BJ’s Restaurants, Inc. — Form 10-Q Summary
Reporting period: The filing covers the 13 and 26 weeks ended July 2, 2013, compared with the corresponding periods ended July 3, 2012. The financial statements are unaudited; amounts below are in millions of dollars unless noted. The request metadata says 2011 Q2, but the filing itself reports 2013 Q2.
Business context and financial performance
BJ’s owned and operated 134 restaurants in 15 states at July 2, 2013. The Brewhouse format was its primary expansion vehicle. Revenue is principally food and beverage sales at company-operated restaurants.
| Metric | 13 weeks ended July 2, 2013 | 13 weeks ended July 3, 2012 | 26 weeks ended July 2, 2013 | 26 weeks ended July 3, 2012 |
|---|---|---|---|---|
| Revenue | $198.5 | $180.7 | $387.1 | $348.3 |
| Operating income | $11.8 | $12.3 | $22.6 | $24.0 |
| Net income | $8.6 | $9.0 | $16.9 | $17.6 |
| Diluted EPS | $0.30 | $0.31 | $0.58 | $0.61 |
| Operating margin | 5.9% | 6.8% | 5.8% | 6.9% |
| Net margin | 4.3% | 5.0% | 4.4% | 5.0% |
Second-quarter revenue grew 9.8%, mainly from restaurants outside the comparable-sales base; comparable restaurant sales increased only 0.03%. For the 26-week period, revenue rose 11.1%, while comparable sales increased 0.2%. Management attributed comparable-sales growth to menu pricing and favorable mix and guest incident rates, partly offset by lower guest traffic.
In Q2, cost of sales declined to 24.4% of revenue from 24.9%, and labor and benefits remained 34.2%. Occupancy and operating expense rose to 21.6% from 20.5%; general and administrative expense rose to 6.4% from 6.2%; and depreciation and amortization rose to 6.0% from 5.6%. For the first half, cost of sales was 24.5% versus 24.8%, labor was 34.6% in both periods, occupancy and operating was 21.6% versus 20.6%, and depreciation and amortization was 6.0% versus 5.6%.
Cash flow, liquidity, and debt
- First-half operating cash flow was $58.1, up from $46.4 a year earlier. Capital expenditures were $60.4, versus $56.1; investing activities used $58.2.
- Cash and cash equivalents were $15.8 at July 2, 2013; marketable securities totaled $27.7. Together they were approximately $43.5. Net working capital was $2.4, and the current ratio was 1.0:1.
- The company reported no funded borrowings on its $75 million unsecured revolving credit facility, which expires January 31, 2017. Letters of credit outstanding were approximately $9.2. The company reported compliance with its covenants.
- Property and equipment, net, was $483.2; total liabilities were $196.0. The balance sheet does not include operating lease obligations as funded debt; the filing notes that lease payments must be met from operating cash flows.
Material changes, outlook, and risks
- Revenue gains reflected restaurant expansion: management cited 12 restaurants opened since the comparable prior-year period. Five opened in the first half of 2013. Growth did not translate into higher profit: first-half operating income fell 5.9% and net income fell 4.1%.
- Management attributed margin pressure to higher occupancy and operating costs, including increased marketing and insurance, higher corporate and restaurant-support costs, and greater depreciation associated with expansion and restaurant initiatives. Better pricing and kitchen productivity helped reduce food cost as a share of revenue.
- For fiscal 2013, the company planned up to 17 restaurant openings, including one relocation, and targeted an approximately 12% increase in total restaurant operating weeks. It estimated total capital expenditures of $115–$120 million. No full-year revenue or earnings guidance is provided in the filing.
- Management estimated a fiscal 2013 effective tax rate of approximately 28%–29%. It expected food commodity costs to remain under upward pressure and cited possible increases in food, labor, energy, construction, insurance, and other operating costs. Menu pricing may not fully offset these pressures if it reduces traffic or changes customers’ purchasing patterns.
- Expansion funding was expected from cash and investments, operating cash flow, landlord tenant-improvement allowances, and sale-leaseback proceeds. Management warned that insufficient operating cash flow, landlord performance, or unavailable replacement financing could slow planned expansion. It estimated domestic capacity of at least 425 restaurants.
- Key risks include consumer spending and competition, execution and returns on new restaurants, commodity and wage inflation, weather and seasonality, lease renewal and rent costs, regional concentration, and dependence on contract brewers for much of its proprietary beer. Three restaurants had active on-premise brewing; contract brewers were expected to supply about 75% of estimated 2013 proprietary beer needs.
- The company disclosed ordinary-course lawsuits and claims, including self-insured exposure for some general liability and workers’ compensation claims. Management did not expect their final disposition to materially affect financial position, results, or liquidity, but noted quarterly results could be affected by changing circumstances. No material risk-factor changes from the prior annual report were reported.
Important facts for investors to verify
- Whether comparable sales and guest traffic improve, given Q2 comparable growth of just 0.03% and reported traffic declines.
- Whether expansion delivers profitable growth, particularly as occupancy, support, and depreciation costs increased and operating margins contracted.
- Whether the $115–$120 million capital plan and up-to-17-opening objective can be funded as planned, and the extent of future reliance on landlord allowances, sale-leasebacks, or credit-facility borrowings.
- Exposure to food, labor, insurance, lease, and construction cost increases, and the ability to offset them without harming traffic or margins.
- Related-party supplier concentration: Jacmar-affiliated distribution supplied $41.0 million of products in the first half, representing 23.0% of cost of sales and operating and occupancy costs; Jacmar was also associated with a director and owned approximately 11.2% of the company’s shares.
- Potential claims, self-insurance estimates, and uncertain tax positions. The filing reported $0.3 million of unrecognized tax benefits at July 2, 2013.