BJ's Restaurants Inc (BJRI) 2016 Q4 法說會逐字稿

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

Thank you, Operator. Good afternoon, everyone and welcome to BJ's Restaurants fiscal 2016 fourth quarter investor conference call and web cast. I'm Greg Trojan, BJ's Chief Executive Officer and joining me on the call today is Greg Levin, our Chief Financial Officer. We also have Greg Lynds our Chief Development Officer, and Kevin Mayer, our Chief Marketing Officer on hand for Q&A.

After the market closed today, we released our financial results for the fourth quarter of fiscal 2016 which ended Tuesday, January 3rd. You can view the full text of our earnings release at our web site at www.bjsrestaurants.com.

Our agenda today will start with Rana Schirmer, our Director of SEC Reporting, providing our standard cautionary disclosure with respect to forward-looking statements. I will then provide an update on our business and current initiatives and then Greg Levin, our Chief Financial Officer, will provide a recap of the quarter and some commentary regarding fiscals 2017. After that, we'll open it up to questions.

Rana, please go ahead.

Thanks, Greg. Our comments on the conference call today will contain forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. Forward-looking statements involve known and unknown risks and uncertainties and other factors that may cause actual results, performance or achievements of the Company to be materially different from any future results, performance or achievements expressed or implied by forward-looking statements. Investors are cautioned that forward-looking statements are not guarantees of future performance and that undue reliance should not be placed on such statements.

Our forward-looking statements speak only as of today's date, February 23, 2017. 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 you're all well aware, the back half of 2016 and Q4 in particular was a very challenging time for restaurants and retail in general. Although we're not satisfied with our Q4 comparable restaurant sales of minus 2.2% and our full-year comp sales of minus 1.3%, BJ's delivered a solid fourth quarter and full year financial and operating results.

We continue to take meaningful market share in our segment and out perform both industry traffic and sales trends for the quarter and full year. These results highlight the value of our brand, the commitment of our team, our menu offerings and quality value proposition we deliver to our guests.

Today we'll review the fourth quarter results, the elements of our plans to strengthen sales, our current expansion plans and the flexibility we have to operate through the current environment while returning capital to our shareholders.

Looking first at Q4, our traffic for the quarter was 140 bps better than Knapp Track and 150 above Black Box. For the full year, we outperformed industry traffic trends by 90 and 100 basis points respectively.

Our cumulative over performance in terms of traffic versus the industry is about 270 bps over the last three years marking an annual rate of about 90 bps per year. And keep in mind that includes the approximately 50 basis point drag we have on our traffic comps as our new restaurants fall into our comp base.

During 2016, we opened 17 new BJ's Restaurants, predominantly in newer markets for our concept. The success of these openings allowed us to capture even more market share in these markets not yet measured by comparable sales or traffic. This strong relative performance speaks to the unique positioning of our concept at the polished or upper end of casual dining.

Offering quality and menu diversity comparable with higher guest check concepts but at price points closer to mass casual competitors.

Importantly, we expect that the current difficult operating conditions will continue to take their toll on weaker concepts and we're positions BJ's to be a significant beneficiary of the shakeout, weaker competitors and an improving environment based upon our continued innovation, our sound execution and our financial and balance sheet strength and flexibility.

Considering the top line challenges our operators faced on the back half of the year, they did an excellent job of controlling our expenses and delivering solid results in terms of margin performance and profitability.

In the fourth quarter, net income grew 18% and diluted earnings per share rose almost 30%. Included in this year's fourth quarter a is a benefit of $800,000 related to our reversal of performance equity awards. Excluding this benefit, our net income and diluted earnings per share would have increased by approximately 12% and 23% respectively.

For the full year of fiscal 2016 and excluding the aforementioned equity comp benefits and the $2.9 million gain from a lease termination in 2015, we were able to grow net income and diluted net income per share by approximately 4% and 13% respectively.

Our model continues to drive significant cash flow as we generated almost $140 million in cash flow from operations in 2016. Our solid competitive performance and cost management aside, our focus continues to be on creating stronger sales momentum on an absolute basis regardless of the pressures of the marketplace.

I believe given the advantages we enjoy as a more relevant, contemporary concept, doing over $5.5 million per restaurant (inaudible) and AUV's that we have the ability to reverse 2016's 1.3% negative comp sales trend despite the challenges presented by the environment.

Something to keep in mind and that we don't talk about that much is that our average guest is younger and skews toward higher household income than the average casual diner. We indexed 9 points higher in the 21 to 34 age group and 4 points higher in the 35 to 54 age group.

In order to better leverage these advantages, we have been testing and pushing ourselves to think innovatively to drive sales and have specific initiatives we'll be implementing this year.

Before I address these though, it is important to reference our fundamental operational execution in our restaurants because without the basics of delivering truly memorable food at a surprising value with hospitality and fun as a foundation, all of the innovation and good ideas in the world are not going to matter.

Although there is always room for improvement in every aspect of our execution, I'm pleased report our operators had another great year as we improved the execution in our restaurants. Our [MPS] metric meaningfully improved in all key measurement with the biggest improvements coming in our value and food quality scores.

We recognize, however, that executing better in and of itself is not sufficient to offset the challenging sales head winds we're facing. And as such, we have several strong sales building initiatives that we're rolling out which in total represent very solid top line opportunities.

Significantly, I also think these strategies will serve to even further differentiate our concept from the world of mass casual dining. Not coincidentally, these efforts hit squarely on our long standing macro sales building strategies of further differentiating our food quality and uniqueness, improving our speed of service and further refining our brand messaging and media strategies while improving our value to our guests and leveraging our broad menu in the takeout and delivery channel.

So let me begin with our menu initiatives. Last year, we began testing new slow roasting oven technology in a number of select restaurants. Our goal was to augment our pizza ovens and broilers, which by the way are wonderful workhorses for our salmon and chicken dishes, with additional oven capacity to slow cook to perfection larger format proteins like prime rib, turkey, pork shoulder, ribs, chops, et cetera.

The quality goal of these items is to at least match, if not improve upon products found in restaurants with price points 50% to 75% higher than ours. We started by slow roasting our ribs and pork shoulder products overnight. And we debuted a slow roasted prime rib featured on Tuesday nights in these select restaurants. We sold the prime rib as a bundle with salad, sides and our famous Pizookie for $26.95.

