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

Good afternoon, everyone. Thank you for joining us. My name is Jeff Bernstein, and I'm the restaurant and foodservice distribution analyst here at Barclays. With us this afternoon from Huntington Beach, California, we have Lyle Tick, President and CEO of BJ's Restaurants; and Todd Wilson, EVP and CFO. They're both to my right. By way of background, for those not familiar, BJ's is a casual dining chain with roughly 220 U.S. company-owned and operated restaurants. They are currently in the midst of a very successful strategic reset prioritizing operational excellence and restaurant economics to pave the way for a disciplined return to unit growth starting next year and the years beyond. So we are excited to have BJ's management with us and an esteemed Board member of theirs in our audience as well. So we want to thank everyone for joining us in the room and on the webcast. I will kick it off with some broader questions for BJ's, but thank you very much.

Here you go, gentlemen...

Great, how are you?

Good.

So I had a couple of bigger picture industry questions and then dive more specific into BJ's. And I'm guessing this will be a question you'll enjoy because we've always asked about the health of the consumer, but it seems like your results of late would demonstrate your consumer is feeling okay. So I'm wondering if you could talk a little bit about how you think about the consumer more broadly, whether there's been any change in trend related to age or income or ethnicity or whether your turnaround is just capturing, you think, lots of things simultaneously.

Yes. I mean, I guess -- I mean, from -- speaking from the BJ's perspective specifically and what we see, we have -- from our consumer perspective, we're not seeing a lot of stress in the consumer, right? I mean, we continue to see strong traffic-driven growth. We continue to see it across age and income cohort, across geographies, across dayparts and now again, across channels, like dine-in throughout this whole thing has been very, very strong, but off-premise as well now. So we're not seeing a lot of stress. Like if I take a step back, and hypothesized. I think the way I look at it is I see a couple of things going on. I mean, when you look at all of the data out there, you have to assume that the consumer is under some level of stress. And I look at, kind of, 2 things. One is what I call, kind of, durable and disposable transactions. And I think we compete for what are pretty durable transactions. So we call it the social splurged space, whether it's the weekly a couple of times a month, I'm going out with friends, I'm going out with family. It's an experience-based thing. And I think people protect those things. And then I think the disposable transactions maybe tend to be more of like my during the week, quick lunch then I'm going to grab or a quick dinner on the way home during lunch before after practice, one of those types of things. And I think you're willing to, kind of, give up on some of those things and make your lunch or eat at home to protect those, kind of, social occasions. And so that's where we compete. That's where we do well. And so I think that's potentially a dynamic why we're doing well. And then you look at the fact that we're not alone in doing well, right? You see there's a number of our contemporaries who are doing well right now as well. And you look -- so then you get into the full-service category. And I think this is where you start to see the spread of winners and losers. And I think this is in a time like this where consumers, when they're giving a transaction, they want to make sure it's a great exchange. And I think the folks that are winning are the folks that are investing in their value proposition holistically, right, their product, their service, their atmosphere and making sure they have a place where their team members and their guests want to be. And those folks are winning more. And I think, thankfully, over the past couple of years, we've made pretty significant progress across all those areas.

No, that's great. And you mentioned some food at home on occasion being that we're sitting in the same building with a lot of my staples peers. I'll keep this quiet, but I've always said that I think food away from home is taking share from food at home. Do you believe that the most recent push of restaurant value is a driver of that? Like how do you believe your brand is positioned in terms of the battle versus food at home because you mentioned some people might just eat at home during the week, so maybe you feel it on the week, but you make it up on the weekend or...

Well, so I mean, I think when I was -- when I'm making that distinction, to me, again, it goes back to, kind of, the disposable or the durable transactions, right? I'm not sure that for that, kind of, couple of times a week when I'm getting together with friends and family, and I want to have that social occasion and I'm really competing so much with food at home. But I do think that if you think about, am I going to get a fast food lunch during the week or do that, kind of, a dinner to just fill a convenience occasion, that's where that choice might be coming into play more so I can protect that social occasion. So that's, kind of, how I see it.

