BJ's Restaurants Inc (BJRI) 2016 Q3 法說會逐字稿

Good day and welcome to the BJ's Restaurants, Inc. third-quarter 2016 earnings release and conference call. Today's call is being recorded. And at this time I would like to turn the conference over to Greg Trojan, President Chief Executive Officer. Please go ahead.

Thank you, operator. Good afternoon, everyone, and welcome to BJ's Restaurants FY16 third quarter investor conference call and our webcast. I'm Greg Trojan, BJ's Chief Executive Officer. Joining me on the call today is 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 closed today we released our financial results for the third quarter of FY16, which ended Tuesday, September 27, 2016. You can review the full text of our earnings release on our website at www.bjsrestaurants.com.

Our agenda will start with Rana Schirmer, our Director of SEC Reporting, providing our standard cautionary disclosure with respect to forward-looking statements. I'll then provide 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 FY16 and some of our initial thoughts on FY17.

After that we'll open it up to questions. And, as, usual we'll try to keep the call to around an hour. And, as always, we'll be around after the call for any additional follow-up.

Rana, go ahead, please.

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 the actual results, performance or achievements of the Company to be materially different from any future results, performance or achievements expressed or implied by forward-looking statements. Investors are cautioned that forward-looking statements are not guarantees of future performance and that undue reliance should not be placed on such statements.

Our forward-looking statements speak only as of today's date, October 19, 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 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. As widely reported, Q3 was a challenging quarter for all restaurant categories, including casual dining and BJ's. Clearly the political calendar, debates in particular, Olympics and general uncertainty on behalf of the consumer combined to produce a generally weak retail environment and the softest industry-wide restaurant performance we've seen in quite some time.

In particular, California sales for our industry, as reported by Knapp Track and Black Box, and our own results in western, regions were disproportionately affected, likely by the televised air time of two national political conventions, Olympic events, and the first presidential debate, which typically started squarely at dinner hour on the West Coast versus 9 PM on the East Coast. Given our heavy weighting of West Coast restaurants, we believe we were disproportionately impacted during these events.

I also think that the tone of this year's political season, regardless of where your allegiance may lie, has generated what some would call a nearly unprecedented level of negativity and doubt in the minds of the everyday American citizen. Overall retail trends and the results of other businesses dependent on consumer discretionary spending confirm that during the quarter many preferred to stay home versus going out.

While our disappointing top-line results were certainly impacted by these macro events, during the quarter we also faced challenging comps with our strong year-ago performance when we generated a 2.3% rise in quarterly comp sales. This was driven by our very successful loaded burger and quinoa bowl launches, which also helped drive a 4%-plus increase in our average check last year. This year our check growth was a more modest 0.8% on nominal pricing in the high 2% range.

This year we built off the success of last year's loaded burger platform with a new late night burger, but wrapped that new burger around summer barbecue and grilling, as well. In retrospect, we should have built more news and targeted promotional support around our burger segment.

Secondly, our check was pressured by the continued traffic outperformance of our lunch daypart versus dinner, partially a result of the macro factors I just mentioned but also as a result of the continued momentum of our value lunch offerings that we rolled out earlier this year. This impacted our add-on and liquor incidents, which is naturally lower at lunch than dinner.

And, lastly, we continued to increase our promotional intensity versus last year, which of course puts downward pressure on our check.

While our frequency of discounting is up approximately 30% versus last year, we remain well on the lower end of the spectrum relative to our category, both in terms of frequency and depth. Although we don't provide precise data for competitive reasons our general frequency of discounted promotional checks is below 10%, and on a dollar basis below 4% of gross sales. That said, dialing up our promotional intensity did impact our year-over-year check growth by about 80 bps.

We will continue to remain competitive but rational and disciplined on the discounting front as we continue to focus on our everyday value, our outstanding food quality and service, along with our unique atmosphere to differentiate and drive our business.

In the fourth quarter we will be deploying technology to segment our offers and to align them with our guest preferences and transaction history. While this program will take time to refine, it is another step towards improving our ability to deliver an attractive targeted offer to those guests who tend to base their purchase decisions on who is providing a discount, as well as drive new traffic.

Next let me spend a few minutes commenting on our cost controls and margin performance for the quarter. While our restaurant level cash flow margins declined due to the negative operating leverage related to the quarter's comp sales, our operators continued to do a very solid job of controlling their businesses. Greg will share more of the details but nearly all of our controllable cost categories were lower on a restaurant operating week basis.

Our overall restaurant level cash flow margins of 17.7%, or 19.5% before marketing, still compares very favorably to our peer group. Keep in mind that Q3 is our lowest weekly sales average of the year. And given our guest check challenges and the incredible choppiness and unpredictability of sales trends, our operators once again showed why they are among the best in our industry.

Let me turn to my thoughts on the start of Q4 and the remainder of the year. While the first three weeks are clouded by the destructive weather in Florida and the Southeast and some promotional offer timing differences within the quarter, our trends have improved from where they were in Q3. Adjusting for weather-related impact to restaurants, we are in the negative 1.5% range, although obviously it is very early in the quarter and ultimately the high-volume holiday season will determine our sales outcome for the quarter.

That said, we expect to benefit from several factors related to restoring healthier check growth for the remainder of the year. Firstly, we will be rolling out several new menu items which are designed to grow guest check while still delivering BJ's signature value. Our recent new menu launch features several line extensions to our tremendously successful enLIGHTened offering, which includes our new lineup of soba noodle dishes, a vegan lentil soup, along with our new superfoods entree salad.

We have expanded our enLIGHTened menu category to include gluten-free, vegan and an array of superfoods, which are building on what I think is now one of the leading lineups for better-for-you operating in the casual dining marketplace. In addition, we are featuring new combination meals for our holiday season, which include rib eye and ahi tuna steaks, which are a great value, while also representing solid opportunities for us to grow check.

Secondly, we recently rolled out a new physical menu format, which highlights items which are some of our more differentiated offerings, while, again, having the opportunity to drive upspend and incident rates. This layout performed quite well in tests.

Lastly, our promotional volume will line up closer to last year's spending level and, as such, will not represent the level of drag on check that we have seen so far this year. We will also continue to drive awareness and trial in our key markets through greater and more targeted marketing. We recently launched our new Making Moments Count campaign, and we will have more media dollars in this year's Q4 than we did in 2015.