We've since added double cut pork chops which I would put up against anyone's product regardless of price point. In addition we're adding prime rib and slow roasted turkey dipped sandwiches to the roll out of these new ovens.

Our prime rib Tuesdays performed so well that we decided to move their availability to Friday and Saturday nights and all day Sunday. Thought it's early, we really like what we're seeing from these products and tests.

As encouraged as we are about these specific items, the power of this cooking platform for future product development and most importantly, further food quality differentiation is what is truly tantalizing. We plan to have these new slow roasting ovens in all of our restaurants by mid April and the new menu items available everywhere for our celebration season beginning with Mother's Day onto our graduations and finally, Father's Day.

In addition to these protein innovations, we have taken the opportunity to rework our sides and snack offerings as well. We'll be offering a number of new premium side options for a small upcharge as accompaniments to our entree offering as well as additional options as stand alone snacks. Examples include sauteed quinoa and kale, ginger cream corn and couscous mac and cheese which we believe all of which appeal to a broad range of customers and preferences.

The trend toward smaller tasting experiences continues to grow. And we think our dining and drinking occasions are well suited for these check building additions. We're also attacking our speed of service opportunities through the addition of new technology in our restaurants. We have tested several iterations of hand-held ordering devices over the past few years. And with the learning from these tests, we have developed an interface with our exist point of sale system using hand-held tablets which is resulting in nice improvements in our service level.

As many of you will recall, given the high volumes of our restaurants, we have an opportunity to speed up our experience at times when our guests are in more of a hurry such as a lunch away from the office, a dinner before a movie, et cetera.

We're finding our hand-held technology along with simultaneous modifications to our labor service model are leading to nice reductions in order time and initial service to our tables. Most importantly, this is translating into measurable improvements in our pace and overall recommend scores in our restaurants.

In addition, these devices provide a platform to add EMB card processing in the near future which will reduce our credit card charge back exposures significantly and add even more convenience to our experience. We have begun implementing the new ordering devices and plan to steadily roll them out in our restaurants to be completed in early to mid August.

Driving and improving our value proposition has been key to out performing the industry in traffic. We were aggressive two years ago in adding middle of the menu and enlightened items at lower than average category price points.

And our brew house burgers, entree salads and pita taco's have all been very successful. Last year, our lunch value offerings added solid boost to our lunch business. In addition, our measured but significant increase in promotional activity primarily through our loyalty and digital media platforms has also provided more value stimuli.

This year, we're expanding our value weaponry through the expansion of our franchise night model. Last year we rolled out a number of daily brew house specials, a few nationally and several others on a regional level. This year we'll be adding either a beverage offering to our current food specials or vice versa where food offerings are going to be added to our beverage specials.

These programs have driven solid traffic build and we like that they give us another alternative for our value conscious guests which gives us a chance to drive trial and incidents across some of our most traditional and iconic menu options.

Another sales building initiative we've been working in growing our off premise sales business through takeout and delivery. Our off premise penetration runs about half the industry average at just about 5%. We plan on leveraging our excellent mobile app technology and recent infrastructure improvements to our web site to drive higher off premise incidents.

We're now testing delivery by connecting through an API program which aggregates available drivers through a number of delivery services. We're also improving our takeout packaging in large party and catering menu options and over time we think that the (inaudible) breadth of the menu which has driven much of our on premise sales success will lead to similar success in growth for BJ's in the takeout and delivery channel.

As excited as we are about each of these opportunities, the power of our great people in our restaurant delivering our quality and hospitality along with our growing marketing scale and experience to drive awareness in both current and newer markets are important and consistent attributes to our sales building strategies and initiatives.

Another is our persistent focus on driving further cost efficiencies in our restaurants and our overall system economics. As many of you know, we have eliminated significant costs and brought great efficiencies to our operating infrastructure through our supply chain initiatives along with team member led in restaurant project (inaudible) improvements.

In 2017, we'll once again rely on savings from the work we performed last year in negotiating new contracts, eliminating waste, et cetera and this effort continues as this year we'll be stepping up our efforts in both supply and contract service procurement.

This is a never-ending process as we analyze and negotiate with vendors and suppliers to offset the increasing cost of doing business in our industry. As I've said before, these efforts help us build sale. By enabling BJ's to offer a better value to our guests while improving the economics of our business.

Lastly, let me comment on our development strategy headed into 2017. Late last year, we indicated that given the current environment, we intended to slow our pace of development for several reasons and reflecting this, we had ten restaurant openings in our plan this year.

Our new restaurant performance has been quite strong with some of the best opening sales volumes we have seen in comparable markets in several years. We're very satisfied with how we've opened new restaurants last year, particularly considering how many opened in new and younger markets for us. However, we believe it is prudent to slow development at this time for several reasons.

First and foremost, it allows us to channel more of our internal energy around these great sales building initiatives I just described and the great opportunities we have to grow our top line.

Secondly, the combination of our long-term expansion opportunity, strength of concept and strong balance sheet makes BJ's current equity valuation attractive and represents opportunities to further returns of capital through buy backs.

Finally, I believe in time real estate values will improve with the demise of weaker performers in our space thus presenting even better opportunities for BJ's.

So in summary, we view our moderate slowdown as bringing real benefits and only marginal opportunity costs. I view the current industry challenges as a great opportunity for us to shine and to widen the gap between our concept and much of the competition in our space. The top line challenges coupled with higher labor cost has already spurred the slowdown in development and demise of several weaker concepts.

This dynamic will continue and over time, bring balance to the capacity and demand dynamic which has put pressure on comparable restaurant sales particularly in high growth US geographic regions. As I've said many times before, we're privileged to have one of the industry's most unique and beloved concepts and most importantly, our great team members behind us on the battlefield.

Our opportunities are clear. We have the right strategies and initiatives in place to accomplish our objectives and our financial footing is solid. Our teams are up to the task of converting the current challenges into more opportunities for BJ's and our shareholders.

So now let me turn the call over to Greg to provide a recap of the quarter.

All right. Thanks, Greg. And let me provide some additional perspective on the fourth quarter and 2016 operating results. After which I'll share our current perspective on expectations for 2017.

