RESTAURANTS Earningcall Transcript Of Q2 of 2024

Gregory S. Levin -- President, Chief Executive Officer, and Director

Thank  you,  Rana.  BJ's  delivered  another  quarter  of  restaurant-level  margin  growth  and  adjusted

EBITDA  growth  of  13%  over  the  same  period  last  year.  These  solid  results  again  highlight  the

benefits  of  the  strategies  we  shared  at  our  Investor  Day  in  November.  Our  approach  focuses  on

driving  sales  through  our  familiar-made,  brewhouse  fabulous  culinary  initiative,  increasing  and

enhancing our brand awareness, improving our operational excellence through our people initiative

centered on our gracious hospitality, and enhancing our ambiance through our remodel initiative.

Additionally,  our  holistic  top-line  approach  to  driving  sales  is  complemented  with  our  margin

expansion  initiative  through  productivity  and  cost  savings  enhancements.  These  strategies  are

working  and  continue  to  establish  a  solid  foundation  for  financial  and  restaurant  growth  and

enhancement of shareholder value. We finished the quarter with total sales of $349.9 million while

comp  sales  were  slightly  negative  at  0.6%.  However, 

throughout 

the  quarter,  we  saw

month-over-month  improvement  in  comp  sales  driven  by  guest  affinity  for  the  BJ's  concept  and

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choosing BJ's to celebrate important moments like Mother's Day, Father's Day, and graduations.

Reflecting this strong guest affinity to the BJ's concept, 107 restaurants broke either daily or weekly

sales  records  in  Q2.  Furthermore,  our  restaurant  margins  continue  to  expand  and  rose  to  15.5%,

representing an increase of 100 basis points from the prior year. Our restaurant-level cash flow per

operating week was approximately 19,200, just slightly behind fiscal 2019 restaurant-level cash flow

per week of 19,300. So, while percentage margins were still behind 2019 levels, we closed the gap

on the dollars per restaurant week.

Adjusted EBITDA in the quarter rose to $36.1 million, an increase of $4.3 million or 13% higher than

prior year. Our teams did an amazing job focusing on driving throughput in our restaurants this past

quarter as we rolled out the second phase of our gracious hospitality people initiative. If you recall,

the first part of this initiative focused on new server scripting and was launched last year. In April, we

initiated our enhanced service model, which balances the number of tables per server, food runners,

and quality-fast expediter positions in our restaurants.

These changes allow servers to get to our guests sooner so we can get orders into the kitchen and

the bar faster. It also frees up our managers so that they have more time to be in the dining room to

ensure  we  are  delivering  the  gold  standard  level  of  operational  excellence  for  our  guests.  And  it

elevates table turnover, which, in essence, expands the capacity of our existing platform. The goals

of these changes are to improve our pace and throughput in our restaurants and further improve our

already high standards of service and hospitality.

Based on our consumer research, we know that pace and throughput is another opportunity for us

that will drive top-line sales. In addition to enhancing our service model, we are also evaluating and

testing  other  technological  enhancements  that  will  help  us  further  improve  throughput  in  our

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restaurants. These include changes to the way our kitchen display system informs our team when to

fire  or  begin  cooking  an  item,  to  changes  to  our  server  tablets  that  can  inform  our  team  members

where the guest is during their dining experience with BJ's. I want to thank our team members for

diligently implementing these service model changes.

It was a large undertaking, and our teams executed it flawlessly, knowing that these changes deliver

a  better  guest  experience,  which  ultimately  continues  to  drive  top-line  sales.  Our  next  gracious

hospitality phase will be new hourly training for all restaurants and that is expected to roll out later in

Q3  and  in  Q4.  This  will  include  additional  side-by-side  training  for  all  new  hourly  team  members.

Overall, we continue to expect these initiatives to take the better part of Q3 and Q4 of this year and

have a slight impact on training labor for these quarters.

These investments in our team are critical elements to driving top-line sales since every additional

sales  dollar  leverages  the  fixed  elements  of  our  restaurant's  cost  structure.  As  we've  said  on  past

occasions, the best way for us to improve our restaurant-level cash flow is by driving sales, and we

have  a  proven  playbook  and  strategies  that  are  helping  us  meet  this  goal.  We  also  continue  to

execute  against  our  remodel  initiative  that  is  similarly  driving  improved  sales  and  traffic.  We  have

now completed 19 remodels year to date, and we expect to do approximately five more this year.

