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BJRI > SEC Filings for BJRI > Form 10-Q on 6-Nov-2012All Recent SEC Filings

Show all filings for BJS RESTAURANTS INC

Form 10-Q for BJS RESTAURANTS INC


6-Nov-2012

Quarterly Report


Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

STATEMENT REGARDING FORWARD-LOOKING DISCLOSURE

Certain information included in this Form 10-Q and other materials filed or to be filed by us with the SEC (as well as information included in oral or written statements made by us or on our behalf) may contain "forward-looking" statements about our current and expected performance trends, growth plans, business goals and other matters. These statements may be contained in our filings with the Securities and Exchange Commission, in our press releases, in other written communications, and in oral statements made by or with the approval of one of our authorized officers. Words or phrases such as "believe," "plan," "will likely result," "expect," "intend," "will continue," "is anticipated," "estimate," "project," "may," "could," "would," "should," and similar expressions are intended to identify "forward-looking" statements. These statements, and any other statements that are not historical facts, are "forward-looking" statements within the meaning of the Private Securities Litigation Reform Act of 1995, as codified in Section 27A of the Securities Act of 1933 and Section 21E of the Securities Exchange Act of 1934, as amended from time to time (the "Act"). The cautionary statements made in this Form 10-Q should be read as being applicable to all related "forward-looking" statements wherever they appear in this Form 10-Q.

The following discussion and analysis should be read in conjunction with our consolidated financial statements and notes thereto included elsewhere in this Form 10-Q. Except for the historical information contained herein, the discussion in this Form 10-Q contains certain "forward-looking" statements that involve known and unknown risks and uncertainties, such as statements of our plans, objectives, expectations and intentions. The risks described in this Form 10-Q, as well as the risks identified in Item 1A of our Annual Report on Form 10-K for the fiscal year ended January 3, 2012, are not the only risks we face. These statements reflect our current perspectives and outlook with respect to the Company's future expansion plans, key business initiatives, expected operating conditions and other factors. Moreover, we operate in a very competitive and rapidly changing environment, and new risk factors emerge from time to time. Additional risks and uncertainties that we are currently unaware of, or that we currently deem immaterial, also may become important factors that affect us. It is not possible for us to predict the impact of all of these factors on our business, financial condition or results of operation or the extent to which any factor, or combination of factors, may cause actual results to differ materially from those contained in any "forward-looking" statements. Given the volatility of the operating environment and its associated risks and uncertainties, investors should not rely on "forward-looking" statements as any prediction or guarantee of actual results.

These "forward-looking" statements include, among others, statements concerning:

• our restaurant concept, its competitive advantages and our strategies for its continued evolution and expansion;

• the rate and scope of our planned future restaurant development;

• the estimated total domestic capacity for our larger-format restaurants;

• anticipated dates on which we will commence or complete the development and opening of new restaurants;


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• expectations as to the timing and success of the planned expansion of our contract brewing strategy for our proprietary craft beers and sodas;

• expectations for consumer spending on casual dining restaurant occasions in general;

• expectations as to the availability and costs of key commodities used in our restaurants and brewing operations;

• expectations as to our menu price increases and their effect, if any, on revenue and results of operations;

• expectations as to the effectiveness of our planned operational, menu, marketing and capital expenditure initiatives;

• expectations as to our capital requirements and actual or available borrowings on our line of credit;

• expectations as to our future revenues, operating costs and expenses; and

• other statements of expectations, beliefs, future plans and strategies, anticipated developments and other matters that are not historical facts.

These "forward-looking" statements are subject to risks and uncertainties, including financial, regulatory, consumer behavior, demographic, industry growth and trend projections, that could cause actual events or results to differ materially from those expressed or implied by the statements. Significant factors that could prevent us from achieving our stated goals include, but are not limited to:

• Our success depends substantially on the favorable image, credibility and value of the BJ's brand and our reputation for offering guests a higher quality, more differentiated total dining experience at a good value.

• Any deterioration in general economic conditions may affect consumer spending and may adversely affect our revenues, operating results and liquidity.

• If we do not successfully expand our restaurant operations, our growth rate and results of operations would be adversely affected.