Total revenues for the 2016 fourth quarter increased approximately 14% year-over-year to $265.6 million while our net income and diluted net income per share were $12.9 million and $0.55 respectively. As noted in this afternoon's release, this year's fourth quarter was comprised of 14 weeks as compared to last year's 13 week fourth quarter. This extra week accounted for $21 million in sales for the fourth quarter of 2016.

Excluding this extra week, sales for the fourth quarter of 2016 increased to $244.5 million which is an approximate 5% increase compared to last year. The extra week which is for the period from Wednesday, December 28th to Tuesday, January 3rd, is a very high sales week for us as it is right in the middle of the Christmas and New Year's break for many people.

Our weekly sales average for this week was approximately $113,000 compared to $102,000 weekly sales average for the entire fourth quarter. As such, we estimate the fourth week benefited our Q4 earnings per diluted share by approximately $0.10 to $0.11.

Our fixed and semi fixed occupancy and operating cost as well as depreciation expense benefited most from the extra sales week and its relationship on our margin.

In regards to comp sales, our comparable restaurant sales declined 2.2% on a 13 week basis and 2% on a 14 week basis. As we've already heard from any other restaurant and retail company, December was a challenging month for the industry. Especially how the holiday period lined up this year with Christmas Eve and Christmas Day being on a Saturday and Sunday, respectively.

In fact, for BJ's, our comparable restaurant sales through the first ten weeks of the quarter which is from the period September 28th through December 6th were only down 1.6%, or generally consistent with what we reported at the time of our Q3 conference call.

Looking at the industry data from both Black Box and Knapp Track, it appears our trends while outperforming the indices were pretty consistent with the casual dining industry, especially in December which saw that marked slow down for casual dining especially toward the end of the period. Cost of sales for the quarter of 25.7% with 100 basis points higher than a year ago quarter but pretty consistent with Q3's cost of sales of 25.6% and was also in line with our expectations. The increase from the prior year was primarily due to the change in the way we internally allocate promotional costs between cost of sales and marketing.

As we mention, on prior calls in the past, we recorded to marketing a food cost charge related to promotional activities which resulted in lower cost of sales and higher marketing expenses. However, given our efforts to increase marketing activity particularly due to activity in our loyalty program, it was prudent to change this practice.

Our labor was 34.9% for the fourth quarter and that represented a 70 basis point increase from a year ago period. Breaking down labor for the quarter, our hourly labor was up about 100 basis points from a year ago which was due to higher hourly wages in both the kitchen and dining room, and the negative leverage related to comparable restaurant sales performance. That was offset by lower incentive compensation and some leverage from the higher sales volume week of that 53rd or 14th week during the quarter.

Our operating and occupancy costs decreased by about 50 basis points to 20.7% from last year's fourth quarter. As I mentioned, occupancy and (inaudible) and semi-fixed monthly operating costs benefited the most from the extra week of sales. Based on our internal estimates, our occupancy and operating costs would have been about 50 to 60 basis points higher than the reported 20.7% if we excluded the benefit of the extra week of sales. This would put our operating and occupancy costs in the low to mid 21% range which is pretty consistent with our current trends over the last several periods.

Included in operating and occupancy costs we had approximately $6.1 million of marketing spend which equates to 2.3% of sales and by comparison marketing spend in last years fourth quarter was $5.3 million which also amounted to 2.3% of sales.

Overall our restaurant level cash flow margins for the fourth quarter were 18.7% including the extra week. Excluding that extra week, we estimate that our restaurant level cash flow margins would be in the low 18% range. Please remember that our restaurant level margins include marketing spend which met many other restaurants companies include in their G&A.

As such, excluding marketing spend, our restaurant level cash flow would be around 21% on a 14 week basis and 20% on a 13 week basis which we still consider to be some of the tops in casual dining. Our general and administrative expenses of $14.3 million decreased by 20 basis points compared to the same quarter last year at 5.4% of sales.

G&A came in lower than anticipated as we reduced restaurant support center incentive compensation by approximately $700,000 and that's based on our 2016 performance. And we also reversed approximately $800,000 of equity award compensation or equity award expense related to our 2014 performance (inaudible) grant.

Our pre opening expense was $1.7 million which was primarily related to the cost of opening five restaurants in the fourth quarter plus some additional opening costs related to restaurants expected to open in the first half of 2017. For all of fiscal 2016, our pre opening costs were around $7 million for 17 restaurants and that brings our average opening cost in line to a little over $400,000 per restaurant. I do want to remind everyone that's down from about $500,000 per restaurant back in 2013 which on 17 restaurants represents about a $1.7 million savings.

Our tax rate for the fourth quarter was 21% which was lower than anticipated primarily due to a decrease in our uncertain tax benefit liability and valuation allowances.

In terms of capital allocation, we continue to use our strong cash flow from operations to execute our national expansion plan by opportunistically repurchasing shares. For fiscal year 2016, cash flow from operations was approximately $138 million compared to our gross total capital expenditure for fiscal 2016 of $109 million which includes the construction of the 17 new restaurants as well as maintenance CapEx and other sales building initiatives.

As a result, we generated almost $30 million of excess cash flow while growing our restaurant base by 10%.

We also continue to be committed to enhancing shareholder value through our share repurchase program which we believe compliments the growth and returns we're driving from our on going national restaurant expansion plan. In this regard, during the fourth quarter, we allocated approximately $47.6 million toward the purchase of $1.3 million shares of our common stock bringing our total repurchases for 2016 to approximately $95 million for the purchase of 2.5 million shares.

The weighing of the repurchases in our share count is now more evident as the 14% rise in our Q4 revenue led to an 18% increase in net income and an approximate 30% increase in diluted earnings per share.

With regard to liquidity, we ended the fourth quarter with approximately $22 million of cash and $148 million of funded debt on our $250 million line of credit. At the end of fiscal 2016, our leverage ratio was slightly greater than one turn of debt to EBITDA at a one to one, or 1.1 to 1 ratio.

As Greg Trojan mentioned, we plan to open ten new restaurants for fiscal 2017 which will allow us to again generate significant free cash flow which we will use to opportunistically repurchase shares. Additionally, while we do not have a set targeted debt to EBITDA ratio, we believe that our strong cash flow from operations coupled with our overall lower CapEx for fiscal 2017 that we have the room to increase our leverage ratio while maintaining a flexible financial structure.

