BJ’s Restaurants, Inc. — Form 10-K Summary
Period clarification: The request metadata says “2011 Q4,” but the supplied filing is BJ’s Restaurants’ annual report for the fiscal year ended December 31, 2013. Fiscal 2013 and fiscal 2012 each included 52 weeks; fiscal 2011 included 53 weeks. This summary reflects the supplied 2013 filing, not 2011 Q4.
Business context and reporting period
BJ’s operated 146 restaurants at December 31, 2013 and reported 147 as of February 25, 2014, across 17 states. Its casual-dining concept centers on deep-dish pizza, a broad menu, and proprietary craft beer. Fiscal 2013 included 17 restaurant openings; the company’s primary expansion format is its Restaurant & Brewhouse.
Financial performance and liquidity
| Metric | FY2013 | FY2012 |
|---|---|---|
| Revenue | $775.1 million | $708.3 million |
| Income from operations | $23.9 million; 3.1% margin | $40.9 million; 5.8% margin |
| Net income | $21.0 million; 2.7% margin | $31.4 million; 4.4% margin |
| Diluted EPS | $0.73 | $1.09 |
| Cash provided by operations | $95.5 million | $88.3 million |
| Capital expenditures | $117.1 million | $109.2 million |
- Revenue grew 9.4%, but comparable-restaurant sales fell approximately 1.1%, reflecting lower traffic partly offset by an approximately 2.2% effective menu-price increase. Sales from restaurants outside the comparable base added about $74 million.
- Operating costs rose faster than revenue: labor and benefits were 35.3% of revenue versus 34.6%; occupancy and operating expense was 22.4% versus 21.2%; depreciation and amortization was 6.3% versus 5.8%. Cost of sales remained 24.8%.
- Cash and cash equivalents were $23.0 million and marketable securities totaled $9.8 million at year-end. The current ratio was 0.8 and net working capital was negative $21.3 million. No funded debt was outstanding; the company had a $75 million revolver, with $12.1 million of letters of credit outstanding.
- Operating cash flow was below capital expenditures. Cash increased by $7.9 million, with proceeds from asset sales and movements in marketable securities also affecting cash flows.
- Long-term operating-lease commitments totaled $479.3 million, plus $23.2 million relating to leases for future restaurants not yet commenced.
Material changes versus the prior comparable period
- Despite revenue growth, operating income declined 41.6% and net income declined 33.1%. Operating margin fell 2.7 percentage points.
- Management attributed margin pressure to negative comparable sales and fixed-cost deleveraging, higher marketing and insurance expense, and higher depreciation. Marketing expense increased to approximately 2.2% of revenue from 1.5%.
- Losses on asset disposals and impairments increased to $3.9 million from $0.6 million, including a $3.1 million impairment charge for an underperforming restaurant and costs associated with relocation/closure of a smaller-format location.
- The effective tax rate fell to 16.0% from 26.4%, primarily due to additional tax credits; management cautioned that this benefit was not necessarily indicative of the following year’s rate.
Outlook, commentary, risks and unusual items
- For fiscal 2014, management targeted up to 15 new restaurants and approximately 12% growth in restaurant operating weeks, with approximately $105 million of capital expenditures. It expected most revenue growth to come from new openings and the carryover effect of 2013 openings, and expected comparable-store traffic to remain pressured.
- Management expected 2014 marketing expense of 2%–3% of revenue and an effective tax rate of approximately 27%–30%. These are company expectations, not guarantees.
- The company planned to build and operate two Texas brewpubs by June 2015 under a January 2014 settlement with the Texas Alcoholic Beverage Commission concerning its prior beer-supply arrangement. BJ’s said it did not expect the transition to materially harm operations or liquidity.
- Risks highlighted include competition and discounting, weak consumer spending and traffic, food and labor inflation, minimum-wage and health-care costs, new-restaurant execution and funding needs, geographic concentration, food safety, reliance on third-party brewers and distributors, alcohol licensing, and long-term lease obligations. The company also cited potential technology, data-security, litigation, insurance, weather, and regulatory risks.
- Fiscal 2013 fourth-quarter revenue was $199.8 million, but the quarter recorded an operating loss of $2.2 million and net income of only $0.5 million. This contrasts with operating income of $8.0 million and net income of $7.0 million in FY2012’s fourth quarter; the filing attributes full-year pressures to lower comparable sales, higher operating costs, and impairment/disposal charges, but does not provide a single-quarter explanation sufficient to reconcile all of the Q4 decline.
- The independent auditor issued an unqualified opinion on the financial statements and internal controls; management also reported effective internal control over financial reporting.
Important facts for investors to verify
- Whether comparable-store traffic and sales stabilized after the reported 1.1% comparable-sales decline, and whether menu pricing can offset cost inflation without further weakening traffic.
- Whether new restaurants achieve targeted economics: mature annual sales of $5.5–$6.5 million and an 18%–20% four-wall operating cash-flow margin, targets that BJ’s cautions are not assured.
- How the planned 2014 openings and capital spending are funded, given FY2013 capital expenditures exceeded operating cash flow and working capital was negative.
- Execution, cost, timing, and regulatory compliance for the two Texas brewpubs, alongside continued dependence on independent brewers for most proprietary beer.
- The sustainability of the unusually low 2013 effective tax rate and the effect of expected 2014 labor, health-care, marketing, and other cost increases.
- The complete notes and subsequent disclosures for lease obligations, impairment assumptions, legal contingencies, and related-party supplier arrangements; Jacmar supplied $82.8 million of goods in 2013 and was affiliated with a director and an approximately 11.2% shareholder.