BJ's Restaurants Inc (BJRI) 2017 Q1 法說會逐字稿

Good day, and welcome to the BJ's Restaurants Incorporated First Quarter 2017 Earnings Release and Conference Call.

Today's conference is being recorded.

At this time, I'd 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 2017 First Quarter Investor Conference Call and Webcast.

I'm Greg Trojan, BJ's Chief Executive Officer, and joining me on the call today is Greg Levin, our Chief Financial Officer.

We also have Greg Lynds, our Chief Development Officer; and Kevin Mayer, our Chief Marketing Officer on hand for Q&A.

After the market closed today, we released our financial results for the first quarter of fiscal 2017, which ended Tuesday, April 4 of 2017.

You can view the full text of our earnings release on our website at www.bjsrestaurants.com.

Our agenda today will start with Rana Schirmer, our Director of SEC reporting, providing our standard cautionary disclosure with respect to forward-looking statements.

I will then provide an update on our business and current initiatives, and then Greg Levin will provide a recap of the quarter and some commentary regarding the remainder of fiscal 2017.

And 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, 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, April 27, 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 we discussed in our earnings call in late February, 2017 began sluggishly from a sales perspective for the industry and BJ's, driven by the New Year's calendar shift and the added impact of severe weather, particularly the torrential rain we experienced in California, our most densely developed market.

Notwithstanding those challenges, traffic trends have begun to improve, and coupled with solid momentum from our sales building initiatives, we believe we have an opportunity to drive positive comparable restaurant sales in the near future.

As such, our teams remain highly focused on what we call our needle-moving sales building initiatives and delivering unparalleled guest dining experience.

I am pleased to report that once again, we've extended our trend of outpacing the industry comparable sales as measured by Black Box, even despite our weather challenges in California.

I attribute this to our operators continuing to take care of our guests in the face of the challenging same restaurant sales environment.

Overall, our team's focus on driving even more efficiency throughout our supply chain and our restaurant expenses were helpful in partially offsetting the top line challenges during the quarter, resulting in restaurant level margins of 17.9%.

Our operators were also able to generate these solid restaurant margins while commencing the unprecedented number of sales building initiatives that are being implemented in our restaurants.

I, and the entire leadership team of BJ's, truly appreciate and are thankful for all the hard work our operating teams are doing to make BJ's the best casual dining company ever.

Our target has always been to drive restaurant level margins of 20%, including marketing, which as you know, many restaurant companies include in SG&A.

We all know the best path to restoring margins to our 20% level is to drive top line sales and regain positive comp momentum in our restaurants.

We have a robust plan to do that, and we're starting to see some early positive results from these efforts.

When we reported our Q4 2016 results in late February, we noted that comparable sales were negative approximately 2.5%, and we finished the quarter at negative 1.3%.

The improving trends are continuing in April, where our comparable restaurant sales are slightly positive, adjusting for the Easter calendar shift, which Greg Levin will discuss in more detail.

And more importantly, we're seeing good early traction from the sales building initiatives I detailed on our Q conference call in February just a few weeks ago.

To briefly recap these initiatives, we successfully tested new slow-roasting ovens in a select few restaurants last year, with our goal to roll these ovens to all of our restaurants by May of this year.

Second, we are rolling out new server handheld ordering tablets in all of our restaurants which in tests drove an improvement in time to order, greater incident rates and improvements in an overall guest satisfaction rating.

Third, we have begun to pursue the off-climate sales growth opportunity and are currently testing third-party delivery services that leverage our existing, highly-rated mobile app and online ordering system as well as exploring other off-premise takeout opportunities.

Fourth, we began rolling out our daily brewhouse special that showcase several of our most popular signature menu items, including our signature Deep Dish Pizza, our world-renowned Pizookie dessert, and BJ's award-winning handcrafted beer, all at attractive prices.

In addition to these 4 strategic initiatives, we also developed a deep pipeline of new menu items, including several new items focusing on our successful EnLIGHTened menu category, featuring our new super food options, our loyalty program enhancements and other productivity initiatives to be implemented in 2017.

It's worth noting that our EnLIGHTened category continues to grow in popularity, and in Q1 was the highest level -- incident level of EnLIGHTened items sold in our history.

With regard to our slow cooking ovens, we were able to complete the installation of these ovens at all of our restaurants by mid-April, ahead of our original schedule.

As a result, all of our restaurants have now been trained on the new slow-cook menu item, and have recently introduced them to our guests using an in-restaurant menu announcer in what I would call a soft roll out, since we have not spent any significant marketing dollars behind this initiative as of yet.

These items include our prime rib dinner, slow roasted ribs, a double-bone-in pork chop, a prime rib, pulled pork and turkey dip sandwiches.

Our prime rib dinner offering is available during the dinner parts on Friday and Saturday and all day Sunday.

This item, which we think is a screaming value at $26.95, has been one of our top 3 best-selling entrées in its early roll out week.

And again, this is without the support of external marketing, which is scheduled to launch in early May during our busy Mother's Day, Graduation, and Father's Day celebration season.

Selectively, these items have been averaging incident rates exceeding our total pizza sales which, as many of you know, remain a foundational element of our menu, dating back to our early days.