In fact in Q1 2017 to date, already this year-to-date, we have purchased over $21 million of BJ's shares using a combination of cash flow from operations and funded debt. In total since the authorization of our initial share repurchase program, which began in April of 2014, and including the $21 million we purchased so far this quarter of fiscal 2017, we have repurchased and retired approximately 7.9 million shares of BJ stock for approximately $312 million. This leaves with us approximately $38 million remaining under our current share repurchase authorization.

Now, before I open the call up to questions, let me spend a couple of minutes providing some commentary on expectations for 2017. All of this commentary is subject to the risks and uncertainties associated with forward-looking statements as disclosed in our filings with the SEC.

As Greg Trojan noted, we're rolling out a variety of sales driving initiatives in the first half of this year. As such, we will incur some training related investment costs for these initiatives during the first half of this year and then expect to see the benefits from these sales driving initiatives in our comparable restaurant sales based in the second half of 2017.

Specifically, as Greg Trojan mentioned, these initiatives include our new slow roasting ovens which will be fully implemented by the end of April and ready for the Mother's Day holiday in May. Our hand-held server tablets which we expect to be fully implemented by August and delivery and new takeout offerings in all restaurants later this year.

Starting early next month, we'll also begin promoting our expanded daily brew house specials featuring some of our signature menu items at very attractive prices. On top of that, we're continuing to roll out our new labor service model which should provide our operators with better information to properly staff our restaurants in 15 minute increments based on sales levels as well as other cost and productivity initiatives.

Until these initiatives are fully rolled out, we believe it is important to be conservative on comparable restaurant sales for at least the first half of this year. Sales for the first seven weeks of this quarter have started off soft as the historic rains in California have really impacted our 63 restaurants located in the state.

To date, we are down about 2.5% in comp sales. Also because last year was a 53 week year, our first week of sales for fiscal 2017 started on January 4th as opposed to the end of December for last year.

As I mentioned, this is a strong week for us both in terms of average weekly sales and positive comp sales. If this week was included in fiscal 2017, we were apples to apples comparison with last year, our sales to date would be down about 1.9%. So that shift in the 53rd week is having an impact of about 60 basis points on sales to date in the first quarter.

Considering the impact of the rains and just a little bit more detail, we've had over 20 days of rain in southern California this year compared to only eight days last year. Additionally, both northern California and central California have seen an approximate 50% plus increase in the amount of rain days this year compared to last year with northern California having over 30 days of rain so far.

While it may be hard to comprehend for those on the east coast and elsewhere, rain in California, frankly, is what snow is to the east coast. Therefore trying to normalize for the weather in California and pulling out only the severe rain days that we've experienced so far, we estimate that the rain in California has negatively impacted our comp sales to date by about 50 basis points.

I want to remind everyone this is just an estimate using our best guess based on the days when we experienced severe rain. Therefore if we exclude the severe rain days in California and we also normalize to include all of calendar 2017 sales into the first quarter, our comp sales would be down approximately 1.5%.

Finally, for those building your models. Specifically for this first quarter, I would expect a greater spread between average weekly sales and comp sales because of the calendar shift that I just mentioned which is resulting in Q1 starting in the first week of January. As a result, we lose one of the highest weekly sales average of fiscal 2016 as well as some impact from eastern spring break being a little later this year than in the past.

I would therefore assume this spread which we have averaged about 100 basis points give or take over the last year may be between 150 basis points to 200 basis points in Q1. Again, this is just a Q1 item because of the calendar shift in regards to the weeks for the first quarter.

So taking that aside, I would expect approximately 2,435 restaurant operating weeks in this first quarter which makes an approximate 9% increase from the 2,231 weeks in last years first quarter.

Moving on to the rest of the P&L, I would expect cost of sales to be in the mid 25% range this year based on overall commodity basket to increase about a half a percent to 1%. And right now we've locked in about 60% of our commodities for all of fiscal 2017.

With regard to labor, we still will absorb an increase in California minimum wage as well as additional minimum wage pressures in other states. Aside from the minimum wage increase, we've seen an overall increase in wages for hourly positions and managers and therefore I expect to see that additional upward pressure on hourly and management wages in the 3% to 4% range this year.

That said, based on preliminary planning, we believe we can mitigate some of the labor pressures through prudent menu pricing, menu design and cost saving initiatives currently underway. In addition to some of the wage pressure as I mentioned, we expect to incur some additional training hours in both Q1 and Q2 of this year related to our sales building initiatives.

Specifically, we expect to incur about 20 to 30 basis points in training labor related to the roll out of our slow cooking ovens and server hand-helds as our key members become proficient with both pieces of technology. In our view, these are investment costs to drive future sales.

Unfortunately, the accounting rules do not allow us to match these training costs with the future revenue so we'll have a temporary increase in labor to get these investments rolled out to drive sales in the future.

Therefore, based on sales trends to date, plus the additional training cost for our sales building initiatives, I expect labor to be in the mid 36% range in the first quarter and to slowly come down throughout the year as our training costs are behind us and we implement our normal menu pricing new menu updates and we get the benefit of some of our additional productivity initiatives later this year from our demand based scheduling system that we're implementing.

Also, please remember that in the past, the first quarter of each year is our highest labor cost as a percent of sales primarily due to higher payroll taxes and benefits that occur at the beginning of each year until we hit many of the state caps or limits later in the year.

Of course, labor is a percent of sales is highly correlated with weekly sales averages and comparable restaurant sales growth. So labor as a percent of sales will be impacted by these factors as well.

With regard to occupancy and operating costs for the year, our expense management and margin enhancement initiatives have significantly reduced these expenses and our goal is to hold the line on these savings while using additional savings to offset some of the normal inflationary pressure we get each year. As such, we're targeting total occupancy and operating costs to be in the low 21% range.

Included in total occupancy and operating costs will be approximately 2% to 2.2% of marketing spend which is pretty consistent with the level of marketing spend in 2016. And like labor, operating occupancy cost as a percent of sales is highly correlated with weekly sales averages and comparable restaurant sales growth.

We expect G&A to be around $61 million in 2017 including equity compensation. The year-over-year growth in G&A fiscal 2017 assumes full incentive compensation and a normalized equity award expense compared to fiscal 2016 when we reversed approximately $800,000 of equity compensation related to our 2014 performance share unit.

