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BJRI > SEC Filings for BJRI > Form 10-K on 25-Feb-2014All Recent SEC Filings

Show all filings for BJS RESTAURANTS INC

Form 10-K for BJS RESTAURANTS INC


25-Feb-2014

Annual Report


ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

GENERAL

As of February 25, 2014, we owned and operated 147 restaurants located in 17 states as described in Item 2 - Properties -"Restaurant Locations" in this Form 10-K. Each of our restaurants is operated either as a BJ's Restaurant & Brewery®, a BJ's Restaurant & Brewhouse®, a BJ's Pizza & Grill®, or a BJ's Grill®restaurant. Our menu features our BJ's award-winning, signature deep-dish pizza, our proprietary craft beers and other beers, as well as a wide selection of appetizers, entrées, pastas, sandwiches, specialty salads, desserts, including our Pizookie® dessert, non-alcoholic beverages, wine and spirits.

The first BJ's restaurant was opened in Orange County, California in 1978 as a small full-service restaurant focusing on a lighter, bakery crust style deep-dish pizza. Over the years we opened several small format BJ's restaurants in Southern California until 1996 when we decided to open our first large format restaurant in Brea, California. The new Brea BJ's restaurant was not only physically larger, it included a brewery to produce our own craft beers and an expanded, varied menu including appetizers, entrees, pastas, sandwiches, salads and desserts.

Of the 147 restaurants we operated as of February 25, 2014, 10 are BJ's Restaurant & Brewery® restaurants (of which four are currently manufacturing our proprietary craft beer for some of our restaurants), 131 are BJ's Restaurant & Brewhouse® restaurants (which are similar to our brewery restaurants except that they do not manufacture beer), five are BJ's Pizza & Grill® restaurants (which are primarily our original, smaller format "legacy" restaurants) and one is BJ's Grill® (a smaller format full service restaurant intended to serve as a live research and development restaurant at the current time). Currently, our future restaurant growth will focus principally on our BJ's Restaurant & Brewhouse® format. However, we may build additional BJ's Restaurant & Brewery® locations in certain areas where we believe it may be more appropriate to brew our own beer.

We intend to continue developing and opening new BJ's restaurants in high profile locations within densely populated areas in both existing and new markets. Since most of our established restaurants currently operate close to full capacity during the peak demand periods of lunch and dinner, and given our relatively high average sales per productive square foot, we generally do not expect to achieve sustained increases in comparable restaurant sales in excess of our annual effective menu price increases for our mature restaurants, assuming we are able to retain our customer traffic levels in those restaurants. Therefore, we currently expect that the majority of our year-over-year revenue growth for fiscal 2014 will be derived from new restaurant openings and the carryover impact of partial-year openings during 2013.

Newly opened restaurants typically experience normal inefficiencies in the form of higher cost of sales, labor and direct operating and occupancy costs for several months after their opening in both percentage and dollar terms when compared with our more mature, established restaurants. Accordingly, the number and timing of newly opened restaurants has had, and is expected to continue to have, an impact on restaurant opening expenses, cost of sales, labor and occupancy and operating expenses. Additionally, initial restaurant openings in new markets may experience even greater inefficiencies for several months, if not longer, due to lower initial sales volumes, which results from initially low consumer awareness levels, and a lack of supply chain and other operating cost leverage until additional restaurants can be opened in the markets.

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. Customer traffic for our restaurants is estimated based on values assigned to certain menu items or individual customer tickets.


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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 employees.

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. We currently have leases for two of our smaller format BJ's Pizza & Grill® restaurants and one for a BJ's Restaurant and Brewhouse® restaurant scheduled to expire during the next twelve months. We are currently evaluating the desirability of renewing these leases or converting to a month to month lease. While we currently expect to pursue the renewal of substantially all of our expiring restaurant leases, there is no guarantee that we can mutually agree to a new lease that is satisfactory to both of us.


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RESULTS OF OPERATIONS

The following table sets forth, for the years indicated, our Consolidated Statements of Income expressed as percentages of total revenues. All fiscal years presented consist of 52 weeks with the exception of fiscal year 2011 which consists of 53 weeks.

