BJ’s Restaurants, Inc. (NASDAQ:BJRI) Q4 2023 Earnings Call Transcript
BJ's Restaurants, Inc. (NASDAQ:BJRI) Q4 2023 Earnings Call Transcript February 15, 2024
BJ's Restaurants, Inc. beats earnings expectations. Reported EPS is $0.34, expectations were $0.27. BJ's Restaurants, Inc. isn’t one of the 30 most popular stocks among hedge funds at the end of the third quarter (see the details here).
Operator: Good afternoon and welcome to the BJ's Restaurants fourth-quarter 2023 earnings release conference call. [Operator Instructions]. I would now like to turn the conference over to Rana Schirmer Director of SEC Reporting. Please go ahead.
Rana Schirmer: Thank you, operator. Good afternoon, everyone, and welcome to our fiscal 2023 fourth-quarter investor conference call and webcast. After the market closed today, we released our financial results for our fiscal 2023 fourth quarter. You can view the full text of our earnings release on our website at www.bjsrestaurants.com. I will begin by reminding you that our comments on the conference call today will contain forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. Investors are cautioned that forward-looking statements are not guarantees of future performance and that undue reliance should not be placed on such statements. These statements are based on management's current business and market expectations, and our actual results could differ materially from those projections in the forward-looking statements.
We undertake no obligation to publicly update or revise any forward-looking statements or to make any other forward-looking statements, whether as a result of new information, future events, or otherwise, unless required to do so by the securities laws. Investors are referred to the full discussion of risks and uncertainties associated with forward-looking statements contained in the company's filings with the Securities and Exchange Commission. We will start today's call with prepared remarks from Greg Levin, our Chief Executive Officer and President; and Tom Houdek, our Chief Financial Officer, after which we will take your questions. And with that, I will turn the call over to Greg Levin. Greg?
Greg Levin: Thank you, Rana. BJ's delivered another quarter of positive comparable restaurant sales and year-over-year margin expansion, as we continue to benefit from the strategies we shared at our Investor Day in November. These strategies are focused on driving sales through our familiar-made brewhouse fabulous culinary initiative, our people initiative around hospitality and gold standard level of operational excellence, and a welcoming contemporary ambiance to our remodel initiative. Our overall strategy also encompasses margin expansion through productivity and cost savings initiatives. Taken together, and with successes already evident on many of these fronts, we have established a solid foundation for future restaurant growth and enhancements of shareholder value.
From a fourth-quarter sales perspective, comparable restaurant sales were positive 0.6%, which was our 11th consecutive quarter of beating the industry as measured by Black Box. We expanded our restaurant margins to 14.4%, representing an increase of 150 basis points from the prior year, and generated adjusted EBITDA of more than $27 million in the quarter. Our margin improvement results compared to last year are even more impressive, in that fiscal 2022 was a 53-week year and included $3.2 million related to a one-time gain in gift card breakage in the fourth quarter. Therefore, excluding these benefits from last year, our restaurant level margins improved by 270 basis points and adjusted EBITDA increased by approximately 40% year over year in the fourth quarter.
For the fiscal 2023 full year, adjusted EBITDA increased to approximately $104 million, an increase of more than 30% on a reported basis, and more than 40% from last year when adjusting for gift card breakage and the 53rd week that benefited fiscal 2022. While Tom will discuss this in more detail, the margin improvement initiatives that generated strong results in 2023 will continue to yield further benefits in 2024. We expect restaurant level margins to expand again this year, and increase from our fourth-quarter exit rate in the mid-14 percentage points, and further close the gap to pre-pandemic levels consistent with what we outlined in our Investor Day presentation in November. Our familiar-made brewhouse fabulous culinary strategy began this past July, as we rolled out our smaller menu removing some of the non-core menu items that added complexity.
While it can be difficult to grow comp sales with fewer menu items in the short term, this is the right approach to move BJ's forward and allow for new menu innovation while improving execution and team member satisfaction. In this regard, our new familiar-made brewhouse diverse items are moving the business forward. Our October Spooky Pizookie dessert had the highest incident rate of any seasonal Pizookie, and our surf and turf combo increased our overall entrée incidents and added approximately $300 to our weekly sales average during the promotion period. We shared with the investment community in November our three-year culinary strategy, which includes upgrading 50% of our menu to have a more visual wow for our guests, ongoing investment in our core items, and further innovation around 20% of our menu focus on value and price point.