First quarter pre opening costs should be in the $1.2 million range based on really two restaurant openings. I do think there is a third restaurant that will open on the last day of the quarter. So, two to three restaurant openings in the first quarter. Overall, we're targeting opening costs to be around $425,000 per opening.

I'm expecting our tax rate to be in the 28% range in the first quarter and for the current year.

In regards to waiting and our recent repurchase activity, it will continually positively benefit the share count and anticipate our diluted shares outstanding will be in the upper $22 million range for the first quarter versus $24.7 million at the end of Q1 2016 and just under $29 million when we embark on our repurchase program.

Our CapEx for 2017 should be in the range of $80 million to $85 million for the development of ten new restaurants, maintenance capital expenditure and our sales and growth initiatives including our new slow roasting ovens and hand-held server tablets before any tentative improvement allowance or sale lease back proceeds we may receive. As with 2016, we anticipate funding our 2017 capital expenditure plan from the balance sheet cash, cash flow from operations, our line of credit, landlord allowances and sale lease back proceeds.

Before we begin rolling out our new ovens and point of sales systems to our restaurants this year, we will expect to take a one-time, non-recurring, non-cash write-down on our old convection oven and for the hardware for our old point of sale system. Since most of these initiatives will be complete in the first half of this year I'm estimating most to be non-cash, non-recurring charges will be incurred in the second quarter of this year. As we go through those write downs or write offs, I will inform the street separately of what those costs are.

I think it is evident as we wrap up from our 2016 results that BJ's is very capable of managing those items in our control to offset the challenging operating environment and deliver solid financial growth.

As we look to 2017, we have taken a thoughtful and analytical approach to our business, brand concept and the current environment just as we did coming off of 2013 when the business was also challenging. At that time, we took the right menu, efficiency and other measures, strength in our business, financial results and returns for shareholders and we are now rolling out what we believe to be one of BJ's strongest ever sales initiatives based on comp sales initiatives planned based on the concept that we tested and proven.

The investments in sales (inaudible) initiatives are enabled by our strong cash flow from operations and the strength of our balance sheet as well as our decisions to moderate our pace of expansion, all of which contribute to our ability to return capital shareholders and allow our team members to focus on taking care of the guests.

In closing, we remain confident that our initiatives to drive sales, productivity to efficiency, combined with a balanced approach, the new restaurant growth and prudent management of our capital structure is a proven formula for sustained long-term financial growth and the appreciation of shareholder value.

That concludes our formal remarks. Operator, please open the line up for questions. Thank you.

Thank you. (Operator Instructions). We'll take our first question from Matthew DiFrisco, with Guggenheim Securities.

Thank you, guys. I missed it just one bookkeeping question before I get into my other question, with respect to the G&A, did you say what it was for the first quarter, what you were expecting?

I did not. I would tend to think it is going to be the $61 million divide by four. I don't think you'll be too far off.

Okay. And then I guess can you comment on the last time I think you guys did some steaks. It seemed like there might have been some up selling or confusion with your consumer and it came across a little bit more as a premium product. You've done a lot of hard work to take some complexity off of your menu over the last year or so. I think now down to a little under 130 items or so on the menu. How do you implement the slow roast product as well as is there anything coming off the menu to manage not bringing back in too much complexity or diluting your brand as far as the core items such as pizza and deep dish pizza and the other products?

Hey, Matt, this is Greg Levin. I'll take the first part. I'll turn it over to Greg to really talk about the new technology. I'm not sure what you're recalling in regard to steak issues or steak complexity in the past. We've had two steaks on our menu for many years and have consistently had about two steaks which is a rib eye and a top sirloin.

Frankly, their incident rates on our menu are some of the highest in the category. They do, in our case, they're the two highest entrees outside of chicken parmesan in the entree category. So steaks have always done well for us. We've never had a huge steak line. I don't know if you're thinking of something from a different time but generally we do them well and they're well received with our guests.

As I just mentioned, some of the highest incident rates in the entree category. In regards to slow roasting and what we're doing, I'll let Greg talk about that.

Yes. Matt, we have been very careful in terms of adding more complexity to the back of the house and it's a great question, as you know. But these ovens are actually very less complex than the average complexity or labor content of the rest of our menu. I'm not going to go into excruciating detail for obvious reasons here. But they provide a consistency given the technology level of sophistication that takes the guesswork out of cooking these proteins in a way that our kitchens will tell you they're loving using these ovens and overall, they would say they're simplifying operations, not making it more complex.

So are you adding though, more steak items on to your menu?

We're adding prime rib. We're not adding steak per se at this point.

Okay. So you're going to be adding more proteins onto your menu than what you've had without the oven.

This is Greg Levin. A little bit. So for example, as Greg Trojan said, we're adding the prime rib. We have beef tip now that's on our menu right now and we're going to replace our beef dip with a prime rib dip. So, it's a change there.

And Matt, it's also taking in house and slow roasting in the restaurant some products that were not being processed to the full extent in our restaurant as these will be. So you know, we did our ribs before but we think these makes our ribs even better even though we were up significantly in our restaurant.

Our pork shoulder will now be slow roasted. Both of those overnight. And also a turkey breast product that is starting out with the turkey dip sandwich. We'll use turkey in other applications as well.

Okay. Can you talk about the size or the scope of the test as far as both the hand-helds and the ovens? How many stores have you tested this in? And is there any intel that I guess -- Is it correct to assume the hand-helds will be beneficial to the top line for better speed of service, quicker table turns in addition to moderate amount of labor savings?

I won't go into exact numbers here. I'll start with in (inaudible) we're, we call it is a slow roasted oven. It is now in all of Texas and Florida. That was the full product lines rolled out. But in terms of our kitchens using that technology. So it started as a test in a handful of restaurants beginning toward the beginning of last year. We gradually expanded that test and moved it to Texas to a part of Texas and then as I said, have now expanded it to all of Texas and to include Florida and we're rolling those ovens out as I mentioned nationally.

In terms of the hand-helds, those have been in -- I would say a double digit number of restaurants for quite some time. We started hand-held testing frankly before me in the Anaheim Mills restaurant and have been looking at and testing different iterations of this technology for a number of years.

And you know, as I mentioned in my comments, we are very pleased with this both physical product and the software integration with our current point of sale and what we're doing from a labor perspective. And we're seeing some really nice improvements. So, as again, I mentioned in the time to order in particular. If you elect to shorten your time in our restaurants, there is the option to do that.

