Q3 2019 Earnings Call
Please standby.
Good day, ladies and gentlemen.
Bgs restaurants incorporated third quarter 2019 earnings release Conference today's call is being recorded at this time I would like to hand things over to Mr., Greg Trojan Chief Executive Officer. Please go ahead Sir.
Thank you operator, good afternoon, everyone and welcome to B-j's restaurants fiscal 2019 third quarter Investor Conference call and webcast I'm, Greg Trojan VJ, Chief Executive Officer, and joining me on the call today as Greg Sullivan, Our President and Chief Financial Officer, We also have Kevin Mayor and arch, our Chief marketing Officer and.
Greg Linzer, Chief Development Officer on hand for Q anyway.
After the market close today, we released our financial results for the third quarter, which ended Tuesday October 1st 2019, you can view the full text of our earnings release on our website at Www B-j's restaurants Dot com.
Our agenda today, we'll start with Ronna Schirmer, our director of does he see reporting providing our standard cautionary disclosure with respect to forward looking statements.
I will then provide an update on our business and current initiatives and then Greg 11 will provide a recap of the quarter and some commentary regarding the balance of fiscal 2019, and some preliminary views on fiscal 2020 and after that we'll open it up to questions. So Ron could you go ahead. Please thanks, Greg I comment.
Conference call today will contain forward looking statements within the meaning private Securities Litigation Reform Act 19 any.
Forward looking statements involve known and unknown risks uncertainties and other factors that may cause actual results performance or achievements of the company to be materially different from any future results performance or achievements expressed or implied by forward looking statements.
Investors are cautioned that forward looking statements are not guarantees of future performance and I do realize shop late on such statements are forward looking statements speak only as of today's date October 24, 2019, we undertake no obligation to publicly update or revise any forward looking statements, but to make any other foreign.
Whether as a result of new information feature events or otherwise unless required to do so by the security slot investors are referred to the full discussion of risks and uncertainties.
Associated with forward looking statements contained in the company's filings with the Securities and Exchange Commission.
Thanks writer.
Our third quarter comparable restaurant sales were negative 0.3% as industry sales weakened during the period by approximately 125 basis points as measured by Black Fox versus the first half of the year.
Despite the near term industry headwinds, we continued our over two year trend of outpacing the industry in both sales and traffic.
While lapping last years, 6.9% comp sales increase and our 500 basis point be versus the industry.
Q3 sales remain challenged in California and were also impacted by Hurricane Dorian in Florida.
Across the industry comparable sales in Q3 lag the first half of the year in every market. We track with the exception of Texas, which remained essentially in line with the recent trends in that state.
In addition to the more challenging industry backdrop, our off premise channel growth, while still very healthy has slowed versus last year and there are a couple of reasons for this first we're now comping against the full rollout of third party delivery across our system and we intentionally pulled back on the level of third.
Third party delivery promotions, we offer.
As I mentioned on our last earnings call as third party marketplaces have gotten crowded with other restaurant concept.
Many of whom are attempting to drive trial promotionally.
The productivity and economics of offers such as free delivery have diminished considerably.
Well this has reduced the pace of delivery growth, we're happy to be building a profitable solid foundation in the off premise channel versus buying unprofitable sales.
Overall, BJ third quarter comparable sales results were unable to offset continued cost pressures coming from historically high wage rate increases and increases in food commodity costs and other variable operating costs.
While we successfully offset some of these pressures with improving labor productivity and ongoing cost savings initiatives restaurant level cash flow margins for the quarter fell by 190 basis points.
Well, we're not satisfied with this outcome several of our key indicators show that we are developing effective strategies and capabilities to succeed in this difficult environment going forward.
[noise] as challenging as the industry has been over the past several months, we are committed to our overarching mission of providing guess amazing value and executing b-j's gold standard levels of service and hospitality.
As many of you on this call no we track our performance across these areas meticulously.
Maintaining quality value and service are the ultimate determinants of who will be the survivors and thrive errors in the casual dining space.
Particularly as everyone is confronting the reality of needing to take price and grow check to partially offset the inflationary pressures were all currently facing.
Given the current market circumstances, expanding and driving margins will be dictated by our ability to drive solid positive comparable restaurant sales, coupled with disciplined restaurant level execution.
We remain focused on maintaining our strong brand and reputation built on quality value and gold standard restaurant level execution.
We will not succumb to the alternative of saving our way to success by making decisions, which would reduce service and hospitality levels compromise prudent maintenance in our restaurants or lower the quality of our menu offerings.
All of which we had a road the trust we have built with our guest and team members.
In Q3, we drove about 2.7% check growth close to our current guide posts of around 3%.
Our biggest weapon in this battle is our broad menu, which allows us to attract more guests to our differentiated center the plate entre offerings, while at the same time driving value through the lower price points inherent in our brewhouse specials and happy hour lineups.
We continue to increase our entre mix, primarily through the success of our slow rose platform well at the same time growing our brewhouse specials and happy hour incidents by close to 10% in the quarter.
As a result, our value scores improved measurably versus last year, and we achieve commensurate improvement in overall recommend scores as well.
Again, we believe our continued success with these metrics speaks to our competitive strength and near and long term positioning relative to our peers.
B-j's combination of value in quality through execution reasons extremely well with casual dining consumers as we consistently take valuable market share even as we lap last year's mid single digit growth.
That said, we're aggressively pursuing several initiatives to further improve our guess value and convenience and drive even more traffic into our restaurants.