The changes we made to the menu are resonating with our team and workflow, allowing us to improve overall execution. In Q4, our team member retention improved for both hourly team members and managers compared to the prior year and are now better than pre-COVID levels, bringing added stability and less training time and cost to our business. In fact, our retention was better than our casual dining peers, which has created tremendous synergy in our restaurants, bench strength, and career advancement opportunities. This synergy has led to improved net promoter scores, and again, reduced training and overtime costs, helping to move our restaurant margins in the right direction. Through our research, we know that a key differentiator in full-service restaurants is ambiance.
Guests want a contemporary, relevant atmosphere that complements our team members' gracious hospitality and BJ's delicious food. In fiscal 2023, we completed 36 remodels and expect to do at least 20 remodels this year. We believe we have about 130 more restaurants that can use one aspect of our remodel program. And with several quarters of data in hand following other remodels, we know this approach helps drive sales and traffic. By the end of 2024, we expect half of our restaurants will either be remodeled or be our newer, lighter, prototype. While the best way for us to continue our margin growth is by driving top-line sales, since every additional sales dollar leverages the fixed elements of our cost structure, we also laid out a plan last year to identify at least $25 million of four-wall cost savings opportunities that will benefit our restaurant operating margins while maintaining our quality standards.
We have now unlocked over $35 million of cost savings on an annualized basis as we reduced food, labor. and operating and occupancy costs. Going into fiscal '24, and we expect to find additional savings that will further contribute to our initiatives to move restaurant-level margins higher. We also continue to open new restaurants in a balanced manner and make sure our portfolio is optimized to continue driving the best return for our shareholders. In 2023, we opened five new restaurants, including the relocation of our Chandler, Arizona restaurant. Our restaurants opened since 2021 are doing exceptionally well with weekly sales average of more than $130,000 or approximately 10% higher than our system average, with restaurant level margins in the mid- to upper-teens on an annual run rate average.
Going into 2024, we plan to reduce the investment cost for newbuilds by approximately $1 million, which will bring down our investment cost to around $6.1 million net of landlord allowances. At the same time, we are working on further refining our prototype with the goal of reducing our investment cost by another $500,000. Our long-term cadence in this business is to drive top-line sales in the 8% to 10% range through a combination of 5%-plus unit growth and comparable restaurant sales in the low- to mid-single digits. At the same time, we continue to expand margins through sales leverage and productivity and savings initiatives. Our continuous focus on optimizing the business and solid financial cadence generates significant free cash flow which we can translate into enhanced shareholder value.
Based on our new restaurant performance, we know that BJ's is a welcomed concept by guests throughout the US, and this provides us the opportunity to double our footprint over time. However, as we've always said, we are going to do it with the right quality, and at the right investment cost to continue to drive strong, new restaurant investment returns that maximizes shareholder value. To that point, and as we continue to focus on reducing our investment costs in our new restaurants, we now plan to open three restaurants this year. We are targeting total CapEx in the $70 million range, net of tenant improvement allowances, including remodeling at least 20 restaurants this year. We expect to generate over $40 million of cash flow this year that we can use to enhance shareholder value through share repurchases or debt reduction.
Our strong EBITDA growth and free cash flow profile will provide solid earnings growth for our shareholders as we are increasingly confident in our strategy to grow sales, expand margins, open new restaurants at the right pace, and return capital to our shareholders. To this point, as we announced today, our Board of Directors have has approved an increase of $50 million to our share repurchase plan. Now, let me turn it over to Tom to provide a more detailed update from the quarter and current trends. Tom?
Thomas Houdek: Thanks, Greg, and good afternoon, everyone. I will provide details of the quarter and some forward-looking views. Please remember, this commentary is subject to the risks and uncertainties associated with forward-looking statements as discussed in our filings with the SEC. For the fourth quarter, we generated sales of $324 million, which was 6% less than last year on a reported basis and 2% higher when removing the benefits of the 53rd week and the $3.2 million of gift card breakage from last year's results. On a comparable restaurant basis, Q4 sales increased by 0.6% over the prior year. From a weekly sales perspective, we averaged approximately $115,000 per restaurant. Our strong and efficient restaurant execution, as Greg just outlined, in conjunction with our cost savings from our margin improvement initiatives helped BJ's again improve margins in the quarter.
