BJ's Spreads in California

Zacks

Casual dining restaurant operator, BJ’s Restaurants Inc. (BJRI), recently announced the opening of a new unit in California. The new opening marks the second of the company’s targeted 16 new openings for fiscal 2012.

The new restaurant has come up in Salinas, in northern California, where BJ’s boasts a solid presence and tremendous customers’ fondness. Thus, we believe the new unit will benefit immensely from its strategic location and likely drive higher sales. Moreover, an additional unit in the core California market will further strengthen BJ’s position in the region.

Additionally, the core Californian market, which was badly hit during the housing downturn, has turned around and started reporting improved same-store sales growth, but we believe it will still take some time to perform at par with the other markets, which were less ruffled at the time of recession. Moreover, BJ's brand awareness is still relatively low even in its home-court California and plenty of growth opportunities still remain for the company in its main market.

Furthermore, to ensure positive restaurant comparable sales in the upcoming quarters, the company continues to take several sales building initiatives like a new guest loyalty program, which has been successfully tested and will be rolled out by the end of the first half of 2012; along with a new catering program, efficiencies and price increases.

BJ’s currently operates 117 restaurants and almost half of those are located in California. The company remains committed to its expansion strategy and estimates capacity increases of 10% to 12% in 2013. Of the new openings, one third will be in California, another third in the Western states outside California and the remaining in the Florida market as well as new markets. Additionally, 50% of the new stores will be conversions of old retail locations.  In the long run, there still exists the possibility of opening at least 300 outlets. Management also has plans to expand in the relatively new markets going forward.

However, Orange County, California-based -based BJ’s will likely face stiff competition in that area from several renowned eateries including Red Robin Gourmet Burgers Inc. (RRGB).

We believe that BJ’s remains well positioned to sustain its growth momentum while generating improved earnings on the heels of efficient operations and innovative offerings. However, higher cost structure mainly related to payroll taxes, increased level of pre-opening costs and stiff competition make us cautious.

BJ’s currently has a Zacks #3 Rank, which implies a Hold rating over the short term. We reiterate our long-term Neutral recommendation on the stock.

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