These new, slow-cook menu items are consistent with our long-held menu strategy to offer a wide variety of compelling items which feature exceptional quality and uniqueness at an outstanding value.

Moreover, they are actually simpler to execute than many of our multi-ingredient, multi-step preparation items on our menu, and vary and are consistent with our Project Q goals of continuing to simplify our kitchen process and procedures.

These items are just the start of the opportunity to leverage this new cooking platform and create other new and unique menu items for our guests that continue to differentiate BJ's from other casual dining concepts.

Additionally, over time, these items present us with a great opportunity to build guest check and traffic, as we believe, and our early guest feedback and sales suggest, their quality and value will build repeat visits as they are truly unique in our space.

We've also made solid progress in our efforts to install handheld ordering tablets in all of our restaurants.

We've been testing iterations of this technology for several years, and are excited to see our current combination of technology and service process producing significant reduction in the time it takes our service to place initial orders for guests seated in our dining area.

We have completed installations in about 1/3 of our restaurants and will be fully converted by midsummer of this year.

These installations are not only speeding up our service times, but they are also resulting in nice growth in sales incidence of beverages and other add-on items, all of which is culminating in higher-quality guest experiences which are being reflected in material improvements in our already-impressive MPS guest metric.

Our focus on growing our delivery and take-out sales also continues to make progress as we continue testing third party delivery options while reworking our entire take-out packaging and large party menu options for our guests.

We believe it is important at this time, and before our broad launch, to concentrate on sharpening our technological links to our online ordering and to add functionality along with our in-restaurant execution of these orders.

While we have work to do, we're pleased with the overall guest reaction and execution flow in our restaurants.

We'll be expanding our tests in several weeks to include several new partners, to include both private-label delivery solutions for orders sourced from our guest ecosystem, along with options to drive incremental demand from several third-party ordering and fulfillment sites.

While we recognize that a number of concepts have jumped all in, with partnerships in the third-party delivery segment, we believe the lack of a national footprint solution today and carefully crafting an in-house and third-party order origination platform will in the long run, maximize both sales and profitability from this significant segment and growth opportunity.

We're also pleased with our expansion of our daily Brewhouse Specials.

Our guests love the opportunity to get some of BJ's most iconic menu items at a daily special price.

We have seen our pizza incidents go up on our Monday pizza night special, and our Pizookie incident rates just keep increasing with our $3.00 Pizookie Tuesdays.

In addition to those 2 daily brewhouse specials, we also have our $10 Loaded Burgers on Wednesday and our unbelievable Baby Back Ribs specials on Thursday.

Each of these menu items is also supported with a daily alcohol special, including specials on our signature and award-winning BJ's Beer.

Overall, we continue to strive to improve the already compelling variety and value offering of our concept, which we believe will drive both traffic and check growth over time.

While we continue to push harder on leveraging and improving the breadth of our menu offerings, the level and consistency of our service and exploiting opportunities in the off-premise channel to grow our comparable restaurant sales, we also continue to grow our brand presence through our successful new restaurant expansion plan.

This year, we have already opened 5 new locations in Mobile, Alabama; Noblesville and Fort Wayne, Indiana; Columbia, Maryland; and Youngstown, Ohio.

Positive customer response and sales volumes in these new markets continue the trend of really solid openings of our smaller prototype footprint.

We're on track to meet or exceed our new restaurant opening weeks with 10 new openings, and we are well underway in laying the groundwork for our 2,000 openings as well.

While 10 openings are keeping our operations and opening teams busy, the 7 fewer openings compared to last year is allowing our team to concentrate on the important sales building initiatives I just described, which we are in the midst of launching and rolling out.

Overall, I'm confident we're doing the right thing for the short and long-term health of our concept as we battle through the tough top line retail restaurant environment.

It's way too early to declare any victory, but we're still -- but we're seeing encouraging signs, and we continue to leverage our great team as well as our strong balance sheet to invest wisely in our business as well as opportunistically buying back our equity when we see the chance to drive shareholder value.

Q1 was a very solid quarter for BJ's despite the headwinds.

We made significant progress on our sales building initiatives which are setting the foundation for many years of successful growth for BJ's.

Greg Levin will now walk you through some of the additional financial details for the period as well as some commentary regarding the remainder of the fiscal year.

Greg?

All right.

Thanks, Greg.

As we noted in today's press release, we saw a marked improvement in comparable restaurant sales to the latter part of the first quarter and total revenues increased approximately 6% year-over-year to $257.8 million.

Our 6% increase in total revenues reflects an approximate 9.5% increase in total operating weeks, partially offset by a decrease in our weekly sales average of about 3%.

Our comparable restaurant sales decreased 1.3% for the quarter compared to a positive 0.6% in last year's first quarter.

And now as mentioned in our Q4 conference call, the large difference in our weekly sales average and our comparable restaurant sales is partially due to the calendar shift as our 2017 first quarter began the first week of January compared to the last week of December in fiscal 2016.

This had the effect of BJ's first quarter comping against one of the highest weekly sales average which ended up being in the last week of fiscal 2016.

During our Q4 2016 call in late February, our Q1 comparable restaurant sales were trending down approximately 2.5% but with the a strengthened March and the cessation of the rains on the West Coast, comparable sales finished down 1.3% for the entire quarter.