We have added two new markets to our television plan, which also includes radio and digital media. We also launched our new website and we are seeing improved metrics across our organic search and site engagement, which is ultimately driving business to our ordering and location pages. In November we will be adding a new online ordering interface which will incorporate more upsell and cross-sell functionality to the site.

Let me now share some thoughts regarding 2017. Driving our brand awareness, further differentiating our food variety and quality, and improving our speed of service through technology and labor deployment remain foundational to our strategy. In addition, we know that growing our off-premise sales given our varied menu is a large top-line opportunity, as well.

Clearly our ability to continue to grow our restaurant footprint is the key opportunity to drive value. We will open 17 restaurants in 2016, with 2 less than we anticipated in the back half of the year as the extensive rains in the Midwest delayed construction of our next two restaurants in Indiana. And we elected not to open later in the year during the holiday season. Instead, we'll open early in 2017 for these two new restaurants.

But as we look to the restaurant openings for 2017, we plan to slow our growth to help navigate the challenging macro environment. While we have not yet finalized our planning for next year, we are anticipating a range of 10 to 15 new restaurant openings. We are slowing the pace of growth to focus even more of our enterprise resources on building sales. In times like these where the sales headwinds are blowing fiercely, we are choosing to point more weapons at growing sales in existing restaurants versus opening more restaurants, much like we did during the 2008 and 2009 down cycle.

I see the impact of our seasoned general managers and executive kitchen managers everyday. And opening fewer restaurants will afford us the ability to season our bench, and keep our veterans in place in their current communities that much longer, all of which leads to even better execution in our restaurants and sales-building within our four walls. From a financial point of view it gives us some margin momentum in these uncertain sales times and will maximize our free cash flow, which, combined with our conservative balance sheet, gives us even more flexibility for sales-building capital and share repurchases going forward.

An additional factor in this decision is the recent increase in unit closures and bankruptcy filings from other restaurant concepts across the country. It looks like the tide has finally turned in favor of a slowing in the pace of seat expansion. And although it will take some time, we believe we will see even more attractive real estate and better underlying rents over the next 12 to 18 months than currently exists. As such, we will remain ready with our first-class development and operation opening teams to take advantage of some great locations and real estate values going forward.

Despite our decision to slow down our unit growth, the class of 2016 is shaping up to be a very strong year of new restaurants for BJ's, particularly given the preponderance of openings in new or newer markets. Pittsburgh, Allentown, suburban Cleveland, North Carolina -- they all represent solid new markets for us and a platform for more restaurant development and future comp sales growth as we ramp towards critical mass in these newer markets.

We're very pleased with the performance of our proto 7,000 restaurant layout, which, at an average net investment of approximately $3.5 million, continues to set the right platforms for solid returns on capital.

It is worth remembering that even in down restaurant cycles such as this -- and we have lived them before -- that full-service dining at nearly $300 billion in revenue continues to be the largest segment of the restaurant industry, with casual dining making up about two-thirds of that segment. Our market share of casual dining at approximately 0.5% represents a large opportunity for us to continue to penetrate and take share in this mature, but very large, market. And notwithstanding the temporary realignment of our new opening schedule, we remain very confident in the strength of our brand with consumers and national capacity for 425-plus BJ's restaurants.

In closing, let me summarize our plan to battle one of the toughest restaurant cycles we have seen since the great recession. We will drive traffic through increased brand awareness and brand affinity by telling our quality and our value stories. We are pulling back on growth to unleash the power of our operations in each and every one of our restaurants to build sales based upon our fundamental consumer proposition, which focuses on great food, great service, great value, in a great setting.

We will build check by focusing on center-of-the plate offerings, which deliver great value at higher price points. And we'll continue to utilize the discipline and experience of our team members to operate our restaurants more efficiently than the day before. And, lastly, we intend to use the power of our balance sheet to drive higher shareholder returns in what we deem as the appropriate combination of investing in sales-building capital initiatives, along with buying back our stock at attractive price levels.

I'll now turn the call over to Greg to provide some more specifics on the quarter and the remainder of the year.

All right, thanks, Greg. Revenues for the 2016 third quarter increased approximately 2% year over year to $233.7 million, while net income and diluted net income per share were $7.2 million and $0.30, respectively. This compares to last year's third-quarter results of $12.4 million in net income and $0.48 in diluted net income per share, which benefited from a 2.3% increase in comparable restaurant sales and a one-time non-recurring pretax gain of $2.9 million or $0.09 per share related to a lease termination payment. Excluding this one-time item our income and diluted net income per share for last year's third quarter, on an apples-to-apples basis, was $10.2 million or $0.39, respectively, compared to the $7.2 million and $0.30 per share for this year.

On a cost per week basis, our operators did an excellent job managing the costs within their control. However, as Greg Trojan noted, our results reflect the negative operating leverage in our business resulting from both ongoing choppiness and negative comparable restaurant sales during the quarter. This led to a restaurant level cash flow margin of 17.7% in the quarter.

As Greg mentioned, our restaurant level cash flow includes 1.8% of marketing spend, which many tier companies include in their G&A. Therefore, excluding marketing spend, our four-wall restaurant level margin for Q3 was 19.5%, which, while down from last year's third quarter, is still among the best in the casual dining space. We think this is a solid indication that our focus on managing costs is particularly helpful in mitigating the impact of the overall market environment where comparable restaurant sales remain challenging.

Our restaurant level margin also is a direct reflection on the overall strength of the BJ's concept, with beating AUVs in the casual dining sector and continued solid returns from our new and existing restaurants. The 3.4% decline in comparable restaurant sales during the quarter included an approximate 0.8% increase in our average check, which was offset by an approximate 4.2% decline in traffic. As Greg Trojan noted earlier, negative traffic counts impacted most of the casual dining sector during this past quarter.

While we do not give comp sales by month, September was our most challenging month in the quarter as we saw a step down in our California restaurants during that period. Looking at the industry data from both Black Box and Knapp-Track it appears that our trends are consistent with the casual dining industry segment, which also experienced the same softening sales trend in the quarter. We believe the softness that we saw in our California restaurants in September was primarily related to the hurdle from a year ago, as in last year's third quarter our California restaurants comped approximately 6% positive, including traffic growth of almost 2.5%.

