regards to menu innovation and so on have allowed us to actually what I would think come into three quarters of flattish to positive guest traffic in that regards.

So when I start to think about going into April, May, and June. I do think June becomes a little bit more challenging maybe with World Cup and other things there. But I think we have a good game plan in regards to the menu that comes out in the May timeframe. We have got some good things around marketing. We continue to learn a lot from our loyalty program.

Frankly, with the things we've made in regards to the our menu around simplification, better products and so on, I think we're executing better and guests, as a result, want to come to our restaurants.

As you know, Nick, I'm always very hesitant in regards to giving where I think comp sales are going to be for BJ's for the year or for the quarter and so on because it is the most challenging thing. I think we have a better handle on where the cost structures of our business. But you know comp sales is one of those things that I always say this is where trends are right now and you guys can go ahead and kind of model accordingly. But I still kind of feel that way.

But I do think the last couple of days as we get away from the Eastern timeframe seem to show that our trends that we saw in other months must seem to be coming back and is really some of that flip-flopping around Easter and spring break.

So from your perspective, given the commentary on where you guys have comps and where you kind of come from over last year or two and all the accomplishments. So it seems like your fairly confident on that at least two trends and so on, you can stabilize transaction trends going forward.

I believe so. I do think we have always talked about the fact that we have outperformed the industry in regards to transaction and guest traffic in that regards. And I think that's where we continue to believe we are positioned.

You know we have got a concept that guests really like and even during the days when we were seeing some comp sales that were negative from that standpoint our guest traffic outperformed the industry from that standpoint. And that's how we tend to look it.

As much as I want to be positive and we talk about that again shooting par for the course, it's holding onto the guests that we currently have in our restaurants. I think we've done that better than, frankly, just about any other casual dining concept out there. And that is ultimately our goal, and then if we can work other things and there by being faster and better, we can get trends to go in the right direction.

Got it, okay. And in the past we talked about sort of the (inaudible) periods and the comparisons from the California locations. And also just kind of with respect to the gap between average weekly sales growth and comp growth. Where are we with that?

It seems like we kind of improved sequentially with respect to that gap Q4 to Q1. Is that kind of a trend line that should continue or should it go away entirely toward the end of this year?

I think as we get further away from some of our newer California restaurants, we haven't built one in, I think, a year and a half or so. I would expect over time that the difference between costs sales and average weekly sales would close over time. The only caveat to that as we are going to some newer market and with the lack of awareness of the BJ's concept in some of these newer market we tend open slower and than build over time.

In fact, without getting caught up in too much specifics, I would tell you that our class of 2011 restaurants, which were negative a couple of years ago when comps started going south, put up a solid comp sales in Q1, and they put up solid comp sales in Q4 of last year. So all of that is starting to come back. Our class of 2012 as it's gone through its honeymoon, has now put up three specific quarters of positive comp sales.

So we always expect our newer restaurants we're going to have a little bit of a honeymoon. They go into a newer market, they're probably not been open up the highest volumes, but we expect them to drive comp sales as they get away from their honeymoon.

So I still think that is consistent with BJ's and always as we going to new markets, depending on how many are there, they are probably open up a tad softer and that might drive a difference between comps and average weekly sales. But we are not worried about it. They're hitting our target on an overall basis.

There's always restaurants that do better. There's always restaurants that are less in that regards. But we feel pretty good about the new restaurants and what we're designing in the guest acceptance of them.

Okay. Last question, you kind of mentioned menu pricing in Q2 high 2% range. Going into Q3, Q4 what does menu pricing look like?

We talked about menu pricing in that mid, upper 2% range. It will be that way in Q3 as well. But Q2 and Q3 will be very similar.

Q4 we won't know until we kind of get through a little bit of (inaudible) and start thinking about that November menu timeframe. I believe we put about 1% of menu pricing out in November of last year. So if we don't replace that you have your menu pricing dropping down into the mid-upper 1%.

Got it. Thank you so much.

You're very welcome.

We will now move to the last question and it comes from Joshua Long with Piper Jaffray.

Great. Thanks for taking my questions.

I was curious on the development pipeline for the year. It sounds like we will be a little bit below that 10% plus operating week target that we had talked about which is in line with previous conversations.

Just curious as you get visibility into the 12 or 13 units that are under construction now. How should we think about those openings from a timing perspective over 2Q and 3Q and 4Q? More closer to the beginning of the quarter mid- quarter, late quarter? Just trying to get a sense from kind of an opening timeframe.

From a quarter standpoint. We did in our press release today we did line up how the restaurants will be opening. I think it was five, six, and two and you can go right to the release there. If I had to think about it from a quarterly perspective I'm looking towards Greg Lynds.

It seems pretty heavy. June is a little heavy and then the third quarter is kind of evenly spaced.

Did you get that Josh? June will be a little bit heavier in regards to Q2 when we open most of our restaurants. And then more evenly spaced in September and then our goal always is to get all of our the restaurants open really before the first week in November so people can enjoy the holidays.

Great, that's helpful. And kind of a high level to round out a call. Any updates you can provide on the loyalty program or some of your technology efforts and how those are being adopted, embraced and used by guests in the restaurant.

I will answer that. As the loyalty program continues to grow we're very pleased with what we are seeing momentum wise there. And we still see very good responsiveness when we reach out and use the data in the loyalty program and we are getting more and more specific and targeted in those offers. In terms of producing activity and driving traffic we are, like I said, quite pleased with what is happening there.

We still see high levels of satisfaction and growth in our app in particular. It's still not at a place where it's frankly driving comp momentum at this point. But we love what the seed set is planning, we get very, very positive comments every day from what we call our direct connect feedback from our guests. So those that are adopting are very loyal and frequent.

And we frankly, we like seeing others following in our footsteps and employing some similar technologies out there because we think it will become more the norm and an expectation particularly paying at the table, mobile pay, etcetera. We have, among others, but among the most to gain as consumers adopt that kind of behavior because our restaurants so busy. So increasing those table turns and throughput with the help of our guests adopting these technologies faster will help us disproportionately.

Thank you free time today.

Thank you.

Thank you. Bye, everyone.