BJ's Restaurants Inc (BJRI) 2016 Q2 法說會逐字稿

Please find by we are about to begin. At and welcome to the BJ's Restaurants Inc. second quarter 2016 earnings release and conference call. Today's call is being recorded. At this time of the conference all Greg Trojan President and Chief Executive Officer. Please go ahead.

Thank you operator. Good afternoon everyone and welcome to BJ's Restaurant FY16 second quarter investor conference call and webcast. I am 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 second quarter of FY16 which ended on Tuesday which ended on Tuesday, June 28, 2016. You can view the full text of our earnings release on our website at www.bjsrestaurant. com.

Our agenda today will start with Rana Schirmer our Director of SSE reporting providing our standard cautionary disclosure with respect to forward-looking statements. I will then provide an update on our business and current initiatives than Greg Levin will provide a recap of the quarter and some commentary regarding the remainder of FY16. After that we will open it up for 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 security litigation 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 for looking statement and not guarantees of future performance and that undue reliance should not be placed on such statements.

All forward looking statement's been only as of today's date July 26, 2016. 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 formal discussion of risks and uncertainties associated with forward-looking statements contained in the Company's filings with the Securities and Exchange Commission.

Thanks Rana. While the second quarter proved to be a challenging sales environment for the casual dining sector. The strength and execution of our new restaurant opening strategy drove 7.9% top line revenue growth and strong bottom-line results despite slightly negative comparable restaurant sales of 0.2%.

Once again with the benefit of our productivity and efficiency initiatives, we leverage this top line growth and achieved record profitability increasing diluted EPS by 19.5% and net income by nearly 11%.

Our operators continue to effectively control what they can control in today's choppy and challenging sales environment as we generated restaurant level margins of 20.6%.

Our ability to continue growing our bottom line even in challenging times highlight the key advantage we have as a concept. Specifically, our ability to grow top line through our new restaurant development engine fueled strong earnings and cash flow growth over the long-term.

Of course we are not satisfied with slightly negative comparable same restaurant sales but we again outpaced the industry average as calculated by Nap Track and Black Box by 100 basis points on sales and by approximately 190 basis points on traffic, both of which also mark an improvement versus the industry compared to our results in Q1.

The biggest reason we consistently generate strong earnings and cash flows, our teams commitment to executing each and every day. A continuously elevated standards of quality and efficiency.

This quarter was particularly challenging as the day to day and week to week fluctuation in sales were more volatile than we have experienced a very long time. This presented our operators with a difficult environment to plan their labor and food prep as you can have. But once again our operators did a solid job of battling back and importantly they continue to search and find new ways of working smarter, cooking better, and delivering friendlier service.

There is naturally a lot of speculation about what cause the incredibly choppy customer trends endured by the casual dining and other consumer sectors in Q2. Some of this choppiness was clearly driven by factors such as calendar shifts, weather, and other outside factors outside of our control.

Some of our sales softness is also the result of reallocating TV media spend in Southern California a year ago to support a few of our less densely developed markets with digital, radio, and local marketing spend this year. While this drove solid list in those markets it did not offset the slowdown in Southern California where we continue to run positive albeit less significant sales growth this year.

Despite the macro trends and the choppy consumer environment, our goal is to make sure we're building this business for the long-term. Therefore, we are committed to controlling everything we can control but at the same time same time preserve the essence of the BJs experience in terms of guest service, facility maintenance, quality, and variety of our menu offering.

Looking at the consumer environment in our early Q3 sales it looks like the challenges around the globe including violence in a number of our most significant markets will present traffic and sales headwinds in the near-term. It's evident that we and all consumer basing companies are navigating through unusual times characterized by a confluence of social and political issues at home. Weakening consumer confidence and increasingly global uncertainty as well as a very unusual presidential election cycle.

The second quarter demonstrates that our concept has a great resilience in tough times for the consumer and we are pressing hard to address all the consumer audiences that we serve to make sure BJ's is the go to option for any dining out experience.

We are challenging ourselves and our teams to be as innovative and entrepreneurial as ever in this environment with initiatives including stepped-up hospitality efforts in increasing our sampling programs where we are offering complementary samples of menu items for guests waiting and dining in our restaurant. Thus reminding our guest of one of our business strength the issue diversity of tastes and experiences on our menu.

Operationally we are operating our host hardware and software systems along with streamlining our seating process to speed to be time it takes us to seat our guests. We've also stepped up our promotional activity to incent trial of our powerful app which when used to join our wait list to order ahead or pay at the table significant me speeds the BJ's experience for those who need to get in and out of our restaurants more quickly.

We are also optimistic that our efforts to improve our already strong value offering will help drive traffic improvement. In general we have stepped up our promotional activity utilizing media that we believe can be most incremental from a traffic perspective meaning we are emphasizing offers to guests who have not yet made BJ's their destination of choice.

A couple of examples in Q2 were our 10 off 35 promotion in our successful bundled lunch offering of grilled cheese or Piadina's with fries and our free nonalcoholic beverage for $9.95. These two offers for example try to guess of a great value and actually build guest check.

We've also improved the value proposition of our happy hour offering in Texas, one of our most competitive happy hours States.

Our fundamental strategies to be a market share taker and I'm proud to report that despite the environment we continue to do that in Q2. As the environment has continued to get tougher and Greg Levin will comment on our recent trends in a moment, we plan to increase our marketing and promotional spend in the third quarter. We have a tremendous opportunity to drive our brand equity and awareness in both our legacy and newer markets. Remember our overall top of mind awareness still lags our larger mass casual competitors by a wide margin.

