BJ’s Restaurants, Inc. — Form 10-Q Summary
Period: The filing covers the 13 weeks ended March 29, 2016, compared with the 13 weeks ended March 31, 2015. This differs from the request metadata, which identifies “2014 Q1”; the filing itself is for 2016 Q1. The company operated 175 restaurants as of May 2, 2016.
Key financial results
| Metric | Q1 2016 | Q1 2015 | Change |
|---|---|---|---|
| Revenue | $243.4 million | $225.1 million | +8.1% |
| Income from operations | $16.4 million | $13.1 million | +25.2% |
| Operating margin | 6.7% | 5.8% | +0.9 percentage points |
| Net income | $11.6 million | $9.6 million | +21.1% |
| Diluted EPS | $0.47 | $0.36 | +30.6% |
| Operating cash flow | $46.8 million | $30.8 million | +$16.0 million |
| Capital expenditures | $25.3 million | $15.8 million | +$9.6 million |
Net margin increased to 4.8% from 4.3%. Cost of sales was 24.9% of revenue (25.0% prior year); labor and benefits 34.8% (35.4%); occupancy and operating 20.2% (20.7%); and G&A 5.9% (6.0%). The effective tax rate rose to 29.0% from 27.1%.
Material changes and operating trends
- Revenue growth reflected approximately $18.6 million from restaurants outside the comparable-sales base and a $1.2 million increase in comparable restaurant sales, partly offset by $1.5 million from restaurant closures. The company opened four restaurants in the quarter and had opened 18 since the comparable prior-year period.
- Comparable sales rose approximately 0.6%: average check, menu mix and incident rates increased about 1.8%, while customer traffic declined about 1.2%.
- Operating margin improved as key expense ratios declined, including through leverage of fixed costs. Management attributed some cost-ratio changes to ending the allocation to marketing of certain promotional food costs. Minimum-wage increases put pressure on labor costs.
- Net income and EPS also benefited from a lower weighted-average share count, following ongoing share repurchases.
Cash, debt and liquidity
- Cash was $27.0 million at March 29, 2016, down from $34.6 million at December 29, 2015. Net working capital was negative $48.1 million and the current ratio was 0.6:1.
- Long-term debt under the unsecured $150 million revolving credit facility was $95.5 million, versus $100.5 million at year-end. Approximately $15.0 million of letters of credit were outstanding and stated borrowing availability was $39.5 million. The weighted-average interest rate was approximately 1.44%; the company reported compliance with its financial covenants.
- Cash from operations exceeded capital expenditures by $21.5 million. Operating cash flow increased year over year, primarily due to timing of receivables, payables and landlord contributions, as well as higher net income.
- The company repurchased approximately 587,000 shares for $24.5 million at an average $41.76 per share; about $29.9 million remained under the $250 million authorization.
Outlook, risks and notable items
- Management planned 18–19 restaurant openings in fiscal 2016 and approximately 10% annual growth in restaurant operating weeks over the next few years. Expected fiscal 2016 capital expenditures were $110–$120 million, funded by cash, operating cash flow, sale-leasebacks, landlord allowances and the credit facility. The company said future expansion could require additional financing and might be slowed if funding is unavailable.
- Management estimated domestic capacity of at least 425 restaurants. As of May 2, 2016, leases, land purchase agreements or letters of intent were in place for all potential 2016 openings.
- Risks highlighted include consumer spending and competition, food and commodity prices, labor and minimum-wage costs, weather and seasonality, restaurant-opening execution, geographic concentration, food-safety reputation, regulatory requirements, technology and cybersecurity, and access to capital. The company does not hedge commodity prices and noted that some commodities cannot be contracted for long periods.
- The Century City, California restaurant closed in January 2016 due to mall renovation. The quarter included $0.4 million of legal and other settlement expense related to a wage-and-hour claim and $0.7 million of asset disposal and impairment losses, primarily for unproductive restaurant assets.
- Ordinary-course claims and proceedings remain possible; management did not expect their disposition to materially affect financial position, results or liquidity, while noting future quarterly results could be affected. Unrecognized tax benefits were $3.1 million; the company anticipated a $1.8 million liability reduction within 12 months, subject to IRS approval of a tax accounting method change.
- A related party affiliated with a director was a major food-service supplier: it supplied $22.3 million of products in the quarter, approximately 20.3% of cost of sales and operating and occupancy costs.
Important facts for investors to verify
- Confirm the intended reporting period: the supplied metadata says 2014 Q1, while this filing reports Q1 2016.
- Track comparable-sales traffic and check trends, and whether margin improvements persist as labor, commodity and occupancy costs change.
- Assess funding capacity for the $110–$120 million fiscal 2016 capital program, including credit availability, landlord contributions and sale-leaseback execution.
- Review debt-facility covenant headroom, lease obligations and the effect of continued share repurchases on liquidity and expansion funding.
- Monitor the tax-method change and related unrecognized-tax-benefit estimate, the supplier relationship, and developments in legal claims.