BJ's Restaurants, Inc. (BJRI) Earnings Call Transcript & Summary

[ Welcome ] to the webcast, I'm very happy to have an old friend with me today who is Greg Levin, who actually have not seen in his current role as CEO of BJ's Restaurants, and congratulations on that well-deserved appointment. We caught up earlier about Santa Barbara, where we used to do a number of events, which is a place that we both hold dear to our heart. So it's great to see Greg again, albeit in Las Vegas at this time; and meeting Tom Houdek, the company's Chief Financial Officer, as well for the first time. This is not a company that is under active JPMorgan research coverage, so it might be a little bit more catching up than some other meetings that we have done. But certainly, look forward to talking to Greg and Tom. Gentlemen, welcome.

So it's very interesting, as we sit here today, the mass restrictions are rapidly being dropped in indoor, gyms, schools and what have you. And are you beginning to notice any change in customer attitude usage, maybe even employees satisfaction in terms of coming to work especially in core markets of California where you have significantly over-indexed exposure relative to many casual dining peers?

Yes, it's a great question, John. And I do think we're seeing increased consumer demand as we really exit, I think, Omicron more than anything. But at the same time, the psychological barrier of masks being lifted, I think, is making consumers feel a little bit getting back to doing things that they were doing pre-COVID. So we've seen a nice trend there, especially coming out of January and into February now into March with consumers maybe increasing their visitation. And at the same time, we said this on our call a few weeks back that we continue to see improved hiring across the board. So not only are consumers coming back, but team members seemingly want to go out and get jobs. And at the same time, if you're working in the kitchen, you love not having to wear a mask. It's already hot back there. So those type of changes all are a benefit for not only the consumers, but also for team members at our restaurants and I'm sure other restaurants and other retail facilities.

I mean you had made a comment that the comps in fully staffed restaurants were 10% better than those still in the process of rebuilding your teams. I mean that's a fairly wide gap. I mean where are we in terms of this journey of staffed restaurants versus those that still need hours? Where -- and is that sales gap narrowing?

Well, so where we are today is we probably have, I would say, about 10% of our restaurants that are not where we'd like them to be in regards to staffing levels. And you still see it on those 10% out of 200 restaurants, let's call it about 20 restaurants that have a pretty big gap versus our fully staffed restaurants. So you still tend to see that play out there. But that progress that we made towards only 10% of our restaurants has been tremendous progress that we made at the beginning of this year, and we feel much better about staffing and, frankly, the trends that we continue to see in it.

And in terms of performance across different states, different cities, even different types of locations, how significant has the variance of performance has BJ's been? And I guess, by definition, do you expect the laggards to significantly become the leaders as we're into 2022?

Yeah. We said this on our call, and it's been pretty consistent and that is certain areas -- and really, I'd almost say today, maybe one area, more in the Northern California tends to be more of a lagger and that's really around the office buildings. And Tom has said this earlier in some of our one-on-one meetings that there's just a lot of news about people coming back to the offices. I believe Microsoft is already back in the offices, some of the other large employers in the Northern California area are coming back. So we expect as the employers come back that, that lunch daypart continues to pick up, especially in those areas, and that improves those comp sales in there. Other than that, you tend to see a difference between maybe the suburbs and restaurants that might be more business-centric like Northern California. And again, I think that's people coming back to the offices, that's going to drive that number better.

A couple of numbers that I would like to ask like where is lunch relative to 2019 levels? I know that had been weak late night, have been weak. I mean how much -- and if those businesses fully recovered to the levels that they previously were, how much would that in and of itself help your comps?

[ Wait ] and see if Tom has anything he wants to add to it. But I think the way we tend to still look at our business, even though we continue to see improvement in the comp sales going forward, is -- we've talked about this generally, and that is -- and I'll keep it in simple math, and that is prior to COVID, we did about $110,000 weekly sales average. And out of that $110,000, $100,000 was dining room, $90,000 was takeout. So that's how you got to the $110,000. And what we've seen more recently is takeout or off-premise and total, such as delivery and takeout, is now doing $20,000 plus. And the dining room, primarily in lunch and late night is still down, and that puts us in that kind of 90%, 95% range. As that comes back, and you just -- if you think that that dining comes back to $100,000 and you now hold on to off-premise, which we've seen to be very sticky, we go from that $110,000 weekly sales average all the way up to $120,000. That's just purely by getting that dining room back. And that is centered -- a lot of it's around the dining room. There's still opportunity for maybe what I'd call later dinner. Dinner tends to drop off a little bit earlier today. It's being made up by higher mid-afternoon and then it's out late night. I don't know if there was -- Tom, anything you want to add to that?