                                                                   Fiscal Year
                                        2013           2012           2011           2010           2009
Consolidated Statements of Income
Data:
Revenues                                 100.0 %        100.0 %        100.0 %        100.0 %        100.0 %
Costs and expenses:
Cost of sales                             24.8           24.8           24.6           24.5           25.0
Labor and benefits                        35.3           34.6           34.5           34.7           34.9
Occupancy and operating                   22.4           21.2           20.5           21.3           21.6
General and administrative                 6.3            6.4            6.4            6.7            6.9
Depreciation and amortization              6.3            5.8            5.5            5.6            5.7
Restaurant opening                         1.2            1.2            1.1            1.0            1.2
Loss on disposal of assets and
impairments                                0.5            0.1            0.2            0.2            0.1
Legal and other settlements                0.1            0.1            0.3              -              -

Total costs and expenses                  96.9           94.2           93.2           94.1           95.4

Income from operations                     3.1            5.8            6.8            5.9            4.6
Other income (expense):
Interest income, net                         -              -              -              -            0.1
Gain (loss) on investment
settlement                                   -            0.1            0.1              -          (0.4)
Other income, net                          0.1            0.1            0.1            0.1            0.1

Total other income (expense)               0.1            0.3            0.2            0.1          (0.3)

Income before income taxes                 3.2            6.0            7.0            6.0            4.4
Income tax expense                         0.5            1.6            1.9            1.5            1.3

Net income                                 2.7 %          4.4 %          5.1 %          4.5 %          3.1 %

52 WEEKS ENDED DECEMBER 31, 2013 (FISCAL 2013) COMPARED TO THE 52 WEEKS ENDED JANUARY 1, 2013 (FISCAL 2012)

Revenues. Total revenues increased by $66.8 million, or 9.4%, to $775.1 million during fiscal 2013 from $708.3 million during fiscal 2012. The increase in revenues consisted of an increase of approximately $74.0 million in sales from new or relocated restaurants not in our comparable restaurant sales base, partially offset by an approximate 1.1%, or $7.2 million decrease in comparable restaurant sales. The decrease in comparable restaurant sales is primarily due to a reduction in customer traffic, partially offset by an effective menu price increase of approximately 2.2% for the year. Although we continue to take actions to stem the decline in customer traffic, we do expect that traffic in our base of comparable restaurants will likely remain under pressure during 2014 primarily as a result of the uneven economic recovery, competitive intrusions, some transfer of sales to our new restaurants and other factors.

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 customers 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


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price increase could be negated and our operating margins could be adversely impacted. To help protect customer 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, as described in the "Risk Factors" section in Part I, Item 1A of this Annual Report on Form 10-K, can impact comparable restaurant sales.

Cost of Sales. Cost of sales increased by $16.3 million, or 9.3%, to $191.9 million during fiscal 2013 compared to $175.6 million during fiscal 2012. This increase was primarily due to the opening of 17 new restaurants during fiscal 2013. As a percentage of revenues, cost of sales remained at 24.8% for fiscal 2013 and the prior fiscal year.

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 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 continue to be subject to upward pressure during 2014. While we continue to work with our suppliers to control food costs, we have entered 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. 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. During fiscal 2014, we anticipate that our qualified independent third party brewers will produce approximately 80% of our estimated requirement of approximately 75,000 barrels of our proprietary craft beer. We also use independent third party 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 $28.4 million, or 11.6%, to $273.5 million during fiscal 2013, compared to $245.1 million during fiscal 2012. This increase was primarily due to the opening of 17 new restaurants during fiscal 2013. As a percentage of revenues, labor and benefit costs increased to 35.3% for fiscal 2013 from 34.6% for the prior fiscal year. This percentage increase was primarily related to the deleveraging of the fixed portion of management related labor and benefits as a result of lower comparable restaurant sales. Included in labor and benefits for fiscal 2013 and 2012 was approximately $1.3 million or 0.2% of revenues of stock-based compensation expense related to equity awards granted in accordance with our Gold Standard Stock Ownership Program for certain restaurant management employees.

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. Some states have annual minimum wage increases correlated


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with either state or federal increases in the consumer price index.
Additionally, California plans on increasing its minimum wage from $8 an hour to $9 an hour on July 1, 2014, and then to $10 an hour beginning on July 1, 2015. 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 customers 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.