On the value front, our highest priorities include expanding our value offerings during our lunch and weekend Dayparts, which have been more challenge then mid week dinners and late night shoulder periods.
We plan on testing, some new and differentiated brew, how special offerings on weekends, along with some additional compelling value lunch combinations.
We also plan to put in place a value oriented takeout entre offer only available within in restaurant dining visit beginning in November .
This will provide an incremental check building opportunity for us while delivering great value to our busy guess.
Another topline initiative now underway as our new catering platform, which we rolled out earlier this year.
These new offerings are doing extremely well generating around 25% growth, albeit on a small base for us.
We know this is a large opportunity across all our markets, especially as we approach this year's busy holiday season.
Lastly, we are hard at work at developing a paid subscription model for our beer loving guess, which will leverage our significant brand equity and award winning in house brewing capability in the craft beer space, well once again, providing tremendous value to our guests.
We're in the early stages of this initiative and expect to be testing. This program in the first half of next year.
At the same time, we keep exploring and developing new technology to reduce and in some cases eliminate pain points and bottlenecks for our guests and team members.
Our successful pioneering efforts with our App and proprietary online ordering enabled us to gain in early mover advantage in the delivery space, while being the first major casual dining chains to utilize handheld order devices has set up our time to get drinks and appetizers to our Thursday and hungry yes.
We know there are even more great opportunities through technology and innovation to make the sit down dining experience, even quicker and easier and therefore more accessible and enjoyable.
In this regard we've begun testing the ability for guest dining in our restaurants to use their mobile phones and other mobile devices to reorder drinks place pazuto waters and pay their checks without having to download our app.
In addition, we're developing the ability to use those same mobile devices again without the need to download an app. So order drinks appetizers and entire meals, if they wish while they're waiting to be ceded in our often busy restaurant lobbies.
While we continue to believe that downloading our apps delivers a lot of value to our most frequent guest and builds our customer loyalty database. We know that it is it is a barrier to greater adoption rates for some less frequent guests.
We're excited about the prospects for this new technology to solve the downloading an app to issue for these guess as we provide them tech enabled convenience features to make their dining experiences that b-j's even better.
Finally, I'm extremely pleased with the performance of our new restaurants, which continue to generate excellent Aro wise as they opened two strong consumer receptions and have set several sales records for openings outside our core, California, Texas and Florida markets.
The strength of our openings is a clear demonstration of the long term value of our brand and concept and more diverse demographic and food diverse geographies.
Importantly, this underscores our confidence in the growth prospects ahead of us.
Before turning the call over to Greg 11 for a review of the finances, let me summarize by saying that although we're not satisfied with our third quarter results. We remain encouraged by our underlying trends and initiatives in place to grow our sales and cash flow in the future.
We continue our momentum as the market share take or even as we lap the large gains of a year ago.
I will first and foremost by our ability to deliver great value to our guests while carefully driving healthy guest guest check growth required in this time of arguably unprecedented cost pressures.
This is supported by our improvements versus last year in every dimension of our net promoter survey scores, including value food quality pace hospitality cleanliness and finally over overall recommend.
All of the show continued improvement despite check growth pressure and difficult labor environment.
We have the best operating teams in the business and I can't thank them enough for their commitment to our mission of making BJ is the best casual dining concept ever.
Lastly, our work on value builders like our takeout entrees luncheon weaken extensions to our successful brewhouse specials.
Our unique ability to deliver a credible award winning craft beer club experience are off premise catering.
Along with our commitment to utilizing technology to improve our guest experience all present meaningful opportunities for us to grow our business and margins. The best way, we know how and thats by growing our topline sales.
Greg.
Alright, Thanks, Craig.
Before we get to the quarterly details, let me remind everyone that beginning the first quarter fiscal 2019, we adopted accounting standards update 2016, Dasha Q, which is four leases.
Requires us to put the present value of our lease payments on our balance sheet as a REIT of use asset with a corresponding lease liability.
New lease accounting standard also required us to make a onetime noncash cumulative adjustment to retain earnings of approximately 29 million a sale lease back is that we were amortizing in occupancy and operating costs over the term of the existing leases prior to the county update.
This is resulting in an annual increase in our operating occupancy cost of approximately 2.2 million.
This new accounting standard impacted our restaurant level margins overall operating margins by approximately 600000 in the third quarter or 20 basis points and a reduced our earnings per share.
Three cents for the quarter.
A reconciliation related to new accounting standard is included in today's press release.
Our total third quarter revenues increased 3.1% to 278.7 million driven by an approximate 2.9% increase in operating weeks and a 0.2% increase in average weekly sales.
Comparable restaurant sales were down three tenths of 1%.
This positive 50 basis point differential between our weekly sales average and our comparable restaurant sales is a direct reflection of the strength of our new restaurants.
This is even more impressive considering that over the last several years, our new restaurant openings have been primarily in the Midwest and northeast and not in California, Texas, and Florida, where we have greater brand awareness, which generally leads to higher weekly sales averages.
BJ strong new restaurant AG. These further reinforce and highlight our opportunity to double the platform and grow from 207 restaurants today.
Over 400 restaurants.
Q3 comparable restaurant sales were impacted by hurricane Dorian as well as a week long closure in September for remodeling of our big sales volume restaurant and Woodland Hills, California.
We estimate that hurricane Doran negatively impacted our comparable restaurant sales.
Approximately 20 basis points as Florida overall had negative double digit comparable restaurant sales declines during that first week of September .