At the same time our marketing team has continued to evolve our core brand messaging and we believe their latest iteration is the best work we've done. It emphasizes our Brew house heritage and the fact that we combine our contemporary atmosphere of a local craft brew pub but without the beer geeks snobbery. That we deliver menu packed with unique flavors derived from craft recipes not bar food. And that we are great place to watch sports but without the ambience of obnoxious fans.

These elements are being featured in all of our marketing in September and we are planning several weeks of TV in select markets to drive home the fact that BJ's is a restaurant with a Brewhouse soul. And that we are resolute in making sure that our consumers know that to us craft matters and that we want every moment that guest spend with us to be special.

Additionally, we remain focused on continuing to make our menu even more unique and craveable for our guests. This fall we will introduced several new items in our enlightened menu category which continues to be a big part of our menu mix and differentiating in terms of taste and overall quality. We will be adding items that answer the growing requests from our guests for more healthy choices in terms of gluten free, clean labels, vegetarian, and more super food options etc.

Eating enlightened is much more than watching calories as guests become more educated and demanding in terms of what they are eating. Having said that, what makes BJ's a special is our menu variety for anyone in any occasion.

Our latest summer menu introductions include an addition to our loaded burgers lineup. On Monday through Thursday daily Brew house special in a flatbread nacho pizza in which we deep fry our flatbread pizza dough. I'm also delighted to report that our Pizookie incident continues to climb this time as a result of our latest PIP product our monkey bread Pizookie.

We will also reinforce our place award-winning craft brewing innovators as we continue to rotate seasonal beers that are only available at BJ's. For example starting next month we will introduce a limited time only collaboration IPA brewed at our temple brewery in Texas with the renowned team from green flash brewery known for their quintessential West Coast IPA brewed in central San Diego County.

Our collaboration brew features a rei based malt combined with all German hops in a dash of toasted caraway seed. Finally, we are testing a new physical menu which based on the layout and placement of certain items has shown in test to increase average check. We planned to have this new menu layout rolled out to all of our restaurants by the fourth quarter of this year.

In addition to these operational marketing and menu initiatives, our strong balance sheet will continue to be a tool for us to drive shareholder returns. About a year and a half though we crossed the threshold of not only being able to find all of our organic growth from internally generating cash flow which we had done for many years but in fact have reached a point where our cash generation exceeds the capital we need to grow and what today we believe is a prudent rate of approximately 10% increase in restaurant week.

As we know we have been allocating that excess cash to share repurchases and as a result during Q2 we leveraged our 10.9% growth in net income to earnings-per-share growth of over 19%. Our fundamental ability to grow our top line through solid new restaurant growth along with the work we've done to nearly double our cash flow generation over the past two years is a powerful combination to drive future returns even when comparable restaurant sales are difficult.

This is very different for most mature casual dining concepts that rely solely on comp sales to increase their cash flow. At BJ's our primary cash flow increases year-to-year are going to be from the tremendous whitespace growth opportunity that we have complemented by comp sales growth at our stable base of existing operations.

In summary I hope is evidence that even in tough times BJ's can and will continue to thrive. We have strategies and plans in place, menu, marketing, and otherwise to do well in the current environment and the balance sheet operating practices and business plan to ensure that our key constituents, our guests, our team members, and our shareholders all benefit from a singular focus of every member of our team to become the world's best casual dining restaurants.

While we are pleased to be able to continue our strong earnings and cash flow momentum, we are clearly in a more challenging environment for dining out occasions. Although these times present new and different challenges, they also present the opportunity dedicate ourselves to being that much better in everything we do and to fight for each and every guest occasion.

As we have any past we believe our concept will come through the fight even stronger in the competitive landscape and will continue our march of taking market share and growing our restaurant footprint. I will now turn it over to Greg for financial overview of the quarter and some commentary for the rest of FY16.

Thanks Greg. Our second quarter results benefited from ongoing gains from our companywide productivity and efficiency initiative and continued double-digit new restaurant growth. While the strong diluted earnings-per-share growth also reflect our ability to return capital to shareholders through our share repurchase program. Our 2016 second quarter revenue increased approximately 7.9% year-over-year to $250.3 million while net income grew 10.9% to $13.8 million and diluted net income per share 19.1% to $0.56.

The slight 0.2% decline in comparable restaurant sales during the quarter included an approximate 1.4% increase in our average check which was offset by an approximate 1.6% decline in traffic as negative traffic counts impacted most of the casual dining sector for the quarter. After a positive comps and aggregate through May our business saw slowdown in June with sales off about 1% for the month.

The slowdown was very widespread and not necessarily specific to any one region and to preempt the question I know we will get, our Texas location which remain soft us do not really see any noticeable change in business trends over the course of the quarter. However, we did experience several softer than normal base in Texas during the heavy rainstorms that occurred in April and May.

Conversely comp sales in California were positive every week during the second quarter. Excluding Texas comp sales for Q2 would have been positive about 1.2% and traffic would have been down approximately 0.5% negative. As Greg Trojan mentioned though we had nominal menu pricing in the 2% range during the quarter, our average check was up about 1.4% as we increased marketing promotions to drive guest traffic and continue to see tremendous success from our value price Piadina's and grilled cheese sandwiches which we introduced in Q1 of this year.

Overall this allowed us to outperform the industry in regards to guests comp sales and guest traffic. Our weekly sales average for Q2 is approximately $110,000, down about 1.6% from last year's second quarter. The spread between comp sales and weekly sales average is in the 1.5% range or so it's been pretty consistent over the last 18 months as we continue to build new restaurants away from our California base.

