We maintain our Neutral rating on BJ's Restaurants Inc. (BJRI). While we are optimistic on the company’s same-store sales (comps) momentum, unit growth and potential success from the loyalty program, the negative impact of commodity inflation as well as increased cost structures in 2012 compel us to remain on the sidelines.
We see the company’s sustained comps impetus as one of its key growth drivers. Among the casual dining chains, BJ’s Restaurants is one of the few casual dining chains that has been expanding in an uncertain economy and is continuously making tangible progress toward further expansion. In the long run, there still exists the possibility of opening at least 300 outlets.
In 2012, we expect the company to witness further improvement in earnings along with profit margins buoyed by several sales building initiatives like a new guest loyalty program, which has been successfully tested and will be rolled out by the end of the first half of 2012 along with a new catering program and price increases.
In terms of headwinds, commodity inflation remains a threat. During the balance of 2012, management expects its commodity basket to increase around 3%, which is slightly higher than the inflation rate experienced in first-quarter 2012. Beef costs have crept up over the last three years and will continue to be a concern in 2012. BJ’s Restaurants will see higher Angus beef and pizza dough prices.
Additionally, increased payroll tax and medical benefits will also be incurred in 2012. The restaurateur will likely incur higher marketing spend in the second quarter to promote new menu and testing television commercials in the Sacramento market.
Over the last two years, BJ’s Restaurants mainly expanded in its existing arena where the company received less tenant improvement allowance leading to lower construction period rent. Now, the company is considering other potential markets for entry in 2013. We believe penetration into new markets will involve some risk for BJ’s Restaurants due to the absence of support infrastructure.
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