But I would say the biggest improvement is getting food or beverage to the table more quickly. And then just an overall guest satisfaction. Honestly, we've been surprised at the level of improvement and satisfaction scores that we've seen from the tests thus far.

Okay. And then I guess just to better understand your guidance and the quarter to date trends, it sounds like, would it be correct to conclude then regionally California is a lagger because of the rain or is it still a stronger region overall than Texas? I noticed you didn't call out the tax refund as an issue or the delay in tax refunds coming out. Is that not an issue in your eyes?

I do think the tax refunds are an issue from that standpoint. They've always bounced around over the last four or five years, or so. Last year they came in earlier and that got people excited going into Q1. And all of casual dining before it started to taper off in the casual dining overall especially when you look at Black Box and Knapp data for 2016. Texas remains soft. You see that in the regional data from Knapp Track and Black Box in that regard.

I would tend to say that I wouldn't necessarily call California a full lagger but it is not where it normally is for us. Look, the rain and we're not trying to make excuses for our comp sales. We're trying to put color around what we're seeing going into this first quarter and provide people with reasons as to what we're saying.

I'll give you an example, Matt. Last Friday, southern California was down 16% in comp sales on a Friday day with the rains that came through here. I don't care how good we've done in comps or how bad we've done in comp sales, southern California is never down 16% unless it is a holiday flip-flop. We just experienced some really soft days with some of these severe rains that have come through to begin this quarter.

Understood. Thank you for all of the color.

You're welcome.

We'll take our next question from Nicole Miller, with Piper Jaffray.

Thank you. Good afternoon. It sounds like toward end of the prepared commentary you talked about with certain food items, you would be offering beverages and with your beverage platforms you'd be offering food. I was wondering if you could expand to that commentary. And then also, would you be adding the premium element to the beverage like you're talking about that you're addressing with the protein? Thank you.

I'll take that. Nicole, I'm happy to go through them. We're calling them brew house specials. On Mondays, we're continuing our half off pizza or half off our large deep dish pizza offering. And we're adding a $5 quality A margarita to that mix on Mondays. On Tuesdays, we've had a nice franchise built on what we call wine down Tuesdays with a deal on wine on all day Tuesdays.

And we're adding a $3 Pizookie offering on Tuesdays to that day's special. Wednesday, we're rolling out $10 loaded burgers with unlimited fries all day on Wednesday. That's combining with late last year we (inaudible) $4 BJ's craft beer day in most of our markets. And I should do the marketing caveat of there are differences, slight differences or some differences across some of our markets depending on mostly legal restrictions. But that being said, that's true in most markets.

And then on Thursday, we're doing a $13.95 half rack or $18.95 full rack of our great baby back ribs. And doing a $5 call drink on those nights.

Okay.

Sorry. Go ahead.

No, I'm sorry. I didn't mean to interrupt.

I was just going to say of some those existed before but not in tandem. We saw them being successful both on a beverage and a food perspective so we wanted to add some more momentum to those offers and compliment either the food or the beverage offering.

That makes sense. And it sounds like it should help mix shift. Just one last quick one. On your commodity basket, what pieces will be up, what pieces might be down and then as you think about grocery store deflation, to the degree that lessens throughout the year, do you feel like you have more pricing power that you can add to the menu? Thanks.

Nicole, in regards to our commodity basket, I think we're continuing to see some pressure in some of the seafood around salmon and mahi and we're still seeing avocados high as much as we were expecting them to come down after some of the historic highs from last year, in that regard.

And frankly, cheese was extremely low last year. So we're expecting cheese to go up in our general viewpoint of going into this year, we think about that half a percent to 1% increase in commodity. In regards to thinking about food away from home versus food at home, we've seen that taper off a little bit. But I think you're seeing it across the restaurant industry, the issue with labor. We mentioned it being kind of in the 3.5% to 4% increase in wage rates and others are seeing that as well. And we're trying to be thoughtful in regards to how we take our menu pricing to offset some of that pressure. When you've got a state like Arizona that went from $8 to $10, literally on January 1st, we've had to take some pricing there. And we've seen the same thing in (inaudible) the high minimum wage states. I think our guests understand that. They hear the increases in minimum wage in those states.

Thank you.

You're welcome.

Nicole, one other quick addition on the pricing front. I'm not so sure it's so well understood. When we're looking at overall pricing, one the things and we did talk about this last year, I did, is that aside from our nominal pricing, not just in things like brew house specials but with our level of promotions have gotten more aggressive to offer deal-oriented guests more offers out there, right? And we increased our discounting. Still we think much lower than the data suggests in our average competition. We increased that on a percentage basis quite a bit last year.

When you put all of that together with what we've done from a mixed perspective, consciously to add value to our menu like last year, the (inaudible) grilled cheese. The year before that, brew house burgers. Our net effective pricing or check growth has been just barely above 1%.

And so I think one of the things that we have consciously been doing to continue to drive traffic and share is to take these cost savings that we've been successful at achieving and managing check in a way that we think will drive traffic.

Thanks again.

We'll go next to John Glass, with Morgan Stanley.

Thanks very much. First, Greg Levin, sorry if I missed this. Did you provide the pricing in mix or check for the fourth quarter in traffic?

You know, I didn't. Our pricing was around 3% from that standpoint while I think as Greg Trojan mentioned, for the full year, our net check in the fourth quarter was only up 1.2%. So unfortunately it puts traffic down in the low 3% range. Even though our absolute pricing was (inaudible) we gained some of it back both on mix and discounting to see our average check only grow 1.2 in the fourth quarter.

Okay. And then just related to that Greg, either Greg, the enhanced brew house menu, what do you think that does to check in 2017? Does it incrementally cause pressure or is it roughly similar? How do you think about check in 2017 versus 2016?

I think there is an opportunity to both drive some positive check growth here, John. But also traffic. And that's what we saw in our testing, particularly with the prime rib product and early going with the others. The goal is, and we're seeing really strong, some of the best value scores, for example in the prime rib. And you've been following us long enough, $26.95 isn't a price point we've touched before. Right? And we weren't sure how our guests would react but our value scores are through the roof on that product. Because A, it's such a high quality but also we're giving people a lot of food. You get two sides and a Pizookie and a salad there. So, that's the idea.

