BJ’s Restaurants, Inc. — Form 10-Q Summary
Period and filing mismatch: The supplied filing is for the 13 and 26 weeks ended July 3, 2018, with comparisons to July 4, 2017. This conflicts with the request metadata identifying “2016 Q2”; the source filing is for 2018 Q2.
Business context and reporting period
BJ’s operated 200 company-owned restaurants in 27 states as of August 6, 2018. Its primary format is BJ’s Restaurant & Brewhouse. The unaudited statements cover 13 weeks (quarter) and 26 weeks (year to date). Amounts below are in millions of dollars unless stated otherwise.
Financial performance and position
| Metric | Q2 2018 | Q2 2017 | 26 weeks 2018 | 26 weeks 2017 |
|---|---|---|---|---|
| Revenue | $287.6 | $265.8 | $566.2 | $523.6 |
| Operating income | $19.1 | $12.4 | $35.5 | $25.3 |
| Operating margin | 6.6% | 4.7% | 6.3% | 4.8% |
| Net income | $16.9 | $9.6 | $31.6 | $18.9 |
| Diluted EPS | $0.79 | $0.44 | $1.49 | $0.85 |
| Operating cash flow | — | — | $72.1 | $51.6 |
| Capital expenditures | — | — | $28.8 | $45.2 |
- Q2 comparable restaurant sales increased 5.6%, driven by average check growth of about 3.1% and traffic growth of about 2.5%. For the first half, comparable sales rose 4.9% (average check +3.5%; traffic +1.4%).
- Q2 net margin was 5.9%, versus 3.6% a year earlier; first-half net margin was 5.6%, versus 3.6%. Cost of sales fell as a share of revenue to 25.0% in Q2 from 26.2%, while labor and benefits rose to 35.5% from 35.4%.
- At July 3, cash was $19.4; current assets were $56.1 and current liabilities $128.5. Net working capital was negative $72.3 and the current ratio was 0.4:1.0.
- Long-term debt was $110.0, down from $163.5 at January 2, 2018. The $250 million unsecured revolving credit facility had $125.5 available after borrowings and letters of credit; the company reported covenant compliance. First-half weighted-average borrowing rate was about 3.2%.
- First-half financing cash outflow was $48.3, including $53.5 net repayment on the credit line, $6.7 of share repurchases, and $4.6 of dividends, partly offset by $16.8 in stock-option exercise proceeds. Cash declined $5.0 to $19.4.
Material changes and notable items
- Revenue increased 8.2% in Q2 and 8.1% for the first half, reflecting comparable-sales growth and sales from six restaurants opened since the prior-year periods.
- Operating income and net income rose substantially. Management attributed improved cost-of-sales percentages primarily to menu pricing, lower commodity costs and less discounting; operating leverage also helped occupancy and depreciation percentages. Higher wages, workers’ compensation and incentive compensation pressured labor costs.
- The company adopted new revenue-recognition guidance in January 2018. It recorded a $4.6 cumulative adjustment to opening retained earnings; first-half revenue included $0.9 of gift-card breakage and excluded $1.3 deferred for unredeemed loyalty points. This changed classification and timing of certain items versus prior periods.
- Effective tax rates were 4.9% in Q2 and 3.4% year to date, versus 16.5% and 22.5%, respectively. The company cited excess tax benefits on equity awards and the lower federal tax rate under the 2017 tax law.
- First-half purchases of property and equipment were lower than a year earlier, primarily due to fewer openings and reduced productivity-project spending. Q2 impairment and disposal losses also declined versus the prior year, when equipment was written off following technology and oven upgrades.
Outlook, risks and contingencies
- Management expected to open five restaurants in fiscal 2018, with three open by the filing date, and estimated full-year capital expenditures of approximately $55 million. It described a slower expansion pace as supporting free cash flow and investment in existing restaurants. Estimated domestic capacity was at least 425 restaurants.
- The company declared a quarterly dividend of $0.11 per share in April and declared another $0.11 dividend in July, payable August 27, 2018. Future dividends and repurchases remain subject to Board review and available capital. Approximately $35.9 million remained under the $400 million repurchase authorization.
- Key risks include food, labor, energy and occupancy cost inflation; consumer spending and competition; weather and seasonality; restaurant opening and staffing execution; food safety and reputation; regulation; and reliance on information technology. A hypothetical 1% change in floating facility rates was estimated to affect annual net income by about $0.8 million.
- Operating leases were not recorded as balance-sheet liabilities under the then-current accounting standard. The company expected the 2019 lease-standard adoption to materially increase reported assets and liabilities, with likely insignificant income-statement and cash-flow effects.
- Routine lawsuits and claims arise in the ordinary course, including self-insured exposures. Management did not expect their final disposition to materially affect financial position, results or liquidity, while noting outcomes could affect a particular period.
Important facts for investors to verify
- Confirm the reporting-period discrepancy: the supplied filing is for 2018 Q2, not 2016 Q2.
- Assess whether comparable-sales gains and improved operating margins persist as labor, commodity and other costs change.
- Review the drivers and sustainability of unusually low interim tax rates, including equity-award tax benefits.
- Track cash generation, debt repayment, capital spending, restaurant openings, dividends and buybacks against management’s stated plans.
- Consider lease obligations, related-party food distribution arrangements, self-insurance exposure and the effects of lease-accounting adoption.