After the storm past, our Florida restaurants return to the solid positive single digit comparable restaurant sales trends that we have seen this year.
Our woodland hills restaurants.
Our woodland Hills restaurant, which averaged over 6.5 million in sales per year impacted comparable restaurant sales by about 10 basis points due to its weeklong remodeling closure.
Therefore, excluding the unforeseen impact from Hurricane Dorian and the temporary closure of our woodland Hills restaurant, we estimate that our comparable restaurant sales would have been roughly flat with a year ago.
At the time of our Q2 earnings call in late July we noted that California comps had slowed down for us beginning with the first week of July .
For the entire quarter, California remain generally softer than many of our other regions, though we began to see an uptick in California sales toward the latter half of Q3 and here into Q4.
Looking below the topline our cost of sales was 25.7%, which is up 30 basis points compared to last year's third quarter and in line with our expectation.
As we telegraphed on the last call. The increase is primarily due to higher Proteus cost from avocados and menu mix related to our very successful tried to certainly.
Our slow rose try TEP has been so successful that it was our number one commodity spend for Q3.
Like our prime rib protein centric tried it sort of line specials have a higher cost to sales percentage, but also generate a higher average check resulting in greater gross profit dollars.
Labor of 37.5% for the third quarter Rose 80 basis points from a year ago due primarily to higher hourly average wages. There were some training and inefficiencies also in the quarter related to the completion of our goal standard kitchen systems and de leverage from Q3 is comparable restaurant sales levels.
Hourly wage growth in Q3 was in the mid single digits, which is consistent with what we've experienced in Q1 in Q2 at this year and I would expect it to remain in that range for the rest of fiscal 2019.
Operating occupancy cost increased 60 basis points to 23.3% from last year's third quarter. This increase is primarily related to higher delivery fees and maintenance costs related to our handheld server tablets as well as a 20 basis point impact related to the new lease accounting that I reviewed earlier.
Included in operating occupancy cost is approximately 6.4 million of market spend which equates to 2.3% in sales and is consistent with last year's third quarter.
Our general and administrative expenses, a 14.3 million were approximately 1.3 million less than expected as we reduce restaurant support center incentive compensation based on performance today.
In terms of capital allocation, we continue to use our strong cash flow from operations to execute our expansion plan and invest in our business, while opportunistically repurchasing shares total capital expenditures for the nine months ended October Onest 2019, or approximately 65 million and we continue to expect gross capex spending.
Cures for fiscal 2019 to be an $80 million range.
During the third quarter, we allocated 41.3 million to the repurchase of 1.1 million shares of our common stock and we returned an additional 2.6 million to shareholders through our quarterly cash dividend.
And as announced today the board just increase the quarterly cash dividend by 8.3% to 13 cents per quarter.
With regard to liquidity, we ended the third quarter with approximately 24.4 million of cash and $158 million funded debt on our 250 million line of credit which is in effect until November 2021.
With trailing 12 months adjusted EBITDA of $130 million are funded net leverage remains modest at approximately one time.
Before we open the call the questions ill spend a couple of minutes, providing some commentary on our outlook for the remainder of fiscal 2019, and some very preliminary thoughts on fiscal 2020.
Oh this commentary is subject to the risks and uncertainties associated with forward looking statements as discussed in our filings with SEC.
As we get as we begin Q4, we've seen an improvement in our comparable restaurant sales, which are currently positive 0.6% or six tenths of a percent.
Well sales are not where we want them to be is encouraging to see positive comps as we are going against last years, three dollar Penske promotion and a 5% comp sales in the month of October and for the last year's fourth quarter, we finished the entire quarter at 4.5%.
For those of you building models the holiday calendar is not as favorable as last year last year Christmas Eve Christmas New years, and new year's day.
Fell on Mondays and two days, which created a long weekend and more time to go out and celebrate for this year. These holidays move to the middle of the week that is Tuesday, and Wednesday, and new year's day shifts to Q1 2020.
New year's day is one of our bigger sales days of the quarter ended shift from Q4 2019 to Q1 2020 is expected to negatively impact comps for the quarter by approximately 10 to maybe 20 basis points, but will provide us with a nice start to fiscal 2020.
With regard to restaurant operating weeks, we're looking at approximately 2705 weeks in Q4.
Moving onto the recipe now I'm expecting cost to sales to be in the mid 25% range for the quarter.
Expecting Q4 labor to be in the mid 36% range, while we're seeing some nice productivity gains related to the learnings from our recently completed gold standard kitchen systems. These efficiencies are not yet enough to offset the continued industry wide wage inflation.
We are targeting operating occupancy costs in the mid 22% range for Q4 and that includes 7.6 million in marketing spend which is consistent with last year's marketing spend.
As we reminded you previously labor and operating occupancy cost as a percent of sales are highly correlated to weekly sales Leverages. Our weekly sales average is comparable restaurant sales growth.
DNA expenses for the fourth quarter should be around 15.5 million to $16 million.
Our preopening cost should be approximately 1 million for the fourth quarter and that's based on Q plan, New restaurant openings plus some preopening costs for the restaurants that are expected to open next year.
I expect the fourth quarter tax rate to be in the 3% range and that should be more in line with our current annual effective rate the yen thats out before any discrete items that may occur diluted shares outstanding should be into high 19 million range for the quarter.
Looking ahead to 2020, we are currently finalizing our financial plan, which will be presented to our board for approval in December so while we do not have an approved plan. Let me provide you with some managements preliminary expectations.
