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Why BJ's Restaurants Has Recovery Potential

BJ's Restaurants, Inc. (NASDAQ:BJRI) could deliver an improving stock price performance, in my opinion, following its 21% decline in the past year.

The restaurant chain is expanding its number of restaurant locations, investing in its delivery services and launching innovative new services.

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Investing for growth

The company has opened 55 new restaurants in the past five years to bring its total number of restaurants to 208. It plans to expand its presence into the Northeast U.S. in fiscal 2020, and increase the number of states where it has at least one restaurant from its current figure of 29. The business expects this expansion strategy to double its number of restaurants in the U.S. over the upcoming years. This could increase the size of its potential customer base and boost its sales performance.

BJ's Restaurants is also investing in its delivery services. For example, in fiscal 2019, it improved the efficiency of its delivery ordering system through reducing the amount of time required by its staff to enter delivery orders into its system. The business also started using a new company to deliver its orders in fiscal 2019. This increases the availability of its delivery services to geographic areas which were not covered by its previous delivery network. In addition, BJ's Restaurants has increased its use of data in recommending specific products to its existing customers. This could increase its average order value per customer.

Innovation

The business is planning to launch a beer club subscription service in fiscal 2020. It will produce unique beers that are only available to customers who choose to become members of the club. This could increase the company's revenue through subscription sales, and also drive an increasing number of consumers to its stores. Additionally, it could help to differentiate BJ's Restaurants from its peers and lead to a higher degree of loyalty among its existing customers.

The company improved its menu in the fiscal 2019 fourth quarter. It launched $6 entrees which can be taken home by its customers, and widened its range of healthier meals to cater to increasingly health-conscious consumers. BJ's Restaurants also launched a new lunch menu that offers better value for money and a shorter preparation time. This could increase its competitiveness versus sector peers.

Potential threats

The restaurant sector is experiencing rising labor costs, which could hurt the profitability of many businesses. For example, BJ's Restaurants' labor costs as a proportion of its revenue increased 1 percentage point in its fiscal 2019 fourth quarter to 36.4% compared to the same period of the prior year. The company expects its staff wages to rise 5% in fiscal 2020, which could put pressure on its margins and limit its scope to deliver rising profitability.

In response, the business is offsetting some of its rising labor costs through charging higher prices to its customers. Strong consumer sentiment in the U.S. and an improving economic outlook mean that BJ's Restaurants could raise its prices without hurting its sales growth prospects.

In addition, it is improving the productivity of its staff through using a greater amount of new technology. This could reduce the amount of time that its staff spendd on administrative tasks and enable them to spend more time serving the company's customers. This may lead to an improving dining experience for BJ Restaurants' customers and could help to increase its margins in upcoming quarters.

Outlook

Market analysts forecast that the company will deliver a 1% rise in its earnings per share in fiscal 2020. Its price-earnings ratio of 16.8 suggests that it may not be cheap, but its growth strategy could catalyze its stock price.

Disclosure: The author has no position in any stock mentioned.

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This article first appeared on GuruFocus.