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BJRI > SEC Filings for BJRI > Form 10-Q on 5-Aug-2013All Recent SEC Filings

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Form 10-Q for BJS RESTAURANTS INC


5-Aug-2013

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 1, 2013, 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 risks 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 operations 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.

"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 restaurants;

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

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

- expectations for consumer spending on casual dining restaurant occasions;

- 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. Some, but not all, 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 makes 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.

- 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 to be 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 1, 2013.


GENERAL

As of July 2, 2013, we owned and operated 134 restaurants located in the 15 states of California, Texas, Florida, Arizona, Colorado, Nevada, Washington, Ohio, Oklahoma, Oregon, Indiana, Kansas, Kentucky, Louisiana and New Mexico. 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 five BJ's Pizza & Grill® restaurants are a smaller-format, full-service restaurant when compared to our large format BJ's Restaurant & Brewhouse® and BJ's Restaurant & Brewery® locations and reflect the original format of the BJ's restaurant concept that was first introduced in 1978. Our BJ's Restaurant & Brewhouse® format currently represents our primary expansion vehicle. 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.

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 values assigned to certain menu items or individual guest tickets.

Cost of sales is comprised of food and beverage costs, including the cost to produce and distribute our proprietary craft beer, soda and ciders. 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.

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.


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 twenty-six weeks ended July 2, 2013 and July 3, 2012, are not necessarily indicative of the results to be expected for the full fiscal year. Percentages reflected below may not reconcile due to rounding.

                                                     For The Thirteen                   For The Twenty-Six
                                                       Weeks Ended                         Weeks Ended
                                                July 2,           July 3,          July 2,             July 3,
                                                  2013             2012              2013               2012
Revenues                                           100.0%             100.0%           100.0%              100.0%
Costs and expenses:
Cost of sales                                        24.4              24.9             24.5                24.8
Labor and benefits                                   34.2              34.2             34.6                34.6
Occupancy and operating                              21.6              20.5             21.6                20.6
General and administrative                            6.4               6.2              6.5                 6.3
Depreciation and amortization                         6.0               5.6              6.0                 5.6
Restaurant opening                                    1.2               1.4              0.8                 1.0
Loss on disposal of fixed assets                      0.2               0.2              0.1                 0.1
Legal settlements                                       -               0.2                -                 0.1

Total costs and expenses                             94.1              93.2             94.2                93.1

Income from operations                                5.9               6.8              5.8                 6.9

Other income (expense):
Interest income                                         -                 -                -                   -
Interest expense                                        -                 -                -                   -
Gain on investment settlement                           -               0.2                -                 0.1
Other income, net                                     0.1               0.1              0.1                 0.1

Total other income                                    0.1               0.3              0.1                 0.2

Income before income taxes                            6.0               7.0              6.0                 7.1

Income tax expense                                    1.7               2.1              1.6                 2.1


Net income                                           4.3%              5.0%             4.4%                5.0%

Thirteen Weeks Ended July 2, 2013 (second quarter of 2013) Compared to Thirteen Weeks Ended July 3, 2012 (second quarter of 2012).

Revenues. Total revenues increased by $17.8 million, or 9.8%, to $198.5 million during the thirteen weeks ended July 2, 2013, from $180.7 million during the comparable thirteen week period of 2012. The increase in revenues primarily consisted of an increase of approximately $17.7 million in sales from new restaurants not yet in our comparable sales base and an approximate 0.03%, or $0.05 million increase in comparable restaurant sales. The increase in comparable restaurant sales resulted from an effective menu price increase of approximately 2.3% coupled with a net favorable increase in menu mix and guest incident rates, offset by a 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. 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. 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. 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, including the large national competitors that have the resources to spend significantly on marketing and advertising, 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 1, 2013, can impact comparable sales.


Cost of Sales. Cost of sales increased by $3.4 million, or 7.5%, to $48.4 million during the thirteen weeks ended July 2, 2013, from $45.0 million during the comparable thirteen week period of 2012. This increase was primarily due to the opening of 12 new restaurants since the thirteen weeks ended July 3, 2012. As a percentage of revenues, cost of sales decreased to 24.4% for the current thirteen week period from 24.9% for the prior year comparable thirteen week period. The percentage decrease was primarily related to increased menu pricing and improved kitchen productivity resulting in lower theoretical to actual food cost variances, offsetting a slight increase in commodity costs and an unfavorable menu mix shift.

