In the second
quarter, conservative guidance helped create a positive EPS surprise. Investors should expect more of the same in
the third quarter. Lower than guided
labor and operating expense should lead to $0.02 upside though traffic was
likely sluggish. Ignoring the gamesmanship, management deserves
credit for cutting operating expense and controlling labor costs. To deliver a real turnaround, BJRI must
deliver traffic and sales growth to leverage its high fixed cost structure.
With the stock trading
at 39x forward four quarter earnings, the market appears to be giving BJRI a
lot of credit for either a margin turnaround or resumed growth. Neither
of those things have happened but management is making progress on margins. BJRI’s third quarter restaurant level EBITDA
margin should be up 70bp to 17%. That
is still 300bp below the company’s 2010-2011 3Q margin, but it is at least
moving in the right direction.
Flat SSS in the the third quarter would also be an improvement from -1.7% in the prior quarter. Same store sales are likely to turn positive in the fourth quarter as BJRI benefits from a 2% price increase and laps a 2% headwind from mix—0% traffic growth plus 2% price plus 0% mix impact = ~2% SSS. An easy comparison is not a turnaround, but the direction here also beats the alternative.
Flat SSS in the the third quarter would also be an improvement from -1.7% in the prior quarter. Same store sales are likely to turn positive in the fourth quarter as BJRI benefits from a 2% price increase and laps a 2% headwind from mix—0% traffic growth plus 2% price plus 0% mix impact = ~2% SSS. An easy comparison is not a turnaround, but the direction here also beats the alternative.
In a best case
scenario BJRI might restore its restaurant level EBITDA margins in 2015 to
19%. If so, BJRI would make more or less
$1.35 (I am looking for $0.98 in 2015). This would still be 140bp below its
peak 2011 margin (also a 53 week year).
At that point, the margin turnaround would be more or less in the rearview mirror. Investors would just need
to guess the right multiple to apply to its 10% planned unit expansion and
whether shares outstanding will decline going forward and, if so, how quickly. Without traffic growth and material positive
SSS, it would be hard to get too excited about anything beyond 20-25x. The current price equals 26x our ballpark
for post-turnaround earnings.
BJRI traded at much higher multiples pre-meltdown but it also grew EPS
at a 25% CAGR back then. The company’s
traffic building plans—app ordering, cheaper items, faster table turns—sound okay
though not too inspired. Seeing is
believing on this front.
How
to manufacture a surprise
BJ’s CFO Greg Levin
gives specific line-item guidance for the upcoming quarter as part of
each
quarterly conference call. Obviously,
this has a big impact on expectations. After reporting the first quarter, he stated,
“I'm expecting labor to be in the mid to upper 35% range in the second quarter,
and that's based on our current sales trend.”
Labor came in at 35%. At the
time of that guidance, April sales were running -1.5% to -2.0% and the final number for the
quarter, -1.7%, was right in the middle of that range. The 75bp pickup from
labor, relative to Levin’s guidance, added almost $0.04 to second quarter EPS. Regarding operating expense Levin said,
“During the second quarter, I'm expecting total operating and occupancy costs
to be in the range of $25,000 a week. Included in this number is about $2,400
per week or $4.7 million in marketing spend.” Operating expense equaled $24,000 a quarter
including $4.8 million in marketing.
This added almost $0.05 to second quarter EPS. Thus, the $0.06 positive surprise reported
in the second quarter was maybe not as exciting as the stock’s 11% jump that
day would suggest. Conservative guidance
is a smart tactic for any CFO. Levin has
been giving conservative guidance for a while and the sell-side has elected to
play along.
The more important
point is that BJRI held labor per operating week flat on top of 2% decline in
the prior period. Excluding marketing,
operating expense fell 5% per operating week.
This was the same as in the first quarter so it wasn’t a surprise per
se, but it is still outstanding. Bottom
line, the company’s EBIT margin was down 60bp year-over-year; a big improvement
from down 210bp in the first quarter.
We expect a year over year rise in EBIT margin in the third quarter.
Another
positive surprise in the third quarter--$0.15 or $0.02 better
BJRI has less wiggle
room in the seasonally weak third quarter but it looks like management's guidance has set
the company up for another positive EPS surprise. I am looking for $206.6
million in revenue with a flat comp.
The flat comp is an improvement.
Not coincidentally, BJRI’s first recent negative comp was in the third
quarter last year. BJRI will benefit from 60bp more price than in the last quarter. A two percent price benefit should offset a
two percent negative impact from mix.
The latter stems from the company’s roll-out of lower priced items like
the $6.95 Brewhouse burger.
According to
management, the July 4 shift from Thursday last year to Friday this year (when
the units would be busy anyway) resulted in a negative first week comp of
-5%. Away from the calendar shift, July
comps were flat to slightly positive. Management
was looking for flattish comps for the overall quarter. According to BlackBox, the overall restaurant
industry SSS improved to 2.2% in September from 2.1% in August and 0.5% in July.
Traffic remains slightly negative. With recent more favorable industry
trends, there could be room for modest upside.
The Street must think so since the consensus revenue estimate is $208.5MM or $1.9MM above my number. Given the timing of the three unit openings in the quarter, it seems likely that operating weeks will come in very close to management’s guidance of 1960. The consensus revenue estimate implies average weekly sales of $106,383 (more or less flat year over year) versus my $105,404. I assume AWS growth will lag SSS growth by 50bp as was the case in the prior two quarters.
The Street must think so since the consensus revenue estimate is $208.5MM or $1.9MM above my number. Given the timing of the three unit openings in the quarter, it seems likely that operating weeks will come in very close to management’s guidance of 1960. The consensus revenue estimate implies average weekly sales of $106,383 (more or less flat year over year) versus my $105,404. I assume AWS growth will lag SSS growth by 50bp as was the case in the prior two quarters.
Lower-than-guided
expenses should again outweigh weak sales.
Management forecast labor in the “low 36%” range. This guidance implies an uptick in labor per
operating week though this has been flat year to date. Assuming a continuation of this positive
trend, I am looking for labor at 35.9%.
This difference would add a little more than a penny to EPS.
Greg Levin guided
operating expense including marketing at $24,000 per week. Marketing spend is expected to total
$4.7MM. Ex-marketing, this suggests
that operating expense would be flat quarter to quarter at ~$21,500. Given lower volume in the third quarter
relative to the second, operating expense per week typically turns lower. Assuming this remains true, I look for
another 5% year over year decline in non-marketing operating expense which
would put overall operating expense at $23,548. The apparently modest difference is worth
$0.02 relative to expectations.
Adding it up, the
third quarter should be another at least semi-manufactured positive surprise
much like the prior quarter. There
should also be plenty of real year over year progress in expense control—labor
and non-marketing operating expense—but not much to get excited about on the
top line. A real surprise would stem
from traffic growth and that seems unlikely.
If you think the
market is likely to again reward BJRI for a positive surprise, get ready.
Another 3Q key—share count
Management
repurchased 300,000 shares in the second quarter but its fully diluted shares
rose anyway given prior option grants.
Since reporting the second quarter, the board approved an incremental
$100MM share repurchase. An actual
reduction in diluted shares outstanding in the third quarter would be a decent
milestone.