Cost of sales for the quarter of 25% was 40 basis points higher than a year ago quarter. As you review last quarter, beginning this year we change the way we internally allocate promotional costs between cost of sales and marketing. Previously we recorded to marketing and food cost charge related to promotional activity which resulted in lower cost of sales and higher marketing expenses.

However, given our efforts to increase promotional activity, particularly due to activity in our loyalty program, it was prudent to change this practice. On an overall basis our commodity basket was slightly down for the quarter with year ago levels. Labor of 34.3% for the second quarter represented a 30 basis point increase from the year ago period and was driven primarily by higher hourly labor of approximately 80 basis points offset by lower workers compensation insurance of 30 basis points and lower payroll taxes and benefits. The increase in hourly labor is primarily related to higher wages specifically here in California.

Operating and occupancy costs were 20% of sales for the second quarter which was 50 basis points lower than the prior-year quarter. Included in operating occupancy costs is approximately $4.4 million of marketing spend, which amounts to about 1.8% of sales.

As I noted just a moment ago we change the way we allocated certain cost related to promotion and discounts with it which are in charge of working marketing previous quarters. This resulted in marketing being about 50 basis points less than the prior-year period when it represented 2.3% of sales.

Excluding marketing, operating occupancy costs in the second quarter averaged approximately 20,100 for restaurant operating week compared to 20,400 last year. Our operating occupancy costs, excluding marketing, represented about 18.3% of revenue in both 2016 and 2015 second quarter periods.

Our G&A was $13.8 million in the second quarter representing 5.5% of sales and down from 5.9% in the year ago periods. G&A was lower than anticipated as we reduce corporate incentive compensation by approximately 500,000. In addition we continue to have lower than expected cost related to recruitment and training of our new managers.

Depreciation and amortization was $16 million or 6.4% of sales and averaged about 7000 per restaurant week which is in line with our recent G&A trends. Pre opening expenses primarily representing expenses related to the three restaurants that we opened in the quarter plus pre opening rent as many as 11 restaurants in a construction was $1.6 million for the quarter.

Our quarterly tax rate of 28.3% was slightly below are annual target rated 29.5% to 30% in a to do some additional (inaudible) credits.

Our total capital expenditures for the first six months of this year were approximately $50 million and we still anticipate gross capital expenditures for FY16 to be in the $110 million to $120 million range. Our anticipated capital expenditures cover the construction of 18 to 19 new restaurants, maintenance CapEx and other sales building initiatives before any tenant improvement allowances.

While we did about 24.5 million of repurchases in Q1 we did not buyback any shares during the second quarter. However as noted in today's press release and based on our continued strong cash flow and current line of credit, we increased our share repurchase program by $100 million. Since authorizing our initial share repurchase program in April 2014 we have repurchased and retired approximately 5.5 million shares of BJ's stock for approximately $220 million.

With the Board's latest ( Indiscernible ) in our authorization, we've approximately $130 million remaining on our current authorized share repurchase plans. Finally with regard to liquidity we ended the second quarter with approximately $23 million of cash and $91 million of funded debt on our line of credit which is in effect until September 2019.

As of the end of the second quarter our funded debt to EBITDA it's very low at about 0.7% on a trailing 12 month basis. Our $150 million line of credit and strong cash flow from operations provide us with the flexibility we need to continue our national expansion program while returning capital to shareholders through share repurchases. Additionally, our line of credit does have what is called an accordion feature that allows us to increase the line to $200 million if we so choose and our financial institution agrees.

Before we open up the call for questions, let me spend a couple of minutes providing some updated commentary on expectations for the rest of FY16 specifically the third quarter. All of this commentary is subject to the risks and uncertainties associated with the forward-looking statements discussed in our filings with the SEC and is based on the information we have as of today.

As we began Q3 the industrywide comp sales slowdown that we experience in June has continued into July. As Greg Trojan mentioned, a variety of headwinds are weakening consumer confidence causing continued declines in restaurant traffic.

Unfortunately around the upcoming US elections including the recent Republican and Democratic national convention, racial divide, public area shootings, and other macro that's a pretty challenging the restaurant industry overall. As a result, our sales to date in July our trending at approximately negative 2% which is comprised of negative traffic of around 2% which appears to be better than the casual dining industry. It means that overall we have a flat check as they we continue to emphasize the value on our menu.

Geographically we have not seen any material change in our Texas restaurants. That said we have seen some flattening of California comp sales in July which is bringing done our overall comp sales to date.

While the various sales building initiatives discussed earlier are being well executed, they are just getting started and at this juncture we would lean toward conservatism in building comp sales forecast for Q3 and Q4 until we see a change in the current trend -- in the current sales environment.

Moving past comps I would expect approximately 2315 restaurant operating weeks for the third quarter. Also as we move further into new markets I expect to continue to see a negative 100 to 150 basis point spread between comp sales and weekly sales averages. This is been pretty consistent over the last couple of years is most of our restaurant to being opened outside of California.

Investor should keep in mind that our lower-cost prototype and lower operating costs from our operating initiative along with the fact that most of our newer restaurants are in states that are significantly less expensive to operate in than California are leading to returns on these new restaurants that are at least meeting and in many case exceeding are internal target.

I actually want to reiterate this point, we are extremely focused at BJ's on driving return on invested capital at our company. As such in many cases we are getting into new locations where BJ's net investment can be as low as $2.5 million. In those situations we may only target averaging volumes of $4 million to $4.5 million which is basically $80,000 to $85,000 a week. At those sales levels with an net investment of $2.5 million we only need to generate restaurant level cash flow margins of approximately 18% to achieve a 30% cash on cash return.

