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BJ's Restaurants Rallies 155% in a Year: More Gains in Store?

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BJ's Restaurants, Inc.’s BJRI sales-building initiatives, enhanced loyalty program, improved comps and operating margins have been perking up investors. Buoyed by these, the stock has gained a significant 154.7% in a year’s time, outperforming the industry’s rise of 7%. However, high cost of sales and slowdown in new restaurant opening are concerning.
Catalysts Driving Growth

BJ's Restaurants’ continuous focus on productivity and efficiency along with implementation of several major sales-building initiatives are major drivers of its top line. The company is also investing heavily in technology-driven initiatives, like digital ordering, to boost sales. The company’s app and digital platforms are allowing it to more effectively offer promotions in order to improve guest traffic.

Moreover, its enhanced loyalty program is expected to boost the top line. The company’s loyalty guest database continues to grow well on a steady increase in transactions. The company has also completed the national launch of its loyalty program in the first quarter of 2018 and is so far witnessing double-digit increases in loyalty sign up as well as similar increases in reward redemptions. On average, 15% of its sales are derived from loyalty guests.

BJ’s Restaurants’ continued focus on refining and streamlining its menu is a key driver for traffic. Notably, in the second quarter of 2018, total revenues grew 8.2% year over year on the back of increased guest traffic and comps. Comps growth of 5.6% year over year and 2.5% increase in traffic have been reported for the same period. BJ’s Restaurants has impressed investors with top and bottom-line outperformance as well. The company’s top and bottom lines have surpassed the Zacks Consensus Estimate in the last three quarters.


High cost of sales and rising wages are the major factors driving the company’s profitability. It has been seen that labor costs, as a percentage of sales, increased 20 basis points (bps) to 35.6% in the first half of 2018, denting its gross margin. Moreover, pre-opening costs, higher marketing expenses as well as costs related to sales-boosting initiatives might further exert pressure on margins.

Moreover, slowdown in new restaurant openings due to greater focus on traffic and sales-building initiatives can dent overall sales growth. After reducing the number of restaurant openings to 10 in fiscal 2017 compared with 17 in fiscal 2016, the company now plans to launch just five restaurants in fiscal 2018.

If we look at the valuation metric, the company looks expensive. Considering price-to-earnings (P/E) ratio, BJ’s Restaurants looks overvalued when compared with the industry. The stock has a trailing 12-month P/E ratio of 37.3, which is above the median level of 29.38 but below the high level of 38.23 scaled in the past year. Meanwhile, the trailing 12-month P/E ratio for the industry is 24.19.

Zacks Rank & Stocks to Consider

BJ’s Restaurants carries a Zacks Rank #3 (Hold).

Some better-ranked stocks in the industry are Ruth's Hospitality Group, Inc. RUTH, Darden Restaurants, Inc. DRI and Dine Brands Global, Inc. DIN, each carrying a Zacks Rank #2 (Buy) .You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.

Ruth's Hospitality Group has an expected earnings growth rate of 26.4% for the current year.

Darden Restaurants reported better-than-expected earnings in the trailing four quarters, the average being 3.1%.

Dine Brands Global reported better-than-expected earnings in the last four quarters, the average being 8.1%.

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