• Our ability to open new restaurants on schedule in accordance with our targeted capacity growth rate may be adversely affected by delays or problems associated with securing suitable restaurant locations and leases, recruiting and training qualified managers and hourly team members to correctly operate our new restaurants and by other factors, some of which are beyond our control and the timing of which is difficult to forecast accurately.

• Access to sources of capital and our ability to raise capital in the future may be limited, which could adversely affect our business and our expansion plans.

• Any deterioration in general economic conditions could also have a material adverse impact on our landlords or on businesses neighboring our locations, which could adversely affect our revenues and results of operations.

• Any failure of our existing or new restaurants to achieve expected results could have a negative impact on our consolidated revenues and financial results, including a potential impairment of the long-lived assets of certain restaurants.

• Our growth may strain our infrastructure and resources, which could slow our development of new restaurants and adversely affect our ability to manage our existing restaurants.

• Any decision to either reduce or accelerate the pace of openings may positively or adversely affect our comparative financial performance.

• Our future operating results may fluctuate significantly due to our relatively small number of existing restaurants and the expenses required to open new restaurants.

• A significant number of our restaurants are concentrated in California, Texas and Florida which make us particularly sensitive to economic, regulatory, weather and other risk factors and conditions that are more prevalent in those states.

• Our operations are susceptible to changes in our food, labor and related employee benefits (including, but not limited to, group health insurance coverage for our team members), energy and supply costs which could adversely affect our profitability.

• Our costs to construct new restaurants are susceptible to both material and labor cost fluctuations which could adversely affect our return on investment results for new restaurants.

• Our increasing dependence on contract brewers could have an adverse effect on our operations if they cease to supply us with our proprietary craft beer and sodas.

• Government laws and regulations affecting the operation of our restaurants, including (but not limited to) those that apply to the acquisition and maintenance of our brewing and retail liquor licenses, minimum wages, consumer health and safety, group health insurance coverage, nutritional disclosures, and employment-related documentation requirements could increase our operating costs, cause unexpected disruptions to our operations and restrict our growth.


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• Our internal brewing, contract brewing and beer distribution arrangements are subject to periodic reviews and audits by various federal, state and local governmental and regulatory agencies and could be adversely affected either as a result of different interpretations of the laws and regulations that govern such arrangements or by new laws and regulations enacted or promulgated by such governments or agencies.

For a more detailed description of these risk factors and other considerations, see Part II, Item 1A - "Risk Factors" of this Form 10-Q and the risk factors identified in Item 1A of our Annual Report on Form 10-K for the fiscal year ended January 3, 2012.

GENERAL

As of October 2, 2012, we owned and operated 125 restaurants located in the states of California, Texas, Florida, Arizona, Nevada, Colorado, Ohio, Oregon, Oklahoma, Washington, Kentucky, Indiana, Louisiana and Kansas. Our restaurants operate under the BJ's Restaurant & Brewery®, BJ's Restaurant & Brewhouse ®, BJ's Pizza & Grill®, or BJ's Grill® names. Our menu features our BJ's® award-winning, signature deep-dish pizza, our hand-tossed style pizza, our proprietary craft beers and other beers, as well as a wide selection of appetizers, entrees, pastas, sandwiches, specialty salads and desserts, including our Pizookie® dessert. Our BJ's Restaurant & Brewery® restaurants feature on-premise brewing facilities where BJ's proprietary craft beers are produced for some of our restaurants. Currently, three of our restaurants have active brewing operations on-premise, while the remainder of our proprietary beer requirements is provided by third-party craft brewers ("contract brewers") using our proprietary recipes. Our six BJ's Pizza & Grill® restaurants are a smaller format, full-service restaurant when compared to our large format BJ's Restaurant and Brewhouse® and BJ's Restaurant and Brewery® locations and reflect the original format of the BJ's restaurant concept that was first introduced in 1978. Our BJ's Restaurant and Brewhouse® format currently represents our primary expansion vehicle. In October 2011, we opened our first BJ's Grill® location in Anaheim Hills, California. BJ's Grill ® is a smaller footprint restaurant that is currently intended to serve as a live research and development restaurant, where certain food, beverage, facility, technological and operational enhancements will be tested for potential application to our larger restaurants.

