BJs RESTAURANTS INC (BJRI) Q1 2021 Earnings Call Transcript

Good day and welcome to BJ’s Restaurants, Inc. First Quarter 2021 Earnings Release and Conference Call. Today’s conference is being recorded. At this time, I would like to turn the conference over to Greg Trojan, Chief Executive Officer. Please go ahead, sir.

Thank you very much, operator. Good afternoon everyone and welcome to BJ’s Restaurants fiscal 2021 first quarter investor conference call and webcast. I’m Greg Trojan, BJ’s Chief Executive Officer and joining me on the call today is Greg Levin, our President and Chief Financial Officer. We also have Greg Lynds, our Chief Development Officer and Kevin Mayer, our Chief Marketing Officer on hand for Q&A. After the market closed today, we released our financial results for the first quarter of fiscal 2021, which ended Tuesday, March 30th, 2020. You can view the full text of our earnings release on our website at www.bjsrestaurants.com. Our agenda today will start with Rana Schirmer, our Director of SEC Reporting, providing our standard cautionary disclosure with respect to forward-looking statements. I will then provide an update on our business and current initiatives. And then Greg Levin will provide some commentary on the quarter and the current environment. After that, we’ll open it up to questions. So, Rana, go ahead.

Thanks Greg. Our comments on the conference call today will contain forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. Forward-looking statements involve known and unknown risks, uncertainties, and other factors that may cause actual results, performance, or achievements of the company to be materially different from any future results, performance, or achievements expressed or implied by forward-looking statements. Investors are cautioned that forward-looking statements are not guarantees of future performance and that undue reliance should not be placed on such statements. Our forward-looking statements speak only as of today’s date, April 22nd, 2021. We undertake no obligation to publicly update or revise any forward-looking statements or to make any other forward-looking statements, whether as a result of new information, future events, or otherwise, unless required to do so by the securities laws. Investors are referred to the full discussion of risks and uncertainties associated with forward-looking statements contained in the company’s filings with the Securities and Exchange Commission.