And to pre-empt any questions, our Texas locations continued soft during the quarter and we really did not see any noticeable change in our Texas business trends over the course of the third quarter.

As Greg mentioned, though we had nominal menu pricing in that upper 2% range during the quarter, our average check only was up about 0.8% as we increased marketing promotions to try and drive guest traffic and saw continued success from our value-priced piadinas and grilled cheese sandwiches, which were introduced in Q1 of this year. Our implied pricing of around 0.8% appears to be very modest compared to the rest of the industry per the Black Box and Knapp-Track data, which, based on our analysis, tends to show the industry had implied pricing closer to the low to mid 2% range.

Our weekly sales average for Q3 was approximately $101,000, down about 1.5% from our comp sales decrease. The spread between comp sales and weekly sales averages in the 1.5% range has been pretty consistent over the last 18 months as we continue to diversify our operating base away from California with restaurant openings and new markets for BJ's.

Cost of sales for the quarter of 25.6% was 110 basis points higher than the year-ago quarter. As we previously noted in other calls, beginning this year we changed the way we internally allocate promotional costs between cost of sales and marketing. Previously we recorded marketing and food cost charge related to promotional activity, which results 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 we saw our commodities increase about 0.5%, and this was primarily due to higher costs for salmon and avocados, which, unfortunately, I expect to stay high through at least the fourth quarter of this year. We also saw an increase in our cost of sales due to the increased promotional activities and menu mix, especially around some of our lunch items, as I just mentioned.

The current macro headwinds and resulting choppy environment has made labor scheduling and cost management more difficult. Our labor came in at 35.1% for the third quarter, representing a 70% basis point increase from the year-ago period, and was driven primarily by higher hourly and management labor of approximately 120 basis points due to higher hourly wages, which run to 3.5% range or so, and deleveraged from negative comparable restaurant sales. This was offset by lower quarterly incentive compensation, as well as less payroll-related benefits and workers compensation expense.

Operating and occupancy costs were 21.6% of sales for the third quarter, 30 basis points higher than the prior-year quarter. Included in operating and occupancy costs is approximately $4.3 million of marketing, which amounts to about 1.8% of sales. As I noted a moment ago, we changed the way we allocate certain costs related to promotions and discounts, which had been charged directly to marketing in previous quarters. This resulted in marketing being about 40 basis points less than the prior-year period when it represented 2.2% of sales.

Excluding marketing, operating and occupancy costs in the third quarter averaged approximately $20,000 per restaurant operating week, and that is compared to $20,300 last year. The decline from last year is due to lower general liability insurance, partially offset by higher facilities costs and our general cost controls in our business.

Even though we were able to reduce our costs per operating week, our operating and occupancy costs, excluding marketing, were approximately 19.8% of revenue compared to 19.1% in last year's third quarter. This increase as a percent of sale is a result of the reduced operating leverage resulting from negative comparable restaurant sales.

G&A was $12.9 million in the third quarter. It represented 5.5% of sales. And that is down from 5.9% from the prior-year ago period. G&A was lower than anticipated as we reduced corporate incentive compensation by approximately $1 million.

Depreciation and amortization was approximately $16.3 million or 7% of sales and averaged about $7,000 per restaurant week, which is in line with our recent D&A trend. Pre-opening expenses, primarily representing expenses related to the five restaurants that opened in the quarter, plus pre-opening rent and other expenses for the five restaurants to be opened in the fourth quarter, as well as restaurants that will be opened in the first half of 2017.

Our quarterly tax rate was 20.5% and that was below our annual targeted rate of around 29.5% or so. And that is due to the use of our FICA tax tip credit and WOTC credit, as well as other credits against a lower pretax income than anticipated.

Total capital expenditures for the first nine months of this year were approximately $81 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 17 new restaurants, maintenance CapEx and other sales-building initiatives before any tenant improvement allowances. And our new restaurant construction costs also include construction costs for restaurants that will be opened in early Q1 and Q2 for FY17, including those two restaurants that we're pushing to the first quarter of next year.

During Q3 we continued to use our strong cash flow from operations and solid balance sheet to opportunistically repurchase shares as we allocated approximately $23 million towards the purchase of 600,000 shares of our common stock. Since the authorization of our initial share repurchase program in April of 2014 we have repurchased and retired approximately 6.1 million shares of BJ's stock for approximately $243 million. This leaves us with approximately $107 million remaining under our current share repurchase authorization.

With regard to liquidity, we ended the third quarter with approximately $26 million of cash and $109 million of funded debt on our line of credit which is in effect until September 2019. Our leverage at quarter end is a little under 1 times debt to EBITDA. And our line of credit is for $200 million and provides us the continued flexibility for our national expansion program, while returning capital to our shareholders through our share repurchase plan.

Before we open the call up to questions let me spend a couple of minutes providing some commentary on our outlook for the remainder of 2016 and some very preliminary thoughts for FY17. 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 we begin Q4, industry-wide comp sales softness has continued into October, though we have seen some early incremental improvement in comp sales for the third quarter. As Greg Trojan mentioned, a variety of headwinds are weakening consumer confidence, causing continued declines in restaurant traffic, as well as increased restaurant supply and a more competitive promotional environment. As a result, our sales to date in October, excluding the impact from Hurricane Matthew in which we lost 26 restaurant days to closures, are trending closer to negative 1.5%. More importantly, we have seen some recent improvements around those numbers.

While we are encouraged by the improving trend to start October, I would like to reiterate that it is 18 days in and over that period we have seen continued choppiness in our daily sales. Additionally, this year, Christmas Eve and Christmas day move to a Saturday and Sunday as compared to a Thursday and Friday of last year, which could have a negative effect on comp sales for the quarter, not to mention some of the expected softer days around the presidential elections and debates. While Greg Trojan mentioned several sales-building initiatives we are implementing, they are just getting started and at this juncture we would lead towards conservatism in building comp sales forecast for Q4 until we see a greater challenge in the current trends of the business.

Moving past comp sales, I would expect approximately 2,590 restaurant operating weeks for the fourth quarter. This does include the 53rd week in Q4.

