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BJRI > SEC Filings for BJRI > Form 10-Q on 4-Aug-2014All Recent SEC Filings

Show all filings for BJS RESTAURANTS INC

Form 10-Q for BJS RESTAURANTS INC


4-Aug-2014

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 December 31, 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.


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"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 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 customers a higher quality, more differentiated total dining experience at a good value.

• Our inability or failure to recognize, respond to and effectively manage the accelerated impact of social media could materially adversely impact our business.

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

• 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.

• 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, leases and licenses, recruiting and training qualified managers and hourly employees 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 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 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 future operating results may fluctuate significantly due to our relatively small number of existing restaurants and the expenses required opening new restaurants.


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• 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 employees), energy and supply costs which could adversely affect our profitability.

• Our dependence on independent third party brewers for some of our beer and soda could have an adverse effect on our operations if they cease to supply us with our proprietary craft beer and sodas.

• Our internal brewing, independent third party 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 by different interpretations of the laws and regulations that govern such arrangements or by new laws and regulations.

• 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 eligibility-related documentation requirements, could increase our operating costs, cause unexpected disruptions to our operations and restrict our growth.

• Unsolicited takeover proposals, governance change proposals, proxy contests and actions by activist investors may be disruptive to our ability to optimally conduct our business and pursue our strategic plan, and may create uncertainty which may adversely affect our ability to attract and retain key employees.

• Our stock repurchase program may require us to use a significant portion of our cash flow or may require us to incur indebtedness on our existing credit facility. Our ability to repurchase stock will depend on our ability to generate sufficient cash flows from operations, exercise of employee stock options and capacity to borrow funds, which may be subject to economic, financial, competitive and other factors that are beyond our control. Any failure to repurchase stock after we have announced our intention to do so may negatively impact investor confidence in us, thereby negatively impacting our earnings per share and stock price.

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 December 31, 2013.

GENERAL

As of August 4, 2014, we owned and operated 150 restaurants located in the 18 states of Arizona, Arkansas, California, Colorado, Florida, Indiana, Kansas, Kentucky, Louisiana, Maryland, Nevada, New Mexico, Ohio, Oklahoma, Oregon, Texas, Virginia and Washington. 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 BJ's award-winning, signature deep-dish pizza, our proprietary craft beers and other beers, as well as a wide selection of appetizers, entrées, hand tossed pizza, 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. Several of our BJ's Restaurant & Brewery® restaurants feature on-premise facilities where BJ's proprietary craft beers are produced for some of our restaurants, while the remainder of our proprietary beer requirement is provided by independent third party brewers using our proprietary recipes. Our four 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 are 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 a component of "Other income, net" 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.

During the thirteen weeks ended July 1, 2014, we closed a smaller format, BJ's Pizza & Grill® legacy restaurant in Belmont Shore, California when its lease expired. 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 our landlord and us or that, if renewed, rents will not increase substantially. We currently have three restaurant leases 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.

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 1, 2014 and July 2, 2013, 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 1,       July 2,        July 1,        July 2,
                                      2014          2013          2014            2013
    Revenues                           100.0 %       100.0 %        100.0 %        100.0 %
    Costs and expenses:
    Cost of sales                       25.1          24.4           25.0           24.5
    Labor and benefits                  35.0          34.2           35.6           34.6
    Occupancy and operating             21.3          21.6           21.6           21.6
    General and administrative           6.2           6.4            6.2            6.5
    Depreciation and amortization        6.3           6.0            6.4            6.0
    Restaurant opening                   0.6           1.2            0.6            0.8
    Loss on disposal of assets           0.2           0.2            0.2            0.1
    Legal and other settlements          0.4            -             0.6             -

    Total costs and expenses            95.1          94.1           96.1           94.2

    Income from operations               4.9           5.9            3.9            5.8
    Other income:
    Interest income, net                  -             -              -              -
    Other income, net                    0.1           0.1            0.2            0.1

    Total other income                   0.1           0.1            0.2            0.1

    Income before income taxes           5.0           6.0            4.0            6.0
    Income tax expense                   1.3           1.7            1.1            1.6

    Net income                           3.6 %         4.3 %          3.0 %          4.4 %


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Thirteen Weeks Ended July 1, 2014 (second quarter of 2014) Compared to Thirteen Weeks Ended July 2, 2013 (second quarter of 2013).