Moving on to the rest of the P&L we're seeing some pressure in commodities primarily around avocados and famine. Also our increased promotional cadence an emphasis on value are leading to slightly higher cost of sales compared to prior quarters. As a result averaged cost of sales in Q3 to be in the low 25% range.

This is also a little higher than our original estimate because of a mentioned we are no longer allocating a food cost charge to market. I want to remind everyone again that this change has no impact in our overall financial performance or restaurant level margins. It's purely an internal allocation between cost of sales and marketing.

I would expect labor to be around 35% or slightly higher in the third quarter as the benefits of project Q continues to help offset some of the costs related to California minimum wage increases and other employee related costs. However, I want to remind everyone that labor is highly dependent on comparable restaurant sales. As such labor may be significantly higher or lower as a percent of sales depending on comparable restaurant sales trends during the current quarter.

We are targeting total operating costs to be in the low to mid 25% -- 21% range. This total will include approximately $5.7 million to $6 million in marketing spend. As Greg Trojan mentioned we plan to increase our marketing efforts in the third quarter to drive sales and awareness of our brand commitment and positioning as well as many new additions and or initiatives.

We know we have solid procedures in place to manage costs of sales, manage our labor, and manage our other operating occupancy costs. In fact over the last two years we've expanded our restaurant level margins by 200 basis points on a relatively modest comp sales in the 1% range. As a result we believe it is prudent to make this investment in our brand to drive top line sales so we can continue to leverage our strong operational foundation.

Our G&A expenses for the third quarter should be in the $14 million range as we expect total G&A for FY16 to be closer to $58 million. Pre-opening costs should be around $2.3 million for the third quarter and that's based on five plans new restaurant openings plus some pre opening costs for restaurants that are expected to open in the fourth quarter of this year and the first quarter of next year.

I'm expecting our tax rate the third quarter to be around 29%. Our diluted shares outstanding should be in the $24 million range for the year which reflect the return of capital shares repurchase activity I reviewed just a minute ago.

Before I open the call to questions, I want to reiterate one of my last points and that is our investment in marketing during this upcoming third quarter. We have proven through project Q another productivity and efficiency initiative they we have solid controls over our business.

Over the last two years as a mentioned our operating margins have increased over 200 basis points with comp sales in the 1% range. As such we can easily cut back on hospitality programs like our menu sampling and our restaurants or cut our marketing spend to try and drive short-term earnings.

However, trying to save your way to success only works for a quarter or two. Our improvement in the business has been predicated on top line sales growth over the last year and a half and improvements in productivity inefficiencies in our business.

Therefore we believe it is important to invest in marketing to build awareness and our brand. We know from our most recent awareness trial in usage study that when guests discover BJ's we have a higher rate at converting these triers frequent users. We believe this is a prudent investment in our business that complements our restaurant expansion and capital allocation strategies going forward.

That concludes our formal remarks. Operator please open the line for questions.

(Operator Instructions)

Will Slabaugh with Stephens Inc. Please go ahead.

Hi, thanks guys. This is actually Bill on for Will this afternoon. Could you give us a little bit more color on the promotions you guys have teed up for the back half of the year? What type of strategy might be targeting with those, I guess, more specifically what kind of price points will they be at relative to your core menu and then, are they were diluted in any way or is more of that coming from some of the promotions as far as giving away food at the front of the house?

Bill, we don't have all of the promotions entirely laid out because in the digital world we can be pretty quick on pulling the trigger on different promotional events out there.

Generally speaking though, we love to do bundling. We've been very successful on our lunch specials, which we mentioned on our grilled cheese and Piadina's, which is actually helped increase the average check out lunchtime by bundling that with unlimited fries and a soft drink. That's one of the ways we look at it as we go into the holidays the second half of this year, we will also have more bundling opportunities around higher-priced menu items. And that being said, we will always look towards look towards times that make sense in regards to driving guests in, whether it's a [pan off 35], or if [it's a certain amount] maybe it's a free appetizer or a free Pizookie. We have used this in the past very successfully. When you the business overall the impact tends to be sometimes around cost of sales, but if you can get the bundle where it drives average check up you make it up on labor and operating occupancy costs.

I think a bigger part of what we are looking towards the second half is actually more about increasing just the awareness of the concept and telling people about the different things we have at BJ's. As we move into a lot of these newer markets we were surprised, and we shouldn't have been, but the lack of awareness we have in a lot of our newer markets and based on that study and awareness trial in usage, we know that if we can increase the awareness of BJ's in the newer markets we definitely drive trial which then drives the frequency of our guests.

Thanks. That's very helpful and actually along with that could you talk a little bit about the lunch day part and whether or not you're seeing any outside strength there, weakness or just kind of how you're thinking about that.

Actually, Bill, a lot of the work we did early in the year and reinforcing value any price points, primarily through the grilled cheese and Piadina products has worked really well. So our lunch has actually held out. It's been a pretty strong part of our day part. And the more recent weakness that Greg and I was describing in June into July is largely been dinner, which make some sense to us when you look at and think about the distractions of, be it world events in political campaigns etc. -- it's been more focused on challenging in the dinner day part.

Thanks, guys. One last thought, if I could, would you clarify what was the full-year G&A guidance which you gave, I believe it was in the $50 million range. That might be below where you were last quarter.