The upturn in comparable restaurant sales in March results in revenues, operating margins and earnings exceeding our expectations and led to net income and diluted net income per share for the quarter of $9.3 million and $0.42, respectively.

Cost of sales for the quarter was 25.4% or about 50 basis points higher than the year ago quarter, but pretty consistent with Q4's cost of sales of 25.3%, and in line with our expectations.

The increase for the prior year was primarily due to increases in commodity costs, the menu mix and higher discounting from a year ago.

Labor of 35.8% for the first quarter represented 100 basis point increase from the year ago period.

Looking at our labor expense for the first quarter, our hourly labor was a little over 100 basis points higher than the year ago period due to higher hourly wages in both the kitchen and dining room, increased training related to our sales building initiatives and the negative leverage related to the comparable restaurant sales results which were partially offset by lower incentive compensation.

Our operating occupancy costs increased by about 70 basis points to 20.9% from last year's first quarter, and this was again, due to the lower operating leverage related to the Q1 comparable restaurant sales result.

Included in operating occupancy costs is approximately $5.2 million of marketing spend, which equates to 2% of sales.

Excluding marketing, operating and occupancy costs in the first quarter averaged approximately $20,000 per restaurant operating week, which was consistent with last year's operating and occupancy costs.

Our general and administrative expenses of $14.3 million decreased by 40 basis points compared to the same quarter last year to 5.5% of sales.

First quarter G&A came in lower than anticipated, primarily due to lower-than-expected personnel costs and lower equity compensation.

Our depreciation and amortization was approximately $16.7 million or 6.5% of sales and averaged about $6,900 per restaurant operating week which is consistent with our G&A trends.

Our preopening expenses were $1.4 million and were primarily related the cost of opening 3 restaurants in the first quarter.

Our tax rate for the first quarter was about 28%, which was in line with our expected tax rate of 28% to 29% for this year.

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

Total capital expenditures for the first quarter was approximately $20 million, and we continue to expect our gross capital expenditures for fiscal 2017 to be in the range of $80 million to $85 million.

This CapEx will cover the construction of at least 10 new restaurants as well as maintenance CapEx and our sales-building initiatives, including the aforementioned slow-roasting oven technology and handheld server tablets for all of our restaurants.

During the quarter, we allocated approximately $29 million towards the purchase of 797,000 shares of our common stock.

And since the authorization of our initial share repurchase program in April of 2014, we have repurchased and retired approximately 8.2 million shares of BJ's stock for approximately $319 million.

Additionally, as we announced today, our board approved an expansion of the share repurchase program by $50 million.

As a result, we currently have approximately $80.5 million available under our current authorized share repurchase program.

With regard to liquidity, we ended the first quarter with approximately $24 million of cash and $183 million or so of funded debt on our line of credit, which is in effect until November of 2021.

Our line of credit is for $250 million, and provides us the flexibility to continue our national expansion program while returning capital to shareholders through our share repurchase plan.

Before we open the call up to questions, let me spend a couple of minutes providing some commentary on our 2017 outlook.

All of this commentary is subject to the risks and uncertainties associated with the forward-looking statements as discussed in our filings with the SEC.

With respect to sales, March and April are always the toughest months to get a read on our business due to the shift of the Easter holiday and related spring breaks.

However, trends in March improved from what we saw in January and early February, and this improvement has extended to April.

Our comp sales in April are running basically flat, inclusive of a negative impact from Easter weekend moving from Q1 of last year to Q2 of this year.

In general, Easter weekend is very soft for us, and as a result, we got a little pickup in comp sales in Q1 of this year, with a corresponding hit to April as a result of the Easter weekend moving from March last year to April this year.

However, excluding the impact from the Easter weekend, our comp sales will be up slightly in the positive 1/2 of a percent or so range.

While we are pleased with the improved underlying sales trends, we are still in the middle of rolling out most of our sales building initiatives, and with the early success that Greg Trojan just reviewed, we remain guarded but cautiously optimistic on comp sales growth until these initiatives are fully implemented and supported with marketing.

Therefore, since they haven't entirely rolled out yet, we will continue to lean towards conservatism in modeling comp sales forecasts for the current quarter.

In regards to restaurant operating weeks for the second quarter, I would expect approximately 2,490 weeks, marking an approximate 9.5% increase from the 2,276 weeks in last year's Q2.

Moving on to the rest of the P&L, we expect to see increased food and labor costs in Q2 related to our sales-building initiative.

Specifically for cost of sales, our teams are learning to perfect the cooking of our new meats as well as setting the correct daily inventory levels, and we are doing a higher levels of sampling of these menu items for our key members and our guests.

As a result, I'm expecting cost of sales to be around 26% or below 26% range for the second quarter.

Generally, these items are more protein-centric and therefore, have a higher cost of sales percentage but also have a higher average check, resulting in greater gross profit dollars.

We expect over time, as we become efficient with these new menu items, that the higher gross profit dollars will generate operating leverage in both labor and operating and occupancy costs.

With regard to labor, I continue to expect about 20 to 30 basis points in training labor related to the rollout of our slow cook ovens and server handhelds as our team members become proficient with both pieces of technology.

We look at these as 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 will continue to have a temporary increase in labor as we get the ovens and server handhelds rolled out.

Therefore, based on sales trends to date, plus the additional training cost for our sales building initiatives, I would expect labor to be around 35% for the second quarter.

We are targeting operating and occupancy costs to be in the low to mid-20% range, and that will include $5.9 million in marketing spend.

As Greg Trojan mentioned, we plan to increase our marketing efforts in the second quarter to drive awareness of our sales building initiatives, specifically around the slow roasted menu as we gear up for Mother's Day, Graduation, and Father's Day celebration.

This margin spend will be higher than last year's $4.4 million which equated to about 1.8% of sales.

Please remember that both labor and operating occupancy cost as a percent of sales is highly correlated to weekly sales averages and comparable restaurant sales growth.

Our G&A expenses for the second quarter should be in the $14.8 million to $15 million range as we expect total G&A for fiscal 2017 to now be closer to $60 million.

Preopening costs should be approximately $1.8 million for the second quarter based on 4 planned new restaurant openings plus some preopening costs for restaurants that are expected to open later this year.

I'm expecting our tax rate in the second quarter to be in the 28% to 29% range and diluted shares outstanding should be in the low $22 million range for the quarter, which reflects the return of capital share repurchase activity I reviewed just a few moments ago.

As indicated on our Q4 conference call, we expect to take a onetime, nonrecurring, noncash write-down on our old convection ovens, and the hardware for our point-of-sale systems as we roll out the handheld server tablets.

The majority of these 2 initiatives will be completed in the second quarter of this year and, therefore, I'm estimating that most of these noncash nonrecurring charges will be incurred in this upcoming second quarter.

We entered 2017 with a comprehensive set of sales building initiatives to offset the challenging industry-wide operating environment that we faced throughout 2016.

These initiatives are intended to complement our enterprise-wide focus on our food offerings, productivity, restaurant efficiency and guest service, which have been fundamental to our expansion and impressive long-term bottom line growth.

Our strong cash flow from operations are enabling these investments and new sales building initiatives and appropriate marketing to drive their awareness and success.

And though early, we are seeing positive results from these strategies.

We've also effectively balanced our capital allocation and the strength of our balance sheet to return capital to shareholders through our share repurchases.

Since the company's first share repurchase authorization was approved in April of 2014, we have reduced our outstanding shares by approximately 23%, and during the same period, we have funded the opening of 46 new restaurants.

In closing, we remain confident that the strength of our concept, combined with well-defined initiatives to drive sales, productivity and efficiency and our balanced approach to 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.

(Operator Instructions) And we'll take our first question from Brian Bittner with Oppenheimer.

This is Mike Tamas, on for Brian.

Just had a couple of quick questions.

You talked about the cadence in the quarter and getting better in March and then some improvement here into April as well.

So just wondering if you think it's more industry-related.

As industry's gotten better, if there's something that you guys sort of changed or focused on a little bit more that you're actually seeing a bottoms-up driver here?

It's clearly both, Mike.

You look at the same industry set that we do, and we're happy to see a lot of just simply weather-related.

I think we're seeing better foundational industry numbers.

But as we tried to point out in our remarks, we're clearly seeing some traction on these sales building initiatives.

Although as we stress it, they're early in their rollouts, but we are seeing positive impacts from what we're doing on it as well.

Got you.

Makes sense.

And then, just on those sales builders.

You sort of talked about them being an unprecedented amount of sales builders.

So I'm just wondering, were you able to test all of these in the same units?

Is there any operational risk?

Because, as you roll these out, it sounds like they're going to do good things in the sales line.

But just wondering if there's any operational risks as it relates to the in-store execution of them?

Well, look, there are always -- I wouldn't -- I don't know, there's risk in them not working.

You're always going to -- there's risk in the overall level of initiatives.

But we've been very, very careful.

And one thing we've proven over time at BJ's is, we are -- we can execute operationally and they have been fairly tested.

I can't say that we've tested all of them in the same restaurants, because we want to take reads on the impact of these individual initiatives.

So we carefully measure those versus control and for that reason, we don't combine them.

But they do impact different areas of the restaurant for the most part as well.

So we're very confident around the implementation of each of these, but it's a lot going on in our restaurants.

For our next question, we'll go to Matthew DiFrisco with Guggenheim Securities.

This is Matt Kirschner on for Matt.

I just had a question -- 2 questions.

First, related to development.

You mentioned how you pulled back this year to only 10 new store openings to focus on these sales building initiatives.

But I wondered, given the improving trends, if it's possible to reaccelerate development in 2017 or how the pipeline looks in 2018?

I'd say, listen, it's too early in the year.

We don't make those decisions until our planning cycle later in the year.

But Greg, who's with us here in the room, is working with his team and looking at and still pursuing deals in a way that gives us the flexibility to increase the level of development next year if we have the desire to do that.

Okay.

And then, just a few questions around the test of delivery.

Would you be willing to share just maybe the number of stores that are involved?

And if you're considering third-party options as well as your own internal delivery network?

Matt, this is Greg Levin.

So as far as where we are on it, it's a small amount of restaurants that we are testing.

As much as it sounds like it should be fairly simple if you use some of the third parties, which we obviously said in our call that we are using some third parties, you'd think you can kind of just snap in and go.