Revenues. Total revenues increased by $20.9 million, or 10.5%, to $219.4 million during the thirteen weeks ended July 1, 2014, from $198.5 million during the comparable thirteen week period of 2013. The increase in revenues primarily consisted of an increase of approximately $24.2 million in sales from new restaurants not yet in our comparable restaurant sales base, partially offset by an approximate 1.7%, or $3.3 million decrease in comparable restaurant sales. The decrease in comparable restaurant sales resulted from a reduction in guest traffic of approximately 1% and a decrease in the average check of approximately 0.7%.

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 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, there are other factors outside of our control that can impact comparable restaurant sales, 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 II, Item 1A of this Quarterly Report on Form 10-Q and in Part I, Item 1A of our Annual Report on Form 10-K for the fiscal year ended December 31, 2013.

Cost of Sales. Cost of sales increased by $6.7 million, or 13.7%, to $55.1 million during the thirteen weeks ended July 1, 2014, from $48.4 million during the comparable thirteen week period of 2013. This increase was primarily due to the opening of 17 new restaurants since the thirteen weeks ended July 2, 2013. As a percentage of revenues, cost of sales increased to 25.1% for the current thirteen week period from 24.4% for the prior year comparable thirteen week period. The percentage increase was primarily related to commodity cost increases and a shift in our menu mix, partially offset by increased menu pricing.

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. Menu mix and changes in menu mix also influence cost of sales. Therefore, cost of sales may be higher or lower in new restaurants as compared to mature restaurants based on their menu mix.

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. As such, we work with our suppliers to control food costs and we have entered into agreements for some of the commodities used in our restaurant operations. However, 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


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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 $8.9 million, or 13.0%, to $76.8 million during the thirteen weeks ended July 1, 2014, from $67.9 million during the comparable thirteen week period of 2013. This increase was primarily due to the opening of 17 new restaurants since the thirteen weeks ended July 2, 2013. 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. The percentage increase was primarily related to higher hourly labor as a result of lower comparable restaurant sales. Included in labor and benefits for the thirteen weeks ended July 1, 2014 and July 2, 2013 was approximately $0.3 million, or 0.1% and 0.2% 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, state and local 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 with either state or federal increases in the consumer price index. Additionally, California increased its minimum wage from $8 an hour to $9 an hour on July 1, 2014, and plans to increase it to $10 an hour beginning on January 1, 2016. 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 $3.8 million, or 8.9%, to $46.8 million during the thirteen weeks ended July 1, 2014, from $43.0 million during the comparable thirteen week period of 2013. This increase was primarily due to the opening of 17 new restaurants since the thirteen weeks ended July 2, 2013. As a percentage of revenues, occupancy and operating expenses decreased to 21.3% for the current thirteen week period from 21.6% for the prior year comparable thirteen week period. This percentage decrease was due to a reduction in the Texas gross receipts sales tax and lower repairs and maintenance and supply costs offset by planned additional marketing expenditures.

General and Administrative. General and administrative expenses increased by $0.9 million, or 7.4%, to $13.6 million during the thirteen weeks ended July 1, 2014, from $12.6 million during the comparable thirteen week period of 2013. This increase is primarily due to higher cash-based incentive compensation and other restaurant support costs during the thirteen weeks ended July 1, 2014. Included in general and administrative costs for the thirteen weeks ended July 1, 2014 and July 2, 2013 was approximately $0.9 million, or 0.4% and 0.5% of revenues, respectively, of stock-based compensation expense. As a percentage of revenues, general and administrative expenses decreased to 6.2% for the current thirteen week period from 6.4% for the prior year comparable thirteen week period. This percentage decrease was primarily due to fewer managers in training and travel related expenses as compared to the prior year.

Depreciation and Amortization. Depreciation and amortization increased by $1.9 million, or 15.8%, to $13.8 million during the thirteen weeks ended July 1, 2014, compared to $11.9 million during the comparable thirteen week period of 2013. As a percentage of revenues, depreciation and amortization increased to 6.3% for the current thirteen week period from 6.0% for the prior year . . .

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