That's correct. I think I said G&A would probably be somewhere in that $58 million for the year. I think originally as we put together our targets for this year we were thinking it would be closer to $60 million; some of that is due to a [frankly] reduction in a complication that we just talked about. Then the other thing is we have been very fortunate in regards to our retention rates for our managers and even as we continue to build new restaurants, and the industry has gotten more challenging on the management within the managers, within the restaurant space. We did a nice job there and what we call our [AM] program, which is managers in training, is coming in lower than expected.

Bill, we are also going to be more selective and challenging sales times like these in making the incremental investments with G&A when the environment is as challenging as it is, so at the combination of all those.

Great. Thanks a lot, guys.

Matthew DiFrisco with Guggenheim Securities.

Hi, this is Matt Kircher on for Matt. Just to clarify, if you could break out the new pricing mix for the check in 2Q?

That in general, we have about -- we set kind of the mid-to range total pricing so, if you kind of take that and said that our track was only [140] you get with the mix would be the difference.

Okay. Thank you. I just kind of looking forward obviously there has been some choppiness now the last few quarters and some [more] volatility in the two year same store sales trend. How should I be thinking about it for the new menu changes, the impacts of Texas, some flattening in California, in the new stores dropping in?

Matt, that was a lot there -- I think we never really -- I could be wrong. We never really specifically stated what we are thinking comps are, et cetera. We give really where we are at the time that we report.

That's the best evidence that we have currently. I think we've got some really good initiatives going on here, whether it's the new menu that comes into the fourth quarter, I think as we get through the conventions which have made it softer in the middle of the week -- last week we saw softness, yesterday with the Democratic national convention. I think there is the ability for that to improve but as far as an actual comp sales number, right now as we said, we're kind of a negative two and we are running traffic about negative two, which based on looking at Nap track and Black Box, seems to be significantly better than the rest of the casual dining industry.

Okay. And then just last thing if I can ask, have you seen any change or an increase in the percentage of take-out sales?

Take-out continues to be someone strong for us. It's a positive area in regards to comp sales. I think, really as Greg Trojan mentioned, dinner has been the softer area [of being] June and going into July and again, think about the conventions taking place in the evening, you think about some of the civil unrest and other things that have happened, they tend to be things where people go home and watch they don't feel like going out in the evening.

Understood. All right, thank you guys.

Christopher O'Cull with KeyBanc.

Thanks, good afternoon guys. I guess I appreciate that BJ's is outperforming the category, but really that's comparing the performance of the brand to some fairly mature and brands that aren't growing. Would give you confidence Greg that there isn't a brand specific issue given the traffic decline?

I do think we're still the comparative set of what the industry is doing, as we're doing higher volumes to the strength of our concept, Chris. And you look at our trends are not where we want them to be, but there's no cause for concern that we are doing something -- if we were out of step with those trends, you could make a good argument we have headwinds in terms of the volumes we are already doing and the busyness of our restaurant etc. in the amount of new markets that we are going into. I could make a long list of factors that actually makes us more -- makes it more difficult for us to drive comp sales and trends than others.

I look at that comparison as a positive -- I mean we are not just squeaking by we've got -- our track record going back to last year in the recent quarters, have still been outpacing the industry by a good solid margin. You know, as I mentioned in my remarks, we've even expanded in this quarter versus last, even though we dipped into slightly negative comp sales.

I reject the theory that -- look, we'd like to be outpacing it by even more and we are working hard to do that; but this is not a concept issue. There is not something specific regionally -- as you know and you know as well from -- we measure every operational and guess metric, more than I think any other concept out there and have as good a pulse on how our restaurants are performing and what our guests are saying about us, through even our most recent market research and [ATU] studies. There's not an indicator that we're out of step here or that we have a concept issue in any way shape or form. When you look at our new restaurants are performing -- those are very solid as well. So I understand the question but I don't -- that is not the issue here.

Chris, the other thing, and you talked with this before, I know you've written on it in regards to Texas. We pulled Texas out of Q2, and I don't like to put it specifically on Texas -- our traffic was more or less kind of down0.5% and we said this on the call, and I said this many times, that we can't count every single person in our restaurant. And when I look at0.5% down in traffic to up a0.5% in traffic, to me is basically flat in that regard. Not that we are happy with flat but if we can hold onto our guest traffic, which we are kind of showing taking the Texas phenomenon in regards to competitive intrusion etc. out of the business, we also take out the newer restaurants in there which have about0.5% impact on comp sales.

You start to get yourself where we feel pretty good, in regards to traffic being a relatively flat number in this casual dining industry. I think it's showing that we're able to hold onto our guest traffic.

That's fair. Greg, in the past it seemed like the company was trying to get away from TV advertising and I can't remember if it was because of the lack of return or just not as effective as you would hope -- or you wanted. But what has changed your thinking because it sounds like you're going to be on TV more now?

Not really. I don't know -- we've never -- we've always thought of -- we've been very selective about where we have run it, because given our restaurant densities in a lot of the markets, it's difficult for us to make those returns work. So we're just not out there and saying this is brand building, let's go do it. So I think we can pretty cautious about it but there's definitely not been a feeling of we need to this less aggressive here.

You may be thinking though, some of the testing we've done in some of these smaller markets where we said -- you know, we know Southern California and a few other more densely populated markets [isn't] working and we've had trouble in some of those areas from a test base -- not trouble, but been more challenging from a return perspective. But in general, I've been consistent about saying is, TV along with digital -- it's not all about social and digital; in combination is when can really be very powerful and some of our markets where we've reached critical mass to be able to make it work.