But to answer your question, it is our expectation that they certainly won't put the idea, anyway, I can't imagine a scenario where they're going to put pressure on check. That should help us build some check and offset. You know frankly, some of the tepid check growth that we've had over the last few years but through word of mouth and it gives Kevin a lot to talk about in differentiating from a marketing perspective. We really want to drive traffic, obviously.

And John. Real quick, to put that in perspective as Greg was saying. We had the half off large pizzas last year. We started that in Texas. We saw incrementally those days with better traffic on a trend basis in Texas than what we've seen prior. And then we slowly rolled that out throughout last year and it didn't have a huge impact on our average check. Same thing with the ribs were started last year as well. If you think about our Tuesday by introducing a $3 Pizookie, frankly at the end of the day we hope that's incremental. (inaudible) somebody decides to add on a Pizookie to their already entree and drive check average up. So, I don't think based on what we've seen last year and how we've laid these out that individually they would actually take down our check.

Okay, helpful. Finally, how do you think about unit development into 2018 and 2019? You may have addressed this in the past but just remind us how you think about it with the reduction this year? Does it slow the overall pipeline or what's your ambitions over the next two years let's say from a development standpoint?

We haven't made decisions there. But I can tell you we're behaving, and Greg Lynds is here, his team is moving forward with the expectation that we'll build more restaurants, not fewer. Because we want that optionality. It is our expectation as things improve that we'll dial up unit growth, John. But we obviously don't have a crystal ball. We're going to remain flexible. That's the mindset, if that helps.

Okay, yes. Thank you.

For our next question, we'll go to Jeffrey Bernstein, with Barclays.

Great. Thank you very much. Two questions, just one maybe thinking about the comp. Greg Trojan, I believe you mentioned you thought in 2017 you can reverse is I believe how you framed it in terms of the down 1.3% comp you saw in 2016. But I know there was another comment that maybe comps in the first half might be slower before the initiatives kick in and then accelerating in the second half.

So just wondering how you think broadly about the 2017 comp? Maybe what components you would envision within that and where the industry is relative to that? I'm assuming you're expecting to continue to take market share. Just wondering what you're thinking the broader industry will be doing relative to whatever kind of rough commentary you want to give on what you might be doing?

Again, we don't have a crystal ball on those things. I do think it is clear from the beginning of the year that things are off to continued tough environment and start for the industry. I can't tell you in terms of timing but the fact that we are seeing things slow down from a development perspective, we are seeing some of these weaker concepts go away, that the pressure on comps from a capacity perspective is going to get better over time here for sure. I think that we've crossed the threshold on when that time is going to start occurring so to speak. I do think at some point, that will start. Certainly start helping.

I do think, you know, you look at some of the other core economic indicators out there and the optimism around the economic part of the platform that's going on that is cause for some optimism as well. But you know, our internal point of view on it is look, we've got to take control of what we can control. The outside factors are what they are. We take some pride in doing a good job relative to the industry as I mentioned in taking share. But at the end of the day, a negative 1.3, we've got to figure out how to turn into a positive.

And that's our expectation for this year just in generally in sense of timing since so many of the initiatives really get going at about the mid-year point and they're going to build from there. We are expecting in the back half to provide a lot more of that momentum and strength than where we are today.

But you know, I do think for all of the reasons we talked about, it is better than it looks right now because of all of the factors that we've talked about but you know, that's what we know. And most of all, we feel really confident given these aren't ideas we came up with on December 15th and said we need something to grow sales.

We really have been working on the majority of them, a good part of last year and even before. And we're going at them in a very focused way. We don't have 20 of these ideas. You've heard the big ones. That's what we wanted to share. We feel good about our focus and we feel good about our test results and how our restaurants are reacting and what we're hearing from our guests. So that's as good as we can feel about those elements at this point.

Understood. And then your comments about the unit openings, the ten and 17. I'm just wondering if you can parse it out in terms of new and existing and maybe just give us an update in terms of the new markets. I got the impression from your commentary that it is not indicative of how new markets are performing. Is there any color in terms of how your stores are doing in new markets with obviously limited brand recognition?

Yes. I'll let Greg fill in but just in general, our weekly sales volumes, (inaudible) this is one of our better years that we've had over the last few. I feel really good about that. And in terms of 2017, you know, I'd say these are more fill-ins of the younger markets. There are fewer pioneering in the there's one. In that mix. That I can think of but most of them are -- there's a restaurant nearby which is -- we don't want to leave one or even two restaurants alone out there for a lot of scale reasons. Particularly people development. Although they're still younger markets, they're not the first to plant the flag in most cases.

Got it. Thank you.

We'll go next to Sam Beres, with Robert W. Baird.

Good afternoon. Thanks for taking the questions. Maybe one clarification. Greg Levin, how much nominal pricing before any mix shifts do you expect to have in the menu in 2017?

Nominal pricing will be two and a half to three, somewhere in that range.

Great. Thank you. And I guess in terms of the slower unit development in 2017, could you maybe just talk about how that's impacting your margin outlook for the year? I assume with less pressure from new inefficiencies likely some type of benefit but do you have any perspective on how to quantify that or on what lines we might see some of those benefits baked in?

Sam, I really don't. We know that looking at it in general, your cost of sales tend to get a benefit as your new restaurants open, they open up with some pretty higher cost sales in the first two months or so. And then frankly, labor is the other one you're going to get the benefit on. One is sometimes you have to hold additional managers and restaurants until new restaurants open. You have to bring out people to open up new restaurants as well to your point (inaudible) therefore you might be over staffed (inaudible) restaurant. So it is really going to come through cost of sales and labor.

My hesitancy is to kind of come up with a perfect number is as we know, labor is such a variable on comp sales. If you told me that look we're going to maintain a 2% comp sale, then I would probably say there's 30 to 50 bps in labor by itself that could come through. And you would see that on an absolute basis.

Depending on where comp sales are sometimes depends on where you show your restaurant level margins. Obviously your pre opening line, a factor of 425,000 times X amount of restaurants being opened. But I don't have an absolute this is what it is going to be in that regard.

Great. Thanks. Maybe just one last clarification. Do you expect any impact on the Q1 and Q2 comps from the shift in the Easter and spring break timing?

