Q2 2023 BJs Restaurants Inc Earnings Call
Feedings welcome to Bt's restaurants incorporated second quarter 2023 earnings release and conference call. At this time all participants are in a listen only mode. A question and answer session will follow the formal presentation. If anyone should require operator assistance during the conference. Please press star zero on your.
Telephone keypad please.
Please note. This conference is being recorded I will now turn the conference over to Ron is Rimer director of SEC reporting. Thank you you may begin.
Thank you operator, good afternoon, everyone and welcome to our fiscal 2023 second quarter Investor Conference call and webcast. After the market closed today, we released our financial results for our fiscal 2023 second quarter you can view the full text of our earnings release on our website at Www Dot Bj's restaurant.
<unk> Dot com.
I'll begin by reminding you that our comments on the conference call today will contain forward looking statements within the meaning of the private Securities Litigation Reform Act of 1995 investors are cautioned that forward looking statements are not guarantee future performance and undue reliance should not be based on such statements. These statements are based on <unk>.
Management's current business and market expectations, and our actual results could differ materially from those projections in the forward looking statements. 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 future events or otherwise unless.
Required to do so by the securities 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, we will start today's call with prepared remarks from Greg Levin, Our Chief Executive Officer, and President and Tom <unk>, our chief.
Financial Officer, after which we will take your questions Greg Lynds, Our Chief Development Officer is also on hand for Q&A session and with that I will turn the call over to Greg Levin strength.
Thank you Ron.
P. J has delivered another solid quarter growing top line sales and expanding margins year over year. Our total revenues increased by more than 6% led by strong comparable restaurant sales of four 7%. We are proud that these results once again beat the industry as measured by Black box both in terms of sales.
Traffic for the quarter.
Consumer demand trends were generally stable and consistent throughout the second quarter and the same trends have continued into the first three weeks of the third quarter.
Importantly, our margin improvement initiatives are also delivering results as we made meaningful progress on this front with restaurant level margins, reaching 14, 5%, which was 260 basis points higher than last year, and our highest margin level since the pandemic.
We still have wood to chop to get back to the high teens pre pandemic margin levels, but the progress we have made to date confirms the effectiveness of the strategy that we've laid out last year.
Our teams are laser focused on methodically executing against this strategy, which drives our confidence and optimism that we can continue to build margins in the near term and over longer horizons.
Our sales and margin growth strategy is based on our in depth consumer research and focuses on building the bj's brand over the long term quarter by quarter and year by year, we know that our guests escape to bj's for a dining experience rooted and gold standard service and gracious hospitality does.
Levered by our restaurant team.
Our guests want familiar food items made brewhouse Fabulous Alden and ambiance that is of higher quality differentiated and full of energy compared to mass market casual dining concepts.
To deliver gracious hospitality and gold standard service, we methodically rebuilt our restaurant teams to make sure we are always delivering memorable experiences for our guests.
Our second quarter restaurant manager retention exceeded the same quarter in 2019, and we continue to see improvements in our hourly team member retention as we narrow the gap to pre COVID-19 levels.
As a result of more tenured team members at both manager and hourly ranks our labor productivity metrics in the second quarter were better than a year ago and better than 2019, highlighting that we cannot only drive record sales, but drive those sales very efficiently. We were also able to drive those efficiencies while maintaining our.
Strong net promoter scores.
In regard to our culinary strategy, we rolled out our new menu in July that has 15% fewer items and is focused on familiar items made brewhouse fabulous based on our guest research.
Having less items, but the right items for our guests will allow us to improve our daily execution by increasing repetition of guest favorites, while reducing prep hours in our kitchen, both of which can over time contribute to our sales and margin growth goals at.
At the same time, we introduced some new items that squarely fit with this culinary strategy, including our new Big twist Pretzels appetizer served with beer cheese made with bjs brewhouse blonde beer Hickory brisket nachos, and we upgraded some of our signature cocktails <unk>.
Demand for these new items are strong demonstrating our product innovation is connecting with the preferences.
With the preferences specific to Bj's guest.
Because we know that our ambiance, coupled with our team members Grace's hospitality and higher quality food profile is key to serving memorable brewhouse experiences for our guests. We continue to invest in our remodel initiative as you may recall, our remodel program includes a variety of potential improvements, including additional seating.
<unk> and updated bar statement, new lighting artwork booths and tables, the new bar statement is amazing and includes a much lighter more contemporary bar featuring a new 130 inch television that screams brew Brewhouse theatre to all guests.
We now expect to remodel 35 to 40 restaurants. This year, that's up from our original plan of approximately 30 remodels due to the encouraging results and financial return profile. These restaurant Remodels have delivered to date as measured by incremental guest traffic and restaurant profit.
When including the nine Remodels, we completed last year, we now expect to have remodeled the remodeled at least 20% of our restaurants by year end.
While the best way for Us to continue our margin growth is by driving online sales. Since every additional sales dollar earned leverages the fixed elements of our restaurants cuts cost structure. We also laid out a plan last year to identify at least $25 million of four walk savings opportunities that will benefit our <unk>.
Strong operating margins, while maintaining our quality standards I am pleased.
To announce that during the second quarter, we surpassed the 25 million goal on an annualized basis, which help reduce food labor and operating and occupancy costs.
While we are proud to have achieved this milestone the team has identified significant additional savings opportunities, which we expect to realize later this year as we continue to execute against our cost savings initiatives.
As we continue to build top line sales and expand margins. We also continue to open new restaurants in a balanced manner to date in 2023, we opened two new restaurants and expect to open three more restaurants. This year for a total of five new restaurants in fiscal 2023, including one of which will be a relocation in Chandler Arizona.
