Filing summary
Period clarification: The supplied filing is BJ’s Restaurants, Inc.’s Form 10-K for fiscal 2016, ended January 3, 2017—not a 2014 Q4 filing. Fiscal 2016 had 53 weeks, including a 14-week fourth quarter; fiscal 2015 had 52 weeks, including a 13-week fourth quarter. Annual and quarterly comparisons are therefore affected by the extra week.
Business context
BJ’s operated company-owned casual-dining restaurants under several formats, with Restaurant & Brewhouse the primary expansion concept. It had 187 restaurants at fiscal year-end and reported 189 as of February 27, 2017. The company’s menu includes deep-dish pizza and proprietary craft beer; in fiscal 2016, pizza accounted for about 13% and proprietary craft beer about 8% of restaurant sales.
Financial and operating metrics
| Metric | Fiscal 2016 | Fiscal 2015 |
|---|---|---|
| Revenue | $993.1 million | $919.6 million |
| Operating income | $61.6 million; 6.2% margin | $63.1 million; 6.9% margin |
| Net income | $45.6 million; 4.6% margin | $45.3 million; 4.9% margin |
| Diluted EPS | $1.88 | $1.73 |
| Cash from operations | $138.4 million | $127.2 million |
| Capital expenditures | $109.4 million | $86.1 million |
| Cash and cash equivalents at year-end | $22.8 million | $34.6 million |
| Long-term debt at year-end | $148.0 million | $100.5 million |
Fiscal 2016 cash from operations less capital expenditures was approximately $29.0 million, versus $41.2 million in fiscal 2015. Net working capital was negative $48.6 million and the current ratio was 0.6:1.0, compared with negative $23.9 million and 0.8:1.0, respectively, in fiscal 2015. The company had a $250 million unsecured revolving credit facility, with $87.5 million available after borrowings and letters of credit at year-end; it was in compliance with its covenants.
Quarterly data reports fiscal 2016 fourth-quarter revenue of $265.6 million, operating income of $16.6 million and net income of $12.9 million. The corresponding fiscal 2015 quarter reported $233.1 million, $15.9 million and $10.9 million, respectively. The filing provides no 13-week-normalized comparison for the 14-week fiscal 2016 quarter.
Changes versus prior year
- Annual revenue rose 8.0%, but the increase included $21.2 million from the extra week and approximately $70.1 million from restaurants outside the comparable-sales base. Comparable restaurant sales fell 1.3% on a 52-week basis: traffic declined about 2.6%, partly offset by a roughly 1.3% increase in average check, menu mix and incident rates.
- Operating income declined despite higher revenue; operating margin fell from 6.9% to 6.2%. Net income was nearly flat, while diluted EPS increased amid fewer weighted-average shares, reflecting share repurchases.
- Cost of sales rose to 25.3% of revenue from 24.7%; labor and benefits rose to 34.8% from 34.5%. Management cited minimum-wage pressure and fixed-cost deleveraging from negative comparable sales. A change in the classification of certain promotional food costs also shifted reported costs between cost of sales and occupancy and operating expenses.
- The company opened 17 restaurants and closed one in fiscal 2016. It repurchased approximately $95.0 million of stock, or 2.5 million shares, during the year. Debt increased by $47.5 million year over year.
Outlook, risks and unusual items
- Management expected to open 10 restaurants in fiscal 2017 and forecast capital expenditures of approximately $80–$90 million. It expected most fiscal 2017 revenue growth to come from new openings and the carryover effect of fiscal 2016 openings, rather than mature-store comparable sales growth.
- Management said the slower opening pace was intended to increase free cash flow and allow more investment in established restaurants. It also planned opportunistic share repurchases, subject to cash generation, debt capacity and covenant compliance. No dividend was planned.
- Fiscal 2016 included a $0.4 million wage-and-hour settlement expense. Fiscal 2015 included a $2.9 million net gain on the Century City lease termination, following a $6.0 million landlord termination payment. Fiscal 2016 recorded $3.0 million in asset disposal and impairment losses, primarily associated with disposal of unproductive restaurant assets; the filing states no impairment expense was incurred that year.
- Material business risks include weak consumer spending and casual-dining demand, food and labor cost inflation, minimum-wage changes, competition and discounting, execution and returns on new restaurants, concentration in California, Texas and Florida, long-term lease obligations, food safety and reputational events, and dependence on third-party brewers, distributors and technology providers. The company reported $586.4 million of future minimum operating-lease payments and $28.7 million of purchase obligations.
- The filing describes ordinary-course lawsuits and claims and states management did not believe their final disposition would materially affect financial position, results or liquidity; outcomes remain uncertain. Management and the auditor reported effective internal control over financial reporting at year-end.
Investor verification priorities
- Confirm the fiscal-period mismatch in the request: this is FY2016, not 2014 Q4, and the year and fourth quarter each include an extra week versus the prior year.
- Review comparable-sales trends, especially traffic, and separate the extra-week and new-restaurant contributions from underlying growth.
- Assess whether margin pressure from wages, promotional-cost classification and negative comparable sales persists, and reconcile reported operating costs on a consistent basis.
- Evaluate liquidity and capital allocation against rising debt, negative working capital, planned capital spending, buybacks and $586.4 million of future minimum lease payments.
- Check execution and returns on the planned 10 openings, including new-market performance, construction costs, tenant allowances and the impact of long-term leases.