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BJ's Restaurants Rides on Menu & Digital-Based Innovation

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BJ’s Restaurants, Inc.’s BJRI multiple sales boosting and cost-cutting initiatives are impressive. However, rising labor costs amid a tepid sales environment along with a slowdown in the company’s development plans remain potent headwinds.

Recently, BJ’s Restaurants posted better-than-expected results in the fourth quarter of 2017. Adjusted earnings of 37 cents per share surpassed the Zacks Consensus Estimate of 32 cents by 15.6%. However, higher costs resulted in 32.7% year-over-year decline in earnings.

Meanwhile, the company’s shares have returned 47.6% over the past six months, outpacing the industry’s gain of 4.4%. Ongoing upward earnings estimate revisions also reflect optimism in the stock’s prospects. Over the last 60 days, current-year earnings estimates have moved up 8.4%. Given its solid fundamentals, the stock should keep performing well in the quarters ahead.

Menu & Digital-Based Innovations Drive the Top Line

BJ’s Restaurants has implemented several major sales building initiatives in 2017 that have been tested over the year and have contributed positively to the company’s fourth-quarter sales. Management has been refining and streamlining its menu, with particular emphasis on its EnLIGHTened menu category to improve traffic. The company’s slow-roast menu also continues to drive healthy check growth.

Moving ahead, the company plans to introduce new flavors. In fact, it expects to offset some of the labor cost through prudent menu innovation and pricing. Additionally, its promotional offers along with bundled lunch offerings should boost sales and drive guest traffic.

BJ’s Restaurants 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 and efficiently offer promotions.

Additionally, the company’s loyalty guest database continues to grow well with the steady increase in transactions. Other productivity improvement initiatives such as a centralized call center to capture more online orders are also expected to boost the top line, going ahead.

Cost Cutting Leads to Margin Improvement

Through an array of cost-containment strategies, BJ’s Restaurants is constantly trying to improve its operating margin. The company is focusing more on its smaller prototype restaurants that cost roughly $1 million less than the prior prototype. This should help in reducing operating costs. Due to lesser food wastage and improved labor productivity, these new restaurants generate higher margins.

Moreover, in 2017, the company initiated an additional $5 million of efficiency savings in areas such as sourcing, distribution, supplies and maintenance.

Higher Costs & Slowdown in Development Add to Concerns

Higher cost of sales and labor costs that characterize the restaurant industry are expected to continue keeping the company’s profits under pressure. Moreover, pre-opening costs, higher marketing expenses as well as costs related to sales-boosting initiatives might further pressurize margins. Particularly, BJ’s Restaurants’ slow roasting ovens and handheld tablets are adding to the labor costs. Subsequently, labor costs, as a percentage of sales, increased 90 basis points (bps) in the fourth quarter of 2017 to 35.8%, whereas operating costs were 21.4% of net sales, up 70 bps year over year.

Meanwhile, after reducing the number of restaurant openings to 10 in fiscal 2017 compared with 17 restaurant openings in fiscal 2016, the company plans to open just four to six restaurants in fiscal 2018. The reduction is due to 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 the company’s development plan may somewhat dent sales growth.

Zacks Rank & Other Stocks to Consider

BJ’s Restaurants carries a Zacks Rank #2 (Buy).

Other top-ranked stocks in the industry include Darden Restaurants DRI, DineEquity DIN and Ruth’s Hospitality Group RUTH. While DineEquity sports a Zacks Rank #1 (Strong Buy), Darden and Ruth’s carry a Zacks Rank #2. You can see the complete list of today’s Zacks #1 Rankstocks here.

DineEquity, Darden and Ruth's earnings for 2018 are expected to grow 22.7%, 18.4% and 20.9%, respectively.

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BJ's Restaurants, Inc. (BJRI) : Free Stock Analysis Report
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