Why BJ's Restaurants Could Beat the S&P 500
- By Robert Stephens, CFA
BJ's Restaurants (BJRI) has enjoyed a relatively strong year, with its stock having risen 10% versus a 1% gain for the S&P 500.
In order to boost its financial performance, the company plans to invest in its loyalty program. It will also refresh its marketing as it seeks to introduce greater personalization and trials to enhance the customer experience.
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The intrinsic value of BJRI
Alongside this, a focus on value could broaden the appeal of the business to a wider range of customers, aiming to further improve its net promoter score. A more innovative business model means greater investment in new technology, while investment in its restaurants could provide it with a greater competitive advantage.
Although labor costs are set to increase, the company's growth strategy could offset their impact to a large degree.
With the company having encouraging earnings growth forecasts and a fair valuation, further outperformance of the S&P 500 could be ahead.
Refreshed strategy
A renewed focus on value is expected to increase the appeal of the business to a broader range of customers. The company has seen a strong performance from its happy hour offerings and specials, and is set to add new products to them in order to boost its range of lower price point offerings. This could increase its value appeal to customers at a time when it is seeking to improve its operational performance. Changes to the physical organization of its kitchens could improve speed and quality, while leading to an improving net promoter score.
The relaunch of BJ's Restaurants' loyalty program in 2018 has helped to drive a significant increase in the rate of new member acquisition. There are now hundreds of thousands of members, with the loyalty program increasing visit frequency among customers. In order to maximize the performance of the loyalty program, the company will ramp up its personalized offers and incentives through increasingly sophisticated email segmentation. Alongside this, its marketing team will aim to introduce further trials, as well as test-and-learn tactics, as it continues to increase spend in digital channels.
Innovation
Innovation remains a key growth catalyst for the business, as it is set to use technology to improve the convenience and experience of consumers. For example, it is expected to test a number of new applications in 2019 that are centered on ordering, payment, pickup and delivery. It is also investing in the appearance of its restaurants, as well as the introduction of third-party delivery partnerships. Increased resources are expected to be focused on the growing large-party segment, where the company continues to be under-penetrated.
Investment in slow-roast oven capacity within its restaurants could allow the company to deliver further menu innovation. Demand for its prime rib, pork chop and turkey items has increased, and investment in new and innovative variations of these products may help to improve the company's competitive advantage.
Costs
With U.S. wage growth reaching a nine-year high in the fourth quarter of 2018, BJ's Restaurants has experienced increased wage pressures across its restaurants. The increase in the California minimum wage and a lack of suitable staff across the industry are expected to cause a 5% rise in hourly and management wages in the current year. This could have a negative impact on margins, and may cause the company's profit growth to assume a lower trajectory than it otherwise would have done.
In response, the company is planning to offset ongoing labor pressures through the strong momentum of sales-building initiatives. Check growth is set to be around 2.5-3% over the medium term, while maintaining the guest traffic levels of recent quarters may allow the company to effectively manage its margins. It also sees significant opportunities to expand the size of its estate, with it expected to open between seven and nine new restaurants in 2019. Meanwhile, changes to its kitchen systems are expected to lead to improved efficiencies related to food preparation and cook line organization, which could help to support margin growth.
Verdict
The company's growth strategy looks set to have a positive impact on its financial performance. It is forecast to record a rise in earnings per share of over 10% in the next financial year. Trading on a price-earnings ratio of 16, it appears to offer fair value for money.
Investment in its loyalty program and a renewed focus on value could strengthen the business over the long run. They have the potential to broaden its customer base, while encouraging more frequent visits.
Although rising costs could be a threat facing the business, investment in new technology plus an expansion in the size of its estate could lead to growing profitability in future years.
Having outperformed the S&P 500 in the last year, further stock price gains could be ahead as the company executes its growth strategy.
This article first appeared on GuruFocus.
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The intrinsic value of BJRI