We are targeting eight to 10, new restaurants after 2020 for modeling purposes today I would use nine restaurants.
We currently anticipate opening one new restaurant toward the end of the first quarter and up to three restaurants in the second quarter with the remainder in the back half of next year.
Moving on to some other metrics for 2020, well, we have not yet finalized menu pricing or our promotional calendar is our new menu introductions based on our current thinking I would expect our average check growth to be into 2% to 3% range as we want to balance offsetting inflationary pressures, while protecting and promoting our overall value proposition.
Yes.
Please note that this is as of today and is based on current expectations for commodity prices labor rates and other inflationary factors.
With regard to our preliminary commodity basket expectations for 2020, we currently anticipate costs were Agra bat aggregate basket to rise between one and half can 82% next year.
We expect to lock in most of our commodities for 2020 over the next couple of months and we'll have a better idea of any commodity variances. When we report Q4 results in February of 2020.
With regard to labor will absorb another California minimum wage increase as well as additional minimum wage pressures another state and continued wage pressure due to the historically low levels of unemployment, we expect wage increase in the 5% range for hourly positions and that's pretty consistent with 2019.
Therefore going into 2020, I would expect that labor will continue to be a difficult cost to leverage both for us and the industry at large and from our vantage point the best way to leverage labor is to drive results from our topline sales initiatives.
We are targeting operating occupancy costs in the high 21% to 22% range next year and that should include approximately 2.3% of sales and marketing.
On the DNA line for 2020, our goal as it's always been is to continue to gain leverage as we grow.
As we said before a portion of our DNA is related to growth and therefore, it's going to be based on opening teams recruiting cost travel our managers for our new restaurants.
Our income tax rate for 2020 should be in the 8% to 10% range.
So in summary, bjs remains a solid free cash flow generator, but the flexible balance sheet significant long term, new restaurant growth opportunity and a strategically positioned within the industry to continue to take market share.
We have consistently outperformed the industry. Thanks to the strength of our brand in our gold standard level of execution.
Our continuing focus to drive sales around new menu items value platforms, and technology will further differentiate b-j's and move us forward.
We remain confident that these initiatives coupled with our disciplined execution in the active management of our capital structure will delivered sustained long term appreciation for shareholder value and we look forward to the balance of 2019 and 2020.
That concludes our formal remarks, operator lets please open the lineup for a few questions. Thank you.
Thank you in ladies and gentlemen, if you would like to ask a question. Please press star one on your telephone keypad.
Speakerphone please.
MS turned off to allow your signals return.
Once again star one for questions.
First question today from John Glass Morgan Stanley .
Thanks. Good afternoon first just back on the delivery comments did so did delivery actually grow this quarter to shrink I think your comments in July suggests there is little soft as was unclear was actually contracting and how do you think about the competition delivery space is it the new barring guilla operators that are entry.
Ring and that is whats hurting you relative to them or is this just a broader comment that there's just a dilution of many brands and they're one of many that are kind of competing against you know those platforms.
Oh, thanks, Thanks for asking about John though no, we're still have solid double digit growth and delivery and and.
So, it's just com calm down versus where we're seeing it seeing a year ago.
So that's the answer to to that part and and the answer is the ladder in terms of I don't think it's any specific.
Entries you just look at the is pure numbers of folks playing playing in these certain market.
Marketplaces, third party marketplaces, and and and the promotions there and it's just it's just a lot more crowded.
Okay, and then just maybe I know you'd outlined a number of initiatives to drive sales, including focusing on some of the new some new value offerings and then there was some longer term I think longer term pieces around beer club digital and mobile ordering without the app, what's the sequencing of that or or or some of those value offers in store now and those should have some effect on the fourth.
Quarter are they coming later as you have to refine them are fitting into the marketing calendar. How do we think about sales drivers over the next a one to two quarters.
John It's Craig 11.
Yes, those the value platforms are in test right now.
So we think about for Q4, we're real excited about catering that we talked about which is a different side of things. We've also worked on the in restaurant catering parties were also as Greg mentioned from a value standpoint, we do have that take home offering, but I think were seeing but we're going to be doing or are doing actually is there way of saying it is testing different value.
Platforms here in this quarter and through the ended the year for next year, along with the beer cloud in a couple other initiatives that we've talked about but looking for Q4, it's going to be around this takeout offering as you're going to be around some catering and some other things that we're doing and getting ourselves lined up I think really for the lunch and some that we can specials into 2020.
Yes.
That's helpful. Thank you.
Next we'll hear from Nick Setyan Wedbush Securities.
Hi, Thank you Greg the 0.6 quarter to date have any impact from like that way fires or anything else.
No, it's probably got the impact from the Dodgers.
Getting knocked out early here in the southern California market, but not really I think.
The fires have been somewhat contained going into at least this week and I know this week I know Nick your local here on probably is going to be a little bit heavier in regards to wins and things like I left.
Watch out for that and you know.
Basically wish that there frankly doesn't have any major fires to displace anybody.
And so is it safe to assume that the margin commentary for the quarter is predicated on the current quarter to date contract or are you assuming.
Yes.
Compare for that for the next couple of months.
I see a little bit about.
Hi.
It goes back and forth, we don't necessarily.
Q2 things first of all we don't give and we've talked about this before pure comp guidance on the corridor. We tell you where we are to date and I do a lot of my analysis on cost per week and things like that.
In regards to when I think about where our numbers are going to come in from that standpoint, so while our comps do get easier from that standpoint, I also that there are still labor inflation, we know where commodities are going and things like that to try and give our best estimate of that timeframe.
Fair enough Im just lastly, any more detail around the subscription model for beer.
I mean anymore color on that would be would be very helpful.
Okay.
Yeah, we're not we're not at the point where.
We want to disclose that Nick for.
Host of reasons, including competitive competitive ones, but I would reinforce when you look at.
We've been we've been brewing beer for well over 20 years.
I think collectively have probably one more.
Significant industry quality awards, the and then certainly any been a chain restaurant out there that we think we can bring.
Some pretty unique.
Offerings and value to two to our beer loving guest here so.
Our well we're excited about it it is still.
You know a bit early and as we mentioned.
We will be ready to test and.
It will be in California in the first half of next year.
Thank you.
Next step Jeffrey Bernstein Barclays.
Great. Thank you very much.
Two questions just one on the restaurant margin just wondering whether internally you.
Maybe set some sort of theoretical floor, where you say this is where we're willing to let it go too, but perhaps not further whether it be by taking incremental price or buy more cost cutting obviously as comps are to come by well maybe on the flip side, you just let margins slip a little bit to protect the.
Trust with the guest from the team members that you mentioned earlier just.
Frame, how you think about protecting that margin going into 20 with the cost pressures high.
Hey look I think.
There is no there is no magic number.
They're Jeffrey theirs.
You know it it all depends on the environment and Kim.
Okay competitive environment.
Out there but.
I can tell you.
It's hard to imagine a scenario I can't imagine, Sarah where I'm, CEO , where we're going to risk the long term brand and health of our concept.
You know over over over margin in the short term now having said that.
What we tried to communicate today and have consistently as we work really hard at going after the cost structure. So we can have more flexibility and and drive value and take less pricing in environments. Like this but also looking at structural ways of although we.
We're not investing in technology.
As a cost cutting measure.
You know if some of that some of these things that we're working on our successful it will take some pressure off of of labor at the same time, our number one priority is improve the guest experience in speed and convenience all the things we talk about but you know the the the world of.
Plentiful hourly labor I think this is not a temporary issue right. So we are looking at structural ways to improve our concept that will enable us to.
Take some pressure.
Our system at our concept structurally.
I think also.
Jeff Real quick as you talk to those things were worth.
Diligent and religious.
In regards to our execution on the cost structure and our business.
And really it's a function at driving that topline sales.
Into our numbers, even when you look at operating occupancy that has been going up.
You pull out the change in accounting on this last quarter, it's up a little over 1% I think it's like one and half the sand you take 600000 divided by the weeks take the numbers out, which I give everybody you'd be surprised that our ability to kind of manage those things and even as you look at.
Ranges and start dividing it by the weeks versus last year, you started to see those things come through which is around initiatives like our gold standard kitchen systems operating I can say get around items, where we do reverse auctions and so forth from that but ultimately as you saw even last year. The way you drive margins is by driving topline sales in it.
Greg Trojan talked about we're not going to go down to slippery slope of trying to add.
DAMI down the concept so to speak or try to save our way to success that the gas will turn on our business when we add industry, leading guest traffic per square foot. So we're going to continue to work all aspects of our business to do what we can to drive topline sales and continued execution of the cost side.
Understood and then my other question would just on the the comment you made about the sales of the new units being strong which is encouraging and you talked about kind of outside of California, Texas and Florida. Just wondering how you think about the profitability on those stores, presumably as you open up one or two and a new market the efficiency would seemingly.
The less than in your core markets. So however, you think about just wondering how an order of magnitude how you compare new stores profitability, which presumably we'll see more new stores in these newer markets relative to your core.
Yes, the profitability on his new restaurants generally are going to be as good if not better than some the.
Existing restaurants, mainly because your cost in the labor line are different.
This compares versus California, using that for example versus some of the areas in the kind of mid west. So generally we are able to get a better from a margin standpoint, there are still not doing some of the California sales levels.
Which is always then.
One of the differences at BJ, but seeing these new restaurants hitting a these that are summers in the 5 million plus range for our business.
Is exciting and as we get larger we get more scale efficiencies around whether it be.
Commodities or whether it be around the marketing side as Kevin is game work to continue to build our brand awareness. So we don't look at these restaurants as an area that generally has a lower return than our existing restaurants.
Helpful. Thank you.
You're welcome.
Alex Slagle from Jefferies.
Thanks for the question.
Stepping back a little bit you had a pretty big buyback during the third quarter and higher debt levels, and then plans to accelerate unit growth next year. So all that signaling a lot of confidence in the business for 2020 and.
Certainly appreciate you're outperforming your peers and good strong guests metrics and the new store value in this but what are you seeing that drives your confidence when thread that broader casual dining landscape seems to be perhaps a bit softer and the cost environment continues to escalate.
Well look alcobra, we're not you know.
As confident as as we are about our concept we're not forecasting.
The dramatic turnaround at a party next year industrywide either but.
Given all the data that we have in the.
Momentum generally that we're seeing in the business and confidence in the concept where think we think we're being balanced about the approach here I mean, we're not coming out and saying we're going to open 15 restaurants next year or lever up to three or four times here. So.
I agree with your comments around our confidence and optimism, but I think we're still being measured in our in our approach and not taking.
Undue risk in any particular aspect of the plan and our capital allocation.
Certainly I agree.
And that dynamics in California, I mean, any unique competitive issues impacting you or.