By the end of this year, we will have remodeled approximately 70 restaurants since we began this

initiative.  We  will  finish  fiscal  2024  with  approximately  half  of  our  restaurants  either  recently

remodeled  or  one  of  our  newer  prototypes.  With  the  success  of  our  remodel  initiatives,  we  have

been  effectively  and  prudently  deploying  capital.  To  date,  we  have  opened  one  new  restaurant  in

Brookfield, Wisconsin, and we expect to open our next two restaurants in August and September of

this year.

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Both  new  restaurants  will  feature  our  new  prototype  that  will  cost  approximately  1  million  less  to

build, bringing the investment cost down to around 6 million on average, and that's net of landlord

allowances.  This  new  prototype  also  provides  greater  operating  efficiencies  and  higher  and  faster

returns while incorporating our learnings from our remodel initiative which includes lighter colors and

a more contemporary bar featuring the 130-inch television as the focal point. Our long-term model

for  our  business  continues  to  be  to  drive  top-line  sales  in  this  8%  to  10%  range  through  a

combination of 5%-plus unit growth and comparable restaurant sales in the low to mid single digits.

However, as we've communicated previously, we are going to do so with the right quality and at the

right  investment  cost  to  continue  to  drive  strong,  new  restaurant  investment  returns  that  deliver

shareholder value.

At  the  same  time,  we  continue  to  expand  margins  through  sales  leverage  and  productivity  and

savings initiatives. Our continuous focus on optimizing the business and our solid financial cadence

results in significant free cash flow, which we will translate into enhanced shareholder value over the

medium and longer term. Now, let me turn it over to Tom to provide a more detailed update for the

quarter and the current trends. Tom?

Tom Houdek -- Chief Financial Officer

Thanks,  Greg,  and  good  afternoon,  everyone.  I  will  provide  details  of  the  quarter  and  some

forward-looking  views.  Please  remember  this  commentary  is  subject  to  the  risks  and  uncertainties

associated with forward-looking statements as discussed in our filings with the SEC. For the second

quarter, we generated sales of $350 million, which was slightly higher than last year.

On a comparable restaurant basis, Q2 sales decreased by 0.6%. From a weekly sales perspective,

we  averaged  more  than  124,000  per  restaurant.  Our  strong  and  efficient  restaurant  execution,  as

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Greg just outlined, in conjunction with cost savings from our margin improvement initiatives, helped

BJ's again improve margins in the quarter. Our restaurant-level cash flow margin was 15.5% in Q2,

which was 100 basis points better than a year ago, demonstrating again the benefits of our ongoing

initiatives to drive efficiencies and the solid foundation we have built for continued growth.

Adjusted EBITDA was $36.1 million and 10.3% of sales in our second quarter. Q2 EBITDA grew by

13% year over year and beat the prior year by more than $4 million with a margin that was 120 basis

points higher. We reported net income of $17.2 million and diluted net income per share of $0.72 on

a  GAAP  basis  for  the  quarter,  which  were  each  up  more  than  40%  from  a  year  ago.  As  Greg

mentioned, our comparable restaurant sales improved sequentially through the quarter and finished

with a modestly positive comp in June.

During  the  quarter,  we  set  a  new  weekly  sales  average  record  at  more  than  141,000  across  our

system  in  the  week  that  included  Mother's  Day.  Also  we  mentioned  last  quarter,  we  have  been

scaling back the degree of menu pricing compared to last year. In May, we only took a small pricing

round  of  approximately  40  basis  points,  which  was  more  than  200  basis  points  lower  than  our  Q2

2023  pricing  round  leading  to  a  comp  headwind  in  the  quarter  as  we  lapped  last  year's  elevated

pricing  round.  The  foundation  we  are  building  is  allowing  us  to  take  a  more  balanced  pricing

approach  to  maintaining  our  traffic-driving  value  with  adding  appropriate  menu  pricing  to  deliver

profit dollar growth.

Our check growth moderated to the mid-2% area in Q2 compared with the mid-4% check growth in

Q1. This was driven by our carried menu pricing in the mid-3% area in Q2 down from the mid-5%

area in Q1. Moving to expenses. Our cost of sales was 25.7% in the quarter, which was 20 basis

points  favorable  compared  to  a  year  ago  and  50  basis  points  unfavorable  compared  to  the  prior

quarter.

