We maintain our Underperform recommendation on BJ's Restaurants, Inc. (BJRI) anticipating an increase in costs in 2014, which will pressurize margins.
Why the Reiteration?
BJ’s Restaurants are mainly located in areas that had been hit hard by the recession. Moreover, higher sales tax and state income tax in California along with higher gasoline prices compared to other parts of the U.S. have been limiting discretionary spending.
Meanwhile, similar to 2013, the company expects overall cost environment for food commodities to remain pressurized in 2014 due to domestic and worldwide agricultural supply and demand imbalance and other macroeconomic factors. In addition to rising commodity, labor, and insurance costs, marketing costs are expected to pressurize margins in 2014 as well. While management strives to handle this cost pressure through marketing and operational initiatives as well as prudent menu price adjustments, we do not expect this to happen in the near term.
The company has been witnessing a slowdown in comps since the last three quarters mainly due to sales cannibalization at older units. Further, an oversupply situation in the market has also been adding to its woes. After registering flat year-over-year comps in the second quarter of 2013, the company witnessed comps decline of 2.2% in the third quarter (reported in October) due to lack of product innovation, absence of promotional offers, cut throat competition mainly in the core California market and the impact of cannibalization. Revenues also missed our expectation due to lower comps in the third quarter.
Also, the company posted dismal results in the third quarter with earnings missing the Zacks Consensus Estimate by 23.5% and also declining 45.8% year over year. Following the results, estimates for 2013 and 2014 largely moved downwards over the past 60 days. The Zacks Consensus Estimate, over the past 60 days, declined 15.0% to 88 cents for 2013 and 20.6% to $1.00 for 2014.
While the company continues to open stores in new markets, we expect increased pre-opening expenses and stiff competition to act as headwinds in the new markets. A relatively smaller scale and the lack of advertising strength compared to its larger peers are negatives for BJ’s Restaurants. Although, the core California market has started reporting improved same-store sales, it will still take some time to perform at par with the other markets, which were less ruffled by the recession.
Other Stocks to Consider
BJ's Restaurants presently carries a Zacks Rank #4 (Sell). Some better-ranked stocks in the industry include DineEquity, Inc. (DIN), Buffalo Wild Wings Inc. (BWLD), and Brinker International, Inc. (EAT). While DineEquity carries a Zacks Rank #1 (Strong Buy), Buffalo Wild Wings and Brinker International hold a Zacks Rank #2 (Buy).