As many of you as many of you know overall, new restaurant construction costs, including furniture fixtures and equipment as well as the related supply chain costs have increased by over 35% since 2019, bringing some of our new restaurant builds to the mid $7 million range on a gross basis before.
Tenant allowance funding.
As a result, our development department has been busy designing a new prototype that takes the best features of our current restaurant, but reduces the cost to build by about a $1 million because of the significant savings. We are submitting new plans for most of our 2024, new restaurants. Our development team is working closely with planning commissions in each city to get the new.
Plans approved as quickly as possible however to be conservative we expect the timing of approvals of these new prototypes will result in some 2024, new restaurant openings moving later into the year and possibly into 2025.
As such I expect 2024, new restaurant openings to be similar in number to this past year and then we will see an increase in new restaurant openings in 2025.
As we've said many times our goal is to Reaccelerate, our new restaurant expansion and grow restaurant weeks by 5% plus annually.
<unk>, we are going to do it with the right quality and at the right investment costs to continue to drive strong new restaurant investment returns with.
With 5% plus new restaurant growth consistent comp sales in the low to mid single digit range and expanding restaurant margins, we should achieve very strong EBITDA and earnings growth for our shareholders.
In summary, we laid out a plan last year to methodically drive topline sales grow our restaurant margins and continue our national expansion over the last several quarters, we have been consistently executing against this plan and building momentum in our business.
I am extremely proud of our restaurant team members, who day in and day out get to provide memorable experiences for our guests, thus, enabling us to drive towards our goal of growing Djs to $2 billion in sales and beyond.
With the positive reactions from our guests to all that we are doing we are increasingly confident that guest affinity for our brand and concept coupled with the trajectory of our business and our current growth and margin enhancing initiatives will enable us to achieve attractive near and midterm overall growth and margin expansion.
And finally I'm excited to announce that we will be hosting an analyst and Investor day. Later this year, when we will share greater detail around our near term opportunities and our longer term growth strategy stay tuned for further information in the coming weeks.
Now, let me turn it over to Tom to provide a more detailed update for the quarter and current trends Tom.
Thanks, Greg and good afternoon, everyone.
I will provide details of the quarter and some forward looking views.
Remember this commentary is subject to the risks and uncertainties associated with forward looking statements as discussed in our filings with the SEC.
In the second quarter total sales grew six 1% to $350 million on a comparable restaurant basis sales increased by four 7% over the prior year.
Our restaurant level cash flow margin was 14, 5% in the second quarter, an improvement of 260 basis points compared to the prior year comparable.
Comparable sales growth in conjunction with improving operating efficiencies and further progress on our cost savings initiatives contributed to our margin improvement.
Adjusted EBITDA was $31 8 million and nine 1% of sales in the second quarter, which beat the prior year by $8 4 million with a margin that was 200 basis points higher.
We reported net income of $11 9 billion and diluted net income per share of <unk> 50 on a GAAP basis for the quarter, both of which were materially higher than a year ago levels.
Our net income included a $2 $2 million income tax benefit which includes the usual FICA tip credit and applying our estimated annual effective tax rate as compared to a $2 2 million income tax expense from the same quarter a year ago.
From a weekly sales perspective, we averaged more than 124000 per restaurant.
In the second quarter, the second quarter tends to be our strongest sales quarter seasonally without outsized sales during the celebration weekends of mother's day and father's day as well as throughout graduation season.
In fact during the week that included mother's day, we set a new all time high weekly restaurant sales average of 140000, which beat our previous weekly record by nearly 10000.
Our California strength continued as it was again, our strongest market with Q2 comparable sales of 8% with similar outperformance across all regions of the state.
Moving to expenses our cost of sales was 25, 9% in the quarter, which was 170 basis points favorable compared to Q2 of 2022, and 70 basis points favorable to Q1 of 2023.
Food costs were about flat quarter over quarter, and slightly deflationary year over year, which was moderately favorable to our expectations.
Inflation figure would have been approximately two percentage points higher if not for the benefits from the changes we implemented to date across our food basket is part of the cost savings initiative.
Labor and benefits expense.
36, 2% of sales in the second quarter, which was 110 basis points favorable compared to the second quarter of last year.
We made further strides improving our labor efficiency in the quarter, which was driven in part by increased labor retention in our restaurants was which was.
Which was at its best level in more than two years.
Number of the labor efficiency metrics, we track, including including items per labor hour were better this quarter than pre COVID-19 levels.
From the second quarter of 2019.
Illustrating the high level, our restaurant teams are operating at as well as the effectiveness of our cost savings initiative to date with respect to refining and optimizing our labor model.
Operating and occupancy expenses were 23, 4% of sales in the quarter, which was 20 basis points unfavorable compared to the second quarter of last year.
Marketing was two 1% of sales, which was 20 basis points unfavorable versus a year ago, and 70 basis points unfavorable to last quarter due to a media campaign using new creative with all of the production cost expense in the quarter.
G&A was $21 2 million in the second quarter.
Included in G&A was 600000 of deferred compensation expense tied to fund performance in our deferred compensation plan, which was 400000 higher than in Q1.
As a reminder, this is a noncash item that has an offsetting entry in other income and expense line in our P&L.
Turning to the balance sheet, we ended the quarter with $53 million of debt after repaying $7 million of our revolver during the quarter.
Note that our ending cash balance of $6 million was impacted by the July 4th holiday falling on the last day of our fiscal quarter. We typically receive credit card transaction funds for Fridays Saturdays and Sundays on the following Tuesday.
Tuesday July 4th was a bank holiday, we had $19 million of cash in transit for credit card sales that was not reflected in our quarter end cash balance.
Looking ahead to the third quarter, we are entering what is typically our lowest sales quarter seasonally factor.
Factoring in recent trends, we expect comparable restaurant sales in the high 3% to low 4% range for the quarter taking into account less of a pricing benefit once we begin lapping our August 22 pricing round, which equates to sales in the $330 million area.
Factoring in our sales expectations and cost trends, we expect restaurant level cash flow margins to be in the mid 12% area for Q3 significantly significantly above last year's Q3 margins.
Based on the current momentum in our business and our cost savings initiatives, we remain committed and optimistic to deliver low to mid teens restaurant level margins on a run rate basis as we exit the year.
We continue to expect G&A in the $80 million to $82 million range for the year.
Our capex expectations remain in the $90 million to $95 million range for the year, which includes five restaurant openings and now the higher 35% to 40 restaurant remodel target.
Two of our new restaurants are opened and performing very well and we expect to open. The remaining three later in the third quarter, one which will be a relocation.
In summary, we know the best way to grow margins and profit is to grow sales.
Recent sales trends have been encouraging with demand for higher quality experiential dining remaining strong, especially at Bj's and we expect to continue making progress with our sales building initiatives at the same time, we remain committed to productivity and cost savings through our margin improvement initiatives with momentum continuing to build.
We have a clear path to sales and margin growth ahead, and our long term strategy and stronger consumer appeal for the Bj's concept positioned us well to continue building on our successes and enhancing shareholder value.
Thank you for your time today, and we'll now open the call to your questions operator.
Thank you if you would like to ask a question. Please press star one on your telephone keypad.
Tone will indicate your line is in the question queue. You May press star two if he would like to remove your question from the queue and for participants using speaker equipment. It may be necessary to pick up your handset before pressing the star keys.
Our first question is from Joshua long with Stephens incorporated please proceed.
Great. Thank you for taking my question was curious if you could dive in a little bit more on the top line trends Theres been I think you've noted some strength across region.
I would.
Positive to hear that curious if you could talk about day part trends any sort of other kind of maybe store level trends that youre seeing in terms of trade down or kind of check management. I know you have a kind of a holistic approach to both the ambiance. The hospitality menu innovation a lot of great things that are working but just curious what you're seeing from the consumer.
As you parse through all of those initiatives.
Hey, Josh it's Greg.
Tom add on here I'm sure.
It's been very consistent.
Across all the day parts.
And our business as well as looking at the business both on the weekends and weekdays.
We haven't seen much trade down or I don't want to say much I don't think we've seen any trade down at all I think the way our menu is setup with things like daily Brewhouse specials seems to be able to bring in people from a traffic standpoint.
But we're not necessarily seeing people trade down to daily Brewhouse specials, we continue to sell a lot of a lot of our higher end items like our prime rib as well as our rabbi.
And alcohol incidents in all of those can continue to do.
Well for us, especially versus 2019 and as we look through April May June and into July .
As we said earlier April was a little chance to begin with and things got really consistent and June 1st week of July was a little choppy I think just with the way July 4th played but as we got out of July 4th timeframe again trends have been consistent on Tom says, Hey, you want to add to that.
Yes.
Great summary, just to build on the incident side, we continue to track just across our menu how guests are using.
Using bj's in it we're really seeing very similar levels of dessert attachment appetizer attachment drink attachment and consistent levels.
What types of things that they're ordering so yeah, we're watching to see if we'll see any consumer pressure leading to trade down or even increased usage of our things like daily brewhouse specials, and happy hour and all of that but it still seems very balanced what we're seeing now is more seasonality driven than anything else, which is great.
That's very helpful. As a follow up when we kind of deconstruct that four 7% same store sales results for the quarter can you talk about price is embedded there any sort of other mix or traffic components as well and then as we think about the back half of the year. What does the pricing look like is there anything planned and if not kind of.
How would that how would that pricing component flow.
As we get into <unk> and <unk>.
Sure so.
For the quarter, the pricing was pretty similar to check and kind of the high single digits and that 7% or 8% range, where we're exiting closer to that.
I think going into Q3, we'll start to lap over a 2% rounded August last year, so pricing will come down a little bit going into Q3, so that was embedded in the Q3.
Estimates there, but traffic was down in the low single digits, a little bit better on the dining room side, but but yes.
Overall, that's about how it.
Work between the pieces.
Great and then last one for me as we think about the opportunity around the remodels exciting to hear that things are progressing you found some opportunities there to take that up a little bit how are you thinking about that or maybe how do you have the unit to date flowed in terms of those various.
Styles or approaches to the Remodels, you've got everything from bar statements to upgrade seating to lighting there is definitely <unk>.
Portfolio or a spectrum of options. There how are you thinking about that and as we think about the kind of incremental upside there in terms of number of Remodels. How would you how would you describe kind of the.
The portfolio and how it's shaping up.
Yes. Good question, Josh I think the thing that we've seen out of the Remodels.
Is when we spend are we.
Please take the time to redo the bar you really get.
We are having technical difficulties level. Please.
Thanks, Jim in just a moment.
Once again, we are having technical difficulties and will begin again in just a moment.
Okay.
Yes.
Okay.
Okay.
Yes.
Yes.
Okay.
Okay.
Yes.
Okay.
Right.
Yes.
I'm going to take the.
And that we're back on Josh Let me add.
And to your question, Josh there right I am here.
Alright, sorry about that.
So about the technical difficulties. So what we found in the Remodels is redoing the bar.
Get that pop to our guests and it actually energizes our team members as well so as we've been going through the Remodels, we've been trying to push more for the bar remodel, which does cost for the bar remodel. We've said can be anywhere from four to 500000 up to 700000.
But we end up getting a higher weekly sales average increase and obviously higher profit from it ends up driving still what we consider to be some good rois in the <unk>.
Mid to 20% mid teens to up to the 20% range. So as we continue to work through as we will continue with barrel booth remodels as we call it.
Adding the expand capacity and some other remodels, but we're trying to concentrate on getting that bar updated and refreshed for our team for our guests.
That's helpful and maybe just as a follow up there as we think about that being maybe the highest priority.
Return opportunity how much of the.
Of the current Remodels have had the bar.
<unk> <unk>, what does that ultimate opportunity look like as you think about all of the stores out there that could receive a remodel.
The bars are right now a little bit on the last we've done a lot more of the barrel boots, and we're going back and doing some of the bars in there we've expanded the bar movement into or the bar refreshes really into the second half this year.
Greg Lynds, our Chief Development Officer, who is leading this initiative.
Initiatives might have more on how many you think we can get in total Greg.
Next year, we're thinking about a similar number overall and the ones where this year, where we didn't do the bar remodel.
We'll go back and just just come back and do a bar remodels, though.
I don't have that number in front of me, Greg, but I would say, 70%. So we could probably upgrade our bars.
At over time.
There is I mean, you think about 130 inch plasma or the 130 inch TV are putting in there that is not in any of our restaurants. So you take out the what we've been building last couple of years, we've got probably a good 150 or 160 restaurants that we can do that so.
Got it that's very helpful. I'll hop back in the queue. Thank you.
Thank you.
Our next question is from Alex Slagle with Jefferies. Please proceed.
Hey, Thanks, Congrats on the progress I wanted to ask on the restaurant level margins and to the degree you're seeing.
Slightly stronger comp trends in the new stores opening well and now exceeding your previous expectations on the productivity.
Cost reductions it I mean, it sounds like Youre still looking for restaurant level margins exit year in that low to mid teens range like you previously talked about but.
Think that trajectory and maybe move a little bit higher than <unk>.
Just kind of wondering what some of the other drivers there that we need to think about in terms of just pricing and commodity inflation trends that might be offsetting that to some degree or just the pushes and pulls spine where that goes.
Yes, Great question, Alex and as I said, there is still a lot of wood to chop here to continue to move the margins up.
Our big wildcard really continues to be where beef costs are going to be so we start to look at it going into the second half of this year.
Talking a little bit more commodity inflation, even though we're working on some additional initiatives around the commodity side and thats going to be our biggest challenge from that perspective as Tom mentioned on his formal remarks, we do have some pricing rolling off and we'll look and determine what's the right amount of pricing you go into the second half of this year to offset some of those inflationary pressures.
And then we.
We continue to work through other initiatives around labor productivity. Some of it we've talked about before like using AI to help us sales forecast and therefore write a more accurate schedule, which will should deliver both labor productivity improvements.
But also better efficiency better gas.
Better taking care of the guests will have the right people on at the right time and now that we've just rolled out our <unk>. Our smaller Russ are smaller menu, we're continuing to work through that and optimize the labor on that smaller menu and that will take a little bit of time as much as we remove that menu, let's call. It July one we haven't seen any changes from our guests.
That smaller menu, which is the reason we tested over the last year, we still have to continue to adjust schedules down a little bit based on how this new menu is rolling out and that should give us additional efficiencies as well and I think as we mentioned in our remarks here.
As a result, we feel very good about the momentum in our business and the optimism to getting to where we wanted to go from our margins in regards to kind of low to mid teens exiting this year and then growing margins into next year.
That's helpful and to clarify on G&A I guess, it stepped up a little bit from wanting to or maybe you are now tracking more towards the midpoint of the range versus lower end of the range and fat.
All right way to think about it.
Yes, Alex.
We called out the deferred compensation expense because that did just with the market going up we see that run higher which pushes G&A up. So that's that's probably fair. There is an element that's just market driven.
Move it up or down in the second half, but but yes, we gave up some of the favorability based on this noncash item that that reverses out further down the P&L, but but yes, we're still targeting at least the midpoint of <unk>.
Could potentially get it lower but but yes, I think the midpoint is a good place to model.
Okay, and then just a final one on the traffic in.
Weather impacts if youre seeing anything kind of from the heat waves.
Smoke from Canadian wildfires anything like that impacting your business from what you can tell.
I can't really tell I mean, the trends have been just really pretty consistent.
Throughout our throughout our business and throughout different markets. So we're not seeing any major changes one weekend or the other based on I guess weather conditions.
Awesome. Thanks.
Thank you.
Our next question is from Brian Bittner with Oppenheimer <unk> Company. Please proceed.
Hi, Thanks, This is Mike Tamas on for Brian .
Second quarter same store sales were kind of where you guided to but your restaurant margins of 14, 5%.
Well above the low to mid 13% range that you guided to the first question is what were the positive surprises relative to what you were thinking internally for <unk> at that time.
Is there anything timing related there or how sustainable do you feel some of these movements are.
Yeah.
Mike It's Greg Levin.
Part of the increase in margins.
It was really on the labor line and I got to give my hats off to Chris <unk>, Our Chief Operation Officer, and our Vice President of operations and really the entire restaurant management team as we kind of mentioned in the call.
The tenure in our management team working through the challenges of Rehiring people back and then driving the efficiencies are managing the efficiencies that we as we increased our weekly sales average week to week year from last year really improved and ultimately.
Our restaurant level IRR since Eros now.
Our overall labor I think came in at a 36, two and last year. It was like a <unk> 36 or 35 nine so when I started to think about that labor line.
It's gotten really really close to where we were in 2019 and again thats a hats off to the operator, they did a really nice job in regards to driving efficiencies within our business I'll, let Tom talk to anything on cost of sales operating occupancy.
Yes.
Also mentioned.
Cost.
So we are getting some nice benefits from the <unk>.
Our margin improvement initiative, but also the market has.
Was a little better than we were expecting there was some areas that we saw some deflation across the menu even from Q1 into Q2 that we werent expecting things like our prime rib salmon ribs, we saw some modest upside as well as cheese.
We saw it go the other direction on things like Tri tip in ground chunk, but there was no. There are definitely areas that we saw some modest improvement there too that we're above and beyond just what we were.
Gathering from our margin improvement initiatives, so yeah to Greg's point, though the labor side really helps when we can get these big sales weeks and get some great leverage off of them, while driving those top sales, but across the food cost as well, it's it was better than expected there as well.
Yes, thanks for that and then.
In your release in your prepared remarks, you talked about getting pass at $25 million in cost savings. You also highlighted some additional cost savings that you are now attacking so what are those new areas and can you put any guardrails around either timing or dollar amount for us.
Yes.
So I don't know if they are necessarily new areas in the sense that we're always going after as the commodity basket, we're always going after labor and we're always going after operating occupancy costs.
And as we've mentioned before our supply chains have normalized we've been able to find additional opportunities tab.
With vendors to take on additional items or different products for us that has helped helped to come in at a lower cost that have not run through our system, yet, but hopefully we'll get we'll get these in Q3 or Q4 I mentioned earlier in regards to the new menu that we just rolled out with 15% less menu items that.
Should help us going into the back half of the year as we get our sea legs under us in regards to those menu items is about the new par levels will be and so forth.
On top of that I also mentioned some artificial intelligence in regards to helping us flavor schedule and then in the operating occupancy side, we're just being able to go out and bid things like take out containers.
Things, we use for it to go containers as well looking at the way, we do some of the facilities work and so forth.
It's a lot of small rocks that removing or as I said earlier, a lot of work that needs to be chopped theres nothing that I would say is huge dollar savings. It's a bunch of little things that we just have to continue to execute and be disciplined against.
Thanks, and then just one quick follow up I think originally you expected inflation commodity inflation to be like in the mid single digit range is that still fair or is there anything that has changed.
Thank you.
For the full year I'm sorry.
Sure.
It's probably a little lighter than that now it's probably more in the kind of low to mid single digits. So we still are expecting some inflation in the back half of the year, especially around beef and the different items, we sell there.
But that's a great point, we are still going against a lot of these ideas have ways to bring the cost down so we.
We definitely even looking into Q3, we've seen some items stepping up as we went into the year, but we have also negotiated and got some lower rates elsewhere. So there.
As there is reasons for optimism, but yet still where we came in for the year, it's modestly better, but we are still expecting.
Relation going into the back half here.
Yes.
Thank you.
Our next question is from Andrew Wolf with C. L. King. Please proceed.
Okay.
Thank you good afternoon, just want on the sales side I just wanted to focus on on the traffic trends.
Kind of in the context of you all expressing its been consistent.
Most of the quarter and into the current quarter.
I just wanted to.
Basically ask you then if you take out the low of the July 4th week, and probably the high traffic I guess mother's day week.
Has it been pretty close to that kind of low single now.
Low single digit traffic trend and is that sort of what your expectation for this quarter is too.
Yeah.
Can you kind of summed it up Andrew I would say as we talked about that April was a little choppy and I don't know if it was the shifting of spring breaks and Easter tax returns, but as we exited April and we got into May and June our traffic trends frankly improved a little bit.
The negative low single digits per se and again take out the first week of July 4th and look at the last let's call. It two weeks here in July it's again kind of lowest single digits.
Flattened out a little bit here and there, but we're kind of expecting.
As I said kind of consistent low single digits negative.
Okay.
Got it thank you.
And on the.
Some of the sequential deflation in just the lower expectations for food.
Food cost inflation could you.
Give us sort of your thinking I know you.
Last reported you were about one third for.
Got.
I guess you were expecting the market to be friendlier and it has been.
Is that still the case are you still.
Kind of a below normal Ford bought position or are you starting to enter into some more forward contracts.
As you see some potential for some more inflation or do you expect it to continue to slow and deep late in certain categories.
It's a great question. There are a couple of items that I'm thinking of that we probably will be entering into some more contracted positions than we have recently, but it has worked out for us I think the going into the year the risk reward on where the markets were in what you had to pay the lock.
It's worked out and we've seen some some items moving the right direction, but it does seem like that there is a shift happening at least in some markets, where we can lock in things now Ed at some attractive rates sort of ways to get some.
Some of the risk off the table so yes.
Percentage wise I don't have that for you, but I would say just more conceptually there are a couple of areas that we are circling that we think that it does make some sense to enter into some contracts.
Yeah.
Okay.
I think last quarter, you said some of them.
Premium or whatever you want to call. It the premium Youre vendors were asking was just too much. So it sounds like they are seeing things normalize.
Lowering there.
Their risk premium to lock in longer term is that right.
I think it's some of that and its some of just more supply is coming to market. So when in the past where there might have only been one or two suppliers to talk you know theres more so more competition is better for us than other restaurants. So I think it's some of what you said and just some of just a little more balance in the market where we can.
<unk>.
More creative and work with our great partners to find win win scenarios for for both of Us, but I think when when Theres more competition that just they will make sure. There is the right type of balance there.
Got it and if I can ask just a follow up on the labor question or the labor area I should say so labor.
<unk> was up two and with the benefits was up I think two 8% year over year, obviously leveraged to sales.
Can you kind of.
Maybe unpack that a little between what was the.
The rate of wage inflation versus what was the you know the.
Partial offset I would imagine well from.
From the.
The battery cost efficiencies or productivity.
Being able to do more with the amount of labor hours that you have.
In other words, I would assume the wage rate inflation would be higher than that figure and there'll be an offset from improved productivity.
And what does that mean going forward I assume if you keep the productivity can you increase that as wages.
Inflation stays the same or even goes down just some flavor for that.
Yes in terms of the.
The inflation on the hourly side it was in the 4% to 5% range, so pretty similar or even a little bit less than it was in in Q1, So right in line with expectations. There. So yes, that's right. We do we did get the benefit of the <unk>.
The efficiencies on top of then this.
What we're paying on the hourly on the hourly front.
Okay.
Can you comment on how you.
See things evolving in the back half pretty much the same or do you think.
Improvement on either the wage inflation side or the productivity side.
Well I think.
Andrew as I mentioned before we are expecting to get improved productivity.
And the restaurants, because we have 15% less menu items.
So as we look at our current menu items to make sure that our new menu is focused on our guests and what our guests want.
We should be able to continue to drive sales, but then we would have less prep hours because certain items that were no longer prepping, so that one in.
Be another step of improved productivity now that being said as you look through it. We just came off our highest weekly sales average. So we start to think about it as purely as a percent percentage of sales. We're now expecting Q3's weekly sales average to be nearly what it was in Q2 at 124000 and even in Q4.
Weekly sales averages go back up it's still not as high as Q2's numbers. So that's going to play a little bit into the percentage side, but generally speaking we would expect to continue to see I think mid single digit labor inflation labor still challenging out there as much it's normalized everybody still wants to get an higher good team.
Members, we want a higher hard and manage easy by bringing by bringing the right people.
Within DJ is from that perspective.
It's still going to be kind of that low to mid single digit labor.
Side of it and then.
<unk> guided to continue to do our job to drive efficiencies, but this new menu last items to continue to drive overall, good labor percentage in our business.
Great. Thank you.
Youre welcome.
Our next question is from Jeffrey Bernstein with Barclays. Please proceed.
Great. Thank you.
Just following up on a couple of the points mentioned earlier.
On your pricing I think you said high single digit or.
I guess at 7% to 8% for the second quarter, which was similar to the average check which I guess is.
Suddenly encouraging that there hasn't been any consumer pushback or much negative mix, but I think you mentioned you're lapping a couple of points in August . So I'm just wondering what your thought processes as you think about going beyond August whether you're comfortable to.
Or the thought process of fully replacing that or maybe not keen to remain at that level is the food at home cost eases I'm. Just wondering it seems like peers are talking about maybe taking a little bit less price going forward, but.
Just wondering your thoughts, especially as inflation prevails.
Yes, Jeff.
It's a really good question and we're always trying to make sure that we provide the right amount of value and balance on our menu.
And while we continue to look at it and haven't determined the exact amount of pricing quite yet we will look at certain areas, where maybe we have the ability to take pricing up.
It could be something around some of the daily brewhouse specials, where we're giving some really great value at an unbelievable price point because they include starters and desserts and so forth that is just.
Frankly, a great discount comparative if youre going to piece them individually.
We will also continue to look at how that barbell and a good better best strategy lines up. So we will look at another round of pricing. We wanted to make sure. We're doing on things that are unique and differentiated to bj's that also sit in a position where they're not necessarily known value items that youre competing on from a commodity standpoint.
And thankfully, we have a lot of unique and differentiated items and we also at the same time, which I think is really important and it gets missed at times is we're investing back into our restaurants, we've talked about the fact that people are coming to <unk> for a social dining experience.
And price point and value are so important but we're not necessarily competing on the pop in guest that is just looking for a burger versa. Burger. So we want to continue to evolve that and that will.
Some of that pricing at the same time.
We continue to look at certain menu items that we put on that are uniquely differentiated.
For us and have a little bit more or we call. The brewhouse theatre that brewery that brewhouse fabulous that allow us to have some pricing and we can move the gas around on our on our average check.
So long winded answer there will be additional pricing don't know if its going to be exactly where it is there I think we also have some other areas that we've been very cautious on that can give us a little bit more ability to take pricing thats not necessarily directly on the menu because of things like our daily brewhouse specials lunch specials and so forth.
Okay.
Understood.
Clearly it's.
Its encouraging that youre not seeing any change in consumer behavior, thus far I'm just wondering.
If you were to see any kind of slowdown.
You know the levers that you'd be comfortable to pull whether it would be to ramp up advertising or.
Again bump up the discounting or maybe there's further cost cuts like how do you think about that in a slowdown obviously, we've gone through slowdowns before I'm, assuming you have some learnings on that front, but just wondering what you would consider to do versus what you would avoid doing if and when we were to see a slowdown in the back half of the year. Thank you.
Okay.
Yeah again, another good question Jeff.
Well, we haven't necessarily gone to this playbook, yet we do know that in the past pushing things around our lunch specials pushing things around the daily brewhouse specials that I just talked about generally have been great place from a value perspective that had been able to drive guests into our restaurants when.
It's been more challenging times.
But when I think back to the great recession lunch vessels worked really well for us.
Also introduce snacks, a small buy small bites.
We introduced lower priced appetizers that have worked well for us to allow guests to kind a splurge without spending a lot. We still have those aspects on our menu. So we can lean into that side of it at the same time.
Always been saying this as well its really important that we continue to invest into our restaurants and into our people because during challenging times guests want to go out for better and what we're trying to do is make sure we're positioning bj's as a better alternative.
Not an alternative that's going to just compete on the lowest price point.
There.
So again as we continue to think about how to play how to play to our strengths and play to the guest that come to Bj's. We wanted to have great price points. We wanted to have a good better best that we can speak and continuing to evolve, but we also want to make sure that that's being matched with the gracious hospitality and gold standard level of service and frankly, the remodels so that should go.
<unk> out to a place that's got energy ambiance, it it becomes that dining experience.
Understood and lastly, just because you mentioned the.
The ideal scenario is getting back to the high teens restaurant margin, obviously theres lots of.
Wood to chop, but I'm, just wondering I mean from a realistic perspective on.
The range of stores that you have that are already achieving this I mean is it a target.
Target you think you can achieve across the system in the short to medium term or maybe you already have some stores that are doing well above that and there's some commonalities that you'd like to apply to the rest of the system, but just trying to get a sense for the.
Turning to really get back to that high teens level. What gives you the confidence you can achieve that over time. Thank you.
Yes.
Yes.
We've got strong.
[laughter] strong beliefs and optimism.
And our ability to get there one is we are seeing great momentum in our business.
Consistently month to month right now the things we're doing in <unk>.
<unk>, our restaurants as I, just mentioned around the remodels, taking our menu and being more focused on who the bj's guesses. So we're giving them the right things, but that also drives efficiency because it's less items to produce.
And then right now we have seen less inflation and less inflation allows us to adjust our numbers up when we think about over the last several years for the Bj's concept, specifically being a little bit concentrated in California that was taking the dollar minimum wage increase through some of the challenging times going through Covid hurt our restaurants, and our restaurant is pretty hard as well as.
The fact that we had a very large menu and complex menu as we continue to work through that to concentrate on our core and California's now more CPI tied it's given us the ability to kind of manage against the inflation side of it and then as Tom talked earlier, just the normalization of supply chain has allowed us to be able to go.
Out to bid on certain products that we couldnt a year ago.
Let's talk about the wing story many times before over the wing story came because we couldnt get wings. It just didn't exist a year ago, we were probably in the same environment today, we might not have made the move on wings that we have done that saved us a lot of.
I think there's a lot of money you made a better product for us because we would've been able to get supplies at a lower cost now we've taken that same mindset, though and started to ask ourselves what else can we do internally that's different to save us money and drive up our margins. That's a lot of where the new menu is coming from I guess, it's again, it's based on consumer research.
Of who our guest is but then we continue to look at how can we do something a little bit differently that we werent doing before that allows us to drive improved margin and frankly have an improved product.
Yeah.
Great. Thank you.
Youre welcome.
Our next question is from Mary Hodes with Baird. Please proceed.
Good afternoon, Thanks for taking the question on.
On the traffic you're running down low single digits. I guess can you talk a little bit about how you're thinking about traffic driving initiatives in the current environment are there any internal initiatives other than maybe ramping up the focus on brewhouse specials that youre excited about for the second half of the year.
Well I think the big one and we've talked about it as Remodels remodels have tended to drive improved traffic.
Into our restaurants, so remodels is one I would say.
A pure traffic driver for us.
Inside the restaurants, we also continue to work on our.
On our loyalty program and doing updates on our loyalty program through our customer relationship management.
And I think as we go into next year.
We will end up with some changes to the mystery program are Mr. If I am to our.
So our loyalty program is a mystery shopper program and then the other one which we continue to work on is still building back our late night business and we've talked about on prior calls, adding the additional half hour back in there and driving the late night business, which is a guest traffic part of our driving business as well and the other area, which has been a big surprise for US we haven't talked about a lot. This year has been.
Catering and catering has been driving a lot of traffic for us in the off premise side of our business and how they can continue to keep consistent off premise sales numbers in and in that 'twenty, one 'twenty 2000 range.
Great. Thank you for that and on the Remodels would you be willing to dimensionalize. The sales lift you've seen for those that have been completed to date.
We've talked about that sales lift go from anywhere from 500, plus if we just for doing kind of a brewhouse remodel.
I'd say brewhouse.
A barrel booth remodel, where we added capacity as we expand that and do bar Remodels and some of the others will see obviously that 500 number come up even higher so that we are seeing high teens trying to target around 20%.
Cash on cash returns on that.
Great. Thank you so much.
Youre welcome.
Our next question is from Todd Brooks with the benchmark company. Please proceed.
Hey, Thanks for squeezing me in and congrats on the margin progress in the quarter.
Wanted to follow up on some of the earlier restaurant level operating margin discussion, obviously over index performance wise in Q2.
Forward commodity outlook I know you mentioned, maybe being worried about beef, but the full year, you're bringing it down to low single to mid single.
You're exceeding your cost save goals.
$25 million.
Yes.
Alex has asked about this earlier that that low to mid teens type.
Type of target I guess, what what keeps us from hitting the mid teens relative to the set up right now on the cost side of the square.
<unk>.
Well Todd.
The business is always predicated on driving topline sales.
And our formal remarks, and we've always talked about it on this call is about sales driving initiatives and cost savings initiatives were.
We're not going to get to our margins narrow any company get to their margins, if theyre not paying attention to top line sales and driving top line sales.
So when you think about the back half of the year.
We have to have the viewpoint.
That the consumer is going to hold up.
And it looks like based on GDP numbers, and so forth that has come out that the consumer continues to be in a good position.
And then I think the biggest challenge for us separately would probably be around commodities, we've seen a shift in the consumer that's really much more kind of into maybe the red meat.
And indulgent menu items and those are areas that we arent as locked so that would be a little bit of a hit on commodity I think those are the two bigger areas for us.
Within our business I think our teams have done an outstanding job on labor and I'm really excited about that.
Smaller menu to help us there some of the AI forecasting so forth to maintain our labor standards in our labor efficiencies to take care of our guests and deliver gracious hospitality. So I like that aspect of it but I really think it comes down to the commodity side and it's the consumer sides, you've got to drive the top line sales were.
He is doing our best to manage operating occupancy cost.
Tell you right now if you haven't.
<unk> thought about it we're running pretty high energy bills right now with the with the air conditioning being used because of the heat out there and it's a lot of strain on our air conditioning units puts a lot of strain on the equipment in our restaurants that we used to call down things keeping tabs.