Our revenues are comprised of food and beverage sales at our restaurants. Revenues from restaurant sales are recognized when payment is tendered at the point of sale. Revenues from our gift cards are recognized upon redemption in our restaurants. Gift card breakage is recognized as other income on our Consolidated Statements of Income. Gift card breakage is recorded when the likelihood of the redemption of the gift cards becomes remote, which is typically after 24 months from original gift card issuance.

Cost of sales is comprised of food and beverage costs. The components of cost of sales are variable and typically fluctuate directly with sales volumes. Labor and benefit costs include direct hourly and management wages, bonuses and payroll taxes and fringe benefits for restaurant employees, including stock-based compensation that is directly related to restaurant level team members.

Occupancy and operating expenses include restaurant supplies, credit card fees, marketing costs, fixed rent, percentage rent, common area maintenance charges, utilities, real estate taxes, repairs and maintenance and other related restaurant costs.

General and administrative costs include all corporate, field supervision and administrative functions that support existing operations and provide infrastructure to facilitate our future growth. Components of this category include corporate management, field supervision and corporate hourly staff salaries and related employee benefits (including stock-based compensation expense and cash-based incentive compensation), travel and relocation costs, information systems, the cost to recruit and train new restaurant management employees, corporate rent, certain brand marketing-related expenses and legal, professional and consulting fees.

Depreciation and amortization principally include depreciation on capital expenditures for restaurants.

Restaurant opening expenses, which are expensed as incurred, consist of the costs of hiring and training the initial hourly work force for each new restaurant, travel, the cost of food and supplies used in training, grand opening promotional costs, the cost of the initial stocking of operating supplies and other direct costs related to the opening of a restaurant, including rent during the construction and in-restaurant training period.


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While we currently expect to pursue the renewal of substantially all of our expiring restaurant leases, no guarantee can be given that such leases will be renewed or, if renewed, that rents will not increase substantially.

In calculating comparable company-owned restaurant sales, we include a restaurant in the comparable base once it has been open for 18 months. Guest traffic for our restaurants is estimated based on representative values that we assign to certain menu items or individual guest tickets. In turn, these values are also utilized to calculate our estimated average guest check amount. Our effective menu pricing factor is estimated using a representative product sales mix and does not consider the effects of any subsequent promotional discounting or other retail price reductions.

RESULTS OF OPERATIONS

The following table sets forth, for the periods indicated, our unaudited
Consolidated Statements of Income expressed as percentages of total revenues.
The results of operations for the thirteen and thirty-nine weeks ended
October 2, 2012 and September 27, 2011, are not necessarily indicative of the
results to be expected for the full fiscal year.



                                           For The Thirteen                     For The Thirty-Nine
                                              Weeks Ended                           Weeks Ended
                                     October 2,       September 27,        October 2,       September 27,
                                        2012               2011               2012               2011
Revenues                                 100.0%             100.0%             100.0%             100.0%
Costs and expenses:
Cost of sales                              24.7               24.7               24.7               24.7
Labor and benefits                         35.0               34.2               34.7               34.4
Occupancy and operating                    21.9               21.1               21.0               20.6
General and administrative                  6.0                6.2                6.2                6.5
Depreciation and amortization               6.0                5.7                5.8                5.5
Restaurant opening                          1.4                1.6                1.2                1.1
Loss on disposal of fixed assets              -                0.2                0.1                0.2
Legal settlements                             -                0.7                0.1                0.5

Total costs and expenses                   94.9               94.3               93.7               93.5

Income from operations                      5.1                5.7                6.3                6.5
Other income (expense):
Interest income                               -                  -                  -                  -
Interest expense                              -                  -                  -                  -
Gain on investment settlement                 -                  -                0.1                0.1
Other income, net                           0.1                  -                0.1                0.1

Total other income                          0.1                0.1                0.2                0.2

Income before income taxes                  5.2                5.7                6.5                6.8
Income tax expense                          1.3                1.5                1.8                1.9

Net income                                 3.9%               4.2%               4.7%               4.8%

Thirteen Weeks Ended October 2, 2012 (third quarter of 2012) Compared to Thirteen Weeks Ended September 27, 2011 (third quarter of 2011).