I expect to continue to see negative 100 to 150 basis point spread between cost of sales and weekly sales average. This has been pretty consistent over the last couple of years as most of our restaurants are being opened outside of California. Investors should could keep in mind that our lower-cost prototype and lower operating costs from our operating initiatives, along with the fact that most of our newer restaurants in states that are significantly less expensive to operate in than in California, are leading to returns on these new restaurants that are least meeting and, in many cases, exceeding our internal targets.

Moving on to the rest of the P&L. As I mentioned, we continue to see pressure in commodities, primarily around avocados and salmon. Also, our increased promotional cadence and emphasis around value are leading to slightly higher costs of sales. As a result, I would expect cost of sales in Q4 to be in the upper 25% range, fairly consistent with this past third quarter cost of sales.

Reflecting the continued choppiness in our lower comp sales currently, I expect labor to be in the low 35% range. However, I want to remind everyone that labor is highly dependent on comp sales and, as such, labor may significantly be higher or lower as a percent of sales, depending on our comparable restaurant sales during the current quarter.

We are targeting total operating and occupancy costs in the 21% range. This total will include approximately $6 million in marketing spend. Our G&A expenses for the fourth quarter should be in the range of $14 million to $14.5 million. Pre-opening costs should be approximately $2.1 million for the fourth quarter based on five planned new restaurant openings, plus some pre-opening costs for restaurants that are expected to open in the first quarter of next year, including the two new restaurants in Indiana that we have shifted from 2016 fourth quarter to early Q1.

I expect our tax rate in the fourth quarter to be in the 27% to 28% range. Diluted shares outstanding should be around 24 million or so. And, finally, please remember this year's fourth quarter, as I already stated, is a 14-week quarter, as this is a 53-week year for us. As a result, we tend to get some additional leverage in operating and occupancy costs and depreciation for the 53rd week in Q4.

Looking ahead to 2017 we are currently finalizing our financial plan, which will be presented to our Board for approval in December. So, while we do not have an approval plan to review today, let me provide you with some of management's preliminary expectations for 2017.

As we mentioned in today's press release, we are now targeting 10 to 15 new restaurant openings next year. For modeling purposes, I would use 12 restaurants as of today. We currently anticipate opening 2 to 3 new restaurants in the first quarter and 2 to 3 new restaurants in the second quarter, with the remaining restaurants scheduled to open in the back half of next year.

As many of you know, opening new restaurants is not an exact science, and things such as weather, delays in permitting, or other construction-related issues may cause our openings to move from one quarter to another. As in the past, we will keep investors apprised of any movement of new restaurant openings.

A significant benefit from slowing our new restaurant growth plan is the tail wind this will provide for our margins and free cash flow generation as the revised new restaurant opening cadence is expected to result in further improvements in G&A and significantly lower capital expenditures and pre-opening costs. I also want to highlight that our new growth plan is not in any way an indication that we are pulling back from our belief in the strength of our brand and concept.

Our attractive four-wall economics from our new restaurants, especially given the lower investment in ongoing operating costs, continue to support our target of at least 425 BJ's restaurants domestically. We're not in a sprint to achieve this goal and we are going to be good stewards of our cash flow during this time of market uncertainly to make sure we remain disciplined and focused on the longer-term targets.

Moving on to some other metrics for 2017, while we have not finalized menu pricing, based on our current thinking I would expect it to be similar to this year, which is for menu pricing to be in the 2% to 3% range to offset inflationary pressure. Please note that this is as of today and is based on anticipated commodity pressure, labor and other inflationary factors. Since we tend to roll out new menus in the winter, spring and fall, menu pricing could change at the time. Also, our forecast does not take into consideration any discounting, mix shift or promotional activity, which could offset some of our menu pricing, or the overall macro environment.

With regard to our very preliminary commodity basket for 2017, we currently anticipate the cost of the aggregate commodity basket to increase around 1% next year. We'll tend to lock in most of our commodities for the next year over the next couple of months and, therefore, we will have a better idea of our commodity pressure when we report Q4 results in early February 2017.

With regard to labor, we'll absorb another increase in California minimum wage, as well as additional minimum wage pressures in other states. Separate of the state minimum wages, we have seen an increase in wage pressures in the restaurant business for hourly positions and managers.

Over the last several years, low cost capital for restaurant expansion has allowed for significant new restaurant openings around the country. However, based on today's tougher comparable restaurant environment we may have finally begun to see new restaurant openings across the industry slow. That being said, I expect to see additional upward pressure on hourly and management wages going into 2017.

We still believe there is some potential for additional labor savings and improved productivity as we continue implementing new ideas to our Project Q initiative, as well as some other sales-building initiatives such as hand-held devices, which we are currently testing in a few restaurants, that could ultimately improve labor productivity.

With regard to our operating and occupancy costs for next year, our goal is to hold the line on these savings we've already achieved in our model, and use additional savings to offset some of the normal inflationary pressures we face each year. While we have not yet finalized our marketing plan for FY17, I expect marketing to be similar to the last several years in the 2% to 2.3% of sales range.

On the G&A line for 2017, our goal is to continue to gain leverage as we grow. As we have said before, a portion of our G&A is growth related. Whether that is our opening teams, recruiting costs, travel or managers in training, all of those costs roll into G&A, and, therefore, with the slow down to 10 to 15 new restaurants next year, I would anticipate us to continue gaining leverage in G&A in FY17.

Our income tax rate for next year should be in the 29% range. And we expect that diluted shares outstanding for next year will likely be in the 23 million to 24 million range. Also, we are assuming higher debt levels next year and, therefore, anticipate a range of around $1.7 million to $2 million in interest expense.

Our CapEx plan for 2017 has not yet been finalized and approved by our Board of Directors. But at this time I would anticipate our gross capital expenditures for 2017 to be in the $80 million to $90 million range, and that is assuming the development of 12 new restaurants, maintenance capital expenditures, and other sales and growth initiatives before any tenant improvement allowances or sale leaseback proceeds we may receive.

We have a very robust restaurant pipeline and, depending on many different factors, this number could increase or decrease. We anticipate funding our 2017 capital expenditure plan from our cash from our balance sheet, cash flow from operations, our line of credit, landlord allowances and sale of leaseback proceeds.

