BJ’s Restaurants, Inc. — Form 10-Q Summary
Period and date discrepancy: The filing covers the 13 and 39 weeks ended October 3, 2017, with comparisons to periods ended September 27, 2016. This conflicts with the request metadata labeling the filing “2015 Q3”; the filing itself is for 2017 Q3. The statements are unaudited.
Business context and financial results
BJ’s operated 195 company-owned restaurants as of November 6, 2017. Revenue comes from restaurant food and beverage sales. In Q3 2017, revenue grew as new restaurants more than offset declining comparable sales.
| Metric | 13 weeks ended Oct. 3, 2017 | 13 weeks ended Sept. 27, 2016 | 39 weeks ended Oct. 3, 2017 | 39 weeks ended Sept. 27, 2016 |
|---|---|---|---|---|
| Revenue | $247.0 million | $233.7 million | $770.6 million | $727.4 million |
| Operating income | $1.6 million | $9.1 million | $26.9 million | $45.0 million |
| Net income | $2.4 million | $7.2 million | $21.3 million | $32.7 million |
| Diluted EPS | $0.11 | $0.30 | $0.97 | $1.33 |
| Operating margin | 0.6% | 3.9% | 3.5% | 6.2% |
| Net margin | 1.0% | 3.1% | 2.8% | 4.5% |
For the 39 weeks, operating cash flow was $69.1 million, down from $108.6 million. Capital expenditures were $57.4 million, versus $80.7 million; cash at October 3 was $28.7 million. Current liabilities exceeded current assets by $47.8 million; the current ratio was 0.6.
Long-term debt was $194.0 million, up from $148.0 million at January 3, 2017. The $250 million unsecured revolver had $14.4 million of letters of credit and $41.6 million of available borrowing capacity. The company was compliant with its financial covenants. Its reported weighted-average interest rate for the 39 weeks was approximately 2.2%.
Material changes and drivers
- Q3 revenue rose 5.7%, but comparable restaurant sales fell 1.7%, reflecting traffic down 3.0% and average check up 1.3%. For the 39 weeks, comparable sales fell 1.5%, with traffic down 3.9% and average check up 2.4%. New restaurants contributed approximately $17.2 million of Q3 and $56.3 million of year-to-date revenue.
- Q3 costs rose faster than sales: cost of sales increased to 26.5% of revenue from 25.6%; labor and benefits to 36.9% from 35.1%; and occupancy and operating costs to 22.4% from 21.6%. Management cited commodity costs, menu mix and promotions, higher hourly labor rates, training labor, and fixed-cost deleverage from negative comparable sales.
- Year-to-date cost of sales, labor and benefits, and occupancy and operating costs also increased as a share of revenue. Together with higher depreciation and impairment charges, this contributed to lower operating income.
- Q3 included $0.9 million of hurricane-related costs from Hurricanes Harvey and Irma, beyond related insurance coverage, and $0.4 million of severance and legal settlement expense. Year-to-date asset disposal and impairment losses were $4.2 million, primarily from write-offs of ovens and point-of-sale equipment.
- Interest expense increased to $3.2 million for the 39 weeks from $1.1 million, primarily because of higher revolver borrowings. The year-to-date effective tax rate was 15.6%, versus 27.0%, primarily reflecting tax credits and lower forecasted income.
- The company repurchased 1.7 million shares for $57.3 million during the 39 weeks. Shares outstanding at October 3 were 20.7 million, versus 22.3 million at January 3.
Outlook, risks, and contingencies
- Management expected to open two additional restaurants before year-end 2017 and planned four to six openings in fiscal 2018. It estimated fiscal 2018 capital expenditures of approximately $50 million to $60 million and said a slower expansion pace should reduce capital spending, increase free cash flow, and direct more resources to existing restaurants.
- Management expected to fund spending from cash, operating cash flow, sale-leasebacks, landlord tenant-improvement allowances, and the credit facility. It cautioned that cash generation may not fully cover plans and that additional financing may not be available on acceptable terms; expansion, repurchases, dividends, or other shareholder returns could be reduced if resources are insufficient.
- The board declared a quarterly dividend of $0.11 per share, payable December 4, 2017. Future dividends remain subject to quarterly board review and discretion. The company had $52.2 million remaining under its $400 million repurchase authorization at October 3.
- Key disclosed risks include comparable-sales weakness and consumer spending, food and labor inflation, minimum-wage and other regulatory changes, weather and seasonality, food safety and reputational issues, restaurant-opening execution, geographic concentration, lease costs, and dependence on information technology and third-party beer suppliers. A 1% interest-rate change on the current debt balance was estimated to affect annual net income by approximately $1.6 million.
- The company reported ordinary-course litigation and self-insured exposure, but management did not expect the matters to have a material adverse effect on financial position, results, or liquidity. Unrecognized tax benefits were approximately $1.3 million. The filing noted that most restaurant and support-center leases were operating leases and not then recorded as balance-sheet liabilities; the company was assessing the impact of the forthcoming lease accounting standard.
Important facts for investors to verify
- Confirm the period: the filing reports 2017, despite the metadata’s 2015 Q3 designation.
- Track comparable-sales trends, especially customer traffic, and whether cost pressures and operating margins improve.
- Monitor debt, revolver availability, covenant compliance, and the effect of floating rates on interest expense.
- Assess whether planned openings and capital spending align with operating cash flow, and how repurchases and dividends affect liquidity.
- Review the impact of the new revenue and lease accounting standards, including loyalty-reward accounting and lease obligations.