Yes. And whether it's in meetings earlier today or in recent months, I'm just wondering, you're relatively new to the seat, although maybe not so much anymore. But what questions do you get most from investors that surprise you or questions you don't get that you're wondering why people aren't asking because it's something that you're excited about, but maybe that's more beneath the surface.

I mean on the surprise me, and I don't know if it surprises me anymore, but I think every -- folks want to compartmentalize the success that we've had or in general into, kind of, what's the one thing, either what's the one thing that did it or what's the one thing that you're excited about? And from my perspective, it just doesn't work that way. It's not one thing. This has been a combination of things that have ultimately improved our business over the past 2 years, and I think set the foundation for future growth. And for me, it's the operational improvements we've made, which we see come through in guests and team member metrics, then followed by unlocking, kind of, the power of the Pizookie, building an everyday value platform, improving our product, starting with the pizza, obviously, moving through burgers and chicken sandwich -- putting a fair bit of money back into our facilities and driving our remodel program. So to me, it goes back to that investing in the full value proposition. And I feel like folks want to compartmentalize it into what's the one thing. And there just isn't a one thing. I think on the -- also, I think the other thing is, as I look at our business, sort of like last quarter, right, we had obviously great growth. Our operators did an awesome job, I think, running the restaurants and getting labor leverage. We had 70 bps of cost of sales headwinds, which that's going to happen over time, right? But in the big picture, I think we did a great job of running great restaurants. And it's, kind of, a question of, oh, like are we now -- are we still growing profit or not? And I guess I take, again, a bigger picture view, which is over the past couple of years, we put on $0.5 million of AUV, about $220,000 of restaurant level cash flow, expanded margins, 240 basis points, and we're still running restaurants and leveraging those sales when you look at the operations we control, right? And so I feel really great about our business and where it's going. But you get, kind of, the -- we want you to be building a long-term better business, and then it's -- but what happened this quarter. And I think we try and be really focused on building a better business over time.

Jeff, I'll tip in with one, if I could. I believe in the -- what question, kind of -- I don't know surprise is the right word, but well, sometimes to Lyle's point on the improvement in the unit economics over the past few years, we'll get questions on what do we need to see to really get the new unit pipeline moving. And I'd say we've really already seen it, right? We've talked about trying to opening up to 2 restaurants this year, but we are very active out looking for new sites. We're signing leases. We're negotiating with landlords. And so the proof points really are over the last 8 quarters of same-store sales growth, traffic growth, dollar and margin expansion that we're building the pipeline, just takes some time when you're talking 12- to 24-month lead times. But we get that question a fair amount that hopefully, that clarifies a little bit.

Yes. Well, just to be able to summarize the way you just did of the volumes, the margins, the cash flow that you've achieved in such a short period of time, the improvement there. That's incredible. So congratulations on that. Is there any talk internally or at the store level about GLP-1s? I mean I know that's just something that comes up a lot, and it feels like this is -- having done this for a while, this is the most, I think, likely to take a bite out of food away from home and sustainability and whatnot, and I have family members and they're losing weight and eating out less, and I'm sharing more with my wife instead of me getting 2 entrees and it just feels like it's infill form and it's cheaper. Like do you see -- do you have any reason to believe it's an area of concern up until now or going in the next few years?

Yes. So we haven't seen it as yet. And the funny thing, I was talking to some of the team about the other day as we were -- we're doing -- one of the market tests that we're doing for some product stuff. We were testing some shareable sides. And it was the most decadent, kind of, over-the-top shareable side that way outperformed every other one, right? And I remember hearing at Delta Chef talk about how he puts like healthy things on the Delta menu and everybody gets the steak in the potatoes. And so I think what people say and what they do can be a little different. I do think our occasion, that social splurge occasion is a little insulated. But the way I think about it more broadly is I do think that overall, people are looking for real food that is fresh and made well for them, right? And so -- that is something we are definitely focused on as we think about the menu and the category work that we're doing. And we do a lot of stuff from scratch right now. But as I think about evolving some of the categories, how we continue to focus on being scratch where it matters, fresh, real, made-for-you food that makes people feel good about the stuff they're putting in their body. I think over time, that's going to continue to be true as long as it's craveable. Nothing -- I haven't seen anything that has people choose something healthy that isn't craveable. It's got to be a craveable dish.

Being that we're in September now and presumably in the fall period, you spent a lot of time probably thinking about 2027. I don't know if there's -- if there's 1 or 2 initiatives that you'd say that's going to define us in '27 is something or other, whether it's an AI thing that's worth mentioning or not. But what do you think is going to be the highlight going into next year?

I mean the thing -- look, I'm -- at the core of our business is food and the product and the menu. And so we've made progress with pizza, burger, chicken sandwiches, but I'm really excited about the menu work that we have going into next year as we continue through the categories. So the food and the menu will probably always be the thing that gets me most excited and will be a continual journey over time because that's what we are. We're a restaurant company, right? The other thing that I get really excited about and Todd touched on it is the work that we've been putting into our new prototype and just our new brand standards and how we express, kind of, our brand is finally going to come to fruition as we end this year and go into next year and bring that to life and building proof of concept around that, which is going to manifest not only through the physical plant itself, but we're really looking at the total experience from menus and menu engineering and plateware and cutlery. And so it really touches our entire experience. And so I'm really excited about standing up proof points of that next year. And I think that's going to be the foundation of a next chapter that we go into with BJ's as we look at how we dimensionalize, kind of, the full growth story.

And I think more specifically about, kind of, each of the components of your business. So from a comp perspective, I mean, the most recent Pizookie, I think you said doubled the incidence rate year-over-year, which is incredible and have 8% traffic, I think, in the most recent quarter, unbelievable. I guess, therefore, not surprising that there's a little bit of average check compression if you get people who are maybe getting a smaller portion or getting dessert instead of -- but the strategy for -- I know you have an upcoming Pizookie launch, -- like how do you think about converting that viral dessert traffic into higher-margin entree sales to get back to average check growth going into next year?

Yes. I mean I think there's a couple of things. One is we know the people who come into us through the seasonal Pizookie, we see them again. So they don't come back and disappear on us. We see them and they come back more often. And I think that goes all the way back to, I think, the first point about the levers that, kind of, play together, which is we're bringing these people into a restaurant that the environment is better, the service is better. And therefore, as we bring new people in, in theory, some of those people are going to have a good time and become customers. So there's a flywheel there. I think with the seasonal Pizookies, when those hit a nerve, you see what you saw in Q2. And what you see is they resonate really, really well with young people like high school and college kids, right? And recruiting that next generation into our restaurant, I'll take every day of the week, right? And -- but yes, we see these things we call them Pizookie trial checks. You'll see a bunch of appetizers, a bunch of Pizookies and some drinks, which aren't discounted checks, but from a dollar amount are a lower total dollar check. But we're bringing tons of these folks through the door as we hit a nerve with these Pizookies. And so I feel really good about that overall flywheel. And the other thing that I feel really good about is, as I look at our sales, our sales every day of the week, whether it's a Pizookie Meal Deal day or not, whether it's Pizookie Tuesday or not, whether it's a weekend day, are super consistent. So we don't have like a lumpy business where we see during the week growing a lot, but not the weekends, we don't have the discount or just the Pizookie Tuesday when we're discounting the Pizookie. We see people coming in across every day of the week, across the weekends, and it's really consistent and even.

