BJ’s Restaurants, Inc. — Form 10-Q Summary
Period and filing: The supplied filing is for the 13 and 39 weeks ended September 27, 2016, compared with the periods ended September 29, 2015. This conflicts with the request metadata identifying “2014 Q3”; the filing itself is for 2016 Q3. Financial statements are unaudited. Dollar amounts below are in millions unless noted.
Business context and results
BJ’s owned and operated 186 restaurants across 24 states as of October 31, 2016. The company’s principal expansion format is BJ’s Restaurant & Brewhouse.
| Metric | 13 weeks ended Sep. 27, 2016 | 13 weeks ended Sep. 29, 2015 | 39 weeks ended Sep. 27, 2016 | 39 weeks ended Sep. 29, 2015 |
|---|---|---|---|---|
| Revenue | $233.7 | $229.4 | $727.4 | $686.5 |
| Operating income | $9.1 | $16.5 | $45.0 | $47.2 |
| Net income | $7.2 | $12.4 | $32.7 | $34.4 |
| Diluted EPS | $0.30 | $0.48 | $1.33 | $1.30 |
| Operating margin | 3.9% | 7.2% | 6.2% | 6.9% |
| Net margin | 3.1% | 5.4% | 4.5% | 5.0% |
Cash flow, debt and liquidity
- 39-week operating cash flow was $108.6, up from $99.6 a year earlier. Capital expenditures were $80.7, versus $63.1; cash after those expenditures was approximately $28.0, before financing and other items.
- Cash ended at $25.9, down from $34.6 at December 29, 2015. Net working capital was negative $55.5, compared with negative $23.9; the current ratio declined to 0.6 from 0.8.
- Long-term debt was $109.3, compared with $100.5 at year-end 2015. The amended unsecured revolving facility totals $200; $109.3 was borrowed, $14.9 of letters of credit was outstanding, and $75.8 remained available. The company was in compliance with its financial covenants at quarter-end.
- The company repurchased 1.17 million shares for $47.4 during the 39 weeks, at an average $40.33 per share. Approximately $107.1 remained under the $350 million authorization. No dividends were planned for the foreseeable future.
Changes versus prior comparable periods
- Quarterly revenue grew 1.9%, but comparable restaurant sales fell 3.4%; customer traffic declined 4.2%, partly offset by a 0.8% increase in average check. New restaurants added approximately $13.3 of sales.
- For the 39 weeks, revenue rose 6.0%, largely from approximately $52.7 of sales at restaurants outside the comparable base. Comparable sales declined 1.0%, with traffic down 2.5% and average check, menu mix and incident rates up approximately 1.5%.
- Quarterly net income declined about 41%, and operating margin fell 3.3 percentage points. Cost of sales rose to 25.6% of revenue from 24.5%; labor and benefits rose to 35.1% from 34.4%. Management cited promotional-cost allocation changes, commodity and promotional pressures, minimum-wage increases, and fixed-cost deleveraging from weaker comparable sales.
- 39-week net income fell about 5%, despite revenue growth. Operating margin declined to 6.2% from 6.9%. The prior-year periods included a $2.9 gain on lease termination, which did not recur; 2016 also included $0.4 of legal and other settlement expense.
- The company opened 12 restaurants during the 39 weeks and reported 16 openings as of October 31, 2016.
Outlook, commentary and risks
- Management expected to open 10–15 restaurants in fiscal 2017 and estimated fiscal 2017 capital expenditures of approximately $80–$90. It expected fewer openings than in 2016 to reduce capital spending and increase free cash flow. Funding sources include operating cash flow, cash on hand, sale-leasebacks, landlord tenant-improvement allowances and the credit facility.
- Management estimated domestic capacity of at least 425 restaurants. It cautioned that expansion plans could be curtailed if operating cash flow, landlord contributions, sale-leaseback proceeds or financing are insufficient.
- Principal disclosed risks include weak consumer spending and comparable sales, food and labor cost inflation (including minimum wages), commodity supply and price volatility, competition, restaurant execution and expansion delays, weather and geographic concentration, food-safety or reputation events, regulatory changes, technology or cyber failures, and lease renewal and rent costs.
- The company is self-insured for portions of general liability and workers’ compensation. It said ordinary-course claims were not expected to materially affect its financial position, results or liquidity, but acknowledged outcomes could affect a particular period. Unrecognized tax benefits were $1.5, of which approximately $1.0 could affect the effective tax rate if reversed.
- Jacmar, a shareholder-affiliated supplier, provided $67.1 of products during the 39 weeks, equal to 20.2% of the combined cost-of-sales and occupancy-and-operating expense base stated in the filing; trade payables to Jacmar were $5.1 at quarter-end.
- New lease, share-based compensation and revenue-recognition accounting standards were under evaluation; the filing did not quantify their expected financial effects.
Most important facts for investors to verify
- Confirm the intended reporting year: the request says 2014 Q3, while the filing reports 2016 Q3.
- Track comparable sales and traffic trends, and whether new-store growth can offset continued comparable-sales weakness.
- Assess margin recovery against food, promotional, wage and occupancy pressures, including the impact of the promotional-cost reclassification.
- Review liquidity and capital allocation: negative working capital, credit-facility availability, planned capital spending and continued share repurchases.
- Monitor execution and funding of the restaurant pipeline, lease obligations, supplier concentration, and legal, tax and self-insurance exposures.