We have recently downgraded our long-term rating on the shares of BJ's Restaurants Inc. (BJRI) to Neutral from Outperform due to the higher cost structure for 2012 as well as tougher sales comparison in the upcoming first quarter.
Boasting a unique position in the commoditized hyper-competitive bar and grill segment, along with a viable business strategy, BJ’s Restaurants offer investors one of the strongest growth stories in the U.S. restaurant industry.
The company’s earnings have been able to beat the consensus over the trailing four quarters by an average surprise of 15.08%. While the new menu and beverage ready for rollout this spring and summer will likely add some flavors to the upcoming quarters’ earnings of BJ’s, there is set of factors which could put its growth on hold in the near term.
BJ’s always experiences higher labor costs in the first quarter of each year due to the resetting of state unemployment taxes and FICA limits. Management generally incurs increased payroll taxes in the first and second quarter of each year. BJ’s expects to see some higher state payroll taxes as many states have increased their payroll taxes to help fund their unemployment deficit.
There will also be pressure on medical benefits in 2012, which currently account for approximately 1% of sales. Additionally, the company continues to witness higher hourly labor, primarily in the kitchen, due to the complexity of new menu offerings.
Some increases in consulting costs related to certain ongoing initiatives and higher training as well as recruiting costs related to expected openings in 2012 are also likely. Total commodity basket is expected to be up around 4% in 2012. Hence, a higher cost structure, in turn, will lessen the magnitude of margin rebound.
Operation for the first quarter of fiscal 2012 began on January 4, 2012 compared to December 29 last year. Hence, the first quarter of 2012 is seeing tougher comparison with the absence of Christmas and New Year. This will hurt first quarter comparable restaurant sales as well as the change in average weekly sales.
Following the earnings, there was a negative sentiment prevailing among the analysts regarding the upcoming quarters with majority of estimates moving southward.
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