Just one piece I'd add there, too. If I think about the mix that we've seen, call it, over the past year, people have gravitated to the areas of the menu that we've highlighted, right? They've gravitated to pizza that we reinvented back in the fall of last year, burgers to start this year, chicken sandwiches most recently, which all of those things are beneficial to us within their category from a sales and margin perspective. We have seen that pull people out of some of our higher-priced items like our steaks and Slo Roast, -- and that -- we prioritize those things first for a reason, right? Pizza was our founding product, and that was first. But I think to -- as you look forward, it gives us confidence that as we reinvent those future sections, we'll be able to push people back there to items that, one, they certainly enjoy and have higher satisfaction and two, that have favorable business financials for us, right? And so it gives us confidence that we're able to drive mix as we highlight these different areas of the menu.

Seemingly, that's worked out well for you, not by design necessarily, but to focus first on things that are a little bit more value during a period where consumers probably appreciate that and maybe in a year or 2, when they're feeling a little bit better and you highlight the steak of the Slo Roast, you can get people to trade back up to that. seemingly that would be set up well.

Maybe spice outside of our -- outside of the Smash burger, which is our entry point burger, our second most popular burger is our Wagyu burger right at the top end. So people are -- they'll trade up and pay for something that is of quality, I suppose.

Great. I don't want to take one data point and spread it too far, but I think you had mentioned that you reallocated the first quarter of this year's marketing funds into the second quarter, and it generated a 60-some-odd percent increase in impressions during your celebration season. Like how do you think about -- it seems like marketing is a powerful tool for you, especially as you reaccelerate unit growth. So I think you're talking about maintaining full year marketing spend flat as a percentage of sales. But how should we think about the back half of this year and going into next year as you think about the marketing dollars spent...

Yes. So I mean, dollars -- pure dollars we'll spend more because we're growing, and we're -- but we're maintaining the percentage. We don't see a reason right now to increase the percentage as we have growth that flows more dollars, and we're able to continue to drive the marketing. And we're getting smarter on our channel mix and our message mix and how we drive that. So we shifted out of Q1 into Q2 because we felt like we were going to get more bang for our buck during celebration season. And Q1 has all of the weather that you can't control and coming out of New Year's, which you can't control. So we felt it would be an advantageous reallocation of dollars, and it was. I think as you look through the balance of the year, you'll see, again, us spending the same percent, us spending more dollars, us optimizing those more towards social and word of mouth, more behind Pizookie and product and then being very choiceful about broader media where we drive our value message. So I think going forward, it's -- for me, it's about that intersection of the right channel and the right message at the right time is what we want to deliver. And I think we continue to get smarter and optimize against that. But certainly, a shift towards social and word of mouth has been clear in our business over the past couple of years.

And the fact that you recently overhauled pizza, burgers and chicken, what percentage of sales -- obviously, you start with the biggest buckets, but -- is that 75% of your menu?

Well, it's not necessarily the biggest buckets. Actually, Pizza was probably only about 6% or 7% of sales. But because it was our founding product, now 6% or 7% of sales, it touched like 20% of checks. So a lot of checks have pizza on it, but it was only about 6% to 7% of sales. But it's our founding product. And I'm just -- I'm a brand guy, so I, kind of, start from are we clear in our brand positioning? Are we clear in our consumer? And then is your foundation strong. And so being our founding product, and we had seen eroding guest satisfaction, we had seen an increase in comps and we've seen sales go down. And so we had to get our founding product renovated. So we started with that. Burgers, handhelds, ballpark here, but...

I'd say between those 3 categories, I'd say 25% of our sales. So it's a nice chunk -- but one of the benefits, I think, of BJ is right, we have a broad menu. That's one of our benefits. And so there's still plenty of runway ahead.

So like what's over the next 12 months, like where do you see the biggest opportunities on the menu to make upgrades that could be meaningful to the overall business?

Yes. I think as I'm looking across the menu at the categories we haven't hit yet, I think steaks and Slo Roast is an area we're spending a lot of time on. Shareables and appetizers is an area that we're spending a lot of time on, which is core to us and touches a lot of checks. But we also have work on the salad category going on, and we'll get to specialty entrees. We're going to touch every category of the menu over the next 12 to 18 months as we ultimately look to get to a menu that we feel like holistically is a more compelling offering.