We are reverting back to Neutral recommendation on the casual dining operator BJ’s Restaurants Inc. (BJRI) from Underperform based on consistent growth in revenues, a relatively benign commodity cost outlook and the company’s expansion projects, which will provide it with greater scale and consequent cost efficiency, going forward.
Why the Upgrade?
Although BJ’s Restaurants’ earnings per share have not increased year over year for the last three quarters, its revenues are marching ahead reflecting a strong business model. Its comps have outperformed the Knapp-track industry average over the past seven years ending 2012. During this period, BJ’s comps grew roughly 28%, while Knapp-track’s record for average sales per casual dining restaurant declined 6--7%.
The Orange County, CA-based company aims to open at least 425 outlets in the U.S. over the long run. With capacity growth, the company is gaining scale advantage, which will help generate cost efficiency in the future.
BJ’s Restaurants anticipates the cost of commodity to increase around 2% in 2013, down from its prior expectation of 2.5%. In the preceding quarter as well, BJ’s had slashed its expected commodity inflation rate from its prior expectation of 4%. Higher prices for cheese, poultry, and beef are expected to be offset by lower prices for seafood, produce, soups, sauces and dressings.
However, despite these enthusiastic facts, some concerns prevent us from being too optimistic on the stock. The company’s bottom line is suffering mainly due to an unfavorable cost structure. With the company’s foray into new markets, we expect slowdown in comps and increased pre-opening costs to act as deterrents, going forward. A relatively smaller scale and the lack of advertising strength compared with its larger peers is another negative for BJ’s Restaurants.
Other Stocks to Consider
Other players in the same industry, which look attractive at current levels, include The Wendy’s Co. (WEN), The Cheesecake Factory Inc. (CAKE) and Burger King Worldwide Inc. (BKW) all carrying a Zacks Rank #2 (Buy).
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