Could you talk about the step seat to from a marketing standpoint could try to drive that business and the third quarter and what your plans are for the fourth quarter to try and credit are there.
Well you know we talked about a few of them going going forward I think you know in general it's around.
Formula that is.
Basic and.
For us and I do think it's about imparting value and I think striking this balance of look we everyone. In this business has to drive some guest check right.
And those that can do that without sacrificing fundamental value it actually add value to the equation I think are going to be going to be the winners here. So.
All the things you heard us talking about Greg pointed out in the even in the fourth quarter here.
I think these these take home entrees, our are great values and actually will also.
Part of our thinking was also they'll help see trial for our takeout and delivery business as well when people see.
Because there is a select number of entrees, namely five.
Here that carry really well and reheat really well so.
Part of the program is that these kind of value equations.
We will will generate a lot of trial in our business, but fundamentally it's around value and striking the balance of being able to still figure out how to drive drive growth some check to offset this wage rate and other inflation, but I think thats really the keys, how can you keep driving great value and.
And deliver the experience and and drive some checked offset inflation thats really that's really what we're trying to do here.
Got it thank you.
Okay.
Our next question is from David Tarantino Baird.
Hi, good afternoon.
First question for Greg 11, I think.
Looking into 2020.
Mention 2% to 3% check growth I was wondering if you could.
Comment on what level of traffic performance, you think you would need to hold the restaurant margin structure flat.
Yes, David I don't know, if we havent answer on that quite yet because we haven't put together all of our financial plans and taken in all the metrics in the business, but I'm not I don't know if next year will be any really different than this year you still got this the same wage rate inflation out there.
Which is really the crocs I think.
Our business.
This year in regards to.
The ability to not leverage it likely like and I think going into 2020, you see that same dynamic playing into the business. So we said this year that probably 3% around a number that we would think about and that's kind of even think about that being a overall comp of around 3% I guess, so I probably go with that.
But it's a little early until we kind of put all our in place and kind of roll up our plan in total.
Alright, okay. Thanks for that and then I.
I guess Greg.
Trojan.
Sure you laid out sort of several factors that I think drive comp performance, but one of the thing.
That was on on your list was marketing and I just wanted to know if you could speak to what role marketing might play and driving better traffic performance in this environment and and whether you think more spending behind marketing.
Of any value as you move into.
Morning 20.
Oh, good good question and I don't leave.
No I could go through the whole.
List of what we do everyday right that is really.
Fundamental to driving driving sales and success on our and our business. So the interest of.
Time, and hiring was extremely new and different.
So I don't leave leave marketing out for obvious obvious reasons. So thanks for asking about that.
And.
So you know as part of the planning process of of every year, we do we do look at that and.
And we'll end the process of evaluating opportunities to spend up productively again, we've done a bit of that over you know through last.
Number of number of years as but.
As weve.
Increased our level of spend historically from the middle like one and a half kind of percent range and into the two to low 2%.
Percentage of sales today.
But the short answer is we're looking we this is when we start looking at opportunities opportunities to do just that and.
And.
If we if we identify.
Identify those will.
We'll we'll pull the trigger.
Fundamentally awareness and particularly as newer markets is still one of the bigger opportunities. We havent BJ as you know the we have mentioned this before I think maybe even the last call around.
We do a periodic.
To use study, where we measure our are not just our brand awareness, but the brand attributes.
We've been doing 10, and the team has been doing a nice job and I've seen some nice meetings, both awareness and brand strength. So.
We know we know spending will Ken Ken speed up, particularly the awareness part of the of the equation. There. It's just a matter of with our.
Amount of density of some of these newer markets the ability to supported with a.
The EBITDA in the other than any other side here. So it's always a balanced but good question.
Real quick Hey, David.
And even though we don't get into specific set of things like in this last third quarter, we increased our kind of digital and loyalty into California.
We've seen some nice improvements in our California trend. So we have a lot of tactical things that we do within the quarters in regards to to driving our business as you think about the fourth quarter. You know, we all thought we talk about it more from a menu standpoint, but the takeout items that Greg Trojan mentioned thats going to be all supported by marketing and getting that awareness.
Got to drive our business and as we go into that planting season, we put together that entire plan for next year, Yes, I mean, I think I'd, just add kind of holistically to that question.
We're constantly evaluating our market strategy in our media mix strategy I think we've got an opportunity in 2020 to look at that media mix with again the emerging the changes in the medium.
Place in terms of how you reach our guest taken talking with them. It gives us some opportunity to possibly expand as some other markets.
Our our loyalty database is a huge asset to us I think were upwards over 20%.
Our sales going through that and we continue to test and learn in areas of segmentation.
Lastly frequency plays on the road et cetera, and then I think into local restaurant marketing space. We've been so good that in the past I still think there's opportunity for us to along with operations too.
To do a little bit more outreach locally whether that be paid Don paid.
Earned type of initiatives together, along with partnership with RG EMS and are deals I think there's a lot of upside there. So that's what we're looking at today for 2020.
Thank you very much.
Our next question will come from Chris Ocull Stifel.
Thanks, Good afternoon guys.
Greg This your sales investments or sales initiatives required quite a bit of PNM investment just based on the initiatives. You described for next year what level of PNM investment do you expect to make next year.
I think a big PNM investment this year was really around our gold standard kitchen systems.
And then we also rolled out tried chip. So those are kind of that did too that probably impacted that's the most earlier in the year and.
As you mentioned on the call the Gs Caspian behind US we feel pretty good about what we're seeing out of those results I think next year, it's a little bit less in regards to that while we're going to do some continued studying around.
Ways that we can be more efficient within our restaurants in regards to our service model.
Both on what we call the other side of the line and within the dining room and again, our restaurants are big it takes a while for us to get from that fine dining from dining room, three as we call. It into the kitchens. Those are all areas that maybe we can be fast tracked so we're going to do some consulting an analysis around it but I don't see any of that kind of.
Impacting our business like it did this year.
As we work through some of the technology side of things as Greg Trojan mentioned, especially around the ability to use your mobile phone.
Our ordering within our restaurants are even paying without downloading the app I think it actually gives us more efficiencies with not really to investment from at training standpoint that we saw this year. So.
No I don't think they're going to be as significant as they were this last year. This last year 19 is probably a little bit more like 70, and then we got the free to that labor coming through sort of second half 17, and 18 in the first half a 19 and I think what we've done this year actually sets us up well for next year.
Do you expect to any significant investments need to be made to start up the beer subscription service.
Not inside the restaurant as much that's going to be a lot of work on both the corporate side of things and IRS restaurant, our brewery team.
Yeah, we're lucky in the sense that we've got five operating breweries. Some of them are specific R&D breweries, where we went out a lot of gold Medal awards, and we're going to take some of those gold Medal awards and other things and really develops I'm I consider some unique creative.
Is that our subscription members will be able to get.
Jimmy as much in the restaurant, but it may be hard Capex, I mean, not PML investment, Chris there'll be some of some of that in terms of bottling carrying lines et cetera, but but.
I don't think it'll be.
A little bit of DNA, but.
I think so nothing from a as Greg said, a restaurant perspective that would be super significant Chris I do say.
Real quick the takeout offering that we're doing here in the fourth quarter and depending on the success of that those could add a little bit of labor because you're you're making some items ahead of time youre getting them, you chelan them down and they're ready to go and you can sell them right away, so theres going to be some.
Blips in curves on things like that but a lot of that's normal in regards to rolling out new menu items versus the investments we did this year.
Okay, and then I know the company struggled to reach its check growth target, especially the beginning of this year. What gives you confidence that you can grow the check at the rate 2% to 3% next year.
Well that was the first quarter phenomenon that we've been through a lot. So I think.
Subsequent to frankly, even into the last part of the first quarter when we.
So corrective action around the promotional calendar we feel.
We feel like we've struck a good balance there and when we say we want to be.
At 3%, we're not going to where a 2.7% I think for this.
This quarter.
We're not dialing in that in exactly we just we want to be in that.
But that range and we've been pretty consistent about it so and like I said I'm I'm.
Feel very good about the fact that we're driving better value scores and.
Been able to do that with that level a check growth. So.
That's why I think.
The menu pipeline is looking.
Strong as well and and Andrew I think we'll continue to build on the success of try to just like we did in prime rib.
In fact, we're seeing prime rib sales grow again, even after some initial cannibalization from from try chips. So.
So look.
Yes. This menu that we have is is first of all one of the most important consumer attributes was our variety, but it gives us the ability to pull levers from a menu perspective that a lot of other concepts don't have.
The same breadth to be able to do that.
And then just lastly, keep Greg do you think the push for catering during this holiday season, given its really year olds first go at it do you think it can be material boost to the comp sales this holiday.
I think it can be a help but I wouldn't I wouldn't honestly I don't think it's going to be a game changing material boost given the small base that is starting out as I think it's it's going to be a bit of a.
Medium slower slower build Chris and it's not it's not at the same level of delivery I think it's the right thing to be doing and we're encouraged to be seeing that kind of.
20, something percentage growth, but it is it kind of word of mouth habit.
You know kind of kind of forming behavior, that's going to take a little bit of time, So I think.
You know I wouldn't call it a.
It's not an instant game changer.
Great. Thanks, guys.
Yes.
We'll take our next question today from Matthew Difrisco Guggenheim.
Thank you had a question, but just a couple of clarifications first I think back on the land on this call last year, there was a shift to the presumably day promotion, which maybe you guys characterized a quarterly comp at 4%, but now you're saying a year ago October was 5%. So I'm assuming that 5% is all in its got the bazooka shifts.
Is that correct, then it's five and it slows down to a full quarter four and a half.
That's correct last where apples to apples in regards to kind of our our quarterly free position today.
Okay, and then if I were to look at sort of if you could sort of and bundle the incremental investments the gold kitchen standard as well as.
The handheld you called out on the previous call also I think youre, saying those were all in about 10 to 20 basis points are so incremental to the.
Occupancy and operating line I'm curious, how what are we lapping in the fourth quarter can you remind us when those started when they unwind and assuming that the majority of those are behind us as we leave the year and maybe even some time in Fourq you.
No I'm not quite sure I understand your your question our handheld we rolled out in 2017, well I think you're talking about the the maintenance the main coffee preferred.
Right.
So we start to laugh that I guess here in Q3 in Q4 of a year ago.
That I will be in Q4, Okay, and then number of stores that went through I think you said 140 stores in the second quarter did the new kitchen.
And that takes a little bit of training and a little bit of.
Incremental labor hours sort of thought you would have had in the third quarter less of a drag from that as well. So it was less than 10 basis points are so that you called out in the second quarter.
I would yes.
It would be a doubling its you got your initial training can you probably about a four weeks or so to get everything and habits. The way we want them and then we start leveraging the business going forward from that standpoint, So Q2, and a lot more of that initial training that initial cost.
