On Aug 14, 2014, we issued an updated research report on BJ's Restaurants, Inc. (BJRI).
On Jul 24, this casual diner reported second-quarter results, wherein earnings beat the Zacks Consensus Estimate but revenues missed the same. We believe the earnings beat was due to improvement in restaurant level margin.
The company remains committed to its target of achieving restaurant level margin of 19%, primarily driven by the cost savings initiative focused on non-strategic restaurant operating cost and support. In fact, in the second quarter of 2014, the restaurant level margin improved sequentially for the second consecutive quarter.
Though the company’s comps underperformed the Knapp-track industry average in the past three quarters, we believe that it is poised to turn it around in the coming quarters with easier year-over-year comparisons for the rest of 2014, gradual economic recovery as well as the positive impact of the numerous sporting events. Thus, BJ's Restaurants remains a turnaround story, in our view.
Additionally, the company’s sales building initiatives like guest loyalty program, catering program and focus on supply chain management have borne fruit. Decline in June comps was offset by Father’s Day and the FIFA Football World Cup, which improved sales toward the end of the quarter. The fact that BJ’s Restaurants managed to grow revenues in the second quarter without sacrificing its margins is laudable. We believe the company will be able to boost its top line in the coming quarters through sales building initiatives as well as sporting events in the U.S.
We commend BJ’s Restaurants’ decision to prudently continue unit development in the next couple of years. The company intends to focus more on its smaller prototype restaurant, thus reducing operating costs amid a sluggishly recovering economy.
However, going forward, we remain concerned due to the rising commodity, labor and insurance costs. In fact, the company’s second-quarter earnings were down 3.2% year over year due to higher costs and expenses.
Meanwhile, as this Zacks Rank #1 (Strong Buy) restaurateur continues to open stores in newer markets, we expect increased pre-opening expenses and stiff competition to act as the headwinds. Also, BJ’s Restaurants’ limited international presence lowers its chances of gaining a share of the global market. Further, higher taxes in California and increased gasoline prices limit discretionary spending, which might affect sales in the coming quarters.
Other Stocks to Consider
Some other stocks worth considering in the restaurant industry include Chipotle Mexican Grill, Inc. (CMG), Jamba, Inc. (JMBA) and Domino's Pizza, Inc. (DPZ). Both Chipotle and Jamba sport a Zacks Rank #1, while Domino’s carries a Zacks Rank #2 (Buy).