But you want to make sure you staff the spot correctly.

You want to make sure you put in the take-out packaging correctly.

And make sure you -- for lack of a better term, you're checking off on all the -- or crossing all the T's and dotting all the I's.

So we're taking it a little bit slow from that perspective.

In regards to the way we're doing it, it is a combination of, as I just mentioned, some of the third-party delivery companies that people are familiar with.

We're also using, and we talked about this before, a kind of an aggregator, where people are going through our internal mobile app or our website, placing orders out there, that go to kind of an aggregator that looks at, for lack of a better term, a delivery-type company, whether it's a Lyft, an Uber or somebody else to come in and help deliver that food.

And then, frankly, we do have a couple of restaurants that have always had the delivery in those restaurants, and we're not really looking to make a change there, but there has not been much discussion about adding our own individual delivery drivers as of today.

So right now, it's primarily using third-party drivers.

Understood.

And then just, if you can share this, obviously you guys are well known and regarded for your pizza.

Do you have -- is that like a high mix item that's being delivered?

Or is there another item that's selling well?

It's actually been skewed more on the other areas of our menu.

Obviously, pizza's part of that.

But -- and it doesn't surprise me, given one of the real advantages, I think we have to take advantage of the off-premise opportunity is the breadth of our menu.

So there's obviously a lot of pizza options out there traditionally, so people are taking advantage, I think, of the new opportunities to go elsewhere in our menu.

We'll go now to Jeff Farmer with Wells Fargo.

You did touch on it, but what role did the introduction of the Brewhouse Specials menu have on that improved same-store sales performance you saw in the back half of the quarter?

I'm just trying to figure out if there was more than just some improved weather for you guys driving that better number?

Jeff, this is Greg Levin.

I don't know if we have that specifically identified as in meaning that 1 specific area.

I would tend to tell you, though, looking at the data, our $3 Pizookies are probably one of the biggest hits out there and you can think about that being an incremental add-on.

And that seems to give us a pretty nice solid Tuesdays, maybe more so than some of the other items because it's, I think, more incremental to the check per se.

I would tell you anecdotally, talking to our restaurant managers, they love these items.

They were selling more of them on each day and the guests are really talking about them from that perspective, but to actually have it broken down and say this is worth x percent in the comp sales improvement.

We just unfortunately don't have it at that type of data.

And then unrelated, but from a menu complexity standpoint, I think, I guess it goes back to your Analyst Day in 2014.

I think you guys peaked out at something like 180 items on the menu.

Brought it down to 150.

There's been a lot of new food news, a lot going on.

So any concern in terms of the SKU proliferation or operational complexity?

Anything to be worried about there moving forward?

Jeff, this is Greg.

Yes, we started at about 184 when we initiated the whole Project Q program.

And we are now probably in the mid-140s, so it's still a very significant reduction.

And we're also making sure, even with these new items and I may have mentioned this in my comments but it's worth reinforcing that these slow-roasted items are less complex than the average BJ's items, and I think it's important to note.

So although they represent new SKUs, not all SKUs are created equal.

And our kitchens really love selling and love seeing these items show up on the kitchen screens because they're reasonably straightforward and such great quality.

They take a lot of pride in them.

So -- but we're always conscious of that trade-off.

And we are taking items off as we add, but we are net adding with this menu launch by a little bit.

That's helpful news.

Last follow-up.

Greg Levin, did you talk about the mix traffic and pricing in Q1?

And also the interest expense expectation for the full year '17?

Yes.

Let me take the interest expense because that one's probably easier, but it came in around $900,000.

And I would probably expect it to probably be around that amount for the next several quarters in that regard.

So what does that get you?

It gets you $3.6 million just before kind of $9 million, so it's probably a reasonable number to think about there.

In regards to the quarter, traffic was down about 4%.

Really heavy in those first 6 weeks or so, I'd say, of the quarter and then start to moderate in that regard.

I think we had about pricing somewhere in the 3% range or so.

But our average check only grew about 2.5%.

So some of it's that discounting that I talked about that kind of impacted a little bit of cost of sales in there.

So that's kind of the breakdown, if that makes sense to you.

We'll go now to John Glass with Morgan Stanley.

This is actually Brian on for John.

Just a quick question around the sales building initiatives.

As you kind of roll those through with the higher cost meats than the discounting at the lower end.

How should we think about that in margin?

Costs still higher?

Should we think margin neutral in the restaurant line?

Margin accretive?

Yes, I think -- this is Greg Levin, Brian.

It's a great question.

And I do tend to think that your cost of sales are going to be in that upper range.

I talked about it being in the 26% range or so here in Q2.

Some of that's inefficiencies.

I think even as we work through some of that, I would expect cost of sales to probably be around that range or maybe upper 25%.

However, as Greg Trojan mentioned, when we were selling at $26.95 Prime Rib Bundle, even at 50% cost of sales, and I'm just using that for an example on this thing because it makes it easier to understand even though our cost of sales aren't there, you're bringing in $13 to $14 of gross profit dollars.

Those gross profit dollars should leverage your overall labor and operating occupancy costs when we start to think about restaurant level margins.

They should, frankly, be neutral, if not positive, going forward.