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Food costs increased by more than 2% quarter over quarter driven by inflation on key items such as

bone-in  chicken  wings  and  avocados.  Labor  and  benefits  expenses  were  36.1%  of  sales  in  the

quarter,  which  was  10  basis  points  favorable  compared  to  the  second  quarter  of  last  year.  We

achieved these gains while introducing a new service model to provide guests with an even better

restaurant experience as Greg just outlined. This rollout added one-time costs related to the training

and extra scheduled labor, which impacted margins by approximately 20 basis points in the quarter.

Occupancy and operating expenses were 22.7% of sales in the quarter, which was 70 basis points

favorable compared to second quarter of last year. We continue to achieve strong efficiency gains

over  the  prior  year  from  our  cost  savings  initiative  and  expect  further  improvements  in  the  second

half.  G&A  was  20.6  million  in  the  second  quarter  in  line  with  our  expectations.  Turning  to  the

balance sheet.

We  ended  the  second  quarter  with  net  debt  of  47.3  million  comprised  of  a  debt  balance  of  $63.5

million  less  cash  and  equivalents  of  $16.2  million.  During  the  quarter,  we  repurchased  and  retired

approximately  255,000  shares  of  common  stock  at  a  cost  of  $8.8  million.  We  currently  have

approximately  52  million  available  under  our  share  repurchase  program.  Moving  to  more  recent

trends, comparable restaurant sales started the quarter modestly positive.

Our  sales-building  initiatives,  including  recent  promotions,  have  been  successful  at  driving

incremental  traffic  as  illustrated  by  our  traffic  performance,  far  exceeding  the  Black  Box  casual

dining index in early Q3. Dollar profit growth is our top success criteria for any promotion. We are

very encouraged by the incremental profit flow-through we have been able to generate with recent

promotions  including  our  Pizookie  pass.  Looking  ahead  and  assuming  recent  trends  continue,  we

expect  Q3  comp  sales  in  the  1%  to  2%  range,  taking  into  account  recent  check  and  traffic  trends

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and anticipating a regular seasonal pattern.

As a reminder, our third quarter tends to be our lowest sales quarter of the year due to seasonality.

Factoring in recent trends and expectations for Q3 comp sales, we expect restaurant-level cash flow

margin to be in the mid-12% area as we continue to expand our margins over the prior year. This

guidance  incorporates  a  higher  level  of  marketing  investment  to  build  additional  brand  awareness

and  drive  traffic  to  our  restaurants  as  we  noted  in  last  year's  Investor  Day  presentation.  As  a

percentage of sales, marketing costs will be approximately 50 to 70 basis points higher than Q3 of

2023.

Also,  food  cost  inflation  has  stepped  up  on  certain  items  recently,  which  is  reflected  in  our  third

quarter guidance. We expect G&A to remain in the $20 million area for Q3. G&A continues to track

toward the higher end of our original full year guidance range of $82 million to $84 million and to the

lower  end  of  the  guidance  range  when  removing  approximately  $2  million  of  extraordinary  G&A

expenses from Q1, which were previously discussed. Much like Q1 and Q2, as well as our guidance

for Q3, we expect margins to continue to expand in Q4 year over year as we grow sales through the

strategic  initiatives  we've  outlined  and  make  additional  progress  on  our  margin  improvement

initiatives.

In terms of cost savings, our new disposables distributor will be fully rolled out by the fourth quarter.

We are also testing a tool for our restaurant operators that uses our AI-based sales forecast at each

restaurant  and  generates  a  tailored  labor  schedule  down  to  the  hour  and  day  based  on  expected

demand and other criteria that we set. The early results are encouraging, and we expect to expand

the usage of the tool by the fourth quarter and drive additional labor efficiencies. Our goal remains to

close the gap to 2019 margins by year-end.

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In conclusion, with significant cash flow from operations, expanding margins, and a healthy balance

sheet, BJ's has the financial flexibility to execute multiple initiatives to enhance shareholder value.

Specifically,  we  are  focused  on  delivering  value  to  shareholders  through  sales  and  productivity

initiatives  and  through  our  disciplined  approach  to  capital  allocation,  including  new  restaurant

openings  and  restaurant  remodels,  which  both  continue  to  generate  strong  economic  returns,  as

well as our share repurchase activity. We have a clear path to sales and margin growth ahead, and

our  long-term  strategy  and  the  strong  consumer  appeal  for  the  BJ's  concept  positions  us  well  to

continue  building  on  our  successes  and  enhancing  shareholder  value.  Thank  you  for  your  time

today, and we'll now open the call to your questions.

Operator?

Questions & Answers: