Q2 2022 BJ's Restaurants Inc Earnings Call
Please standby.
Good day and welcome to the Bj's restaurants, Inc. Second quarter 2022 earnings release and conference call. Today's conference call is being recorded at this time I would like to turn the conference over to Greg Levin, Chief Executive Officer and President. Please go ahead Sir.
Thank you operator.
Good afternoon, everyone and welcome to Bj's restaurants fiscal 2022 second quarter Investor Conference call and webcast.
I am Greg Levin, Bjs, Chief Executive Officer and President.
And joining me on the call today is Tom <unk>, our Chief Financial Officer.
Excuse me after the market closed today, we released our financial results for the fiscal 2022 second quarter you can view the full text of our earnings release on our website at Www Dot Bj's restaurants dot com.
Our agenda today will start with Rhonda Schirmer, our director of SEC 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 Tom will provide some commentary on the quarter and the current environment. After that we will now open it up to questions. So Rolla. Please go ahead.
Thanks, Greg our comments on the conference call today will contain forward looking statements within the meaning of the private Securities Litigation Reform Act of 90 95.
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 undue reliance should not be placed on such statements.
Our forward looking statements speak only as of today's date July 21, 2022, we undertake no obligation to publicly update or revise any forward looking statements or to make any other forward looking statements whether as a result of new information information future events or otherwise unless required to do so by the secured.
These laws 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 Greg.
Okay.
Thanks, Rhonda and Q2 Bj's generated the highest quarterly sales in our history in fact, we beat the prior periods.
Record set in the second quarter of 2019 by 10% we accomplish this by staying true to our key principle at Bj's. We are sales drivers first and foremost we.
We delivered four 8% comparable restaurant sales growth compared to Q2, 2019, which is our best quarterly result during the pandemic era. We also added more restaurant operating weeks for two additional new restaurant openings during the quarter, both of which are off to a very strong start <unk>.
Additionally, we finished the quarter with our staffing levels near full capacity compared to 2019 levels, providing us more opportunity to recapture dining room traffic and drive further sales growth.
As we have all experienced accompanying our sales growth was multi decade high levels of inflation.
Inflationary pressure on our operating costs accelerated in the second quarter and is now running ahead of our earlier forecast and remains ahead of the menu pricing. We have taken since inflation began to really ramp up in the second half of last year.
As we have shown throughout the various challenges presented during the past two years, we will remain agile and adjust our business for the current environment.
And in a moment I will outline steps, we have taken to manage our business given the current inflationary backdrop.
Another aspect of high inflation is its impact on consumers as pocketbooks are pressured.
In the second quarter, we began to more closely track the underlying patterns of our guests. So we could identify any shifts in our guest behavior early.
We measure not only overall sales and traffic trends, but deeper layers such as how often certain categories of guests visit and what is being ordered from our menu and we review and analyze this data regularly.
Good news is that to date through July we have not yet.
Under any measurable changes in our guest behavior.
In fact traffic patterns are following a typical seasonal trend and our guests are continuing to enjoy the usual amount of appetizers drinks and desserts in our restaurants.
And we haven't seen any uptick in the usage of our value offerings, including our happy hour and daily Brewhouse special menus.
If a consumer pullback does occur and impacts the industry, we expect that BJ strong value proposition would lead to a better overall relative performance.
Furthermore, we expect that any broad decline in demand would be accompanied by relief in input costs, which could benefit margins.
So as I've just outlined we have not seen any changes in our guest behavior to date, but we will continue to monitor and if need be take appropriate actions to effectively manage any changes in the environment.
Returning to sales growth as I outlined in detail on our previous quarterly call. We have a comprehensive set of strategic initiatives that offer the best path forward to a meaningful sales growth.
These sales initiatives over the long run will allow us to leverage the fixed cost inherent in our business to drive margin expansion.
During the second quarter, we made considerable progress on both the near and longer term sales catalysts.
TJ is most impactful near term sales driving opportunity heading into the second quarter was improving staffing levels.
Our restaurants deliver we hired more than 6000, new hourly team members during the quarter and are now approaching pre pandemic staffing levels in most restaurants.
Approximately one quarter of our restaurant team members have been hired in the past three months.
As such our second quarter labor costs reflect both increased training costs as well as lower efficiency as these new team members learn bj's processes.
I expect these investments will deliver a quick payback in the coming quarters as we are able to build even more sales while gaining labor efficiencies.
Another area of growth within the four walls of our existing restaurants is our remodel initiative there.
The early results of this initiative continued to be very encouraging we have now added additional seating capacity and for restaurants, and we've had similar success in each with a very attractive return profile.
With the return profile, we have seen to date I am increasingly confident that remodels will be an important part of our capital allocation strategy going forward, we will continue to analyze and refine this plan through the balance of this year, which will incorporate into our 2023 capital planning.
We also made considerable progress in the quarter on initiatives that will drive future sales.
For example, we continued our work on expanding our high potential catering business.
We are now testing a more high touch catering experience to help further expand in the corporate catering channel, which tends to have more recurring orders with higher check average in the second quarter, our catering business was up more than 70% over 2021, and we have our sights set on exponential growth from current sales levels.
Yeah.
Next we've reached significant milestones with some great best in class guest and team member technology we.
We developed and are piloting a digital order tracker, so guests ordering takeout curbside and white label delivery can now track their order status in real time.
We have integrated this with our well received existing digital curbside check in portal.
You said this strong guest sentiment is very positive and then automates tasks that were handled by our team members.
We plan to roll this out more broadly in the third quarter of this year.
Another key initiative is our digital call ahead wait list.
Enhancements and are testing various versions using AI to determine and communicate accurate table wait times to our guests through digital and automated voice channels.
This is another example, where the tech helps both guests and team members since the current process is slower and more labor intensive.
We strive to empower guests and team members by providing technology at the right time and not tech for <unk> sake.
We also recently introduced daily pay for our team members, allowing them to get paid as early as the day. Their wages are earned our team members loved this option, which fits with our strategy to find innovative ways to differentiate bj's in the talent marketplace and be the employer of choice in casual dining.
Yeah.
Sales is always a key focus as topline growth results and leveraging fixed cost with which expand margins and result in higher dollar profit.
Though in the current environment with high levels of inflation. We are also maniacal about identifying quickly testing and implementing margin expansion opportunities throughout our business.
We are careful to not impact what drives our guests love for Bj's, which keeps them smiling and coming back, including our gold standard level of service gracious hospitality food quality on par with or better than much more expensive restaurants, and our high energy like new first class restaurants.
With respect to food costs, beginning in July we changed certain pack sizes for some items to more common sizes, which brings cost savings.
Also we are testing slow roasting, our own chicken wings to drive cost savings.
Let me tell you because of our slow roast ovens. These products are delicious and early guest feedback is very positive.
We are also evaluating different sizes and cuts of key inputs, such as chicken breast salmon and avocados that would be less expenses to procure.
We also have opportunities in both labor and operating occupancy costs on labor now that the majority of our restaurants are fully staffed and our teams are getting their sea legs. We can begin driving improved efficiencies around our ideal staffing levels, while reducing training and overtime costs.
On operating and occupancy costs, we continue to evaluate how we buy our chemicals linear and glassware and take out packaging as well as many other items.
While not everything we test will meet our high standards I am very confident we have a number of meaningful near term margin enhancing opportunities ahead of us.
The cost saving opportunities identified to date could enhance restaurant margins by as much as 200 basis points.
So actual savings will depend on which opportunities we decide to implement following testing.
As we mentioned in previous earnings earnings calls, we completed a deep dive into our guest research that has informed our menu strategy going forward, we know guests come to Bj's for food that delivers the comfort are that familiar with a brewhouse twist.
Based on this research we will begin testing a slightly smaller menu focused more on our core brewhouse favorites and key differentiator differentiating items later this fall.
The slightly smaller menu allows us to focus on our guest favorites and improve our operating efficiencies.
And no inflation and margin conversation would be complete without discussing menu prices.
Given the acceleration of inflation throughout the quarter in our input costs. We are now scheduled to take an additional 2% of pricing round in early August .
This follows a one 4% of menu pricing taken in early June .
In aggregate our pricing is still behind the current level of inflation. We will continue to provide strong affordability as we manage our good better best pricing strategy. For example, we will continue to provide our guests with our lunch specials, starting at $10 in certain markets as well as our daily brewhouse specials at.
At the same time for guests that want to indulge in some of our brewhouse favorites, we have items like our prime rib and double bone in pork chop.
During the second quarter, we opened new restaurants in San Antonio, Texas in Framingham, Massachusetts.
We have now opened three new restaurants, this year, increasing our footprint to 214 locations.
We are very pleased with the performance of these new openings, which continue to demonstrate that guests loved the bj's concept in both new and existing markets.
We continue to expect to open up to five additional restaurants in the second half of this year.
Those supply chain constraints could impact our actual opening dates.
As I stated earlier in my remarks, we are very encouraged by the early results in our restaurant Remodels, which have delivered strong returns by driving sales through added seating capacity.
As we assemble our 2023 capital allocation strategy later this year I believe remodel investments will have an important role along with a measured approach to top quality new restaurant openings with both initiatives focused on return on investments.
I also envision that we will enter without we will reintroduce returning capital to shareholders once conditions are more normalized.
In summary, we are focused on a comprehensive set of initiatives initiatives aimed at significantly increasing our average weekly sales.
Growing our restaurant margins and continuing our national expansion with a controlled pace and top quality sites with the goal of growing BJ sales to $2 billion and beyond and delivering meaningful earnings growth and shareholder return.
In the meantime, we are incredibly optimistic that guest affinity for our brand and menu offerings, coupled with the trajectory of our business and current growth and margin enhancing initiatives will enable us to achieve attractive near and mid term growth and margin objectives, even in the face of the challenging.
<unk> currently presented.
In closing I would like to express our appreciation and gratitude for each and every one of our team members, who remain committed to making Bj's gold standard in the casual dining industry and it's all the new team members that recently joined Bj's welcome to the team.
Now, let me turn it over to Tom to provide a more detailed update from the from the quarter and current trends Tom.
Thanks, Greg and good afternoon, everyone.
I will provide details of the quarter and some forward looking views. Please remember this commentary is subject to the risks and uncertainties associated with forward looking statements as discussed in our filings with the SEC.
For the second quarter, we reported total sales of $329 7 million or sales increased approximately 14% versus Q2 of 2021, and 10% versus Q2 of 2019, which makes it our highest quarterly sales ever.
On a comparable restaurant basis sales increased by 11, 7% compared to Q2 of 2021 and increased by four 8% compared to Q2 of 2019.
Q2 sales improvement both in comparison to prior years and seasonally led to a quarterly sequential improvement in restaurant margin to 11, 9% compared to nine 8% in Q1 of this year.
There'll be inflationary environment limited the margin upside.
Adjusted EBITDA was $23 4 million and seven 1% of sales in our second quarter behind our Q2, 2021 levels, which reflected the environment before outsized inflation began in the second half of 2021.
We reported net income of <unk> 3 million and diluted net earnings per share of a penny on a GAAP basis.
Our net income and diluted net income per share included a $2 2 million income tax expense or <unk> <unk> per share, which reflects our estimated annual effective tax rate and offset a portion of the $10 $2 million income tax benefit recorded in the first quarter of 2022.
As a reminder, our effective tax rate benefits from the FICA and other tax credits, which is illustrated by our $8 million tax benefit through the first half of 2022.
From a sales perspective, we remained in the mid single digit positive comparable restaurant sales range throughout the quarter compared to 2019. This.
This equated to a weekly sales average of more than 118000 per restaurants.
We maintained our off premise weekly sales average in the low 20, thousands while growing dine in sales to approximately 97000 in Q2.
Which was $10000 higher than the first quarter as we benefited from seasonally stronger sales.
Improved staffing levels and a more limited COVID-19 impact.
Moreover, the week in May that included mother's day was our highest sales week ever at nearly a 130000 per restaurant, beating the previous high sales. We set in 2019 by approximately $4000 on a per restaurant basis.
Moving to expenses our cost of sales in the quarter was 27, 6% of sales, which was 30 basis points unfavorable compared to the last quarter.
Food cost inflation continued at multi decade highs and was exacerbated in Q2 by the war in Ukraine, which drove gas prices and other input costs higher in the quarter.
This food cost inflation equated to approximately 10% higher than levels.
Higher than the second quarter of 2021, and 2% higher than what we experienced in the first quarter of this year.
As Greg mentioned in his remarks, we have price below inflation our.
Our restaurant cost have increased by more than the four 6% of menu pricing. We have added since our November 2021 pricing round. When we began to combat this inflationary cycle.
To help further mitigate the impacts of the inflationary environment. We're now planning an additional menu pricing round of 2% in August following our one 4% round in June .
We have been consistent through this inflationary cycle and taking measured and more frequent pricing actions to limit the impact of guest traffic, while we determine the true level of lasting inflation.
Also as part of our margin improvement initiatives, we started implementing several smaller changes to save on input costs, such as switching to larger more common pack sizes for a number of our ingredients.
We also have a number of more significant cost savings opportunities in test and we will continue to provide updates as we get these opportunities.
Labor and benefit expenses at 37, 3% of sales in the quarter were favorable to the prior quarter, but unfavorable to the second quarter of the prior year.
As Greg discussed we have made tremendous progress re staffing our restaurants in the quarter, which required a labor investment in training and lower efficiency. After training was completed before we realize the full benefits of our new team members as such our training and overtime hours remained elevated in the quarter due to the strong hiring that impacted labor as a percentage of sales.
By an additional 70 basis points compared to Q2 of 2019.
Also as part of our margin improvement initiatives over the past month, we have fine tuned our labor scheduling tools to unlock additional savings opportunities, while maintaining the gold standard level of service to our guests.
The labor efficiency metrics have already started to improve in early Q3, and we will continue to work closely with our restaurants to ensure a smooth and rapid path back to more standard leverage of our labor hours.
Occupancy and operating expenses at 23, 2% of sales in the quarter were favorable to the prior quarter and to the second quarter of 2021 <unk>.
Included in our O&M expenses was marketing spend at one 9% of sales, which was higher than the second quarter of 2021 by 70 basis points driven by a return to media, including TV in certain markets to drive incremental sales.
G&A for the second quarter was $16 9 million included in G&A is the mark to market on investments in our deferred compensation program. The recent down downward pressure on investment accounts provided a onetime benefit of approximately $1 6 million to G&A this quarter given.
Given the onetime deferred compensation benefit and now expect full year G&A to be in the $74 million to $75 million range, including the impact of our 50 <unk> week in Q4.
Turning to the balance sheet, we maintained our debt balance at $50 million and ended the quarter with net debt of about $12 million.
We are pleased with the strength of our balance sheet and will remain consistent within our approach of prioritizing growth driving investments by return profiles, including building, new restaurants, improving our existing restaurants and funding sales driving initiatives. We continue to expect to spend in the 90% to $95 million range on Capex. This year, which includes up to five additional new restaurant.
Openings in the second half.
We plan to open one restaurant late in the third quarter and as many as four in the fourth quarter.
Additionally, we continue to believe returning capital to shareholders is an important part of our longer term capital allocation strategy. We will continue to evaluate business conditions to identify the proper timing to potentially resume returning capital to shareholders.
Looking to the third quarter of 2022, we incurred we are encouraged by our recent sales trends our comparable restaurant sales period to date in July our four 8% higher than 2019 levels and four 5% higher when excluding the impact of a popular free <unk> promotion, we ran in 2009.
<unk>.
As Greg said in his remarks, we have yet to see any meaningful shifts in rguest trends that we continue to monitor the situation.
And we will remain agile to appropriately manage to any environment.
Historically, the third quarter is our seasonally lowest sales quarter. For example in 2019, our average weekly restaurant sales declined from approximately 114000 in Q2 to 104000 in Q3.
The sales decline resulted in deleverage through our P&L and impacted margins with restaurant margin restaurant level cash flow margins declining by 350 basis points over the same period in 2019.
In Q3, I anticipate that our sales will follow a similar seasonal trend, which will impact margins given the early margin improvement opportunities, we've realized and other opportunities in front of US. In addition to our upcoming August pricing round, we're targeting restaurant level margins in the 10% area.
Finally, looking towards the end of the year in 2019 restaurant level margins improved by 250 basis points from the third quarter to the fourth quarter as sales seasonally improved.
Assuming a similar pattern of seasonal sales growth in Q4, coupled with more of our margin improvement initiatives coming to fruition, we have an opportunity to make meaningful additional progress building a restaurant margins through the end of the year.
In terms of taxes I expect the tax benefit in Q3, when our business low seasonally following a tax expense in Q4 as sales ramp back up.
I currently expect a modest tax benefit overall in the second half, but our GAAP taxes will be determined by our performance in any changes to our full year forecast.
In summary, we know the best way to grow margins and profit is to grow sales recent sales trends have been encouraging and we remain committed to being sales drivers first and foremost we expect re staffing and training investments to payback quickly with higher sales growth in those restaurants at the same time, we have.
Elevated productivity and cost savings throughout our margin improvement initiatives.
We have a clear path to sales growth and margin recovery.
And our long term strategy remains intact.
While we have seen new challenges emerge throughout the pandemic. We continue to meet these challenges head on and manage our business for both near and long term objectives and remain steadfast in our focus on providing our guests with the best experience, which will allow us to continue delivering outsized growth in the years to come.
Thank you for your time today, and we'll now open the call to your questions operator.
Thank you if you would like to signal with questions. Please press star one on your Touchtone telephone.
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Our next question will come from Jeffrey Bernstein with Barclays.
Great. Thank you very much.
Two questions first one just looking at.
The restaurant margins that you're referring to.
It looks like the second quarter came in below your expectation.
But it does seem like you have confidence as we look to the back half. So just wondering maybe what surprised you most in the second quarter.
If I understand correctly third quarter, Youre expecting 10% in the fourth quarter.
<unk> you would expect more than the 250 basis point seasonal sequential improvement because of incremental initiatives that you have in place. So if you can give any color on that front that would be great and then I had one follow up.
Hey, Jeff This is Greg and I'll, let Tom give you a sounds closer to it I think.
Which is I think.
Listening to our formal remarks, we would try to lighten up a couple of things. There. One was cost of sales. We saw just an acceleration a continuing acceleration in cost of sales where they are up even 2%.
Versus Q1.
And we are expecting our cost of sales number frankly not to be in the upper 20 sevens, but to start to come down to the lower 27.
So that was the first one that really surprised us.
Now does that continued inflation that kind of came through.
Otherwise just with the amount of labor hiring that we did especially getting ready for some of the busier seasons.
Holiday seasons in the May and June timeframe, our labor numbers came in higher than where we anticipated with that and I think as Tom touched upon the second part of that first question.
Was a couple of things.
First like anything it makes you look at.
The business in the way you've done it at different times and start to realize that we can be better at this.
That kind of has a certain pack sizes certain things that maybe we are getting a smaller pack sizes and being delivered to our restaurants three times a week, we've been able to take those out to a larger pack size hasnt delivered once a week and that saves us on those not only helping us on the delivery fees that you're able to buy it in bulk so you reduce your costs there the other side is.
On labor, we have now started to really move back to our traditional.
Labor standards now that our team members are in place.
Just putting our standards in place, we're seeing nice improvement here in the month of July .
And that's because frankly, we don't have as much training as it had in the past. So we haven't even done any shifting in our labor where not all of a sudden telling our servers and our restaurants that we're going to eliminate certain positions or do things like that that we heard at our restaurants today, because we understand that people come to us.
For a social dining experience and the service and hospitality from our team members drives top line sales now, it's really just getting back to kind of the labor efficiencies that we would run back in 2017 18 and 19.
And there is a tremendous amount of our savings some of those things. So just some of the things we've identified on cost sales on the way to do things different again, as we mentioned even the wins, we have a very proprietary way that costs us money the way the way. It is currently done the analogy with our slow roast oven is some pretty significant.
<unk> savings that we can do at Bj's and actually make it a more unique and even differentiated our product so.
I like our initiatives that we've got going forward.
As Tom said and I'll pass over to him in here in a second there is always a challenge that just seasonally a weekly sales averages come down so you're going into a fixed cost. So we get a little bit more difficult in Q3, but I do believe as we get into Q2, we'll see about our acceleration of margins and Tom I'll turn it over to you.
Thanks, and I will ask you to answer the second question around as we look at Q4 and again comparing it to more of a regular year I do think that there is opportunity ahead of what we saw in 2019, and that's really driven off driven by what extra sales can can we deliver we.
Still have capacity in our dining rooms that can.
Can continue to add more and more guests and now with the increased staffing levels.
There could be some upside there. The real question is cost of sales if that stays flat or if it starts to drop a little bit or even goes up so that that could be the piece that we're just continuing to watch, but with the pricing coming in with capacity there with the margin initiatives that we spoke too yes.
Yes.
I think that there should be some opportunity above the usual seasonal improvement from Q3 into Q4.
Understood and then.
My follow up in terms of unit openings.
I'm wondering if you can share some early thoughts on whether or not 2023 would be an acceleration from the eight in 'twenty two.
And I know you mentioned that new markets are doing well just wondering if theres any one metric we could assume as to what.
Our new market sales and margins are relative to maybe what an existing market is just so we have a frame of reference when we think about new versus existing markets and those new openings for next year.
Yes.
Yes, let me handle Theres a couple of things.
And that question.
First as Gary.
We again set a little bit on the formal remarks here.
We like the remodel profile thats going on right now and we know there's a.
As many as 70 restaurants that we can add this additional capacity to <unk>.
Our restaurants I'd like not all of them are going to play the same way as our current ones, but anytime we can add capacity Endo Bj's restaurant, we generally can drive some sales from it.
And knowing that in the current environment.
The construction costs have continued to stay up.
Pre pandemic and I hate going back to 2018 and 19, we were building restaurants at that five $5 million to $6 million six days or is that an additional $1 billion, which I do think over the long term it doesn't change the profile of our business, but I do think when you look at it in the short term you look at the high ROI on some of the re <unk>.
Auto programs.
I think about 2023, and we haven't finalized this.
I don't think theres going to be a huge acceleration in new restaurant growth.
We'd rather pivot and try and get into some of the high ROI Remodels just from that from the very top line and we're still putting together our pipeline for new restaurants next year I don't see it being reduced down to where we are today I'm just not sure if theres going to be.
A large acceleration versus where we are today.
On that knowing that we still got great opportunity.
In regards to the margin profile the margin profile honestly depends on the certain markets. We go to Anna <unk>.
Cost inputs in those markets on minimum wage and other things that play into those markets. So we will have to see I would tell you a couple of years back we went into Michigan as a newer market and it's performed really well for us from a sales and margin perspective, it's too early to tell us something like finding ham, which is kind of in the Boston Metro area.
Where that's going to be except the sales levels are off the chart right now so I'd expect it to be really good.
From that perspective, but its and its honeymoon phase right now it doesn't have the sea legs under its team members yet and so forth. We're also going into Illinois later, this year, which will be a newer market for us and we wanted to see how that plays but generally over the history of Bj's, we've done well in new markets and.
The margin profiles havent changed that much from one to the other you know we always talk about California, California is got to do higher sales to hit the margin profile, maybe versus other states, but generally the margin profiles all come out pretty much excuse me fairly much in line with where we are targeting from an ROI perspective.
Understood. Thank you.
Youre welcome.
Yeah.
Thank you and our next question will come from drew North with Baird.
Great. Thanks, I have a follow up on margin and thank you for the perspective on the cost saving initiatives.
How are you thinking about the long term margin opportunity for the business and the path to get there from the levels expected in 2022 any perspective or framework in terms of how youre thinking about the longer term margin opportunity would be helpful.
Yes true.
Excuse me.
It's interesting.
When we talk on our calls we still go back to 2019 as kind of our baseline.
Even as we look at July to date here and the reason for that.
Is the fact of the matter. If you think about in 2021 things opened up the Delta came then in the fourth quarter Omicron came and so forth. So 19th the last year that we kind of look at to normalize our business and we also look at 19 to normalize our business because thats, what we want our margins to go that's our target.
And we've got to look at that target.
A N a viewpoint that we're not going to continue seeing 9% plus inflation year in year out and Thats, what were kind of facing right now in our business and as Tom mentioned, we've only taken four 5% of menu pricing or so since really the November .
November menu rollout and this is when all of the inflation started to happen in our business.
We're adding additional menu pricing on top to go against that but as inflation normalizes and we get price stability, it's going to allow us to continue to drive and optimize our business to work with our vendors and suppliers to figure out ways to do things differently and go after those targets back in restaurant level margins back into the mid teens.
When I think about what that stair step would be I think we'll see some nice acceleration in margins moving into Q4 of this year as Tom talked about because some of the initiatives we have in place and as those initiatives continue to roll and we find that our initiatives into 2023, I think that allows us to accelerate margins as well and the busy.
Now I am saying that also in the sense that inflation is going to have to start to stabilize versus the fact that it's continued to go from eight 186 to 91 and some of those are obviously plays into our business as well but.
That's how I tend to see our business site ICA going into next year. Some nice improvement in margins I think we'll see it actually coming coming into Q4 of this year as well.
And the other piece to worth mentioning there.
As we look at margin improvement, we're also doing that on a higher sales level too soon we think about comparing to prior year as being that we were up 10% from 2019 overall sales levels where.
We're multiplying these margins by a much higher sales level. So as we think about the recovery.
The dollars will come first in the margin percents will come will come second, but given the amount of pricing and just other check that we have I think that there is a good opportunity to keep expanding both there.
Okay. That's helpful. Thanks for the perspective, there and one on pricing and how.
How did you determine that 2% with the right amount of pricing to take this time around in August .
Signs of slowdown in sales exiting Q2 at least for the broader casual dining industry give you any pause on taking more aggressive pricing or just any thoughts on your philosophy there.
Yes.
No.
As I mentioned or amount of call, we haven't really seen any change in.
Our consumer behavior.
Our business and I know on the broader macro.
There has been discussions of that we've seen that I think either end.
Some of our government information or maybe some of the <unk>.
Industry information, but we haven't seen in our business.
And we kind of use a combination of where we've taken pricing in the past, where we wanted to be in regards to how we can try and move margins up the right way and frankly, how we can push this through.
Without necessarily changing our price barriers et cetera on certain items. We also like everybody. We do competitive shops, frankly, I look at where we are and make sure that we continue with this good better.
Good better best pricing strategy, So where we know we can.
Lean in on certain items that are unique and differentiated to bj's, we have that ability in certain areas, where we know that is what we call a caveat known value items, we're going to be a little bit less in regards to our pricing as we as we tend to look at it. We also know that as a business we've got to build ourselves back into our margins and as much as we'd all public.
Feel really good to take five or six or 7% pricing all at one time and go look what it can.
Due to the business, we know that over time that would erode the value of the business. We also know that trying to save our way to success can make us feel really good for a quarter.
But over time that erodes the value of the business as well so we're going to take the approach of <unk>.
Twice.
Once as we go through and put in our initiatives to move the business forward.
Thanks for all the color.
Yeah.
And moving on to Alex Slagle with Jefferies.
Hey, thanks.
So you made a lot of progress on the labor front.
I wanted to ask what the improving staffing situation means now both.
In terms of things like operating hours, and where that goes and the ability to close the capacity gap in the dining room.
But also in terms of promotional activity, what you could do there and also your ability to ramp up our growth initiatives like the beer club, maybe the virtual brand and catering, which you're obviously you're working on just now that you kind of have the staffing in a better situation and how far you've come if if you're at a point now where we're.
We should expect to see a step up in any of these fronts.
After all.
I'll take the first part is our CFO Tom has some color on it.
So Alex on yes, we talked about the catering specifically and we continue.
To work the beer club in the second quarter and the <unk>.
This quarter, we did step up a little bit more on the marketing side of things.
And Tom mentioned that we went on television.
And a couple of select markets.
And we're evaluating the return on that we do plan on increasing that going into a little bit in the second half of this year as well as we get through really.
Pre the elections, because frankly some of the media costs go up so we're looking on on that and we haven't talked about it much our slow roast, which is I want to say somewhere in the neighborhood of 40 restaurants, or so actually continues to do really well for us and continues to be incremental to our business as we continue to kind of toy with that.
In regards to what the right menu pricing is and what the next rollout is that I think we'll see that virtual brand rollout a little bit more over the next year. We wanted to do it in a very deliberate manner as well, especially now that our staffing levels.
Our in place and we continue to make some changes around the beer club.
And Alex you are here on the state of California, So youll get this others might not but one of the big parks on the beer club was these growler refills and Unfortunately, California outlawed growler.
<unk> refills. So we've introduced our six packs as replacement we wanted to see how that goes.
And how guests like that as we continue to tweak around with the beer club, but we love what peer cloud can do for US I think it's a real differentiator out there and we continue to kind of optimize that and we will look towards that as I've always said towards 2023 is in regards to the next step as we continue to test many different things there but.
I like that I think the.
But they wanted to add a little bit different Alex to your question.
It is where our menu goes and we mentioned on the call about reducing our menu a little bit like the information we've gotten back from our guest research.
And being able to prune that back from an optimization standpoint of our labor hours in our efficiency and I think that actually allows us to grow our menu category, our menu a little bit and some of those more core areas, we haven't been able to grow as much in our core areas over the last couple of years because of the expansion on our menu and some of these kind of fringe areas. So I think there's a real off.
For Kt, there and I think that will help us grow not only topline sales, but helped us be more efficient.
In the middle of our P&L as well on labor and some other areas.
That's very helpful. Thanks.
Our pleasure.
And moving on to Todd Brooks with benchmark.
Hey, good afternoon, guys a couple of questions for you if I may.
One.
With the improvement in staffing levels.
Can you talk about maybe trends across the quarter retention wise are.
Our retention numbers, improving how do they compare to pre pandemic levels.
Is that still an area of the staffing challenge so that we'd be dwarfed.
I don't.
Don't have in front of me just our turnover metrics I would tell you that looking at them earlier, they were improving they were actually going in the right direction and we're seeing some of our best.
Highest retention numbers in a while especially as everybody opened up so you almost have to think about in the last 12 months because as businesses open up everybody with hiring and that's when we see the.
The kind of voluntary resignations, so they move in the right direction.
Believe though Todd I'm, saying I believe because I don't have in front of me that theyre still above maybe where they were pre pandemic.
In that regard I don't believe our general manager and manager turnover is now much higher than pre pandemic I feel good on the manager side. The hourly has been going in the right direction for US I believe as I said going into this quarter. We are seeing some of our best retention that we've seen over the last 12 months.
Okay.
And just one other piece of data there everything Greg said is right and then on top of that really the other improvement. We saw in staffing is really just the number of folks hired when we compare just the because.
You are talking about the net gains you want to limit the team members, leaving but the bigger gain this quarter was really the amount of new.
Team members, we were able to hire and bring in so with that and the improving retention. It's.
Good on both fronts.
And Tom typically when you bring a new team member on.
When do you start to unlock that efficiency I know, we're talking about seasonal retrench to kind of 10% at the restaurant level.
In Q3 does that imply that really a lot of that labor efficiency is more of a Q4 event when we get higher volumes.
Okay.
I think we'll see it start in Q3, but.
With with more upside in Q4.
Yes.
In Q3.
Just with weekly sales average coming down.
Just from a seasonal standpoint, it gets a little bit mask and there and as we tried to allude to on today's call. Even what we're seeing in July right now when we look at our labor efficiency model and we have a model based on what we call items per labor hour. So how many labor hours do we need to.
Basically cooking items service to our guests and so forth those numbers have dramatically improved here in July as we got back to saying Here's our labor standards. These are at the same standards that we used back in 16, 17, and 18, so theres no significant changes to them they always get tweaked here and there but looking at that.
<unk> versus where we were in Q2, we're already seeing that difference at the same time as our weekly sales average is going to go down from some of these higher numbers youre going to still delever, a little bit as a percent of sales thats just the way the business kind of operate especially around fixed positions, whether theyre somebody at the host stand our fixed position in this.
One is that we need somebody at the appetizer station somebody on pizza et cetera.
Okay, Great and then a final question from me you talked about.
Really.
Thoughtful pricing, but being focused on still delivering value.
Wondering and you talked about some competitive shops, but do you have a metric of of relative value to gauge if bj's has expanded its relative value.
Being.
As conservative as you have on price.
Secondly on the value side, I know you talked about pack sizes coming in.
And maybe some different cuts of things coming in but as far as portions on the plate anything that youre touching there or is that a big part of the value.
Delivery to the customer and youre not going to touch on that at all.
Yeah on the relative value, it's hard we do pull over our peers and look at where they where they are where they are priced at certain items as I talked about from a <unk> as well as on the differentiated items and making sure that we believe that the price affordability is in line across the <unk>.
Or is it something that.
We've worked really hard to especially over this last year to make sure that we have this good better best strategy.
Across all of our menu items.
In regards to where we're looking for efficiencies on the back side of it is as you said Todd it's what we're bringing into our kitchen and into our restaurants to serve our guests. So as we look at things like Salmon for example, which I, which I mentioned, we're still stay in the fresh salmon, that's a quality differentiator for bj's.
So we haven't made a decision to all of a sudden go to a frozen this or something like that we're just looking at it how it comes and we looked at something is going to sound little bit trivial, but like the soco block that we use for <unk> that we're testing right now we actually use a round and.
And we can go to a square and save some money.
In that regard and what's happened is suppliers they want to today, meaning manufacturers flash suppliers. They want to run one SKU and get that skew to everybody in and let us cook, it and make it better and make it brewhouse Fabulous.
Three or four years ago, They would say hey, I can do this special cut our special run for you today for us to get special run its a huge premium. So that's why we're looking at more traditional commodity lineup, there and then making sure we differentiate it and one of those differentiations, which gets to your quest.
Question at the end there is in regards to the portion on the plate of the value on our plate, we have not changed that as we said earlier, we've added two ounces.
Alfredo sauce trucks grilled chicken Alfredo we moved our crispy chicken sandwich up to a six ounce chicken chicken from our four hours. So we've actually increased portions there we added additional chips and we added black beans to R. Taco dishes, we have not.
Scam to or reduced any of our current menu items now at the same time, we will continue to work on items that maybe blend itself more to a lunch menu items. So maybe some of the items. We've created our lunch items will be a smaller portion specifically set for lunch and lunch only and we'll look at at our <unk>.
New items that might be new that have different.
Different sizes versus what we currently have but we don't think its the right strategy to all of a sudden go from 12 wings to 10 wings or in our case, we do have a pound that boneless wings to all of a sudden.
I guess a third.
Third pound boneless wing, so we know guests come to us because of the quantity that we're providing them in that value and we think thats the right strategy to get to to move forward with.
Okay, great. Thanks, Greg.
My pleasure.
And our next question comes from Jon Tower with Citi.
Thanks for taking the question I appreciate it just got a couple here I'm curious and I apologize if I missed this but I think on the last call you talked about high single digit commodity inflation in the second quarter. It sounds like obviously that came in a bit higher than mid single digit in the second half does that second half outlook still hold.
Maybe a follow up on that as well.
Sure John Thanks for the question.
We did see.
Some inflation from sequentially from the first quarter to the second quarter. So we saw about 2% or so increase in the basket. So yes, it did pick up a touch but.
Looking across the commodity landscape for the next six months. It doesn't seem like there is there is any pressures. We're seeing right now that are going to move things dramatically up or down we're still seeing some help on some of the bigger meet areas that we spend on <unk>.
Some other areas are catching up with some of these July resets with contracts, but it feels.
Knocking on wood that it feels like theres not too much more.
Big moves that.
We're seeing right now.
Got it so some of the spot markets.
Checks that we're seeing with respect to prices rolling over certainly versus peak.
They haven't necessarily shown up.
In your contracts, yet or anything that youre seeing with respect to purchasing maybe later in the year, but don't want to hold your breath.
That's accurate.
Okay.
And then just just looking at your model.
Then kind of looking.
And what Youre discussing about next year with respect to Remodels.
And I think store growth potentially staying at similar levels to this year.
Taking higher and potentially returning cash to shareholders I'm just curious if you could help me think through.
The puts and takes of the.
The operating cash flow, because I think that would require a pretty significant step up in operating cash flows or a material step up in leverage levels. So I'm, just curious, which one you think plays out next year in order to be able to satisfy one or all three of those.
<unk> bin.
And perhaps it's a mixture of both more debt taken on as well as an improvement in the operating side of the business.
John as I was saying earlier I am expecting our margins to move up next year as.
As we look through some of the initiatives around our margin improvement getting kind of into the run rate here in Q4, and then moving into next year.
I think that is a big player into it I think.
As we stabilize and grow from there taking on additional debt is not something that were against from that standpoint, we always want to maintain the flexibility in our balance sheet.
But and so that could play into it but our plans are frankly for those margins to improve both from a combination of the consumer coming into our restaurants from a sales perspective, and some of the sales driving initiatives that we continue to work on and then as I just mentioned the margin improvement initiatives as well.
And maybe just zeroing in on those Remodels, you're talking about with respect to even a bump outs are the additional seating capacity.
How have those looked so far with respect to with the sales and or even costs on the stores that you've touched.
There's really not much of an additional cost into the restaurant and really what we're doing is we're taking more of a what we call a bus station that FSA, we stopped using many many years ago. So it's in a certain generation of our restaurants.
And converting that over to.
Two three booths that are kind of eight tops. So theyre large boost from that perspective really working well, obviously on the weekend and from a dinner perspective.
So it's primarily an incremental sales to our restaurants now I would argue that or I would make the case that as we add those in there and for us to take care of our guests the way, we want but thats, probably going to entail a server and that because we wanted to hold onto our server and our cable server per case.
<unk> standards as best we can it might not be that way in all cases, depending on how it's allocated in that restaurant.
So that's our.
That's where we're adding capacity right now where I can look at some things around some and closures on some patios and some other things that will be done later here in the third quarter, we will see where that plays out but generally speaking that hasnt added any real incremental operating costs into our business.
Awesome. Thanks, I'll pass it along I appreciate the time.
And our final question today will come from Sharon Zackfia William Blair.
Hi, good afternoon, I'm, sorry, if I missed this my phone cut out, but I was wondering how you're how you're measuring kind of your value proposition with customers and if you kind of have any data on how that's holding up or with it.
Maybe even improved versus 2019, and then did you give any information on kind of how california might be trending either differently from the rest of the country.
Through this kind of more hyperinflationary period, the last few months.
Yes, let me, let me touch on California Sharon.
We still see the bay area with the most opportunity there has been improvement we have seen the comp in comparing the 2019 here, it's still sitting negative, but it's improving so thats the.
The big difference in California, really southern California looks a lot like the rest of the country, if not a little bit stronger. So that's on the California piece.
Greg did you want to touch value proposition.
You can go ahead, Tom I mean, we cover.
Please go ahead.
Sure. So yes in terms of the value proposition. There is no direct measure that we look at their we shop on known value items, and we look to see what the guests are the most interested in.
Parable across the brands, so we use that as a metric.
We look at our own internal measures on our net promoter scores and in terms of value. So those are the main ones that we watch and it does.
You would expect I mean as pricing goes we're not seeing.
We're not seeing any any falloff, there if anything to values looking stronger so it.
Nothing assuming any signs that.
Taken too much price or anything like that.
Okay. Thank you.
Welcome.
Thank you that does conclude today's conference we do thank you for your participation.
An excellent day.
Thank you everyone.
Thank you.
Yeah.
Okay.