Revenues. Total revenues increased by $23.8 million, or 15.7%, to $175.2 million during the thirteen weeks ended October 2, 2012, from $151.4 million during the comparable thirteen week period of 2011. The increase in revenues consisted of an increase of approximately $20.9 million in sales from new restaurants not yet in our comparable sales base and an approximate 2.3% increase in comparable restaurant sales. The increase in comparable restaurant sales resulted from an estimated effective menu price increase factor of approximately 3.4%, partially offset by an estimated 1.1% reduction of guest traffic.

Our restaurants, like most in casual dining, are impacted by inflationary pressures for the costs of certain commodities, labor and other operating expenses. We attempt to offset the impact of inflation on our cost structure with purchasing economies of scale, productivity and efficiency improvements, menu merchandising and menu price increases.


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If our guests do not accept our menu price increases, either by reducing their visits to our restaurants or by changing their purchasing patterns at our restaurants, the expected benefit of any menu price increase could be negated and our operating margins could be adversely impacted. We currently expect our estimated effective menu price increase for fiscal 2012 to be in the 3% range on an annualized basis. However, depending on inflationary pressures, costs for key inputs and general economic conditions for consumer discretionary spending, our actual menu pricing for fiscal 2012 may be greater or less than our current expectations. Additionally, to help protect guest traffic and to respond to the actions of our competitors, we may consider the promotion of selective menu offerings or introduce new menu offerings at reduced or lower price points which could have the effect of further reducing any benefit from menu price increases. As a relatively small casual dining restaurant chain, we do not have the financial resources to match the marketing and advertising spending levels of our larger casual dining competitors. Accordingly, increased marketing and advertising spending by our larger competitors may also adversely impact general levels of guest traffic in our restaurants. Openings of new restaurants by competitors in our trade areas will also impact guest traffic in our respective restaurants. Furthermore, we believe that our overall guest traffic levels will also be dependent upon consumer confidence, discretionary consumer spending and other economic conditions including energy prices, commodity inflation and overall employment.

All potential menu price increases must be carefully considered in light of their ultimate acceptability by our restaurant guests. Additionally, other factors outside of our control, such as inclement weather, shifts in the holiday calendar, competitive restaurant intrusions into our trade areas, heavy promotional and discounting activities by our competitors, general economic and competitive conditions and other factors, as described in the "Risk Factors" section in Part I, Item 1A of our Annual Report on Form 10-K for the year ended January 3, 2012, can impact comparable sales.

Cost of Sales. Cost of sales increased by $5.8 million, or 15.6%, to $43.2 million during the thirteen weeks ended October 2, 2012, from $37.4 million during the comparable thirteen week period of 2011. This increase was primarily due to the opening of 15 new restaurants since the thirteen weeks ended September 27, 2011. As a percentage of revenues, cost of sales remained stable at 24.7% for both the current thirteen week period and the prior year comparable thirteen week period. In general, we have experienced increases in the majority of our commodities during the thirteen weeks ended October 2, 2012. These commodity increases have been offset primarily through menu pricing and cost savings from our new distribution agreement that went into effect in July 2012.

We do anticipate that cost of sales in our new restaurants will typically be higher during the first several months of operations than in our mature restaurants, as our restaurant management teams become accustomed to optimally predicting, managing and servicing sales volumes at our new restaurants. Accordingly, a comparatively large number of new restaurant openings in any single quarter may significantly impact total cost of sales comparisons for our entire business. Additionally, restaurants opened in new markets may initially experience higher commodity costs than our established restaurants, where we have greater market penetration that generally results in greater purchasing and distribution economies of scale.