So that's an area that I know our facilities team looks at it every day I know our restaurant managers are looking at that every day and our vice President of operations are looking at that every day I think that's a short term challenge for us from a just a utility standpoint, and the heat that's going on there with <unk> seen the same thing in winter months with cold weather and.
Gas usage and so forth but.
Taken those out of it it's really I think where commodities go and where the consumer goes.
That's great and then just following up on that Greg If you look at.
Where things seem to be tracking for this year, you're probably looking at a couple of hundred basis points of improvement in restaurant level margins as you roll to 'twenty four and you think about all the work that you've done on the cost side.
How does how does the next step function look as far as the operating margin recovery and I know, it's top line dependent certainly but.
There are improvements that you've made as well.
Just kind of walk us through maybe what Youre looking at is the slope based on some of the early wins that you've had.
Upside that you saw in the second quarter here for restaurant level margin recovery in 2004.
Well I think it kind of continues to move up.
In that regards to where the consistency of mid teens is there for next year versus kind of the bouncing up and down that we've seen now right. We started into 12, we move to the <unk>, it's going to go down because of weekly sales average then move back up where I would like to see us as an organization move to NEK.
Sure. We continue to work on that is why we will have those ups and downs, but there's ups and downs will all well will the floor.
Those ups and downs will be at least 18 number if not and then moving up versus now being in the 12% range I don't want to be there next year. So I think that's where we continue to move it forward and I think we've got things in there from a productivity initiative as we talked about on labor getting some other things coming through on the operating occupancy that will continue.
To bring those numbers down and then we will be able to offset that with better commodities.
Going forward, if you think about our business and where we used to be.
Still need to move labor or not labor I'm, sorry, we need to move.
Cost of sales really into the mid 20, fives and that should be more of a consistent number for next year. So there is an additional 50 bps that we've got to go after.
So I think you start to move those things in there.
Into the numbers it starts to move us more towards a low teen in the slower quarters and more in the mid to upper teens in the other quarters.
That's perfect. Thank you and then one follow up for separate question for Tom Tom you kind of implied with the August pricing rolling off to think about 6%.
For the third quarter.
Before any other pricing actions with upcoming menus.
Where do we stand on the test of the.
The third party delivery pricing I know that.
Bj's has been one of the few that had not taking any menu pricing premium I think you were testing a couple of different tiers, I guess, where does that stand and how should we factor that into pricing across Q3 and Q4.
Sure So just to be clear on the overall pricing the 2% rolled off in August so it's not purely the entire quarter that we'll be at that kind of 6%. So.
I think we'll still be more than that.
Call, it 7% or so level and into Q3 as we carry pricing forward and yes, we continue to test and in terms of the the third party delivery pricing I know, we're one of the the last in casual dining that hasnt.
That price yet and so we'll we'll update once once we have something new to report there but.
Tests, I would say are going well.
And does anything roll off after the August price increase or 7% carry through Q4 as well.
So as Greg mentioned, we do have another menu print that's happening at the end of September so nothing else from last year that will roll off. It's just a question of exactly what we end up doing for our late September pricing.
That could have some more pricing in it.
Okay, great. Thanks to you both.
Thank you. Our final question is from Nick <unk> with Wedbush Securities. Please proceed.
Thank you.
I hate to belabor the point, but when we exited Q4 with Cogs under 26%.
Nick what we got under 26% in Q2.
Yeah.
I hope, we get there and I hate to use the word hope we've got our plans in place I guess to look at our items.
In regards to commodities as Tom has talked about before on today's call, where we're looking at many different things that we have input in the air.
Commodities into like soup sauces dressings, some of the other things we're doing in trying to see if we can get other vendors to help us here worked with vendors from a commodities market perspective, and continue to work that side of it.
The wildcard is I think beef honest I wanted to say like Ribeye steaks are now one of our number one selling items for Bj's and it's something that's changed really coming out of.
Coming out of Covid and that product, we don't have locked so we see the same thing with our prime rib, our prime rib weekends are huge and again thats a product that floats on the market. So when we think about cost of sales and where it is a lot of that's dependent on some of the market.
The dynamics in regards to commodities as I mentioned earlier, even even to Todd our goal as you just kind of mentioned is we would we would like to get cost of sales.
To be really in the mid 20 fives.
And while we're happy at $25 nine and Q Q2. The next step is to move that down to the mid 25, and that's why we're working with our suppliers. We have some great suppliers that are helping us trying to think through this that we can figure out ways to bring that down now provides the same quality and differentiation that we do have.
P J as we've mentioned many times on this call are things that we have just.
<unk> said no tail.
We're not using frozen salmon.
We're sticking with staying with our fresh salmon like those things make a difference for us and what we're trying to do as a differentiated car.
Concept out there that's focused on what our guests want and what our consumers want and we heard loud and clear from our consumers that we provide a better quality dining experience that comes with better quality products. So we're going to continue to do that in the right way to move our our margins in the right direction.
That's very helpful and non labor.
With all the productivity etcetera are year over year, the seasonality is pretty much the same but like what happens to the similar amount of leverage year over year in Q3.
I think year over year, we'll see decent leverage there it's really our weekly sales average and then you lose the ability to leverage your fixed costs and labor.
So youre going to not be able to leverage manage our labor. So that's why you won't see that as much versus Q2, you're not going to leverage your hospitality desk as much as you do in Q2.
Yes.
I'll give a little more background too so when we launched our margin improvement initiative in Q3 of last year, we did make some changes to our labor table starting them. So we're going to start lapping some of those efficiencies we put into place we've done more since then but it won't when you think about Q2.
Year over year versus Q3 year over year, we will start going over some of those efficiencies that we implemented last year as well.
Okay got it thank you very much.
We have reached the end of our question and answer session. We will close the conference. We wanted to thank everybody for their participation and have a great day.
Thank you thanks, everybody.
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Yeah.