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BJ's Restaurants Rides on Menu Innovation Amid High Costs

Zacks Equity Research

BJ's Restaurants, Inc. BJRI relies on various sales-building initiatives such as menu innovation and digital enhancement to drive top-line growth. However, despite having a cost-cutting mechanism at place, the company is plagued with high costs of operations.

Let us delve deeper into factors that suggest that investors should hold on to the stock for the time being.

Catalysts Driving Growth

BJ’s Restaurants implemented several major sales-building initiatives, which have contributed positively to the company’s results over the past few quarters.Notably, in the first quarter of 2019, off-premise sales increased to 10.1% of the company’s revenues, indicating an all-time high level. Further, BJ’s Restaurants expects this channel to grow at least 50% over the next several years. In 2019, the company intends to open seven to nine restaurants.

Coming to menu innovation, BJ’s Restaurants’ extensive focus on refining and streamlining its menu is the key driver for improved traffic. The company’s slow-roasted menu, launched in 2017, has become a huge success. It significantly boosted average check, with high incident rates.

Additionally, the restaurant developed a robust pipeline of new menu items, focusing on its EnLIGHTened menu category, featuring its new super food options. Moving ahead, the company plans to introduce new flavors and improve the quality of its menu items. Notably, BJ’s Restaurants’ higher-priced menu items have continued to be popular and management believes that these items would boost guest check in the near term. In fact, the company expects to offset some of the labor pressure through prudent menu pricing and design.

Meanwhile, 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 offer promotions more effectively and efficiently.

Additionally, the company’s loyalty guest database continues to grow well with the steady increase in transactions. It also completed the national launch of its loyalty program in the first quarter of 2018.Ithas been 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. 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. The company also continues to drive awareness in its key markets through greater and more targeted marketing.

Concerns

Although BJ’s Restaurants is focusing on cost savings, and has reduced cost of sales and labor expenses; pre-opening costs, higher marketing expenses and costs related to sales-boosting initiatives might weigh on margins. Particularly, slow roasting ovens and handheld tablets are adding to the restaurants’ labor costs. The company is also facing high general and administrative expenses. In 2018, general and administrative expenses increased 9% year over year. In the first quarter of 2019, total costs and expenses increased 5.6% year over year.

 


 

In the meantime, while several other restaurateurs — including Yum! Brands YUM, McDonald’s MCD and Domino’s DPZ —are capitalizing on the emerging market potential, BJ’s Restaurants seems to be slow on this front. We believe that the company needs to expand its presence beyond the United States to offset the impact of cutthroat competition in the saturated domestic market.

High costs and competition may have led this Zacks Rank #3 (Hold) company’s shares decline 30.2% in the past year against the industry’s 31% rally. You can see the complete list of today’s Zacks #1 (Strong Buy) Rank stocks here.

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