We provide our customers a large variety of menu items and, as a result, we are not overly dependent on a single group of commodities. However, based on current trends and expectations, we believe the overall cost environment for food commodities will likely be subject to upward pressure for the remainder of 2012 and into 2013, primarily due to domestic and worldwide agricultural, supply/demand and other macroeconomic factors that are outside of our control, including the severe drought conditions in key domestic grain producing regions. While we continue to work with our suppliers to control food costs, and while we have taken steps to enter into agreements for some of the commodities used in our restaurant operations, there can be no assurance that future supplies and costs for such commodities will not significantly increase due to weather and other market conditions outside of our control. Additionally, there are some commodities that we are unable to contract for long periods of time, such as fluid dairy items, fresh seafood and many produce items, or where we have currently chosen not to contract for long periods of time such as our ground beef. There are also certain commodity items, such as certain produce items and certain seafood items, in which the contracts principally consist of "collar" agreements whereby the costs are subject to floors and ceilings. It is our current intention to attempt to offset our expected commodity cost increases through certain cost savings and productivity/efficiency initiatives and menu mix shifts, coupled with selective menu price increases. However, there can be no assurance that we will be entirely successful in this respect.

The cost to produce and distribute our proprietary craft beer is included in our cost of sales. We currently have qualified three contract brewers to produce our high-quality craft beer. During fiscal 2012, we currently anticipate that our qualified contract brewers will produce approximately 70% to 75% of our estimated requirement of approximately 70,000 barrels of our proprietary craft beer.


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Our longer-term objective is to have large contract brewers produce substantially all of our larger-volume beers. We currently expect to continue to create and brew our smaller-volume seasonal and specialty beers; however, we may eventually decide to move the majority of this production to contract brewers as we continue to grow our restaurant base and therefore increase our demand for our proprietary craft beer. We believe the larger-scale contract brewers have greater economies of scale, stronger quality control systems and more effective, leverageable supply chain relationships than we have as a relatively small restaurant company. Additionally, this allows our brewery department to focus on creating and developing distinctive and unique beer flavors for us as opposed to focusing on the production and logistics of large scale brewing. As a result, over the next several years, we expect that the production cost of our larger-volume proprietary craft beers can be gradually reduced, while simultaneously providing an improvement in the overall consistency of our beer. However, freight costs from our contract brewing locations will likely absorb a large portion of those production cost savings for a period of time until we can further increase the number of restaurants we operate and negotiate more favorable terms with our transportation vendors. Additionally, the cost to produce our craft beers is subject to the same inflationary pressures that affect food commodities in general. Therefore, any savings that we may achieve by moving the production of our craft beers to larger scale contract brewers may be offset by increases in commodity costs. Contract brewers also produce substantially all of our craft soda and cider products, the costs of which are also included in our cost of sales.

Labor and Benefits. Labor and benefit costs for our restaurants increased by $9.6 million, or 18.4%, to $61.3 million during the thirteen weeks ended October 2, 2012, from $51.8 million during the comparable thirteen week period of 2011. This increase was primarily due to the opening of 15 new restaurants since the thirteen weeks ended September 27, 2011. As a percentage of revenues, labor and benefit costs increased to 35.0% for the current thirteen week period from 34.2% for the prior year comparable thirteen week period. This percentage increase was principally due to incremental hourly labor resulting from the implementation of our new BJ's Premier Rewards program, the introduction of our new "Beer Master" program for hourly team members and the accelerated rollout of our fall menu to late September this year, as well as higher hourly kitchen labor due to the intensiveness and complexity of some of our more recent menu offerings. Included in labor and benefits for the thirteen weeks ended October 2, 2012 and September 27, 2011 was approximately $0.3 million and $0.5 million, or 0.2% and 0.3% of revenues, respectively, of stock-based compensation expense related to equity awards granted in accordance with our Gold Standard Stock Ownership Program for certain restaurant management team members.

Our restaurants can be affected by increases in federal and state minimum wages and state unemployment insurance taxes. Additionally, some states have annual minimum wage increases correlated with either state or federal increases in the consumer price index. In the past, we have been able to react to changes in our key operating costs, including minimum wage increases, by gradually increasing our menu prices and improving our productivity in our restaurants. However, we cannot guarantee that all or any future cost increases can be offset by increased menu prices or that increased menu prices will be accepted by our restaurant guests without any resulting changes in their visit frequencies or purchasing patterns.

For new restaurants, labor expenses will typically be higher than normal during the first several months of operations, if not longer in some cases, until our restaurant management team at each new restaurant becomes more accustomed to optimally predicting, managing and servicing the sales volumes expected at our . . .

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