With that, this concludes our formal remarks and I'll turn it over to the operator so we can open up for questions.

(Operator Instructions)

Nicole Miller, Piper Jaffray.

Good afternoon. Thanks for the update. You gave us a lot of industry information, which was helpful. Do you see grocery deflation having an impact on your business?

Nicole, it is obviously impossible to quantify. But that gap of food away from home and grocery versus restaurant side of things, it's certainly not helping. I don't think it's driving the traffic differences that we're seeing year over year as much as perhaps some of these other hopefully more temporal factors. But I do think it is part of the story.

And then I'm taking the store count to 10 to 15 next year. Are there any cash write-offs or anything we should be aware of with any associated previously signed leases or LOIs? Are you basically able to push those out with no impact?

Yes, we were able to push those out without any impact when we put together our pipeline.

I would say it is highly unlikely. There is none that we have seen in that category. Again, we haven't firmly decided on the exact pace and number of restaurants, Nicole, but I would be surprised if we saw that.

Okay. And just the last quick one for me, can you remind us of the growth versus net comparison on CapEx historically, or how much PI, or just how much to think about that generally going forward?

Nicole, we generally -- first of all, on new restaurants, it is gross of about $4 million. We try to get $1 million in TI. Some we get zero, some we get $1 million, some we get less. In general, we're probably looking at somewhere in the neighborhood of about $0.5 million per restaurant. So, if you figure 12 restaurants you can figure 12 times $500,000 gets you $6 million of TI that would come into it. We generally spend about $75,000 or so for maintenance CapEx, so you're looking at probably about $15 million or so in maintenance CapEx for next year.

And then, as we do every year, we put together a list of sales-building initiatives that we present to our Board. And, generally, depending upon how the year is going or whether we see an ROI from those sales-building initiatives, we will, for lack of a better term, call an audible on them and change them mid year.

In general, we probably target somewhere in the neighborhood of $15 million to $20 million in initiative CapEx that is in our number right now as I think about next year's preliminary CapEx number of $80 million to $90 million. And, again, those are always subject to change, and tend to move during the year.

Great. Thanks again for the update.

Matthew DiFrisco, Guggenheim Securities.

Thank you. I just had a question with respect to the new menu and lot of the innovation you have done as far as elevating the menu. Your traditional customer has been coming in for pizza. And I wonder, have you seen -- what is your mix right now of pizza?

And are the new menu items maybe a little bit less frequently used? Are you getting a consumer that might use you more like a cheesecake maybe once a month rather than, I think historically you have always been on that -- you've indexed pretty high as your core user coming in maybe and using you a little over three times a month. What have you seen in that behavior?

I'll take the general question and then I'll let Greg follow up, Matt. Because I think it is an important one to understand and remember. When we're talking about some of these guest check-building opportunities, we're not doing that -- remember, in the first part of the year we rolled out piadinas and grilled cheese that were real value offerings. So, given our varied menu, we're not saying that's a single focus for all of next year, but we do see in the testing that we're doing and the success of so many of our items on the higher spectrum of guest check for us, that there is an opportunity to do more and build check, particularly in a time that we can all see where traffic is challenged.

But don't take that to an extreme where it represents a change in our concept. We're still as committed as ever as having this varied menu that gives folks the choice from a price point, and a check perspective, to taste what they want to eat at a given point in time.

We have not had a preponderance of menu development that has changed or skewed the experience in that respect, if that is answering your question. And I don't see that happening. Some of our, both on the enLIGHTen side and some of the other areas of our menu have been and continue to be very popular. And I think there is an opportunity to do more of this, given the climate and what we're seeing in trend-wise there.

We had a strong pizza year last year. We had a bit more product development there. But it's remained very healthy. I think overall on a national basis, it is down a little bit because, as we open in new markets outside of our core in California, our pizza incidence is naturally lower in those markets. But market to market we still sell a lot of pizza.

We're actually generating -- probably more than you wanted to know -- but some good trial in pizza through -- one of our franchise nights is half off large pizzas on Monday night. And one of the strategic reasons for doing that is we want to introduce our great pizza to particularly newer markets. And that program is working well.

Okay. Did Greg want to add something to that, you said, also, or can I do a follow up?

The only comment I would make on that, it really just changes quarter to quarter based on our marketing at that time. A year ago, which we're going over right now, we marketed loaded burgers, and you get a switch from pizza to loaded burgers from that standpoint.

At certain times, I believe, in the third quarter of last year, as well, we did a [two in kind] in certain markets featuring our pizza. So, your pizza mix goes up at that time. So, it is a little bit of combination of things that Greg Trojan talked about, on top of what we're emphasizing during that quarter.

Okay. Greg Levin, can you also talk a little bit about -- the average check was a little confusing. I think you said average check but then you also implied your price. Was your price 0.8% in the quarter or was it 2% and then you had a negative mix representing the promotional activity?

That's correct. Our pricing was probably more in the middle to upper 2% range in that regard. And then overall our average check -- you would expect your average check to be up, call it, 2.5%, but your average check was only up 0.8%.

And the reason it was only up 0.8% was a variety of factors, which Greg touched upon. One is we're seeing an increase in traffic compared to dinner at the lunch time, so you've got more people coming in at lunch, it's lower priced items. As well as the fact that we are, frankly, having a tremendous amount of success out of the lunch items we put on earlier this year. So, that played into it.

When you're having a little bit less on the traffic for dinner, you're also not getting that additional beer sales or appetizers. And then the other side of it was really the promotional or marketing side of things, which we did increase year over year where we had a greater percentage of our check had some type of promotion against them from where we were a year ago. So, our effective average check only increased about 0.8%.

But, still, can you quantify how much of your checks are on promo? I don't want people to walk away and think this is like QSR. You're still pretty low.

That is why I mentioned it in my remarks that it is below 10%. We're not going to get too specific there, but compared to where a lot of our peers are in the industry as it appears, that puts us on the very low end, as you know.

Yes, below 10%.

Excellent. And then, last question, the pull-back in openings, is it probably correct to presume you're going to follow that same thing that you did in 2008 when you last pulled back growth? That was troubled markets, so, in that day, it was the Inland empire of California. So, would we suspect, then, Texas probably is going to see -- that's where the majority of your square footage curb, where you're going to curtail some of that square footage growth?