As I described in my remarks, we pulled back versus last year, a rotation of media in Southern California because we felt like we had to get a little more balanced around supporting some of these newer markets. Which frankly, is a tough decision because we know where we have the most restaurants and density and we can go on TV in Southern California.

That's probably the best short-term return for our media dollars but at some point we've got to be balanced about it and be investing in some of these younger markets. So we don't plan on doing that versus the calendar of a year ago for the remainder of the year, certainly in those larger markets. So that challenge is behind us from a headwind perspective.

Okay that's great. Just the last one, you look at the annual EBIT margin, seems like is around 7% which is 100 to 200 basis lower than some of the heavily owned restaurant companies but the restaurant margin is the comparable BJ's unit to comp stores seem to be higher than most chain. I guess my question is whether the long-term EBIT margin, whether you could see the to be in the 8% to 10% range? Just trying understand how much opportunity you think you may have longer-term to expand the EBIT margin of the business.

We still think -- we still think we have that opportunity there. I mean when you look at our business and you look at those margins, you've got to take into consideration two things, that I think sometimes get missed in this business when comparing across more mature concepts, per se, because one is pre-opening in that regard. So when you start to look at our business we've got 70 to 100 basis points in pre-opening. Hey, you don't see at a restaurant company.

And other forms of growth expense, well when we're growing organically at 10% those other concepts you are comparing against don't have 10% organic growth, as you know, goes beyond those pre-opening expenses.

So, to that, you've got the G&A growth element which is about 40% of our G&A that gets related to growth, that Greg was just talking about, then over time we should continue to see depreciation amortization start to leverage the [guide] a little bit. In the last year or two as we flatten out around $7000 a week where it used to be in a $7200 to $7300; we continue to build these restaurants at the lower cost. That number would go down [into] a normal comp, it should go up.

You look at our income from operations right now, including the disposal, because we have disposals and there which average about 20 basis points or so in our business. We just finished our [seven, eight] or [seven, three] right now. So, you start to think about your 8 to 10 number, I don't think we're that far off, actually, Chris.

Okay. Thanks.

We will move along to Brian Bittner with Oppenheimer and Company.

Great, thanks this is Mike [Tayman] on for Brian, just two quick questions and then -- I missed the G&A in the pre-opening for the third quarter. Do you mind just repeating those quickly?

The G&A is going to be right around $14 million and the pre-opening will be about $2.3 million and that's based on five restaurants.

Can you just maybe talk about the comps for the quarter and maybe a year ago comparisons for the third quarter, as we think about July, August, September here? Does it look like it's a little bit easier from here or how should we be thinking about that?

We don't give out monthly comps. We give some guidance and ranges around it. Mike, what I would say, last year we got on this call we talked about comps being about 1% and then they actually finished up 2.3% for the third quarter, so, to some degree they do get a little bit more difficult from that respective. I do think at the same time to get through some of the conventions and some of this other stuff, it's been a little bit more challenging in the middle of the week and once that's the [back on] environment, could be easier from that standpoint. But that's kind of how it played out last quarter of last year.

Got you and then on the share repurchases, how aggressive do you guys look to be in terms of using your balance sheet and the cash? Is there a timeline for that incremental $100 million that was just authorized?

We don't have a specific timeline. We're pretty opportunistic, as you can see, we've been pretty aggressive over the last two years from that standpoint. We think there is an opportunity to return capital to our shareholders because we think there was a good stock price out there and we'll take advantage of that.

All right. Thanks, guys.

Thank you.

Nicole Miller with Piper Jaffray.

Thank you, good afternoon. In terms of the investor -- excuse me the consumer trends that you are seeing, do you view that as a short-term attitudinal shift or more of a reality of the potential long-term operating environment?

Look I think, Nicole, hopefully in terms of the world events and challenges from that perspective, obviously, we don't have a presidential campaign -- thank God -- for four straight years. I do think they're more temporal.

Actually when you step back and think of a category you'd like to be an from a retail perspective there is -- there is no duplicating or replacing the social dining occasion, in particular, from a sit down perspective. You can't do that online at the end of the day and I actually think and we saw this in the last great recession. BJ's actually did very well in the difficult times because people wanted to actually socialize and be with family and friends and this concept does very well in those kind of times.

Look, I don't think sit down dining is going away or going anywhere. I don't think this is even a medium- to long-term phenomenon. I think there's just a number of these events that have kept people in their homes a lot more than usual. And I don't see it going away tomorrow with the convention the remainder of this year but I do not think this is a permanent condition where people decided they are just not going to eat out as much. I don't think that's the case.

That's very helpful. Thank you. In terms of your California commentary, are those trends a result of less mix or less traffic? And if it is less traffic do you think they're trading down to limit service or they just going home. Could you give us a little more color? Thanks.

You know right now it's been a little bit less traffic. We have seen some changes in mixes as we brought out -- rolled out some fruit house specials and some other things promoting some value, so I would actually say, thinking about it's a little bit, Nicole, it's both. This is going to sound like an excuse and I hate to make it an excuse, but for those that have lived here in California and last year, one of our big weekends of last year in July, we had El Nino rainstorms came through. And frankly, it shut down the beaches, it shut down all activities from almost, kind of all of California, meaning northern to southern California. And a year ago we had really saw the comps because of that.

This year we didn't get those El Nino rainstorms and that changes the pattern over one of the weekends in our business. So I kind of look at that as being a discreet item. I also look a little bit that convention and other things that seemed to be discreet across our business. But taking that aside, we've done some really neat promotions that I think really have proved out well for us in certain markets and we will roll those out companywide. And that's changed our mix a little bit, it's right now brought us actually down to this flattish overall guest check.

