Kind of a letdown. The
existing board of BJ’s Restaurants (BJRI) placed one activist nominee on the
board in April, which was expanded from 10 to 11, and recommended three more
activist nominees for election at the June 3 annual meeting. The company also agreed to buy back a
disappointing $50MM of stock. The company could easily and cheaply borrow up to 3x EBITDA for a $220MM buyback. Not even
an insulting letter…yawn.
More interesting, longtime BJRI shareholder T. Rowe Price
hit the bid. Luxor and PW Partners
continued accumulating stock in March and April and T. Rowe appears to have used
this as an opportunity to complete an exit from what was a 15% position a year
ago. Citadel and Baron also exited BJRI or at least
dropped below 5%.
Luxor Capital, PW Partners, Zelman Capital et al
collectively own 15.9% of the company.
They signed a standstill agreement (no solicitation etc.) as part of the
agreement to place their nominees up for election to the board. This is in effect until 10 days prior to the
next deadline for submitting directors for nomination to the board in
2015. Alas, insulting letters are
prohibited. So now the outsiders are insiders
and we get to find out if Ellsworth Toohey, Howard Roark’s tormentor and a sometime
Seeking Alpha commenter, is right to wonder if this is indeed a case of dog
catches car. With the stock now
trading 19% below its post-activist pop of $35.18 and 5.6% below the activists’
average cost of $30.36, the dog is gaining on the bumper.
The pull back in the shares was likely a function of an end
to short covering, an end to buying by the activist group, and a brutal
correction in richly valued consumer discretionary stocks. While
the XLY Consumer Discretionary index is down just 4% since BJRI peaked on 3/18,
high flyers are down a lot more including Chipotle Mexican Grill (CMG) which is
down 16% since then.
On Thursday (5/1) we will find out if BJRI topped the 13% comp reported
by CMG for the 1Q. Since BJRI was running down 4.2% at 2/16, the
question is not exactly fair. I am
guessing -3.3% given an industry wide pick up in traffic in March as weather
issues abated. My quarterly forecast
is below:
Part of BJ’s Restaurants (BJRI) earnings problem is easy to
fix – marketing. To counteract ebbing
traffic, management has ramped marketing from 1.2% of revenue in 2011 to 2.2%
in 2013 and up to 3.0% is expected in 2014.
A large chunk of the increased spending has been directed to
television. Here was one of the ads until it was also deleted from YouTube.
The company also ramped up spending on its loyalty program
and tried an LTO with a third party, Big Poppa Smokers. Perhaps because few people have heard of
Big Poppa and even fewer believe that a chain restaurant at the mall can produce
credible BBQ, the latter failed as has the overall marketing program.
The money spent on marketing, 2-3% of sales, may sound
trivial, but it is huge in the context of the company’s 3.2% 2013 EBIT margin. BJRI could almost double its net income by
cutting a discretionary expense. The $17MM
spent on TV and other efforts resulted in 3% less traffic at the units. Cutting that closer to zero would almost
double net income. This seems like a no-brainer. Instead, management is doubling down. It fired the old marketing chief and hired a
new creative advertising agency.
Management said that it planned to spend $5.5MM on marketing in the first
quarter alone with the great majority of that coming in March. We will get a glimpse at the result of all
that spending when the company reports after the close today. Given that the company also distributed
thousands of coupons for free Pizookies and $5 off coupons, it would seem
almost impossible that traffic did not improve in March particularly since
overall casual diner traffic improved from -1.7% in February to -0.2% in March
according to MillerPulse.
“One for All” is probably better than “Wow, I love this
place!” but the slogan probably is not the crux of the issue for BJ’s. At an analyst meeting at the end of February
the company described the brand/concept similar to my snarky epithet—CAKE with
beer. In other words, BJ’s is a place with
a huge menu like the Cheesecake Factory with a huge number of beer options but
lower prices. The new creative team decided to embrace the
huge menu as a defining element. “One
for All” is intended to emphasize that there is something for everyone at BJ’s. Unfortunately, CAKE with beer may not be that
compelling particularly now that lots of places offer impressive selections of craft
beers on tap.
Craft might be part of the problem. Craft, local, and artisanal is where
consumers are headed. Of course, in
eighteen months those words will be as devoid of meaning as “gourmet”. That trend
is a big headwind for most chains and a tailwind for Chipotle Mexican Grill
(CMG). Management at BJs likes to portray the craft
trend as part of the appeal of the concept.
It isn’t. BJ’s is a large
format chain restaurant that is typically located at a mall or just
outside. It has a long laminated menu
devised in a corporate office. The food
is prepared by hourly, modestly skilled and probably disinterested labor. BJ’s is the antithesis of craft. And no BJ’s did not help start the craft
beer trend as management sometimes claims.
The craft trend was started by home-brewers in the late Eighties then
kick started in the Nineties by then micro-brewers like Sam Adams, Sierra
Nevada, and Red Hook. Coincident with
the start of the craft brew trend, a number of restaurants added in-house
brewing (really high margins!) and evolved into brewhouses. BJ’s is part of a group of craft-beer themed restaurants from that era which
includes Rock Bottom Brewing, John Harvard, and Heartland Brewery. They are easily identified by the kitschy
beer logos that they all use and their strange affinity for red and brown ale.
Yes, I know BJ's has one countless beer awards, but they all have. There must be 300 beer contests with 20 medals awarded at each one. Coors Light has medals too.
This logo is a winner:
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