We had already been doing that, Matt. The bulk of our development has been outside of California and Texas, which is an important point to understand. It's not specific in the way that 2008 and 2009, where there were, because of the housing bubble, some real geographic differences of impacted areas. We had already made the decision that we're going to lighten up development given the amount of seat density and the number of seats that had been added in that market.

So, it is more of a broad. We think having more of our, like I said earlier, resources in general focused on four-wall sales building makes some sense. But it is not targeted in that specific geography or two.

Okay. So you will have Texas openings in 2017?

No.

No, no.

I'm just saying that is not new news. We had already made that decision.

No Texas openings. Good. Thank you.

David Tarantino, Robert W. Baird.

Hi, good afternoon. My question is coming back to the same-store sales performance. It's been a while since we've seen this level of underperformance relative to the industry. My question is, are you seeing anything in your data -- and I know you called out a lot of macro factors and some factors that are specific to you -- but are you seeing anything in your consumer feedback data or customer feedback data that would signal an issue with the value proposition or the brand? Or anything Company-specific in your data that you're looking at?

Thank you. That is a good question and thank you for asking that, because the answer is no. Actually our satisfaction scores, frankly, our internal team satisfaction scores are all improving. Our fundamental metrics continue to be very sound, David.

Really, the things that we think were driving that -- because you're right, we have been outperforming, by and large, for a good period of time now in terms of Knapp and Black Box -- is the preponderance of California in our mix is a big deal. And you look at the industry metrics relative to the West Coast and California, it bears that out.

And there is a bit of a perfect storm around lunch and the things that were impacting traffic. So, we did a little bit of this to ourselves on purpose to drive some more traffic at lunch. And then on top of this the macro factors that emphasize lunch in favor of dinner really had an impact on our check.

And I would emphasize the number I mentioned in my remarks. We had guest check growth of a year ago at 4%. And the impact of our loaded burgers and our enLIGHTened launches of a year ago, lapping those in the face of the double whammy of lunch versus dinner, we would do that differently in terms of product intensity this year if we had it to do over. But those are really the factors that drove the difference between industry performance this time around.

Got it. And then maybe turning to the unit growth outlook, a lot of the commentary suggests this might be a temporary pull back. But what would make you want to re-accelerate the growth? What would you need to see to have those openings move higher going forward?

I just think the biggest factor is momentum on top line from an overall macro and from a concept perspective. It is clearly tough out there. The driving force, although there is some other important advantages, in my mind, of doing this, is to martial more of our internal resources, and that is people, that's limited time in the day, and limited number of folks that we have here at the RSC and our restaurants focused on battling those headwinds.

One of the things that I think that generally can be a little underappreciated about the history of our concept is how well we have done running, fundamentally executing our base restaurants and opening 10%-plus unit growth historically. And we are really good at doing both. But ultimately there is a tradeoff between how many resources you are going to put on one front versus the other. To me, this is all about putting more of those resources on driving traffic and sales.

Even though we have proven we can be pretty balanced about it, given the difficulty we're seeing in the external environment, I want more troops on that side of the equation. When we see that being successful, that would be the time where we would accelerate growth.

Got it. Makes sense. And then, Greg Levin, is there any way to frame up the margin benefit from slowing down the growth, an all-out school math equation? What would the benefit of the EBIT margins be just from changing the growth?

David, it's a great question. I don't know if I have that yet or not. Or, I should say, I don't think I have that yet. We haven't put together our plan for next year and really worked it. What you tend to get out of it, I just don't know what the answer is.

Obviously the 17 restaurants that opened this year, they moved from, for lack of a better term, freshman to sophomore. So, they're going to play better and execute better, being only replaced by 12. So, I don't know where it is yet.

It also depends on what you're thinking about comp sales environment because obviously it will get masked from that standpoint. You will definitely see lower G&A. In that regard, we've always talked about G&A growing at somewhere in the neighborhood of 70% of top-line growth, and that top-line growth is always dependent upon 10%-plus unit growth in that regard.

So, your G&A will come down, pre-opening comes down. I don't know on the restaurant level margins yet until we start really finalizing, for lack of a better term, pencil to paper on new restaurants.

Okay. I'm sorry to ask so many questions but on G&A coming down, does that mean the growth in G&A dollars comes down? Or do the dollars actually decline next year?

No, the G&A dollars will go up because you're still going to have growth from that standpoint, but they wouldn't go up nearly as much as what they would year to year.

Got it, okay. Very helpful. Thank you.

John Glass, Morgan Stanley.

Thank you very much. Just maybe staying on that theme of benefits from slower growth or dynamics around slower growth, first, is there any benefit to lower cannibalization? Or has cannibalization not really been a factor given the variety of markets right now?

I think there is certainly some cannibalization, John. That's been less though, as we have moved the bulk of our development out of California and Texas. But, nonetheless, we're still clustering the development of these restaurants, so there is intentional cannibalization.

The other thing I would tell you is, as we have less of a mix going forward of honeymooning restaurants, will help us from a comp perspective, as well, because, as we have often said, its been pretty consistent, is our restaurants new to the comp base bring our overall comps down about 50 basis points typically. Over time we'll have less of a drag there.

And you had mentioned slowing helped you redeploy some resources from new stores to existing stores. Did you mean by that just human resources, meaning you can keep more people in stores? Or did you mean something else, that you were going to redirect some certain spending towards sales-building? I wasn't sure if it just meant people or you're actually going to spend more.

It is really all of the above. David was asking the question to Greg around quantifying the financial benefits, and there are quite a few, quite a list that we can get fairly precise around in terms of pre-opening, et cetera. But the hidden costs of growth, one of the big ones is the amount of manager churn and movement in the system that it drives.

We're going to be here some day telling you we're going to amp up growth and how excited we are about it. So I don't mean to get too excited about slowing down here, either. But the fact of the matter is, in a time like this, slowing down that churn within our restaurant and keeping our managers in place longer has measurable margin improvement and sales-building improvement opportunities that go with that. And that is a big thing within our restaurants.

