Friday, May 2, 2014

Surprise-manufactured. Expense control-real

BJ’s earnings are still falling just not as fast as management suggested.   The first quarter looked great relative to the low expectations set by management—an apples-to-apples positive surprise of $0.19 EPS from operations versus the Street (and me) at $0.12.   But, the quarter was awful relative to the first quarter of 2013 with net earnings from operations down 32%.   Then again, versus BJ’s horrific fourth quarter, there was a lot to like.   So take your pick—the first quarter was great, awful, encouraging.

A breakdown of the actual results versus my forecast is below:

As the table makes apparent, the positive surprise in the quarter stemmed from a modest revenue surprise combined with impressive labor and operating expense control.   Same store sales declined 2.9% versus my -3.3% with traffic down 2.2% versus my forecast -3.3%.   Price added 1.1% while mix clipped 1.8%.   The latter is a near term key to the story as management added a number of lower priced options to the menu in February.   Mix is likely to pressure SSS until Q4.  Same store sales in April were said to be running down 1.5% to 2.0%.   

Gross margin at 75.1% dipped from last year’s 75.5% but improved from 74.7% in the fourth quarter.   The improvement suggests a pull back from coupons and other price promotions.
Labor leapt from 35.0% of sales in the first quarter last year to 36.1%.   That looks bad but it was a lot better than management’s 2/27 guidance of 36.5% to 37.0%.    Labor per operating week was flat year over year and 1% less than my forecast.   A strong performance given wage pressure in some markets.

Even with marketing expense jumping from $3.4MM in the first quarter last year to $5.2MM, operating expense only rose from 21.5% to 21.9% of revenue as ex-marketing operating expense per operating week fell 1.7% year-over-year.   Total operating expense per week at $23,624 was just under management’s guidance at $24,000.

Variances in G&A, D&A and other line items netted out close to zero.    The company did take a $1.55MM charge for expenses related to its shareholder agreement with PW Partners and Luxor Capital.    This charge was partly offset by tax credits that reduced the effective rate to 24.6% in the quarter.   Management had guided to 28% though that guidance was reduced to 27% on the conference call.   Adjusting for both the charge and the slug of tax credits, operating EPS in the quarter was $0.19.

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