In Q3 had cash a lag period that went through it and then we're putting a lag period, we've seen actually some nice labor productivity is really going into September and.
I think should give us a little bit of it at a tailwind here in Q4, but I wanted to be clear, it's not enough to offset kind of mid single digit out wage inflation that we see.
In our restaurants.
Completely understood, Okay, and then just a better understand.
On trade promo by one take one.
That's going to be throughout all of the stores or is that just being introduced first in California in the quarter.
So we're doing that we're doing that in all all restaurants.
Okay, and I assume that is structured as far as the price point open entre that you'd have to buy and the.
The products that you're allowed to take home it would be margin accretive.
As well as Chuck accretive.
Well, yes in terms of margin and.
Sales accretive.
I'm not sure what you meant by the.
Front end, where we're limiting the offering to five entrees.
To give it to get a little more specific so that we can control both quality intrepid et cetera, but.
But the answer is yes, we think it's a great check builder.
And I think ultimately a nice traffic builder as people.
I think people will enjoy the value in the convenience to for subsequent Neil.
For sure Okay. Thank you very much.
Welcome.
And next step is Matthew Difrisco, because im sorry next step is will Slabaugh Stephens incorporated.
Yes, thanks, guys.
Follow up on delivery, you mentioned that growth it slowed somewhat and you seem to be going about that business in a more measured and profitable way could you give us an update on how you're thinking about the overall profitability of that business and if theres been any change in how you think about the incrementality of delivery.
No or will sorry.
Not really I think the the change really has been in this and the promotional spend and effectiveness of that spend but.
The foundation, you know economical economics of Ah still incremental sales.
It Theres still a lower percentage margin, but it's still delivering.
Incremental dollars we're leveraging.
Against our fixed costs in our in our restaurants. So our view is still optimistic and and we look forward to continue to grow the grow the channel I, just think we're making a prudent decision to not jump in.
Crazily on when the economics are we think even more challenging than they were a year ago in terms of the promotional spend I think well one of that comment. Thank Craig made on the call was.
After Q3, we were pretty much in AD delivery in all of our restaurants last year. So as we are in Q3. So now from a comp sales standpoint, it's not so much adding restaurants.
And what we're seeing out there is the marketing cadence by others as well as ours. When you do a marketing initiative you don't get quite the lift that maybe we saw a year ago. So we want to be prudent and ways to grow that that is profitable, but the overall underlying business delivery is solid for us it grew.
Double digits in this quarter and we think it's important part of our business.
Understood.
And then.
Other one if I put on on the gold standard.
Initiative, I know Theres, a lot going on behind the things that we can't see what I was curious how we should think about a point at which we might expect to see some sort of pinedale benefit whether that be improved throughput in sales or maybe cost efficiencies are you. This mortgage we need to do to sort of keep up and maintain our best talent.
Well one of the things I've mentioned that I don't think we mentioned in our prepared remarks will it reminds me is we are seeing an improvement in turnover in the kitchen.
That.
I think we mentioned was early last last.
The last call, but we're continuing to see that.
And I'd I'd say that its.
The.
It's a meaningful.
Momentum change that.
We we certainly.
I think is one of the most important reasons. We went after this GSK us initiatives and make our kitchens.
Yes, fundamentally better places an easier places to work so.
So we're really happy about about that aspect, but you know all of our key.
Metrics around not just efficiency, but order times and and throughput et cetera.
Or are headed in the in the right direction again. This isn't this isn't going to change productivity by.
Orders of magnitude, but but look we're in the business of.
Constantly improving you know.
Everything that we do and we think this is taking a nice step forward.
From a kitchen perspective.
Yes, if you if we.
Yes.
I think we will show.
Going into 2020, you'll see the leverage there and again I think.
That's one of those areas that people somehow on the other side I think you kind of mentioned a well not seeing everything don't don't quite understand we're not going to ask our restaurants outside and have a server hat run eight cable stations are 10 table stations, we're not going to get rid of somebody at the hospitality desk, we're not going into.
Ask our kitchen people test if you're on piece that did you pizza and now do salad those things don't make sense fresh you're not going to grow your sales by doing things like that so we've got a basically put things in that we can be faster and more productive that and that's going to allow us to grow sales and that's always been armani mantra BJ and that's how we're going to go after our business.
We've seen too many other companies that get on these calls they talk about the fact that we're eliminate eliminating X y and Z position and all of sudden they've got a big line at the front door, because there's no buddy taking care of via the guests as they walk and they've got a server that is sweating, because they've got 15 tables to take care of we're not going to go down that path.
I think as Greg mentioned early on you know ultimately, it's about serving having any better quality dining experience, which is what we're about a DJ.
Hi, Thank you.
We have time for one further question will come from Sharon Zackfia William Blair.
Hi, good afternoon, sorry, if I Miss this but could you tell us what off premises lives as a percent of sales for the quarter.
And then kind of going to the beer subscription service is that get any use as an opportunity to drive traffic into the restaurants, meaning you know highly encouraging customers to come pick it up or is that something thats more of a traditional kind of be over the month and it's going to be shipped to the customers.
It is.
It is much very much weighted towards traffic in the restaurant.
Okay.
And then on your first where in that 10% to 11% total off.
Okay. Thank you.
You're welcome.
And ladies and gentlemen that does conclude our question and answer session and it also does conclude our conference for today, we would like to thank you all for your participation and you may now disconnect.
Thank you everyone. Thanks.