And then we've got a team here in Huntington Beach that, slowing down this growth and putting those resources to bear against some of the ideas we have around speeding up our restaurants and putting capital behind some technical capability that will make us better from a guest perspective. Those are all limited resources that we can on the margin put towards sales building.

And then, Greg Levin, you mentioned the comps quarter to date excluding weather. Just so we're on the same page, what was the weather impact, or what would comps be if you included the hurricane impact?

Right around 2% or so.

A decline of 2%?

A decline of 2%, yes. So, it's about 50 bps in there or so, related to Hurricane Matthew.

Got it. Thank you so much.

Chris O'Cull, KeyBanc.

Thanks. Good afternoon, guys. Greg, I wanted to follow up on the underperformance in the quarter. Did BJ's start to underperform the segment in new geographies during the quarter or was it just a function of industry sales slowing in California and BJ's being overindexed to that state?

It's the latter there. As I mentioned in my formal remarks, September took a step down in California. We were surprised by it in that regard. And, as a result, September became a much more challenging period for us in the quarter. And September, as we all know, for everybody that follows the restaurant industry, tends to be your lowest weekly sales average month of the entire year.

So, all of a sudden we got this low weekly sales average and negative comps on top of it, and it is hard to leverage the business in that quarter, because of that. So, that is what happened when we look at the quarter versus maybe in July where we said we were down 2%.

Look, we talked about it in July that California has softened in June. Those were part of our formal remarkets. I think we heard other companies talk about that same dynamic, June into July. That would be maybe more a California-concentric concept. Then we did see that step down in September.

That being said, we've seen California come back a little bit here in October. It is not where we want it to be. When we look at the numbers, again, year over year, you look about how busy our restaurants are and think about how busy they are in California. For us to do a plus 6% in California a year ago in September and do 2.5% guest traffic growth in California and how busy our restaurants are a year ago, to some degree -- I hate to blame it on prior year or do a two-year stack -- but it was a tough hurdle for us to go up against.

We don't know if El Nino from a year ago ended up driving up comp sales in California where we had this hotter weather, or what it was. It was very odd. And I think the numbers, as we get into October, I've seen, suggest that we've gone back to a June/July time frame, which isn't great. I think we're actually doing a little bit better than that. But we've definitely come up from where we were in September, looking at California.

Okay. Have you guys started to outperform again in early 4Q?

I haven't looked at -- I just don't have it specifically -- the Knapp-Track and Black Box directly on those two for Q4.

Greg, there seems to be more self-inflicted issues every quarter, I guess related to menu and maybe marketing management. Has there been any changes to your testing process, or have you considered retooling that process?

I don't think there is, Chris. I understand what you're getting at. I think what we're trying to do is give our very best explanation to the investment community as to what we're seeing going on out there.

Maybe we're doing it to a fault in saying -- you know what, our piadinas and grilled cheese are really successful. Or maybe we said that we want to go after grilling this time, barbecue grilling versus just purely on the burger standpoint. And then you can look at it year over year and say -- wow, that promotion on burgers were better a year ago than what they were this year.

But I don't think there's been any change in our business. I don't think there's been any change in strategy. I know we got the call on -- what about pizza -- earlier. Two years ago when we rolled out a really heightened enLIGHTened menu category and came on with that side of things, our comps turned around and went into the plus territory with a lot of these new menu items because they've been very successful from a guest perspective.

So, I don't think there is any change there. I think it is more of the fact that we're trying to be as honest with the investment community as to what we're seeing everyday and what we've done versus a year ago. Versus saying that we did something that was unsuccessful or is a change in what we've done historically.

Okay. And then I apologize if I missed it, but what comps do you think you need in 2017 to maintain restaurant margin?

It is always a challenge there because when I look going over a negative [3.4] that we're going over right now, realistically, we should be able to get margins back into the 19%-plus range. That's what we always talked about for our business. And, yes, we got there faster than what we were originally anticipating, in a way, but that was all predicated around that 1%-plus -- well, it was really predicated around the 2% comps. At the time we were able to get more value savings out of Project Q and other cost initiatives. I think you start to go back to the 1%-plus range.

And, frankly, that is also dependent on how you get there from a comp sales perspective. 1% all on pricing is a lot easier to manage your margins on versus 1% on 1% traffic and 0% pricing. So, I think it is probably you're looking at 1%-plus range where you need to start going to get margins back to where we want them to be.

Okay. And then, Greg, my last one is just, in the past, you guys decided low, today you decided low unaided awareness is an issue, especially in newer markets. How are you measuring whether the new marketing program or campaign is improving awareness? And are you able to measure whether the intent to return for new or last users is consistent with what you're seeing from the core users of the brand?

This is Kevin Mayer. We have an ATU study in awareness, trial usage study in place, proprietary. We look at not only our brand but as well as competitive brands. And we look at it regionally.

So, we are able to tell, understand our awareness, both aided and unaided, as well as intent, consideration, as well as quality of the attributes. So, we are tracking that both at the national level as well as a regional level. And over time we'll be able to wash it away as to how we're doing and measure the success of our marketing.

And I'd just reinforce something I said earlier, because it's a related question around are we seeing any change in those metrics. If anything, in terms of our direct connect scores and satisfaction of our guests and the intent to return of new tryers, which is one of the key things we look at in that ATU, are all very positive.

Great. Thanks, guys.

Will Slabaugh, Stephens.

Thanks, guys. I wanted to go back to the capital side of things. I know you said you could spend that excess free cash on both sales-building capital, which it sounds like could be more tech involved. So, I wonder if you could talk about more what that sales-building capital could be? Then what that mix of excess free cash flow could mean between share repurchase and that sales-building capital.

That is exactly what we're working through on a planning process, that balance. And, as Greg said, we look at it iteratively even throughout the year. I'm not going to get super-specific here, but Greg did give an example of the handhelds from a speed of service. We like what we're seeing from that perspective. Our servers love it.

So, that would be an example. And there are several others that involve technology and back of house process that we have been working on this year that look very promising.

But we also think that the metrics around the value and the growth opportunity of our Company in terms of stock price are quite attractive. It's nice to have a balance sheet like we do, that we have that kind of flexibility, and it is not an either/or. But in terms of that balance, I can't give you a ratio or a hard number in that respect, as we're working through it as we speak, but I would expect to see both.