Yeah. And to Greg's point, the two dayparts that we're most focused on or they have the biggest opportunity in percentage terms are both lunch and late night. So lunch, very much tied to the offices coming back, which is in process of happening. And late night, it's a bit staffing and a bit self-imposed. We're still down about an hour per restaurant per day. So during the week, we did close at midnight, now it's 11:00 for most restaurants and for Friday, Saturday it was 1:00, now midnight. So we're -- staffing is rebuilding, as Greg mentioned, we're looking at across the system right now and finding the right cadence to start bringing back some of those hours too that will help that late-night daypart. Both that hour you add back, but you also get some benefit in the shoulder hour in the 10:00 to 11:00.

And by the way, that's also part of the consumer psyche, getting rid of masks and getting back to more pre-COVID activity. So as much as we've brought that down as well, there is some of the consumer that wasn't necessarily wanting to stay out till 12 o'clock.

Yeah. I understand that. I mean I don't even – Miami Beach used to be filled with 24-hour restaurants. I don't even know if there's one now. I mean still it's like people -- our IHOP is open 24 hours. Everything is taking a long time to come back. So it was interesting reviewing that your off-premise mix is -- I mean is actually -- is low relative to many peers. I can maybe only think of Texas Roadhouse, which is lower than you, it has 0 delivery business. So is that -- do you not focus on it? I mean was that not a priority? I mean do you prefer people to come in for the differentiated experience that BJ's has relative to its peers?

Yeah, that's a great question. And it's a little bit of both. We've done a lot of consumer research over the last year, 1.5 years, and I'm fortunate enough to take over at a time when I've got all this guest data. And ultimately, what we've realized or what we've seen is guests come to BJ's for kind of a social dining experience. And that core, our most valuable guest, really is kind of broken down into two areas that we call the Cheers on tap guest and the [ scapers ] that are coming again to either celebrate and have a great time or they're coming to kind of escape the day with friends and so forth. So when you start to think about that mix on our business, it is an experienced restaurant versus a pop-in restaurant. And that's why we have under-indexed in off-premise. And that's an area that's tremendous opportunity for us is how do we continue to drive that experience in the off-premise business, what are the initiatives for us to continue driving that. Some it's around technology and making it more frictionless. But the other thing is looking at that menu mix and what travels well, what works really well in the off-premise business and start to market and promote into that area. So ultimately, to your point, it's nice to go from 10% to 20%, we're actually at 20% plus, but we think there's still opportunity to go above that. The other side of that that plays into it as well, and we talked about this on our call, is we're just scratching the surface on catering. And catering is an area that we're putting some focus on as well that will help grow that today, let's call it, 20,000 plus in off-premise to continue to move that to 25,000 and 30,000 and so forth.

And did you not, I guess, put a lot of promotional muscle behind your third-party apps? I mean, remind me where we are on delivery. And I guess why many people think that that's a fully incremental part of their business, and it's worth giving up a margin to get that fully incremental part, but would love to hear your perspective.

Well, I think the best way to look at that, and I think at our company is probably the same ability, is COVID gave a little bit of a -- gave the ability to actually see what happens as dining rooms close and then open up. And as COVID came on board, and obviously, we had to close all of our dining rooms, the off-premise channel just doubled and actually tripled for a while. And it was a combination at first of takeout being significantly higher and then third-party delivery growing as well. And what we've seen as our dining rooms open up is the third-party delivery business is really, really sticky. It hasn't moved down as much. And takeout went up a lot because those are people that really are fans of the BJ's restaurants, and they want to support it and use it for takeout, never thought about maybe using it for take-out before. And then as the dining room opened up, they get to enjoy that social dining experience again. And that takeout business is probably at a higher correlation -- say probably that take-out business does have a higher correlation with the dining room where the third-party delivery has tended to be very, very sticky. Which if you start to look at it and have this time to kind of go back, it does show that the convenience of third-party delivery is a different dining occasion. And frankly, even take out as we've seen it because it hasn't been a one-for-one correlation as dining rooms open. It's actually double where it was before, shows that that's also a different dining room occasion.