A little bit of the offset may be the Brewhouse Specials, but something like a $3 Pizookie is incremental to a purchase.

And we're seeing some of that same type of add-on purchases to our incident rate to some of the other items that kind of offset some of the discounting back there.

So our goal, as we put this through, is to really be restaurant-level, cash-flow neutral and probably a little bit of an increase in cost of sales in your offset in your labor and operating occupancy costs.

Perfect.

Okay, really helpful.

And then just one -- just following up on the delivery.

When you look at what you're doing internally versus going to the third party, can you just comment a little bit on profitability between the 2?

What are you seeing in terms of after the take rates, things like that, just relative to doing it in-house?

It's too early really to give you any very specific guidance there, but I think it's important to point out and again, this is something that I mentioned early in the remarks, but it's worth -- I'm not sure how understandable it was is, we're looking at this as being a mix of both, a pure third party model which you see a lot of right now.

And given our excellent app online ordering capability and our loyalty program, we know we have the ability to drive a lot of this business internally as well, right?

And so part of what we're doing in taking our time with a variety of partners is to make sure both live so that we maximize the incrementality of this channel.

And so we see we want the third parties to be more new users and highly incremental and we're willing to pay more from an overall cost perspective for that incrementality and we want to be more margin-efficient by -- through the business that we're able to generate through the loyalty program and already large volumes that we're doing as a concept.

So that's what we're balancing right now but obviously, our margins will be higher.

We're successful in balancing that way with our internal business versus the third party.

Our next question will go to Sam Beres with Robert W. Baird & Co.

Maybe just one clarification.

I think, Greg Trojan, you mentioned something about thinking you can drive positive comps in the near future and obviously, reported comps flat despite the Easter shift, negative here in Q2.

So is that suggesting that you guys are expecting positive comps here in Q2?

I think -- this is Greg Levin.

I think as those initiatives roll out, Sam -- the idea of those initiatives like any sales driving initiatives are to provide positive comp sales.

So we think that with the success of those initiatives and the things we're doing that there's that opportunity that these should be driving positive comp sales for us.

I mean, same old story there.

We don't have a crystal ball of what the rest of the world is going to be doing here, but that's the goal.

That's helpful.

And I guess, maybe on the traffic side.

Obviously, key focus point is getting improved traffic and I guess, what are the key factors that maybe get you back more towards a flattish traffic trajectory potentially as you move forward?

I guess, is that a realistic assumption moving throughout or towards the back half of the year against easier comparisons?

And I mean, to improve that traffic beyond the initiatives, do we need to see a stronger underlying improvement in the industry demand environment to maybe get to that flattish traffic level potentially?

Sam, this is Greg Levin.

I think you kind of hit upon it a little bit at the end there.

We do need to see some improvements, I think, in the macro environment.

And the challenges that continue in the macro environment is really just the abundance of restaurants that continue to get developed out there.

All of the data that I'm seeing really suggest that consumers are of going out, and they're going out and eating, but it is at a flat rate.

And when you're going out, so you're not increasing your amount of time of going out, but you're going out and unfortunately or fortunately, whichever way you want to look at it, there is a amount of new restaurants coming on board, so you're just splitting the pie up to more and more pieces from that perspective.

I do think though, when you look at the BJ's concept that not only will our initiatives make us have some unique menu items on there that can drive guest traffic in there for special occasions from that standpoint.

So I think that helps in that regards.

But on top of that, looking at some of our numbers and where we're seeing some improvement, we are seeing Texas, which is an area that's been soft for us and frankly it's probably made us have, I would say, negative traffic more so than looking at some of the other markets.

I think, it's started to come back a little bit.

It's still up and down.

It's not where we want it to be.

But I think when I look at our business, I think Texas is probably a little bit of the key to seeing improving traffic on an overall perspective.

I mean, another thing I'd add there is, there's a silver lining of the difficulty of the environment we're in, both from a sales and then you look at all the cost pressures, particularly on the labor side from an industry perspective is, we are starting to see some of the weaker players actually reduce -- helping reduce the number of seats out there, both at the concept level, but even at the number of units you see being closed by some concepts out there.

So that is helpful.

But that's going to be -- start to reverse some of the overexpansion in number of seats issues that we've seen particularly in markets like Texas.

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

I'm curious first on average ticket and how we should think about that going forward.

I know you mentioned that was up 2.5% with a 3% pricing this quarter.

And I'm curious as we look to the rest of the year and we have the full rollout happening at the slow roasted items to complement that expansion of the Brewhouse menu, which sounds like that was a little bit earlier, how do we think about that progression of the ticket and should it be below pricing going forward?

So I think, there's a couple of things there.

Some of the items that we're putting on are, as Greg Trojan mentioned in the formal remarks, they're to help drive average check.

So you would hope that, that on top of your pricing would actually see a positive mix.

The [sundry] you'll see on an offset of that on the Brewhouse Specials.

And I think when we look at our business going forward, we're expecting mix to more or less to be flat to slightly positive.

The offset there and it's always been the offset for the last couple of years is the promotional environment.

Do we get a little bit more promotional or not in regards to the environment out there and that would adjust down your mix a little bit.

And that played a little bit in Q1.