When were doing negative 2% traffic and look, we're not happy about that right now but you look at it and it goes 2% traffic is equating to 2% negative comp sales, that's because we're not getting any average check [lift] right now because of some of the things we've done to drive value. And I think it's showing the sense that we're outperforming the industry but we like to get a little bit more maybe average check in there as well, to offset some of these inflationary costs, let's call it.

That's helpful as well, and just the final one from me. When do you think commodities would normalize and if there is more inflation sometime in the future, what's the brand's commitment to value and promotions that you been talking about as of late?

I'm sorry, I missed that.

You are able to take the commodity deflation, I'll just called it savings in this environment, I don't want to put words in your mouth and use that against discounting promotions value, and so if commodities inflate can you still do that?

I think if commodities inflate we would obviously look to see how we want to bundle things and provide value from that standpoint versus pure discount. We haven't got as caught up in the sense that commodities are flat or decreasing and therefore we are going to be out there more promotional in that regard. We are really thinking about it more about from a traffic standpoint than we are in a sense that ground beef come down. Right now for us, as I just mentioned, we're going to see a little bit of inflation here, not a lot in the third and fourth quarters, primarily due to some salmon -- some El Nino things hurt the salmon industry little bit, so we're seeing that increase here in July, and avocados until they can switch to, I think it's California, we're seeing an increase in avocados we actually, believe it or not, use a lot of avocados in our restaurant.

Thanks for taking my questions. I appreciated.

My pleasure.

[Tim] with Robert W. Baird

Hello, good afternoon and thank you for taking the question. Just one have maybe a quick clarification and I know you guys have talked about revised marketing plans and focused on both driving frequency for guest in existing markets, but then also driving awareness for guests in new markets. So, wonder if you could provide some perspective just on how the marketing approach differs for those two types of markets?

This is Kevin. First of all we've got a baseline -- someone asked earlier about the television and channel strategy -- no matter what market we're in we think it's very important to lay down a baseline of local mass media, which would include digital video, digital paid social, as well as television to make sure we can reach the broad customer base that we have; and we would treat both mature markets and new markets similarly in that way.

When you're looking at newer markets it is very much about giving guests a reason to try you, beyond your core concept, we have heard that from focus groups. And therefore, we have leaned into loyalty a little bit more there, as well as call it, targeted digital push media. So when we have offers that we have right now in the market where we're doing, buy at $9.95 and get a free appetizer, we can use very geo targeted digital media around those restaurants to try to reach those guest out there in the Internet. So that's probably where we would layer on, on top of a newer markets to try to reach guests as they're in markets searching for casual dining restaurants.

Great, that's helpful. And then, maybe Greg, you'd also talked a little bit about possibly some newer units with smaller and less expensive footprints but then also some lower unit volumes as well. So just wondering if you could provide some more perspective on that, in terms of potential timing of when those types of units could open, and what types of markets you'd be looking at for those. Is it more of an in fill in California opportunity or looking to use those in newer markets?

I can't necessarily give you a timeline of this one is going to be lower, this is going to be higher et cetera, from that standpoint. You can generally look at when we open restaurants how those things play out. Meaning, when we open our restaurant in New York or we open a restaurant in what would be a higher cost area, generally speaking it's going to first of all have a higher menu pricing in there and it's going to have to cover that cost which is usually going to be a little bit more expensive in those (inaudible)markets.

That tends to play out but I do want to reiterate the bigger point of that has to do with our focus on return on invested capital. As I mentioned on the call, when we can get into a location for $2.5 million and we know there's solid restaurant sales in those markets, we will do that at $80,000 to $85,000, 18% restaurant level cash flow, we are generating 30% cash on cash return. We think that's the right use of shareholders capital in regards to the investment of that asset cash flow in our business.

Just to be clear, because you may have been hearing something that wasn't intended from Greg that I heard in your question, which is there's not another -- we're not talking about a different, smaller restaurant than we are building elsewhere. This is not a new prototype, so to speak, but manages that number down for us. First of all -- I don't know how long you've been following us, but we've done that through our current prototype where we took over $1 million out of our build out, from what we called our proto-six version, well over a year ago. So we are building, what we call our proto-7000, which has a gross cost of about $1 million less than previously what we were building.

What we are able to do is in some of the smaller markets, is now that we are spending $1 million less to drive that [ROIP] but also the fundamental cost from a real estate perspective is often times lower in those smaller markets, so that and through the kind of lease deals we are able to negotiate with Greg and his team, that we are able to manage that investment down to, at times, even those mid-to lower $2 million range. It's not a different footprint, it's not a different building.

Great. Great. That answers the question, thank you. Maybe, Greg Levin, just following up on the buyback strategy, obviously you talked about where the line of credit could go. I guess, what's your comfort level with taking on additional debt to buy back shares and if you are comfortable, kind of what type of leverage in terms of debt to EBITDA, do you think you'd be comfortable with on the business?

We continue to evaluate that all the time and we don't really have anything set in stone. We still think with the amount of white space that we have in front of us and ultimately opening up new restaurants and being a market share taker is the best use of capital from that perspective. We want to make sure that overall we maintain a relatively conservative balance sheet that allows us to take advantage of opportunities to continue to build new restaurants. So, that's primarily the way we look at it. Where we are today at [.7] or so, gives us a lot of room to go up on that leverage ratio but we haven't necessarily put something in stone and said this is where we want to be.

Great. Thank you.

We like the flexibility of our balance sheet.