Our restaurant-level cash flow margin was 14.4% in Q4, which was 150 basis points better than a year ago on a reported basis. When adjusting for gift card breakage and the 53rd week, our restaurant-level cash flow margin was nearly 300 basis points higher than last year, demonstrating again the benefits of our ongoing initiatives to drive sales and efficiencies. As a result, our restaurant-level cash flow dollars continued to improve, and we were in line with 2019 Q4 levels. Adjusted EBITDA was $27.3 million, an 8.4% of sales in the fourth quarter. Q4 EBITDA beat the prior year by $8 million, with a margin that was 220 basis points higher when again excluding the gift card breakage benefit and 53rd week from 2022. We reported net income of $8.1 million and diluted net income per share of $0.34 on a GAAP basis for the quarter, which were at approximately twice the levels from a year ago, even before adjusting for gift card breakage and the 53rd week.
For more detail on sales trends, overall casual dining industry sales as measured by Black Box decelerated starting in November, and our sales patterns followed the industry. We made certain strategic decisions in Q4 to drive profitable sales, including changing our Veterans Day promotion, which benefited margins but weighed on November comp sales. We also reduced promotional spend for off-premise starting in November, which benefited margins at the expense of some off-premise sales. Our on-premise business remains our strongest, most profitable, and most differentiated channel with comp sales up low-single digits in the quarter. BJ's is an experiential brand, and as such, we intend to direct the majority of our focus on growing our on-premise business.
This is where guests can experience the energy of our restaurants, which is elevated by our remodeling investments, along with our gold standard level of service, great food served fresh from our kitchens, and innovative drinks prepared by our bartenders. We believe that driving a strong on-premise experience creates more affinity for the brand that over time will help drive the off-premise business. Late night is our best performing daypart, with comp sales of positive low- to mid-single digits in Q4. Our late-night authority is an established core competitive advantage for BJ's. We reinforced this daypart by adding back more operating hours in 2023, and through our remodel program with a focus on the bar statement, while continuing to create and serve innovative and creative brewhouse fabulous food and drinks.
Moving to more recent trends. Restaurant sales in the first six weeks of 2024 have been materially impacted by storms and winter weather, along with the continuation of a more cautious consumer. Each week has had some degree of inclement weather that has kept guests at home. The first six weeks, comp sales are down mid-single digits in aggregate. Looking ahead in the quarter and assuming that the worst of the winter weather is behind us, we expect comp sales to improve in full-year comp sales in the negative low-single digit area for Q1. Despite the challenging weather to start the year for the industry, we continue to beat the casual dining trends when compared to Black Box. In fact, our quarter-to-date comp sales is approximately 250 basis points ahead of the industry through the first couple of weeks of February.
Turning to margins. We realized additional cost savings in the fourth quarter. We have now eliminated more than $35 million of costs on an annualized basis, which is $10 million higher than our original target, allowing us to expand our restaurant-level margins to the mid-14% in Q4. As a reminder, our fourth-quarter margins generally serve as a good proxy for our average margin throughout the year. And I would suggest using Q4 margins as a starting point for modeling full-year 2024 margins. We are encouraged by our continued progress in closing the gap to our 2019 restaurant margins of 16%, and maintain our confidence in being able to meet and then surpass historical margin levels. Moving to expenses. Our cost of sales was 25.5% in the quarter, which was 130 basis points favorable compared to a year ago, and 40 basis points favorable compared to the prior quarter.
Food costs were down about 1% quarter on quarter, with new meat program sourcing driving down costs and more than offsetting inflation on other items. Food cost inflation was approximately 1% for the 2023 full year period, and would have been approximately 300 basis points higher without our savings initiatives. Labor and benefits expenses were 36.5% of sales in the quarter, which was 30 basis points favorable compared to the fourth quarter of last year. We made further strides improving our labor efficiency, which was driven in part by our simplified menu that requires less kitchen prep hours and number of the labor efficiency metrics we track, including items per labor hour. We're better this quarter than pre-COVID levels, illustrating the high level our restaurant teams are operating at, as well as the effectiveness of our cost savings initiatives to date with respect to refining and optimizing our labor model.