I mentioned it in our call that in general, I expect Q1 for those -- for doing a modeling and whatever modeling number you put in there, I would expect our average weekly sales to grow 150 to 200 basis points less than the comp sales. As far as Easter being a little bit later in the year, so it is going to shift to Q2, you're going to get those spring breakers in Q2 and that should help us in Q2 and probably a tad softer in Q1 overall. You do pick up that Easter Sunday which helps a little bit but that week leading into Easter Sunday will be softer.

Thanks.

We'll go now to Brian Bittner, with Oppenheimer.

Thanks very much. Just circling back to unit growth strategy, (inaudible). How much of this is really maybe the equity markets not giving you the credit for growing right now in your guy's minds and maybe harvesting some more cash during this time? And how much of it is really just maybe execution risk with rolling out these pretty intense sales initiatives and just wanting to focus on that more than anything else? How do you think about the balance of those two and have you thought about the unit growth for 2017?

Brian, as I mentioned in my comments, it really is both. I don't really have a weighting but those are both significant factors. We've been very explicit with the cash flow advantage and opportunity from building two restaurants and we think also holding off on -- because the deals are going to improve are the three reasons. But listen, we're going to be opportunistic about taking that cash and buying back stock and we do think it will help us operationally and we think there will be more better deals to do six, 12, 18 months from now as well.

And Greg Levin, you kind of talked about the line and some of the leverage coming from implementing some of these things, the training costs and what not. Are you able to say how much of that or how many basis points is I guess somewhat nonrecurring as the training costs and the roll-out (inaudible)?

I think I said in my call maybe you're asking a different question, if you are, we can talk about it afterwards or maybe I can understand a little bit better but I said in the call that we probably would see 20 to 30 basis points in labor to roll out these initiatives. We've got to train people on the slow roasting technology which as Greg Trojan mentioned is a fairly simple technology but it is something we have to train and wrap the food on it, we've got to cook it, wrapping means kind of tasting it, making sure they understand it.

And then the hand-helds. Server hand-helds are actually a little more challenging than you expect. You think you could just give it to a server and you would be done. Everything would be great. But one is the server has to learn how to navigate through the system and then we have to make a couple of adjustments to the way we staff the restaurant as well, which will lead to basically improved order times and improved efficiency in regards to food and drinks being run out to you. And that requires us to make some changes in the staffing model a little bit. That will take a couple weeks for restaurants to really nail down. So overall, these are going to be coming throughout the year. I see that 20 to 30 basis points and then it drops off.

Okay. That answers it. (inaudible) And then just the last question, where are you at now on carry out as a percent of the business? It just seems there is a trend taking hold with concepts like yours that seem to have pretty good portability with some of their menu, pizzas and what not. Is that an opportunity for you guys going forward?

Well, yes. We're at about 5.5% off premise, Brian. We think given that the category is closer to 10, there's clearly a big opportunity for us there. We've been designing our technology, particularly our app even a couple years ago with this in mind through an API to be able to communicate with third party delivery services. And we're operationally testing that today as we speak. And from the technology perspective it's working very, very well.

I would say, you know, our real advantage in all of this and why we're excited about the opportunity is our broad menu. I think it goes beyond any particular category whether you think pizza or burgers or whatever is we're a place you can go to and order for a family and everybody has an opportunity to order something that they're going to really look forward to. And the diversity of our menu and a lot of which travels really well is a real advantage for us. (inaudible)

What do you think the biggest reason why you under index versus peer group on off prems today?

I think it has just been a matter of focus and given our large sales volumes in our restaurants. It just was -- we were focusing on the business within our four walls. There is not a structural reason where we've banged our head against the wall and it hasn't worked. Look. We have grown this business over time relative to us but there's not been the kind of focus on it that we're now putting on the channel (inaudible).

In the large sales items, I guess it makes more sense. Okay. Thanks for your time. Appreciate it.

You're welcome.

Thank you, Ryan.

We'll take our last question from Will Slabaugh, with Stephens.

Thanks, guys. Just a quick one on mini strategy. It sounds like with the oven news and some other kind of strategies you're talking about, you're going after quality and even maybe a little bit more premium where many of your competitors have moved more toward heavily discounting core items.

I'm curious if that response is something we should expect to maybe take awhile to bear fruit given the tough environment or if this strategy that is coupled to eventually as you talk about with more brew house options is something you expect to bear fruit more immediately as well and sort of a near-end long-term play?

Great question, Will, and thanks for asking it. I think what's really important and you know, as we're talking about initiatives like this, sometimes lose sight of balance here. You think about all of the things we've done menu wise to add value over the last couple of years and really three years, and you know them well, right? It is the lunch items and the brew house burgers. And even this year, we're going to be investing heavily in terms of value in these franchise nights that I said I just described as well.

I don't want anyone to take away from this that we're solely focused on growing the high-end and prime rib and we're trying to turn ourselves into Houstons exclusively. But I'll tell you the success of these quality items that we have on our menu, the number two or three, just to give you a sense -- and it is not as big a shift as people think that it is for our concept.

I think those who don't know us as well think of us as more pizza and perhaps bar and grill oriented. We've been selling Atlantic salmon and cherry chipotle salmon -- salmon is our number two or three highest cost of goods item in our entire concept. You know what our -- if that's our second. Our third are rib eye steaks. It is not pizza and burgers exclusively.

And we sell a lot of that, as you know. So this is not intended or do I think of it as this seismic, strategic shift. This is something that Jerry started before me of moving us into the polished casual higher side on the continuum. And we have proven and our guests are telling us they love that side of our menu. But don't interpret that to be we're walking away from $7.99 (inaudible) and lunch specials that are really attractive and you know, $3 Pizookies and all of the other offerings that we have on our menu. So, I appreciate you asking that question because that balance is one of the wonderful things about our concept and who we appeal to.

We want to go through the value conscious. That's why we've upped our discounting and are offering great values as well on top of all of that. We also, as I said, we index really well on the household income front. You walk into any of our restaurants, I don't care which geography, there are a lot of one percenter pluses that don't think twice about a $26.95 prime rib or a mid teens priced prime rib sandwich. And there is an opportunity to offer great value to that guest as well. We really are trying to do both. We're not walking away from the value, the fundamental value proposition in all of this.

Very helpful. Thank you.

Sure.

That does conclude today's question-and-answer session and brings to a conclusion today's conference. We thank you for your participation. You may now disconnect.

Thank you.