Thanks Rana. I'm very pleased to report the positive momentum in our business continued and accelerated throughout the first quarter of 2021, propelled by both improving dining room seating capacity in key markets, and guests eager to return to our restaurants. Our sales are continuing their steady recovery. The quarter began with weekly sales per restaurant averaging $66,000 in January, as strict indoor dining restrictions remained in place in a number of states including California, where we operate 62 of our 209 restaurants, where all on-premise dining was banned, including outdoor patios. In February, our weekly sales average rose to 76,000, as certain states loosened restrictions, and we benefited from sales from outdoor patios in California that were allowed to open in late January. In March, the pace of our sales growth accelerated even further with our weekly sales average increasing to 97,000, a 27% increase from February, as California began allowing guests to dine indoors, albeit with limited seating capacity. Our sales increased by 50% in the span of the quarter, highlighting guests' appreciation of the BJ's concept, and I couldn't be prouder of our teams that continue to deliver our gold standard service in this rapidly evolving environment. We continue to see positive momentum in April with our weekly sales per restaurant now averaging more than 100,000 a week. Additionally, on a comparable restaurant basis, our April sales are now within 7% of 2019 sales levels. In fact, more than one-third of our restaurants now have higher sales than in the same weeks in 2019, which is quite encouraging when you take into account that we're operating with still only approximately 70% of our seating capacity, given ongoing restrictions, and that our late night business, while improving, still lags 2019 levels as bar-centric late night traffic remains challenged. Offsetting the sales hurdles has been our team's ability to drive outdoor dining and off-premise sales. Regarding outdoor dining, we've installed temporary patio spaces in more than a third of our restaurants, which are currently adding approximately 10% to our effective seating capacity. Even if our dining rooms are allowed to open at higher seating capacity, some guests still prefer outdoor dining, especially as the weather continues to improve. We are even seeing guests book these outdoor spaces for special events such as birthday parties and other celebrations. And we're entering a busy time for our restaurants with Mother's Day, Father's Day, and graduation season in the coming months, and anticipate these additional seats will continue to serve us well throughout the quarter. Next, our takeout and delivery sales have held up extremely well, even as on-premise dining has begun to recover. Our off-premise weekly sales average per restaurant was more than 26,000 in the first quarter and has maintained more than 25,000 to date in April. Our delivery and takeout sales remain more than double pre-COVID levels as our guests continue to take advantage of the convenience of enjoying BJ's in their homes while also returning to our dining rooms. We're encouraged that the off-premise innovation we introduced during the pandemic, including expanded family meals and our connected curbside service, remain very popular with our guests. We continue to believe that habits such as these formed during the pandemic, which increased consumer convenience, will remain strong going forward. All told, we're very pleased to see both our in-restaurant sales and off-premise sales now higher than the levels in the fourth quarter of 2020, demonstrating strong momentum across all of our channels. As we welcome back more guests into our restaurants, nothing is more critical than delivering our gold standard level of service on each and every visit. Last year, we took a balanced approach to streamlining parts of our menu, which benefited our execution while maintaining BJ's tremendous variety, which is one of our key competitive advantages. And we continue to see the results in our NPS metrics. In fact, our dine-in NPS recommended score reached another all-time high in Q1, beating our previous mark set in Q4. The key to continuing to deliver our gold standard service as our sales volumes recover is hiring and retaining talented restaurant managers and hourly team members. We estimate that to return to pre-COVID sales levels on a sustainable basis, we need to recruit and train more than 5,000 additional kitchen and front-of-house team members and another 125 plus restaurant managers. These restaurant leaders are critical to both strong execution today and to fuel our future growth as we ramp up our new restaurant openings. Much like our long-standing philosophy on opening new restaurants, where we always prioritize the quality of openings over quantity, we will not compromise our hiring criteria as we seek only the best hospitality-focused team members. We've also made notable continued progress on several key initiatives that we believe will be key sales drivers in the coming quarters and years, including our Beer Club and our virtual brand called Slo Roast. In March, we launched our Beer Club to the majority of our California restaurants. As a reminder, our Beer Club is a subscription program where members pay $30 every two months for two unique and exclusive beers from our brewery team, as well as perks that include a free appetizer, a free pizookie, large pizza, and $5 growler refills to go. While we're still in the early days of the broader California launch, we continue to be encouraged by the guests' interest in and engagement with the program as it is driving both incremental visits and profits. Looking beyond California, we are encouraged to see the progress of updates to liquor laws in certain states that could enable us to offer our Beer Club in other large markets such as Texas and Florida. Earlier this month, we expanded the test of our virtual brand Slo Roast to approximately 30 restaurants in California and Texas. Our survey results show top-tier satisfaction scores and a high level of guests' incrementality, which supports our research and optimism that this brand can flourish alongside BJ's. We use learnings from our earlier testing to make adjustments to the menu, and we're now testing various price points to determine the best pricing structure to optimize sales and profits. We expect to be in a position to establish a broader rollout plan in the coming few months. And no discussion of our growth prospects would be complete without mentioning our new restaurant openings. We remain on track to open our 220 21 openings in the second quarter located in Merrillville, Indiana, and Lansing, Michigan, which were already under construction at the outset of the pandemic. Our Merrillville restaurant will open this Monday, April 26th, and we also intend to reopen our Richmond, Virginia location in the third quarter. Our pipeline for 2022 and beyond continues to build and we remain incredibly optimistic about the opportunity for many more new future locations as we continue on our path to at least 425 domestic restaurants. Reflecting on an unprecedented 12 months of operating during a pandemic, I remain amazed at the dexterity and ingenuity of our teams in our restaurants and at our restaurant Support Centre. BJ's has a long-standing tradition of rigorous testing with an ability to move quickly to implement changes across our system. These efforts were supercharged during the pandemic as we evaluated and executed on many opportunities to optimize our business in such a rapidly changing environment. We are using the learnings of our most recent innovative work to build an even stronger innovation capability with a cross-functional team from key areas in our restaurant Support Centre and select test restaurants. So, we can learn even faster through testing and iterating on how to best approach our next opportunities. Also, in the past year, we have expanded our guest research capabilities. We're still in the early innings, but I believe our enhanced ability to identify top priority consumer needs and quickly filter and refine solutions, bolstered with our enhanced innovation process, will be a powerful driver of outsized performance going forward. Finally, I'd like to take a moment to share my immense gratitude to our restaurant team members. Our results wouldn't have been possible without the hard work and dedication of so many of our team members going above and beyond to welcome guests back to our restaurants with our world-class gold standard execution, which sets us apart. We can see through consumer surveys that guests are enjoying their dining experience at BJ's more than ever, which is only possible with the best teams in the business. So, now let me turn it over to Greg to provide a more detailed update from the quarter and current trends. Greg?