Occupancy and operating expenses were 23.6% of sales in the quarter, which was 10 basis points unfavorable compared to the fourth quarter of last year. We increased our marketing spend by 20 basis points from Q4 of last year to build additional awareness and drive traffic to our restaurants. G&A was $21.7 million in the fourth quarter. Included in G&A was more than $600,000 in deferred compensation expense linked to fund performance in our deferred compensation plan, compared to $100,000 benefit in Q3. As a reminder, this is a non-cash item and has an offsetting entry in the other income and expense line in our P&L. We also had extraordinary legal expenses of approximately $800,000 in the fourth quarter. Combination of these two items pushed our full-year G&A to $82 million, which was at the high end of our original guidance.
Turning to the balance sheet, we ended the fourth quarter with net debt of 30 months -- $39 billion, which was $9 million lower than the end of Q3 due to our growing free cash flow. We ended Q4 with a debt balance of $68 million and a cash balance of $29 million, each of each of which was up from the end of Q3. Also during the quarter, we continued to return capital to our shareholders through our share repurchase program. This share repurchases reflect management's belief that BJ's shares represent a fantastic value and our confidence in BJ's longer-term growth prospects. During the fourth quarter, we repurchased and retired approximately 263,000 shares of common stock at a cost of $6.7 million. Reflecting our strong and increasing operating cash flow, the Board of Directors has approved an expansion of the share repurchase program by $50 million.
As a result, we currently have approximately $61 million available under our authorized $550 million share repurchase program. Total 2023 CapEx was $98 million after related asset proceeds. Included in CapEx was $5 million related to the timing of payments for 2022 projects. Excluding this $5 million related to 2022 projects, CapEx of $93 million was in our plan range, which includes the five new restaurants opened in 2023, and 36 restaurant remodels. Also, in the fourth quarter, we closed an underperforming restaurant, which required a non-cash write-off in the losses and disposal -- loss on disposals and impairment of asset line. As I said previously, we expect Q1 comp sales in the negative low-single digits due in part to the impact from the wet winter weather through the first six months of the quarter.
Factoring in recent trends and near-term expectations, we expect restaurant level cash flow margins to be in the 13% to low-13% range in Q1 accounting for the deleverage during the weather impacted weeks. We do still expect to grow margins in Q1 year over year, despite the top line impact from weather. We then expect to continue expanding margins throughout the year, as we grow sales through strategic initiatives and additional progress on our margin improvement initiatives. Our goal is to close the gap to 2019 margins and finish the year with an exit rate approaching 16% restaurant-level cash flow margins. For 2024, we are expecting food cost inflation in the flat to low-single digit area and labor inflation in the mid to upper single digits.
For 2024, we are targeting G&A in the $82 million to $84 million area. We are limiting our planned CapEx spend to approximately $70 million net of tenant improvement allowances, which includes three new restaurants and 20 existing restaurant remodels. Consistent with the strategy outlined during our November Investor Day, we continue to take a disciplined approach to capital allocation and new restaurant growth relative to new restaurant costs with our overall restaurant economics guiding the timing for accelerated growth and related capital expenditures. This approach serves BJ's its guests and shareholders well, while also allowing us to use our growing cash flows to enhance shareholder value through additional share repurchases and debt reduction.
Following our Brookfield, Wisconsin opening scheduled for April, the two additional new restaurants planned for fiscal 2024 will be our new prototype, which is designed to cost approximately $1 million less to build than our recent new restaurants. In conclusion, with significant and improving cash flows from operations, expanding margins, and a healthy balance sheet, we have the financial flexibility to execute multiple initiatives to enhance shareholder value. We are focused on delivering value to shareholders through sales and productivity initiatives, and on our disciplined approach to capital allocation, including for new restaurant openings and restaurant remodels, which both continue to generate strong economic returns. We have a clear path to sales and margin growth ahead and our long-term strategy and strong consumer appeal for the BJ's concept position us well to continue building on our successes in enhancing shareholder value.
Thank you for your time today, and we'll now open up the call to your questions. Operator?
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