Great thanks.

Sharon Zackfia with William Blair.

Hello, good afternoon. Just a couple of questions on the conversation on ROIC. I know you look at it heavily on a unit level basis but I'm wondering if there any incentives on the corporate ROIC, which is kind of sub 10% and what you think about in terms of the progression there.

We do, Sharon. We've got a performance shares that the executive team has. They received them in 2014 and 2016, I think we disclosed in our proxy, As much as you talk about 10%, I think after everybody does it a little bit differently, I think we might be a little bit better than that. But if you look at where we were three years ago versus where we are today we made tremendous strides in moving that forward in regards to a total entity level.

Okay. Well, I'll look at the information but is it based on a progression or an absolute threshold, the performance base comp?

Is based on a three-year average over that time frame that has to have progression to it. So, obviously if you go up in one year but you drop back down in another year, it's not at the end point as much as it's the progression over that three-year timeframe. And just be perfectly clear, I don't know if we explained that or not, it's a simplified ROIC because it's very difficult to go to every executive and tell them about the tax shield and other things. But it does entail most of the factors that people use in an ROIC calculation.

Okay perfect, And then a question on labor, I understand the volatility in the second quarter made it challenging but I think if I just throw in negative Q comp and a 35% labor, it looks like 60 basis points of deleveraging on labor would be actually pretty good for a negative 2% comp. Is there something that you are doing in the September quarter that's different from a labor scheduling perspective or some sort of efficiencies are getting there that's helping mitigate that deleverage on labor?

Just to be clear, we're not forecasting a negative 2 comp for the quarter. We're not forecasting any specific comp -- I've over said that but the early weeks of July have been. Right?

No, I'm clear on that but obviously when Greg says 35% for labor we have to assume some sort of sales so -- I would assume you are assuming negative but --

No, I think as we go through it and look at the way we've got our labor staffing set up, some of the things that we rolled out from project Q that we've implemented this year whether it's volume metric prep and other things that we're still continuing to evolve, our labor modeling and staffing based on, frankly a lot of the initiatives that we continue to work in our business.

Okay and then last question on the Olympics, any thoughts on that? Good, bad, neutral to the business?

Yes, opening and closing weekends are always pretty tough. That Friday night of opening weekend everybody wants to either walk into the stadium, that always seems to be a little bit tougher. The rest of it is kind of a non-event, in that regard, it's really not favorable from that standpoint. Again, people don't get together and say -- let's go to BJ's to watch Michael Phelps swim for two minutes.

All right, fair enough. Thank you so much.

You're welcome.

We have time for one more question if will be from Nick Setyan with Wedbush Securities.

Hi, thanks guys. Once you get the big leg down in Texas last year, I'm assuming kind of starting in Q3 and Q4 (inaudible) would you expect Texas comps to get any better?

You know, Nick, when we look at Texas it's very interesting, the restaurants that are going over a lot of the competitive intrusion, you start to see some of their improvement. The problem is something else opens on another restaurant in that regard, we just seen that like in Lubbock, Texas. We've seen it in a couple other places. Where we are going -- hey, there's a nice trend here what just happened to that restaurant? Oh, the four restaurants in the new shopping center just opened. And then we look at some of the other existing restaurants and they are starting to see their trend come back.

I think looking specifically at Q2 and going into Q3, Q2 incrementally probably got better and the business overall. It has some wacky days of some of that weather that was unexpected but I think overall, we are seeing some improvement in some of these markets from that standpoint. It's just again, amazed at how many new restaurants and new developments don't come online in that state.

Got it. You did mention that some of these new restaurants that have been coming to the comp base they remain a drag. I know we've kind of gone out of building in California (inaudible) and I'm assuming they're kind of a lower volume stores so maybe so perhaps [they should build] in year two. Are we not seeing that, are we still seeing (inaudible) periods early on and so (inaudible) still a drag on the comp?

We are. We've been pretty consistent where anywhere from 30 to 50 basis points kind of, is a drag on comp sales for the quarter. I think I mentioned at this call or on a previous conversation on this call, that I think there was another 40 to 50 bips or something like that, related to the class of 2014 which is now rolling into our comps. So you pull that out you'd be at basically, what, positive0.2. You pull out of Texas and the all of a sudden you're in the 1.5 % range of comps for the quarter and you're at kind of flat traffic.

Unfortunately, you can't necessarily cut and dice -- cut and slice everything that way. But it's what we see in our business right now -- we've got the Texas drag and we have some new restaurants still at that 40 basis points. Even in new markets, generally speaking, you have a honeymoon. People want to see what is this new concept; let me go there; I've heard it and maybe have seen it in a different state; and it opens up relatively big.

Does it open up as big as California? No, in that regards, we're not expecting it to. Except occasionally in certain locations, we get some very big openings like [LyCanne] just opened up really big, Lexington, and so on.

Got it. Last question next year is going to be -- we're going back to (inaudible) year. Are you guys talking about 10% operating [week] growth adjusted for the third week this year or do you think we'll be back to operating growth (inaudible) year?

If your question is on new restaurant development, Nick, we haven't gone through the planning process. In general, we are very confident given that we're at 177 restaurants, double-digit restaurant week growth is a primary way to keep growing our concept. But we haven't settled in on a number and specifics this early yet for next year. We are busy building, Greg and his team are building that pipeline and that's going well. But we don't know at this point what -- if we're in that range we'll fall (inaudible).

Thank you.

Welcome.

Ladies and gentlemen this does conclude today's conference call. Thank you all for your participation.

Thank you.

Thank you.