Thanks Greg. As Greg just outlined, our sales continue to be largely dictated by capacity restrictions. Therefore, my commentary on Q1 and Q2 today reflects where we are with the ever-changing national, state, and local restrictions and regulations regarding dining room limitations. Please remember this commentary is subject to the risks and uncertainties associated with forward-looking statements as discussed in our filings with the Securities and Exchange Commission. As restrictions eased throughout the quarter, especially in California where we started with off-premise only in January, and then as outdoor patios in February, followed by indoor dining in March, BJ's weekly sales increased impressively, as we finished the last two weeks of March with average weekly sales greater than $100,000 per restaurant. Our comparable restaurant sales compared to fiscal 2019 improved sequentially as well from negative 36% in January to negative 31% in February, and finally, negative 7% this past March. Total revenues for Q1 were $223.3 million and we reported a net loss of $3.1 million and diluted net loss per share of $0.14 on a GAAP basis. The easing of dining room restrictions during the quarter allowed us to productively leverage certain variable and fixed costs in our business, resulting in restaurant level operating margin of 11.5% and positive adjusted EBITDA of $12.7 million for the quarter. Specifically, the cost of sales came in at 25.1% for the quarter, which was in line with last year's first quarter. Sequentially, the cost of sales came down 70 basis points from Q4, driven primarily by decreases in cheese costs and our overall sales mix in the quarter. Labor came in at 36.6%, which was 420 basis points lower than the prior year. Adjustments we made at the beginning of COVID, including reducing our menu and continuing to drive off-premise sales, allowed us to leverage our kitchen and dining room labor compared to a year ago when COVID restrictions were just beginning. While it is difficult to compare 2021 labor to last year, our 36.6% labor is only 40 basis points higher than in Q1 of 2019, when our weekly sales average was 26% higher at 111,000 compared to 81,000 this past quarter. Our labor productivity is really a result of the adjustments I just mentioned regarding a slightly smaller, yet still very broad menu, changes in management staffing levels based on weekly sales results, the continuing strength of our off-premise sales, and the leverage we are getting from the continued increase in weekly sales as capacity restrictions ease. Right now, our sales are ahead of our ability to hire the talented people needed to operate our restaurants at the level expected. As Greg Trojan mentioned, the key to continuing to deliver our gold standard service as our sales volumes recover is hiring and retaining talented restaurant managers and hourly team members. Great people delivering our gold standard food service and hospitality is how we grow our sales volume beyond our prior levels, which enables us to manage labor as a percentage of sales at levels that productively contribute to bottom-line growth. Operating occupancy costs were 26.8% for the quarter, inclusive of about 1% of sales for marketing. Operating and occupancy costs averaged about 22,000 per restaurant operating week for Q1, representing a decrease of 2.6% compared to last year, including operating occupancy costs which was over 1.3 million of operating expenses for temporary patios, which generated over $60 million in revenue for the quarter. G&A for the quarter was $15.3 million. We are still targeting G&A of approximately $67 million for 2021, which includes more than $6 million for incentive compensation compared to less than $500,000 booked in 2020 due to COVID and its impact on the business last year. Our G&A budget also includes $8 million related to equity compensation compared to only $7 million in 2020. As always, depending on our results, the $6 million of incentive compensation may vary. Now, turning to the balance sheet, as we previously reported, in January, we raised an additional $30 million of equity capital and that combined with our improving sales and productivity resulted in us finishing the quarter with approximately $90.7 million of cash on our balance sheet and funded debt of $116.8 million. At current sales levels, we are now generating more than $2 million of cash per week. With sales continuing to recover, subsequent to the quarter end, we paid down an additional $15 million on our credit line and plan to further reduce our debt balance in Q2 by another $10 million to $20 million, depending on the sales environment. But the bottom line is we have a very strong balance sheet, cash flow, and the capital necessary to opportunistically and aggressively pursue new restaurant expansion while further investing in our sales-driving initiatives. Shifting to today, as I said at the beginning of my prepared remarks, our sales continued to be governed by the varying capacity limitations imposed by local and state regulators. While many state and local jurisdictions continue to ease their capacity, we have seen some states rollback the easing of dining room restrictions. For example, certain counties in both Washington and Oregon have reduced allowed dining capacity from 50% to 25% recently. Furthermore, despite some eliminating all restrictions, we continue to operate our restaurants with the safety of our team members and guests first, and therefore, continue to follow CDC guidelines of maintaining six feet of social distancing in our restaurants. The safety-first practice will cap our total capacity to around 70% to 75% in the near-term. However, with the strength of our off-premise sales and the continued use of temporary outdoor patios, we believe we have the opportunity to continue growing our sales sequentially each quarter until all restrictions are eliminated. As we noted in our press release today, on a comparable restaurant sales basis comparing current sales to 2019 we are down around 7% for the first three weeks of April. This equates to a weekly sales average of approximately $102,500 per restaurant so far in April. I am encouraged by both the recovery of our dining room sales, which was led by California in late March when dining room restrictions were eased, as well as our ability to maintain off-premise sales that are more than double our pre-COVID levels. Going forward, we expect some modest sales benefit in the coming months, which are seasonally stronger historically with guests celebrating Mother's Day, Father's Day, and graduations with us, but believe sales will be range bound until dining room capacities return to the 90%-plus level, which generally will not happen until we can safely eliminate the six feet of social distancing. We're all hopeful this will be sometime in the second half of the year, as the growing number of vaccinated Americans will further reduce the spread of COVID. With regard to the middle of the P&L right now, we anticipate commodity inflation between 1% and 2% with the cost of sales in the mid 25% range for the second quarter. This is slightly up versus Q1 as we are seeing more freight costs increases and other supply chain challenges as manufacturers and distributors ramp back up for increased restaurant sales. At the current time, we have about 55% of our food commodities locked for the rest of this year. While labor as a percent of sales is trending back to more historical levels, as Greg Trojan noted, we estimate that in order to return to pre-COVID sales levels on a sustainable basis, we will need to recruit and train more than 5,000 kitchen and front-of-house team members and another 125 plus restaurant managers. While this is an investment in our business for the long-term, it will put some upward pressure on our labor as a percent of sales compared to Q1. We are in the high-touch business in which our precise execution of every aspect of our business, including food, service, and hospitality, drive long-term sales growth, and therefore profitability. I'm anticipating G&A to be in the range of about $17 million, which will include about $2.1 million in equity compensation compared to $1.6 million for Q1 and increased investment spend as we ramp up our hiring of new managers and people to continue driving sales. Additionally, I'm expecting our diluted shares outstanding to be in the 24.6 million range for the second quarter. And finally, the positive and growing sales trends discussed today clearly highlight the work of our exceptional team members combined with the strength and attractiveness of the BJ's concept, and the quality, and level of hospitality our guests know and love. BJ's is positioned to not only excel today but also to emerge from the pandemic with a strong opportunity to grow sales volumes and profitability exceeding pre-COVID levels. Our solid balance sheet enables us to opportunistically reaccelerate new restaurant growth beginning next year as we enter a new normal operating environment and continue investing in additional sales-driving initiatives like our Beer Club and guest research. We continue to believe that the BJ's concept can grow to at least 425 restaurants domestically and that the combination of our sales momentum, higher cash flows, and strong balance sheet can readily support an acceleration in our restaurant expansion program. Thank you for your time today and we'll now open up the call to your questions.