And the other piece to the math and the mix calculation is really what your base of sales is. So our $10,000 going to $20,000 in off-premise, there's other concepts that have done that. But when their base of sales for their dine-in is only $50,000, they're getting almost double the benefit in terms of comp growth and as well as mix. So where doubling up to 20 is great. But to Greg's point, we've got a lot of initiatives to find ways to even drive that further because there's certainly -- the consumer wants convenience, the consumer wants to eat at home. And I think as Greg was alluding to, this is very much incremental to our business. We see this as more of a cannibalizing from grocery. It's people not wanting to cook and clean up after and go through that. They're having their favorite foods brought to them or picked up from restaurants. So we just want to make that easier and give them more opportunities to do that from BJ's.

And then, the specific trade areas or maybe even the specific centers that you are, what has been the state of competition? I think you have 211 units. I mean have you seen material relevant competition around you contract? Or are there openings to come? How has been that shift? I mean we talked about it, gosh, for many years. I mean there was less retail square footage, more restaurant square footage. I mean, that was smack into 2020. And then presumably things probably changed or at least moved around to some extent. How would you characterize your competitive environment relative to '19?

It's come down overall. I don't think it's come down in huge ways like people thought. And I think a lot of it has to do with the fact that, frankly, casual dining and restaurants in general are -- have a lot of competition [ in our guys ]. It's a fractured business and you're not going to get one retailer, you're not going to get a Circuit City disappearing in the restaurant space. It just doesn't have that set up there. So we see pockets in areas where certain maybe older mass casual chains have disappeared and gone out. We've also see more independents go out. The one thing I would say, though, is, generally, there's a turnover. So it's not like that box that's vacant for two years or three years, but you'll see a six months to a year of an empty box, then maybe a local person will jump into it, a local competitor might jump into it. So it's eased. But again, you're not going to see some massive restaurant company disappear. I think John, in your time and my time, I'm not sure if there's any major casual dining concept that has entirely disappeared.

I mean we -- I mean, Ruby Tuesday was a significant contraction, maybe Logan's Roadhouse, but I mean it's like -- but I have to -- like really Boston Chicken contracted a lot. It's like we're on one hand, more or less, in terms of like that you think -- that even on like a local market, you've actually seen some -- you'll see some sales moving around.

And the best outcome is when you see those restaurants go vacant and then turn into a bank or to a shoe store [indiscernible] a Pay Less.

It does happen periodically.

But if it is a temporary and another restaurant pops up, it helps you in the near term.

I mean -- Gene [ Levy ] used to always talk about this, he was right. It's like once you have your gas lines and your friers and your freezers in, someone's going to do something with that in food service. If you think of this as it's like taking a vault out of a bank. It's not even worth deconstructing it. Yes, so that make -- brings you to the next point and that was like, okay, it's like maybe incrementally less competition that you can look at some empty square footage that's around. Eight restaurants doesn't strike me as a lot for 2022. But I mean, how is that really relative to a run rate in terms of where you would like to get this brand in 2023, '24? I think your overall U.S. unit potential is unchanged, but just kind of put that into context in terms of how many units, 425, I was going to say 450. 425 units, you're less than half of that today. I mean, does it make sense to reaccelerate? Or are we at the point where generating healthy free cash flow for investors might be incrementally more important?

Yeah. So first and foremost on that, we have always been about quality over quantity. And we're going to stick to that. That's been the mantra since the day I joined BJ's many teen years ago in that regard. And as a result of that, we have never had one of those press releases that you see from other companies saying, hey, we're closing or taking a write-off on 20 of the last 40 restaurants that opened. And I know the Street gets super excited about hearing somebody go public and say they're going to grow at 20%. And that's great for about a year. And again, in year or three, all of a sudden, they're writing off a bunch of restaurants. So the cadence that I think about in our business and where we'd like to get to is a minimum of 5% unit growth, and frankly, I'd like it to be closer to 7%. And we've got to build up to that. So we've got to rebuild our training department. We've got to rebuild a little bit of our supply chain team and so forth in regards to being able to make sure that we can execute new restaurants at the level we did pre-COVID. I mean we got up to 17 restaurants prior to that. And so if you start to think about it, eight restaurants on a base of, let's call it, 200, it's below the 5%. And we need to get that up. So you'll see that eight restaurants grow next year, and we'll grow from there as we start to move it into the -- closer to the 5% to 7%. And even as I think about the growth of our business, we've got a really, really healthy pipeline. The challenge right now, besides rebuilding some of our training and talent development team and our training managers, has actually been more to do with permitting and planning coming from the municipalities and getting the HVAC and other kitchen equipment into our restaurant from a timing perspective. So that's still a little bit more challenging, and we were really looking more at 8% to 10% this year, kind of backed it off to 8% because of the planning and permitting and the equipment. But there's tremendous growth. The goal is to move that up, but it's going to be done with quality, not quantity.

Yeah. So a couple things we talked about before, years ago, your predecessor, I mean it was kind of like no more units in California ever. I want to know if that's [indiscernible], I get that. I want to know if that's still the case. Where are those eight going? It's interesting seeing what your state by state is. I mean, you're not very penetrated anywhere outside of Florida, Texas and California. So does it make sense to pick a market and penetrate it, but you tell me what your [indiscernible] line is?

Yeah. So the goal there is always to do a combination of infill and new markets. So you don't run to the point where you all of a sudden are doing all new markets. And as we think about this year and even next year, it's across the board in that infill in new markets. So we're going to be opening restaurants in the San Antonio market this year. We're actually going to be opening restaurants out here in the Vegas market. We've already got four restaurants out here do really well. We're excited to finally build a couple more here. We're adding another restaurant into Arizona where we've got, I want to say, seven total restaurants. So those are kind of those infill markets. At the same time, we're now looking at Chicago and building into the suburbs of the Chicago market and starting to fill out that kind of Middle East area. We've got a restaurant coming into Framingham. Super excited to get that restaurant up there in the Northeast, which kind of to your point, is an underpenetrated market for us. So I think over the next several years, you'll see still that infill, maybe even a few here in California where we've got some openings primarily in the Southern California market in San Diego. And then we'll continue to work into the Midwest and into the Northeast as kind of at our hubs to build out.

I mean most people seem to be Tennessee, Florida, Georgia, Alabama, Texas, but that's not for you?

I wouldn't say it's not for us. As I just said, we're building up in San Antonio. We are looking for a couple of sites in the Houston market. We're looking at a couple in Florida as well. But we found ourselves doing really, really well in the Midwest. Our latest restaurants that we opened in Lansing, Michigan, and last year, Merrillville, Indiana are both exceeding the sales levels of other restaurants in those same states. And so we like really going into that. And the thing that is super exciting about the BJ's concept, I think people kind of miss this, is we have this ability to go into McAllen, Texas and El Paso, Texas. And we talked about this before, John. We're in Pennsylvania, but we're not the King of Prussia. We're in Allentown and we're a Lancaster and McCandless, like the ability to go into a lot of those markets with this type of concept is, I think, very differentiated, especially in the polished casual space. The polished casual space wants to go into Florida. They want to do a Dallas, Fort Worth. They want to do some of those kind of higher end markets. And we have the ability to go anywhere, and that's really exciting. I think it's really differentiated from a growth story versus I think what a lot of the other companies try and do.

As I came in, I wanted to go to a restaurant and I kind of looked at the map. I mean you guys were like on the outer ring of Las Vegas. I mean you kind of -- you guys have got to look at a map -- kind of juxtapose it relative to the airport. And I can just kind of see how that grows. Is that -- I mean, is that -- is it not -- is it the outer ring of major cities and just kind of like more mid-tier cities? I mean is that now the sweet spot that's been developed overall?

