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Here's Why You Should Steer Clear of BJ's Restaurants Stock

Zacks Equity Research

Shares of BJ’s Restaurants, Inc. BJRI have declined 17.8% year to date, substantially underperforming 5.7% growth of the industry it belongs to.



Moreover, this Zacks Rank #5 (Strong Sell) company has been witnessing downward estimate revisions of late, reflecting analysts’ pessimism on its growth prospects.

Over the last 60 days, the Zacks Consensus Estimate for BJ’s Restaurants’ current-quarter earnings has slumped 31.6%, reflecting eight downward revisions versus none upward. Also, its current-year earnings estimates have moved down 11.1%, due to eight downward revisions versus no upward revision.

This apart, BJ’s Restaurants has a number of other aspects that make it an unattractive investment option at this point.

Lackluster Earnings Growth

BJ’s Restaurants has historical (3-5 years) earnings per share (EPS) growth rate of negative 7.3% compared with the industry’s average of 5.7%. Investors should however really focus on its projected growth. Here, the company’s EPS is estimated to witness a decline of 14.7% year over year, comparing unfavorably with the industry average, which calls for EPS growth of 3.9%

Notably, earnings growth is often an indication of strong prospects (and stock price gains) ahead for the company in question and is thus one of the most important factors to consider. Evidently, BJ’s Restaurants falls weak on this front according to current assessments.

Industry Headwinds

The U.S. restaurant space has not been too enticing for the last few quarters. Despite economic growth, somewhat lower energy prices and higher income, consumers increased their spending only modestly on dining out that resulted in low consumption. This is because along with wage growth, inflation is also on the rise that translates to lower real income, and in turn less disposable income. In fact, the situation has taken a worse turn, thanks to higher health care costs and tightened credit availability in the country.

Moreover, as consumers demand high-quality products at lower prices, it is pushing grocery stores to decrease their food prices in order to remain competitive. This, in turn, is resulting in a bigger gap between food-at-home and food-away-from-home indices.

Consequently, same-store sales growth has been dull in a difficult sales environment. Traffic too has been weak. In fact, the second quarter of 2017 marked the sixth consecutive quarter of negative comp sales for the restaurant industry as a whole, thereby continuing the somber mood. BJ’s Restaurants is no exception to the trend and resultantly, the company’s sales have also come under pressure.

Slowdown in Openings

It is to be noted that BJ’s Restaurants has reduced the number of planned restaurant openings to 10 in 2017 compared with 17 in the last year. The reduction came on the back of the company’s continued belief that the sales headwinds in the industry call for greater focus on traffic and sales building initiatives. However, the slowdown in company’s 2017 development plan may dent sales growth.

Rising Costs Putting Pressure on Margins

Higher cost of sales and labor costs due to higher wages are expected to continue keeping profits under pressure. Also, costs incurred owing to the implementation of the Affordable Care Act would dampen profits.

Moreover, pre-opening costs, higher marketing expenses as well as costs related to sales-boosting initiatives might further pressurize margins. Particularly, additional training on slow roasting ovens and handheld tablets will add to the labor costs.

Meanwhile, BJ’s Restaurants has recorded trailing 12-month net margin of just 3.8% compared with the industry average of 15.1%. Given the continual rise in expenses, the trend is not expected to reverse for the company any time soon.

Stocks to Consider

A few better-ranked stocks in this sector are Papa John's International, Inc. PZZA, Domino's Pizza, Inc. DPZ and Del Taco Restaurants, Inc. TACO. While Papa John’s sports a Zacks Rank #1 (Strong Buy), Domino’s and Del Taco carry a Zacks Rank #2 (Buy). You can see the complete list of today’s Zacks #1 Rank stocks here.

The Zacks Consensus Estimate for Papa John’s 2017 earnings climbed 1.4%, over the past 60 days. Moreover, the company’s trailing four-quarter average earnings surprise is a positive 5.10%.

Domino’s earnings surpassed the Zacks Consensus Estimate in the trailing four quarters, with an average beat of 6.75%. Meanwhile, for fiscal 2017, EPS is projected to witness a rise of 33.8%.

Del Taco’s trailing four-quarter average earnings surprise is a positive 3.61%. For 2017, EPS is expected to improve 6.3%.

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