That's why our average check wasn't up as much as maybe our pricing.

But I think, ultimately it's going to be kind of flattish, maybe slightly positive.

But Will, compared to most of the last year, when you look at that, I think our overall guest check increase was about 1.4% in that neighborhood, right?

And we had similar levels of pricing, right?

So when we talk about being in 2.5% land, that's obviously helpful, right?

And we'd rather take -- see offset some of the inflationary pressures with positive mix versus pure pricing.

So it should be a help in comparison to what we saw overall last year by at least of what we've seen in the quarter maybe a little bit more going forward.

The dynamic there -- and I'm sorry, just to give you a reason is, if you remember, our overall increase in level of discounting last year was a lot more significant than we are seeing this year or plan to see this year, right?

So we took quite a step up a year ago overall and our incidents of discounting went from about, I don't know, 6% to a little over 9%, which -- that's a big increase obviously.

Still below where the industry is.

But from impact on check, that was pretty significant.

We're not looking at that level of step function increase this year unlike we were last year.

So we'll see less degradation from a check perspective.

We could see some -- little bit of an increase there, but it's not going to be anything like last year as we see things now.

Makes sense.

And I want to follow up on the comment you made around handhelds.

Can you talk a little bit more about that rollout?

And if I missed the timeline there, I apologize.

And you did mention something about better incident rates with the handhelds.

So I'm curious what were those incidences?

Is it Pizookie?

Is it drinks, appetizers, et cetera?

I'm kind of curious what is being driven by the handheld there and you mentioned some efficiency gains as well.

So any other color you would be able to give there would be helpful.

Sure.

Yes, we are on track to have all of our restaurants handheld-enabled by mid-August.

It'll be midsummer or so and we're well on track towards that.

Our incidents rates are being driven by -- probably the biggest is beverages.

And then we're seeing it in all the categories you mentioned.

We're seeing it in add-ons, appetizers and desserts.

But we've seen the biggest impact in beverages because one of the main benefits I mentioned and we're seeing is this time to order and getting -- therefore we're getting drinks, in particular, to the table quite a bit more quickly than we were able to in our old order-taking system.

So that's generating more frequency on the beverage side, plus all the drinks we're just getting just have less incidents of our service forgetting to bring in drinks because of the way the new system works in order to fill those drinks by and large for those drinks to get to the table, they have to be run in and out.

Got it.

One last one on Texas, if I could, to follow up on a comment that you guys made earlier.

So just to make sure I was clear on that, Texas is still lagging a little bit from your broader system, but it sounds like you're somewhat pleased with that progression you're seeing recently.

And is that just more of a 1Q or maybe late 1Q into 2Q phenomenon?

No.

Actually we saw Texas -- last year we made big strides in Texas versus where we were before.

So again, we're not doing backflips, but relative to the trends, particularly in the back half of the year, we took a number of steps.

A lot of it -- some of them are around these franchise nights that we began in Texas and happy hour changes that were successful in Texas gave us the conviction to roll them out system-wide.

So we've seen -- this is not a 1 quarter of "Wow, Texas is doing better." It's been a slow, more steady improvement which has been good to see.

Well let me just also backtrack and I can follow up.

You also asked a question on the efficiency of handheld, so I wanted to just quickly mention, we are not rolling out handhelds in our restaurants to save labor, unlike some folks out there.

We look at this as a sales building and guest service opportunity, not a labor reduction opportunity.

So if you heard us talk about efficiency, it's more around delivering better service.

But our goal is, if we can remain labor neutral because we are changing our sequence of service here to actually speed things up.

It's not just a matter of having these tablets.

You could just use the tablets and increase table station and not speed up service in my mind or increase quality.

We're not taking that route.

We want to build sales through this technology.

So I thought that was important to mention.

We'll go now to Nick Setyan with Wedbush Securities.

So just going back to the delivery.

Would you be willing to kind of tell us what percent of sales in the stores that you're testing it is?

What the average check looks like relative to your normal average check?

What the costs associated with there are.

I mean I think the publicly disclosed information's about 20% to 25% of the transaction size.

Is that kind of the right way to think about this?

Nick, honestly today, we don't have much to disclose from that standpoint.

It's being tested.

It's working through more of our online apps.

We haven't put much marketing behind it.

So we haven't necessarily felt compelled yet to talk about where we are in regards to where we think it can go this year from that standpoint.

We're really trying to actually hone it with the right radius, what are the different delivery fees, et cetera, from that standpoint.

So it's just too early to kind of give an update as to where we see it going within our business.

We do know and I'm sure you've heard it from everybody else that everybody thinks this is a big opportunity.

We know for BJ's specifically that, say, only 5% of our business is off-premise.

And even without the rollout, third party delivery companies within BJ's, most other casual dining chains are closer to 10%.

So I think there's that opportunity there and an opportunity to get above that.

But we're so far at the beginning of it that there's really nothing that can actually -- we can provide you that would make a difference in our business today to talk about.

So in terms of the timing of the rollout, I mean, you guys said it's going to be later this year.

So should we think about it more as like late Q4 type of a rollout?

Probably more of a Q3 rollout.

We've got some more testing coming up here in Q2.

So again, this is going to be a handful of restaurants.