I don't know if that's now the sweet spot. I mean, we'll take a look at everything. But I would generally say we work really well as kind of this suburban nonchain chain restaurant. So you start to think about Vegas, as you just talked about it. We do really well in Henderson, in Summerlin and Centennial. Those are all these great growing suburbs that, to your point, surround Las Vegas. And that's really kind of, to your point, maybe a little bit of our sweet spot. We wouldn't necessarily say no to major cities, but we really like being that nonchain chain I mentioned in just great suburban markets.

I'm on your e-mail list, and I don't remember even like which restaurant specifically, that knows me to have gone to because I've gone -- gone to many. I clicked on it and I guess it was a Guinness night that you have, sold out. Just -- I think it's on a Monday night, and it's not St. Patrick's Day. So I feel like -- explain to me -- like I mean that's obviously like, okay, you guys have obviously hit something with this.

Well, we have this craft beer authority, and we want to continue to leverage that. That's part of the testing of our beer club in California, which we'll continue to test and continue to grow members there and figure out the right experiential event that happens around that beer club as well as being such a great product. But at the same time, we've been doing this for many, many, many years. We have these quarterly beer dinners that are curated by our brewery department. And they'll go out and get with Guinness and find some of the regular Guinness beers, but also unique Guinness beers where we do these beer dinners like a wine dinner. And you get a taste of different beers and you get to eat, obviously, BJ's great food. And it's unbelievable the following that we have for that -- for those beer dinners. And to your point, they get sold out time and time again.

And can we push those to monthly or does it lose its...

They are -- I don't think we can push it a monthly. It's a great idea. The challenge there actually is making sure, and you think about it in today's environment, making sure you've got the right supply chain lined up for unique and differentiated beers -- and that's really the challenge and then we create the menu items that fit with it and so forth. We would love to have it monthly, Don't get me wrong. But we want to make sure that there's a specialness to it. It's -- we get the same question even like on Prime Rib. We do such a great Prime Rib with our slow roast ovens, that you start to think, well, should we have it on a Monday, Tuesday, Wednesday, Thursday, and it's really about trying to offer something unique and differentiated on the weekends. I think the beer dinners play the same way.

Greg Trojan would remember this. I mean I think the first time I had a handheld ordering device for full service in the United States was yours, and this is gosh, who knows. I mean I'm not very good at years anymore, probably seven, eight years ago. But I mean, you were kind of -- you were doing technology that others were not. I mean, you recognized the need to reduce the demand for labor at your stores while maintaining or even improving customer service. I mean, walk me through the technology and equipment journey, I guess, that you have been on and what some near-in opportunities might be.

Yeah. So from a historical standpoint, we were the first casual dining restaurant, maybe one of the first restaurants period to come out with a mobile app. And that mobile app allowed, obviously, to pay an order and actually put your name on a wait list and so forth. And we continue down that path with the handheld tablets -- by the way, even prior to that, and you've obviously known us for a long time, we put in table management systems and kitchen display systems and so forth to really unlock the capacity in our restaurants to become more efficient. So we think always looking at technology from an efficiency standpoint is really important. And to your point, we put out handheld devices that allow us to get that order into the kitchen that much quicker. By the way, we didn't necessarily do that to change our staffing model. So we didn't all of a sudden go, a server can now take on 8 or 9 tables. That was never our model. And it's about how can we use that to be faster in regards to bringing things out and give guests, to your point, a better dining experience. Going forward, we continue to work on how does technology play into the off-premise. I know a lot of people talk about that, and we'll be piloting or rolling out, I believe, later this year, order tracker for takeout. We have the -- so you know where your order is, and therefore, you can come with your car and pick it up at the right time. Obviously, you have SMS technology and so forth as well as texting when you get there and curbside pickup through technology, which is really, really important. I think there's two next steps that we're looking at, and I'm sure others are, and one is how can we get better on understanding sales patterns? At the end of the day, we really know our sales patterns, the efficiency driven in a restaurant in regards to what do you prep that day? How many people you bring in from a staffing perspective, how you face people is so, so important. And that drives that margin in our business. And frankly, like the hotel industry and the airplane industry do that way better. You're talking about artificial intelligence, and you see what goes on with hotel rooms and pricing and same thing with airplane tickets. We need to get to that at BJ's, and probably the industry overall, in regards to getting much more predictable. The other side of it has started to use artificial intelligence to make sure that the food itself looks good. As it's sitting up there in the window and you've got all these different food ingredients, we should be able to have the ability to take pictures and see what's going on to make sure the product looks the way it needs for training. And that's the other area in regards to technology, how do we can look at our product. We can also use that technology at the front door to see if people are waiting and wait times and so forth through our business. So there's a lot of opportunity, I think, around technology for BJ's to improve. And frankly, we're diving into that. And then the last one, John, around technology -- I think everybody is using this as well -- is how do we use technology to understand our guests better. We get that through our loyalty program. We get it through our beer club program. But at the same time, as guests are now using digital to order takeout, that's a lot more information for us. And as we started to understand our guests more over this last year, we now have a lot more robust guest information and data to figure out who's a look-alike of our most valuable guests that doesn't come to BJ's today that we can reach out to and entice them in from a digital perspective.