Occupancy and Operating.Occupancy and operating expenses increased by $23.7 million, or 15.7%, to $174.0 million during fiscal 2013 compared to $150.3 million during fiscal 2012. This increase was primarily due to the opening of 17 new restaurants during fiscal 2013. As a percentage of revenues, occupancy and operating expenses increased to 22.4% for fiscal 2013 from 21.2% for the prior fiscal year. This percentage increase was principally due to planned additional marketing (0.7%), including expanded television testing in select markets, coupled with increased facilities and general liability insurance costs (0.3%) and the deleveraging of the fixed component of these expenses as a result of lower comparable restaurant sales.

General and Administrative. General and administrative expenses increased by $4.0 million, or 8.8%, to $49.1 million during fiscal 2013 compared to $45.1 million during fiscal 2012. Included in general and administrative costs for fiscal 2013 and 2012 was $3.1 million and $3.3 million, respectively, of stock-based compensation expense. The increase in general and administrative costs was primarily due to higher field supervision and restaurant support costs, higher rent expense related to the expansion of our restaurant support center and increased consulting and director fees, partially offset by lower cash-based incentive compensation expense. As a percentage of revenues, general and administrative expenses slightly decreased to 6.3% for fiscal 2013 from 6.4% for the prior fiscal year.

Depreciation and Amortization. Depreciation and amortization increased by $7.7 million, or 18.5%, to $49.0 million during fiscal 2013 compared to $41.3 million during fiscal 2012. Depreciation and amortization increased as a result of new restaurants, restaurant remodels and initiatives, including the expansion of our restaurant support center and test kitchen. As a percentage of revenues, depreciation and amortization increased to 6.3% for fiscal 2013 from 5.8% for the prior fiscal year. This percentage increase was principally a result of the deleveraging of the fixed component of these expenses as a result of negative comparable restaurant sales as well as additional depreciation related to our remodels and initiatives, including the expansion of our restaurant support center and test kitchen.

Restaurant Opening. Restaurant opening expenses increased by $0.7 million, or 8.2%, to $9.1 million during fiscal 2013 compared to $8.4 million during fiscal 2012. This increase is primarily due the opening of 17 new restaurants during fiscal 2013 as compared to 16 new restaurants during fiscal 2012. Our opening costs will fluctuate from period to period, depending upon, but not limited to, the number of restaurant openings, the location of the restaurants and the complexity of the staff hiring and training process.

Loss on Disposal of Assets and Impairments. Loss on disposal of assets and impairments increased by $3.3 million, or 596.4%, to $3.9 million during fiscal 2013 compared to $0.6 million during fiscal 2012. These costs were related to the reduction in the carrying value of one of our underperforming BJ's Restaurant & Brewhouse® restaurants (approximately $3.1 million) and the write off of the remaining net book value of assets related to the closure and relocation of our smaller format restaurant in Eugene, Oregon, coupled with the disposal of certain unproductive restaurant assets in connection with our ongoing productivity/efficiency initiatives and facility image enhancement activities.


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Legal and Other Settlements. Legal and other settlements of approximately $0.8 million, or 0.1% of revenues, during fiscal 2013 was primarily related to accrued compensation and related benefits resulting from employment settlements, a TABC settlement related to our beer model in Texas and sales tax audit assessment as compared to legal settlements of approximately $1.0 million, or 0.1% of revenues, during fiscal 2012, which related to the settlement of a trademark infringement civil action and a California sales tax audit.

Interest Income, net. Interest income, net, was $0.1 million during fiscal 2013 compared to $0.2 million during fiscal 2012.

Gain on Investment Settlement. Gain on investment settlement of approximately $0.8 million for fiscal 2012 related to the settlement agreement reached in December 2009 with our former broker-dealer for the full liquidation of our auction rate securities investment portfolio.

Other Income, Net. Other income, net, increased by $0.2 million, or 32.2%, to $1.0 million during fiscal 2013 compared to $0.8 million during fiscal 2012. This increase was primarily due to greater gift card breakage income coupled with an increase in the cash surrender value of certain life insurance programs under our deferred compensation plan. Based on an analysis of our gift card program since its inception, we determined that at 24 months after issuance date, the likelihood of gift card redemption is remote.

