BJ’s Restaurants, Inc. — Form 10-Q Summary
Period and scope: The filing covers the 13 weeks ended April 3, 2018, compared with the 13 weeks ended April 4, 2017. The request metadata says 2016 Q1, but the filing itself is for 2018 Q1. BJ’s operated 198 restaurants in 27 states as of May 7, 2018.
Financial performance and liquidity
- Revenue: $278.5 million, up 8.0% from $257.8 million. Comparable restaurant sales rose 4.2%, reflecting approximately 3.8% higher average check and 0.4% higher traffic. New restaurants contributed $11.0 million of sales.
- Profit and margins: Operating income was $16.4 million versus $12.9 million; operating margin improved to 5.9% from 5.0%. Net income was $14.7 million versus $9.3 million; net margin was 5.3% versus 3.6%. Diluted EPS was $0.70 versus $0.42.
- Costs: Cost of sales declined to 25.1% of revenue from 25.4%; labor and benefits increased to 36.1% from 35.8%. Occupancy and operating costs were 20.6% versus 20.9%; G&A was 5.4% versus 5.5%.
- Cash flow: Operating cash flow was $25.8 million, compared with $21.4 million. Capital expenditures were $14.1 million versus $26.3 million; operating cash flow less capital expenditures was approximately $11.7 million. Cash increased $4.4 million to $28.7 million.
- Debt and liquidity: Long-term debt was $158.5 million, down from $163.5 million at January 2, 2018. The company had a $250 million unsecured revolving facility, $14.5 million of letters of credit outstanding, and $77.0 million available. It reported compliance with facility covenants. Net working capital was negative $56.3 million and the current ratio was 0.5:1.0.
- Capital returns: BJ’s repurchased $5.6 million of stock and paid a $0.11-per-share dividend during the quarter. Approximately $37.0 million remained under the repurchase authorization.
Material changes and notable items
- Revenue growth reflected comparable-sales gains and eight restaurants opened since the prior-year period; one restaurant opened during this quarter versus three in the prior-year quarter.
- The effective tax rate was 1.5%, compared with 27.9%, primarily due to a $1.1 million excess tax benefit from equity awards and the lower federal tax rate under the Tax Cuts and Jobs Act.
- The company adopted the updated revenue-recognition standard using the modified retrospective method, recording a $4.6 million cumulative adjustment to opening retained earnings. The quarter included $1.1 million of loyalty revenue deferred until redemption and $0.6 million of gift-card breakage recognized as revenue.
- Interest expense increased to $1.4 million from $0.9 million, attributed to higher rates and a higher average debt balance. Other income of $0.8 million in the prior-year quarter became other expense of $0.1 million, partly reflecting reclassification of gift-card breakage under the new standard.
Outlook, risks and contingencies
- Management expected to open five to six restaurants in fiscal 2018 and projected fiscal-year capital expenditures of approximately $50 million to $55 million. It cited the slower expansion pace as a source of increased free cash flow and flexibility, while directing more resources toward existing restaurants and shareholder returns.
- The company estimated domestic capacity of at least 425 restaurants. It expected to fund growth and capital spending through operating cash flow, cash on hand, landlord allowances, sale-leaseback proceeds and its credit facility; it cautioned that financing might not be available on acceptable terms when needed.
- Key risks include competition and consumer-spending weakness; food, labor, energy and occupancy cost inflation; labor availability and wage regulation; weather and seasonality; food-safety and reputational issues; restaurant development and lease availability; and reliance on information technology and beer supply arrangements.
- The revolving debt carries floating rates. Management estimated that a hypothetical 1% rate change would have an approximately $1.4 million annual impact on net income. Commodity costs are also exposed to market volatility; the company uses some fixed-price purchasing but does not use financial instruments to hedge commodity prices.
- Ordinary-course legal claims and proceedings are ongoing. Management did not expect their disposition to materially affect financial position, results or liquidity, while noting that future developments could affect a particular period. The company is self-insured for portions of certain liability and employment risks.
- Adoption of the lease accounting standard was expected to materially increase reported assets and liabilities, with likely insignificant impact on earnings. The filing says adoption is expected in fiscal 2019 but contains an apparent reference to “ASU 2016-09” where the surrounding discussion concerns lease standard ASU 2016-02.
Important facts for investors to verify
- Confirm the reporting period: the filing is for the quarter ended April 3, 2018, despite the request metadata’s “2016 Q1.”
- Assess whether comparable-sales growth and cost trends—particularly labor, incentive compensation and workers’ compensation—are sustainable.
- Review the company’s substantial lease obligations, negative working capital, floating-rate debt exposure and covenant headroom; the filing does not provide a clear covenant cushion value.
- Track execution against the five-to-six restaurant opening plan and $50 million–$55 million capital-spending outlook, along with the use of credit and landlord funding.
- Evaluate the effects of the new revenue-recognition treatment and tax-law changes when comparing periods, including the retained-earnings adjustment and altered gift-card and loyalty accounting.