Understood. And one quick follow-up on to go and potentially delivery. I know you mentioned to go is something you were going to focus more on. We've seen some of your peers who, would argue, are much more mature than you are, that have been seeing some pretty good results with to go as they've been marketing that. So, I'm curious how far along you are with plans in terms of launching more to go offerings or more to go marketing to get people more aware that's something you're going to focus on.

We have done some menu work there, but what we want to do is, given the busyness of our restaurants, is make sure we direct that to items that are right for the guest and right for us. So, there is a bit more menu work to be done there before we launch into the marketing aspect.

And given the fact that our app really makes this a seamless experience, as well, we think there is a lot of opportunity in combining them both. There is a bit more marketing work to be done towards the end of this year and I'd look to start seeing it into the early part of next year.

Great. Thank you.

Jeffrey Bernstein, Barclays.

Great. Thank you. A couple of follow-up questions. First, just on the comp, if I understand it right, I think in the third quarter you started down 2 for the first few weeks. I know you said September was the worst, which, just based on the averages, would seem like September was running down mid single digits.

If that is close to accurate, and now you've re-accelerated to actually down just 1.5 in October, that would seem to be a significant improvement in trend. I'm just wondering if there is anything specific you attribute that to. I know you mentioned the California hit in September, but is there anything that you have done specifically, or anything that you could point to, to explain what seems to be a sharp re-acceleration in the trend?

I'd like to say that we've unlocked something magical to bring around that turnaround in momentum. But it is still negative so we're not dancing in the streets here. We, I think, from a marketing perspective and a messaging perspective, are in as good a place as we have been in for quite some time. And we have a new menu in place with some items that we think are driving some good incidents, as well.

But if you look at the macro differences, we're not in the middle of an Olympics. I think, hopefully, people are tiring of watching debates. But the level of distraction from, particularly, I would again reinforce -- and you can see it in the California numbers what happened during Q3 in terms of prime time -- those macro forces are somewhat easing. And hopefully post-election people will get into a more normal rhythm and mindset as well, and we would look forward to that happening, too.

Unfortunately, you got one more debate tonight to get through. Otherwise, you're in better shape.

I don't know if there is going to be a lot new there, though, so I'm hoping viewership will be down.

Good luck with that. If you're down 1.5 quarter to date, I know you're lapping, I think, a 0.7 positive last year. Is there any sequential comparisons the rest of the year? It would seem like compares got tougher the rest of the year last year. Is there anything we should be aware of as we look to the rest of this quarter?

It wasn't any tremendous change month to month or period to period. I think we might have said at this time a year ago that we were up 0.5%. We finished the quarter at 0.7. But it wasn't 0.5%, 0.5%, and then all of a sudden December was up 3% or something. Very close.

Got you. And just lastly, on the unit side of things. You said we assume 12 openings for next year. It would seem like two of those are the push-back that you got, the ones you pushed off from Indiana this year. But if we were sizing up that dozen openings, new versus existing markets next year, if you can provide some color on that and whether or not the pre-opening costs -- I don't know whether we take a straight ratio of 12 units in 2017 versus the 17 in 2016, or might there be some nuance with that where the pre-opening cost might be lower, for whatever reason?

I think you could still do pre-opening costs somewhere about 425 or so, where we have been, or so, over the last couple of years. We did the proto 7,000.

Generally speaking, there is two new markets that we're looking at right now that are on our short list. The rest are in existing markets but they're in markets that we're continuing to build out, whether that be Indiana or Ohio, or even we just went in this year to North Carolina. We're looking at a couple sites in that area. So, they're existing markets but they're still a little bit of newer markets in that regards as we continue to try to build with that cluster impact and build our brand awareness in those markets.

Understood. Thank you.

Andy Barish, Jefferies.

Hey, guys, just quickly, the top-line environment, are you going to present to the Board a plan that includes positive comps for next year?

Andy, I don't know if we know the answer to that, yet. It is a great question, and I'm sure our Board members are listening. I will tell you historically they have not allowed us to present a plan to the Board with negative cost sales. So, the likelihood is probably, yes, it will be positive. But we don't know until we get together and we put together our scenarios and we talk it through with them.

I think more importantly, though, Andy, when you look at the back half of this year and the challenging environment -- and, look, nobody on this call has a crystal ball -- but I do think there are a lot of temporal issues and factors that I'm optimistic that it will be better next year. And that would include an environment that is positive from a comp sales perspective.

Hope you're right. Just one quick final one on lunch, the lunch daypart, I'm assuming it is not positive, it is just down less than the overall comp. Is that what you were referring to on lunch becoming a bigger part of the mix with your efforts on value, and things like that?

That's correct. Specifically around traffic.

Okay. Thank you.

Sharon Zackfia, William Blair.

Good afternoon. Just two quick questions. Do you think the comp weakness in September and maybe in October has anything to do with NFL viewership?

And then, secondarily, can you remind me, on the fourth quarter, are you going to do comps on a 13-week basis or 14-week basis? And is that going to include or exclude the holiday week?

Sharon, I'll take the NFL one. It is interesting that you have been reading that, as a very depressed Jets fan looking at the NFL. But I don't think that is impacting our business meaningfully. We're not a sports-focus concept where we go up and down with events.

If there is a team in the World Series one year and not the next, we'll see something like that. So, I don't think a 10% viewership change -- which I think is what they have been talking about -- is a meaningful difference to our business.

But I have been reading it and thinking about it. I think what people might be missing a little bit is what it says about the mentality of people in the mood to be out and even watching football. It's not a jovial time.

I don't know, it is hard to describe much differently than that. I just think the mood is pensive in general. And why people aren't out in restaurants as much might have something to do with why people are not watching as much football. Not to play psychological counselor here, but I think of it more in terms of that than specifically traffic-driving.

And Sharon, it's Greg Levin here, the other Greg. We'll do what we did I think in 2011. That is, we'll report on 13 weeks, so we'll keep it apples to apples in regards to of how comp sales came through. And then we'll end up pulling it out of weekly sales average and everything else from that standpoint exactly like we did it back in 2011.

Okay. Thank you.

And that does conclude the question-and-answer session and today's call.

All right. Thank you, everyone.

Thanks.

Again, this does conclude today's conference call. Thank you all for your participation.