It's a little bit of a personal thing between you and I. So in March of 2009, you sat here, maybe even exactly here and said, if you look at the cost of commodities relative to the pricing [ method ] in March of 2009 relative to the pricing that this industry took in 2008, he's like, I've got new issues, like every single company you cover is going to just destroy earnings. You gave me just like -- you made this like great comment. It goes like, that's [indiscernible]. I don't know. You're worried that the stock market is going down. We had this huge housing crash, but COGS dropped by a couple hundred basis points and like almost every company made more money in 2009 than they did in 2008. It's like even after kind of the crash of Lehman. So you obviously -- so I'm giving like a lot of credit at just like seeing the world in a way that others did not, just like all those stocks were absolutely at their bottom at that point. How do you feel about the current -- the oil market, the commodity market, the labor market rents? I mean, what's your overall sense in terms of how you and this industry -- not just from an overall demand environment, but how cost will affect the consumer and how cost will influence various companies, especially your own and the industry? And that's a very real-time question. That may be different than what you would have answered a week ago.

I don't know if I have prognosticated that [indiscernible]. I do remember that. I do remember that actually. And because what happened then is commodities went way up and then they came way down, everybody priced [ or ] they collapsed. And honestly, COVID has defied what I would have expected from traditional supply economics -- supply-demand economics. And now we've got what's going on in, obviously, Ukraine and that's putting a little bit of an impact on things. I still come back to taking -- I don't know when it comes through that things normalize. People start to go, hey, there's a great demand for wheat. So let's go ahead and produce more wheat. Or, hey, how can we use technology and that normalizes costs over time, and that gives a little bit of an upswing for overall earnings growth. And right now, the consumer, at least short term, feels good about masks being lifted, and you're not seeing a pullback at least here in the US on consumers. So I think that helps people from a topline. But the inflationary environment right now is something that I can't predict. Give me a year when we come back and maybe I'll have a better comment. But every now and then you get lucky, maybe I got lucky in 2009.

You have like a lot, you have the data. I mean, that's kind of -- that's the point. Data was more important than we realized. And the final question, we've talked about this a lot, is the importance of scale in this industry, and you're kind of at the size, I mean, I don't know the exact number -- a little bit over $1 billion in sales. I mean like how do you feel about your advantage to invest in things like tech and data and marketing, IT, what have you, relative to companies that are larger? I mean do you feel that you have the revenue base to be able to invest and perform and compete at the level of what you would like to?

Yeah. I think we -- those costs continue to come down. I know there's this inflationary bubble around things. But the cost of technology comes down. And you think about third-party delivery companies, they've been around forever, right? It used to be you'd fax it in, and they'd have drivers come and so forth and nobody could do it on the scale. And everybody went for it at first. And then as that cost came down with cloud computing and so forth, it made it work. So I look at our business and the ability for us to innovate around technology. I'm not worried about it. I think you do get -- probably larger companies get the economics in regards to supply chain more than anything. That's probably a little bit of a difference there. But where we are today in growing new restaurants and the volumes that our restaurants do individually helps us. You'd rather be a truck driver, in a way, dropping off, making a route to BJ's and unloading at BJ's with the amount of product there versus make a smaller product. So we get leverage from the volume that our boxes do, which I think helps us in this environment versus just scale of being higher in sales.

Yes. Understood. Thank you.

Thank you. Great to see you again.

Great, seeing you.