BJ’s Restaurants, Inc. — FY2019 Form 10-K
Period and scope: Fiscal year ended December 31, 2019; the fiscal year comprised 52 weeks. The request metadata says “2017 Q4,” but the supplied filing is the company’s FY2019 annual report, not a 2017 quarterly filing. BJ’s operated 208 restaurants at year-end and reported 209 as of February 24, 2020, across 29 states.
Financial performance
| Metric | FY2019 | FY2018 |
|---|---|---|
| Revenue | $1,161.5 million | $1,116.9 million |
| Operating income | $49.1 million; 4.2% margin | $57.6 million; 5.2% margin |
| Net income | $45.2 million; 3.9% margin | $50.8 million; 4.5% margin |
| Diluted EPS | $2.20 | $2.35 |
| Cash from operations | $116.0 million | $132.9 million |
| Capital expenditures | $82.2 million | $61.0 million |
| Cash and equivalents at year-end | $22.4 million | $29.2 million |
| Long-term debt at year-end | $143.0 million | $95.0 million |
Revenue rose 4.0%, driven by $30.9 million from restaurants outside the comparable-sales base and 1.1% comparable restaurant sales growth. Comparable sales reflected a roughly 3.0% increase in average check, partly offset by a 1.9% traffic decline. Cost pressures reduced profitability: labor and benefits increased to 36.5% of revenue from 35.9%, and occupancy and operating costs rose to 22.1% from 21.4%. Cost of sales increased to 25.4% from 25.2%.
Net working capital was negative $93.8 million and the current ratio was 0.4:1.0, versus negative $71.9 million and 0.5:1.0 a year earlier. The company had a $250 million unsecured revolving credit facility, with $143.0 million borrowed, $18.1 million of letters of credit outstanding and $88.9 million available at year-end. It was in compliance with facility covenants. Reported lease obligations were $480.5 million in present value; these are separate from reported debt.
Changes, outlook and notable items
- Operating income fell 14.7% and net income fell 11.0% year over year despite higher sales. Operating cash flow declined by $16.9 million, while capital spending increased by $21.2 million.
- The company opened seven restaurants and closed one smaller Balboa, California location in FY2019. It repurchased $82.8 million of shares and paid $10.0 million in cash dividends; 2.1 million shares were repurchased at an average $39.93 per share.
- Management expected to open eight to ten restaurants in FY2020, with three to four anticipated in the first half, and estimated FY2020 capital expenditures of approximately $90 million. It expected 2020 marketing spending of 2%–3% of revenue. These are forward-looking estimates, not guarantees.
- Management expected most FY2020 revenue growth to come from new restaurants and their carryover contribution, plus higher average checks. It cautioned that mature restaurants were generally near peak-period capacity and did not expect sustained comparable-sales growth beyond average-check increases, assuming customer traffic was retained.
- FY2019 included a $4.7 million net gain on lease transactions from selling land beneath two restaurants. The company adopted lease accounting (Topic 842), recording $377.0 million of operating lease assets and $473.8 million of lease liabilities at adoption; this significantly increased reported assets and liabilities. Adoption also produced a $19.5 million cumulative retained-earnings adjustment.
- The effective tax rate was 2.3%, which management attributed primarily to recurring federal tax credits. The low rate materially supported reported net income relative to pretax income.
- DMA, the distribution consortium that supplied most food products, gave notice of non-renewal; the existing program was scheduled to expire June 30, 2020. The company was soliciting proposals from DMA and other distributors. A director’s affiliation with Jacmar, a DMA member and the company’s largest distributor, makes this a related-party matter.
Risks and contingencies
Key risks include declining customer traffic and discretionary spending; intense competition; food, labor, commodity, insurance and occupancy cost inflation; execution and returns on restaurant expansion; reliance on third-party delivery, distributors and brewers; food safety and reputation events; labor and regulatory changes; and technology, privacy and cybersecurity failures. Geographic concentration is meaningful, with 62 restaurants in California, 34 in Texas and 22 in Florida. The company also cited health-pandemic risks, including potential effects on traffic, staffing, supply and operations.
Substantially all restaurants were leased, generally under long-term arrangements, and future lease renewals may cost more. The company reported $644.9 million of undiscounted operating lease payments and $26.3 million of purchase obligations. It had $18.1 million of standby letters of credit supporting insurance programs. Management said ordinary-course litigation was not expected to materially affect financial position, results or liquidity, while noting outcomes could affect particular periods. The workers’ compensation and general liability reserve was $21.7 million.
Investor verification priorities
- Confirm the filing period: this is FY2019, although the request specifies 2017 Q4.
- Review comparable-sales trends, especially the traffic decline, average-check growth and whether menu pricing is sustainable.
- Assess margin pressure from labor, occupancy, delivery commissions and commodity costs, and compare performance with management’s stated outlook.
- Check FY2020 restaurant openings and approximately $90 million capital-spending plan against actual results, including expected returns on new units.
- Track liquidity, borrowing, covenant headroom, dividends and buybacks alongside operating cash flow and capital requirements.
- Verify the replacement distribution arrangements following DMA’s non-renewal notice and review the related-party disclosures involving Jacmar.
- Separate lease-accounting effects and the $4.7 million land-sale gain from underlying operating trends; review lease commitments and renewal exposure.