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 period 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 guests 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 continue to be subject to upward pressure during 2013, primarily due to domestic and worldwide agricultural, supply/demand and other macroeconomic factors that are outside of our control. 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 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 2013, we anticipate that our qualified contract brewers will produce approximately 75% of our estimated requirement of approximately 70,000 barrels of our proprietary craft beer. We also use craft brewers to 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 $6.1 million, or 9.9%, to $67.9 million during the thirteen weeks ended July 2, 2013, from $61.8 million during the comparable thirteen week period of 2012. This increase was primarily due to the opening of 12 new restaurants since the thirteen weeks ended July 3, 2012. As a percentage of revenues, labor and benefit costs were 34.2% for both the current and prior year thirteen week period. Included in labor and benefits for the thirteen weeks ended July 2, 2013 and July 3, 2012 was approximately $0.3 million and $0.2 million, or 0.2% and 0.1% 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, workers' compensation insurance, federal and state unemployment insurance taxes and other government regulations including overtime laws and mandated health insurance requirements. 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 new restaurants. Accordingly, a comparatively large number of new restaurant openings in any single quarter may significantly impact labor cost comparisons for the entire Company.


Occupancy and Operating. Occupancy and operating expenses increased by $6.0 million, or 16.2%, to $43.0 million during the thirteen weeks ended July 2, 2013, from $37.0 million during the comparable thirteen week period of 2012. This increase was primarily due to the opening of 12 new restaurants since the thirteen weeks ended July 3, 2012. As a percentage of revenues, occupancy and operating expenses increased to 21.6% for the current thirteen week period from 20.5% for the prior year comparable thirteen week period. This percentage increase was principally due to planned additional marketing (0.5%), including expanded television testing in select markets, coupled with increased facilities and general liability insurance costs (0.4%).

General and Administrative. General and administrative expenses increased by $1.4 million, or 12.8%, to $12.6 million during the thirteen weeks ended July 2, 2013, from $11.2 million during the comparable thirteen week period of 2012. The increase in general and administrative costs was primarily due to higher field supervision and restaurant support costs. Also included in general and administrative costs for the thirteen weeks ended July 2, 2013 and July 3, 2012 was approximately $0.9 million and $0.8 million, or 0.5% and 0.4% of revenues, respectively, of stock-based compensation expense. As a percentage of revenues, general and administrative expenses increased to 6.4% for the current thirteen week period from 6.2% for the prior year comparable thirteen week period. This percentage increase was primarily due to increased field supervision and restaurant support costs.

Depreciation and Amortization. Depreciation and amortization increased by $1.9 million, or 18.7%, to $11.9 million during the thirteen weeks ended July 2, 2013, compared to $10.1 million during the comparable thirteen week period of 2012. As a percentage of revenues, depreciation and amortization increased to 6.0% for the current thirteen week period from 5.6% for the prior year period. This percentage increase was principally a result of increased construction costs for new restaurants and depreciation on our new operating toolsets, restaurant remodels and initiatives.

Restaurant Opening. Restaurant opening expense was $2.3 million during the thirteen weeks ended July 2, 2013, compared to $2.6 million during the comparable thirteen week period of 2012. This decrease is primarily due to opening costs related to four restaurant openings during the thirteen weeks ended July 2, 2013, compared to five restaurant openings during the thirteen weeks ended July 3, 2012.

Our opening costs will fluctuate from period to period, depending upon, but not limited to, the number of restaurant openings, the size and concept of the restaurants being opened, the location of the restaurants and the complexity of the staff hiring and training process. Restaurant opening expenses for any given quarter will typically include expenses associated with restaurants opened during the quarter as well as expenses related to restaurants opened towards the end of the prior quarter and restaurants opening in subsequent quarters.

Loss on Disposal of Assets. The loss on disposal of assets was $0.5 million . . .

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