And it's a funny thing about is, everybody from the analysts' side wants to just think about pure incremental sales that come through from the margins from that standpoint.

But we've learned in our -- a little bit of our testing is, you've got to staff for it.

You've got to put that labor on there.

So are you driving the right amount of sales to cover that labor, as we just mentioned?

You got to make sure you got some of the right take-out packaging that wants to come through here and other things.

So another phase of testing is going to be done in the next 60 days.

So it will give us more to talk about probably at the Q2 conference call in July, when probably, by that time, we'll have more of a definitive rollout program for it.

But much like we've talked about with the slow roasting technology or even the handhelds, we want to do this right.

And we want to make sure that our restaurants are taking care of our guests.

And as a result, we're not going to rush to do it to get it out there.

We're going to do it in the right way at the right pace that serves our guests and serves what we have considered gold standard food to our guests.

Nick, the only quick think I'd add is, the good news is, the testing which has been more operationally focused, as Greg mentioned, is going very well.

I mean we've had a big head start with our own app development and the ability to program and have these orders talk to our kitchen delivery system and our front house system.

So all of that, for some folks is the hard part of this.

We're very satisfied and pleased with.

As Greg mentioned, we just want to make sure we get the guest experience piece of this down right.

And then structurally we're set up for this, sort of, hybrid model I described earlier between the -- our own orders versus the third -- pure third party orders working well together with the right partnership.

So we're obviously excited about it.

The only last thing is, I mentioned, it's not all about delivery.

The big -- there's also an opportunity clearly on take-out, the big part of off-premise.

And a lot of the -- not just take-out packaging, but we've been working hard on making our take-out ordering and menu variety more compelling for our take-out and easier to understand from a take-out perspective.

And we'll be rolling that, those elements and products out more like midyear than later than that.

And we think there's a real opportunity in the near term to drive just traditional take-out and we do have the ability through our app for people to order ahead on the app and stay in their cars and have curbside delivery and never have to get out of their vehicles as well is part of what we already have programmed in our app capability.

So -- just important not to leave out traditional take-out in all of this.

And just on the handhelds, is it increasing table turns as well?

Or is it just incident rates that you highlighted?

Well, it's -- with time to order improving, we would generally be able to shorten up the duration, the guest duration and that would kind of be a goal down the road from that standpoint and one of the things that we'll continue to monitor.

Is there a component of pay-at-the-table as well?

Not yet.

That's part of the -- that will be part of the thinking, obviously.

But initial roll out will...

Well, there's a couple of things there.

So the current setup is, you can actually -- the server can actually swipe the card and pay it right there.

They'll have to send it to a fixed printer.

Our goal is later this year to get that EMV-enabled.

That's one of the things that we're waiting on.

And when it's EMV-enabled, we will actually be able to hand you the device.

You'll be able to actually put the tip on the device at that point and sign it and complete the full handheld side of it.

Right now, it's kind of a hybrid approach.

For our final questions, we'll go to Joshua Long with Piper Jaffray.

Greg, wanted to circle back to that gap you were talking about between average weekly sales and same-store sales.

I understand that, that was largely driven by -- from the calendar shifts you had.

Would you -- are you expecting for that to go kind of evolve over the course of the year?

I mean, I guess, and that will narrow back down to a more normalized range, but does -- do any of the other sales driving initiatives or other items you have kind of built into the guidance materially move that one way or the other that we should be aware of?

No, I mean, the sales driving initiatives technically would be equal across all restaurants, new and old, from that standpoint, so it won't necessarily change your average weekly sales differentiator from new to existing restaurants.

I would expect that as we go into the other quarters and your calendar normalizes, that we won't necessarily see, in this case I think we were negative 1.3% and our average weekly sales, if you do the math, I think was actually down 3.3% and I said approximately 3%.

So you had kind of a 200 basis point spread there.

I would tend to think that, that would start to normalize back to the 100 to 150 that we've seen over the last couple of years.

Got it.

Okay.

And then in terms of just the premiere rewards, loyalty mobile app side of the business, I wanted to see if we could get an update there, just see how those things -- those initiatives are progressing and it seems like they would fit in nicely with some of the new technology that you're rolling out.

But just curious where we're sitting out there in terms of guest usage or any other metrics that you'd be willing to share.

We don't have specific metrics, but we continue to be pleased about the progression.

And as we've talked about before, we have in test some, for lack of a better word, some refresh around the program that we think will make it even more appealing.

And even though we're seeing good general fundamental momentum, we're rounding into year 5 of the loyalty program.

And in year 4 or 5, the incrementality, research would suggest is, could use -- those programs need a refresher, if you will, and we think there's some incrementality from doing that.

So we're testing an iteration of that for, if that goes as planned and then, as well, we would rollout later this year, probably in the beginning of Q4 is what we're thinking now.

But there's some testing between now and then.

So that's a general overview.

Specifically, you're right on that.

There's more to do and some real upside of integrating that loyalty experience more in step with our app and our online ordering for instance.

So we think we have some very interesting capabilities around the corner in regards to loyalty and that becoming a more seamless experience with online and app.

That concludes today's question-and-answer session and also brings to an end today's conference.

Thank you for your participation.

You may now disconnect.

Thank you.

Thank you.