Income Tax Expense. Our effective income tax rate for fiscal 2013 was 16.0% compared to 26.4% for fiscal 2012. The effective income tax rate for fiscal 2013 differed from the statutory income tax rate primarily due to additional tax credits. We currently estimate our effective tax rate to be in the approximate range of 27% to 30% for fiscal 2014. However, our actual effective tax rate for fiscal 2014 may be different than our current estimate due to actual revenues, pre-tax income and tax credits achieved during the year and the deductibility of any subsequent disqualified dispositions related to incentive stock options.

52 WEEKS ENDED JANUARY 1, 2013 (FISCAL 2012) COMPARED TO THE 53 WEEKS ENDED JANUARY 3, 2012 (FISCAL 2011)

Revenues. Total revenues increased by $87.4 million, or 14.1%, to $708.3 million during fiscal 2012 from $620.9 million during fiscal 2011. The increase in revenues consisted of an increase of approximately $80.6 million in sales from new restaurants not yet in our comparable restaurant sales base; as well as an approximate 3.2% increase in comparable restaurant sales on a 52 week basis. The increase in comparable restaurant sales resulted from an estimated effective menu price increase of approximately 3.3% coupled with a positive shift in our estimated menu mix, offset by a slight decrease in estimated customer traffic.

Cost of Sales. Cost of sales increased by $22.9 million, or 15.0%, to $175.6 million during fiscal 2012 compared to $152.7 million during fiscal 2011. This increase was primarily due to the opening of 16 new restaurants during fiscal 2012. As a percentage of revenues, cost of sales increased to 24.8% for fiscal 2012 from 24.6% for the prior fiscal year. This percentage increase was primarily due to increased commodity costs and menu mix shift to higher cost of sales menu items, partially offset by increased revenues from our estimated effective menu price increases.

Labor and Benefits. Labor and benefit costs for our restaurants increased by $30.6 million, or 14.3%, to $245.1 million during fiscal 2012 compared to $214.5 million during fiscal 2011. This increase was primarily due to the opening of 16 new restaurants during fiscal 2012. As a percentage of revenues, labor and benefit costs increased to 34.6% for fiscal 2012 from 34.5% for the prior fiscal year. This percentage increase was principally due to incremental hourly training labor resulting from the implementation of our new "BJ's Premier Rewards" customer loyalty program and the introduction of our new "Beer Master" program for hourly employees 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 fiscal 2012 and 2011 was approximately $1.3 million and $1.6 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 employees.


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Occupancy and Operating. Occupancy and operating expenses increased by $23.0 million, or 18.1%, to $150.3 million during fiscal 2012 compared to $127.3 million during fiscal 2011. This increase was primarily due to the opening of 16 new restaurants during fiscal 2012. As a percentage of revenues, occupancy and operating expenses increased to 21.2% for fiscal 2012 from 20.5% for the prior fiscal year. This percentage increase was principally due to higher marketing, property and general liability insurance costs, and the benefit in fiscal 2011 of one extra operating week without a full complement of occupancy and other operating expenses, partially offset by our ability to leverage the fixed component of these expenses as a result of comparable restaurant sales increases.

General and Administrative. General and administrative expenses increased by $5.2 million, or 13.0%, to $45.1 million during fiscal 2012 compared to $40.0 million during fiscal 2011. Also included in general and administrative costs for fiscal 2012 and 2011 was $3.3 million and $3.0 million, respectively, of stock-based compensation expense. The increase in general and administrative costs was primarily due to higher field supervision and support costs coupled with certain expenses related to our CEO transition and certain production and media costs related to our television adverting tests, partially offset by lower cash-based incentive compensation expense. As a percentage of revenues, general and administrative expenses were 6.4% for both fiscal 2012 and fiscal 2011.

Depreciation and Amortization.Depreciation and amortization increased by $7.3 million, or 21.3%, to $41.3 million during fiscal 2012 compared to $34.1 million during fiscal 2011. Depreciation and amortization increased as a result of our construction costs for new restaurants and depreciation on our new operating toolsets, restaurant remodels and initiatives. As a percentage of revenues, depreciation and amortization increased to 5.8% for fiscal 2012 from 5.5% for the prior fiscal year. This percentage increase was principally a result of . . .

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