BJ’s Restaurants, Inc. — FY2015 Form 10-K
Period note: The request specifies “2013 Q4,” but the supplied filing is the Form 10-K for the 52 weeks ended December 29, 2015. The filing also provides unaudited quarterly results, including the quarter ended December 29, 2015.
Business context
BJ’s operated 171 restaurants at fiscal year-end 2015 and 172 as of February 22, 2016, across 22 states. Its full-service casual dining concept centers on deep-dish pizza, a broad menu, and proprietary craft beer. The company opened 16 restaurants and closed one during 2015; the Brewhouse format is its primary expansion vehicle.
Financial performance
| Metric | FY2015 | FY2014 |
|---|---|---|
| Revenue | $919.6 million | $845.6 million |
| Operating income | $63.1 million | $35.4 million |
| Operating margin | 6.9% | 4.2% |
| Net income | $45.3 million | $27.4 million |
| Diluted EPS | $1.73 | $0.97 |
| Cash from operating activities | $127.2 million | $100.0 million |
| Capital expenditures | $86.1 million | $88.1 million |
| Cash and cash equivalents at year-end | $34.6 million | $30.7 million |
| Long-term debt, including current portion | $100.5 million | $58.0 million |
FY2015 revenue grew 8.8%. Comparable restaurant sales rose 1.7%, comprising a 3.1% increase in average check and menu mix, partly offset by a 1.4% decline in traffic; new restaurants contributed approximately $60.7 million of sales. Cost of sales improved to 24.7% of revenue from 25.2%, and labor and benefits declined to 34.5% from 35.3%. Net margin was 4.9%, versus 3.2%.
For the fourth quarter of 2015, revenue was $233.1 million, operating income $15.9 million, net income $10.9 million, and diluted EPS $0.43. In the comparable 2014 quarter, these were $213.9 million, $10.9 million, $8.3 million, and $0.31, respectively.
Liquidity was limited on a current-balance-sheet basis: net working capital was negative $23.9 million and the current ratio was 0.8:1.0. The company had a $150 million unsecured revolving facility, with $100.5 million drawn and approximately $15.0 million in letters of credit outstanding at year-end; it reported compliance with facility covenants. Operating lease commitments totaled $556.5 million, excluding $32.7 million of commitments for future restaurants.
Changes, outlook, and notable items
- Operating income increased substantially year over year as revenue growth combined with lower cost-of-sales, labor, occupancy, and G&A ratios. Net income also benefited from higher sales and operating leverage.
- FY2015 included a $2.9 million net gain on termination of the Century City lease, following a $6.0 million landlord termination payment; the restaurant closed in January 2016. The La Jolla restaurant also closed in 2015, with relocation planned for 2016.
- The company repurchased 2.1 million shares for $95.5 million in 2015. Approximately $54.5 million remained under its authorization at year-end. It does not plan to pay dividends in the foreseeable future.
- Management planned 18–19 restaurant openings in FY2016, with estimated capital expenditures of $110–$120 million. It expected most revenue growth to come from new openings and the carryover effect of 2015 openings, rather than sustained comparable-sales growth at mature restaurants.
- Management targeted approximately 10% annual growth in restaurant operating weeks over the next few years. It estimated domestic capacity of at least 425 restaurants. FY2016 has 53 weeks, versus 52 weeks in FY2015.
- Management cited competitive pressure and traffic challenges in casual dining, as well as exposure to food, labor, insurance, energy, construction, and occupancy costs. Other material risks include consumer spending and brand reputation, food safety, employee hiring and retention, weather and regional concentration, liquor licensing and beer supply, cyber and technology disruption, and access to capital.
- Proprietary craft beer accounted for approximately 9% of restaurant sales in FY2015. About 70% of proprietary beer was produced by independent brewers; Texas supply shifted to company-operated brewpubs after a regulatory settlement, with two Texas brewpubs opened in April 2015.
- Jacmar, an affiliate of a shareholder and a director, supplied $87.4 million of products in 2015, approximately 20.8% of the company’s cost of sales and operating and occupancy costs. The filing says pricing was considered comparable to unrelated suppliers after a competitive bidding process.
Ernst & Young issued an unqualified opinion on the financial statements and internal controls. Management reported effective disclosure controls and internal control over financial reporting at year-end.
Important facts for investors to verify
- Confirm the intended period: this filing covers FY2015, not 2013 Q4; reconcile any analysis to the correct filing and period.
- Assess whether comparable-sales growth can persist given the decline in customer traffic and management’s expectation that mature-store growth will be limited.
- Review debt use, available borrowing capacity, covenant headroom, and planned FY2016 capital spending alongside the $95.5 million of 2015 repurchases.
- Evaluate the sustainability of earnings excluding the $2.9 million lease-termination gain and the effects of new-store opening costs and impairment charges.
- Examine the long-term lease burden, future restaurant commitments, and dependence on landlord tenant-improvement allowances and sale-leaseback proceeds.
- Monitor commodity and wage inflation, beer-production and distribution arrangements, liquor regulatory developments, and the concentration of restaurants in California, Texas, and Florida.