Thank you. And we will go to our first question from Brian Bittner of Oppenheimer.

Thank you. Good afternoon. Congratulations on the recovery you're seeing thus far in your business. Greg, you said in your prepared remarks that one-third of your stores are currently trending at higher sales volumes and experienced in April of 2019. Can you just maybe break out the commonalities in this cohort of stores? I'm sure they have higher seating capacity than the other stores and still have very high off-prem. But any more specific color you can give related to this group that's now outperforming the 2019 levels would be helpful. Is their late-night business coming back more quickly? Is a check average a lot higher? Anything else you can get would be helpful on that.

Yes, that's a great question. It's encouraging to see a third of our restaurants showing positive performance three weeks into April. Generally, these successful locations are in areas with relatively loose restrictions, allowing for greater capacities. In California, for example, we have some locations that are also performing well, particularly those with large temporary patios. Additionally, there's been some resurgence in late-night business, and these restaurants have excelled in off-premise sales, successfully maintaining those sales along with the patio and late-night offerings. Overall, the situation is quite mixed; we are seeing positive trends in various states, including California, Texas, and Arizona, reflecting a broad geographic distribution.

Brian, I'd like to add that even though some states have lifted most restrictions, we are still operating with six feet of social distancing. We believe this is the right approach. So, even in areas where restaurants might have more relaxed capacity limits, we are maintaining social distancing. Depending on the restaurant layout, this generally limits our capacity to about 75%. I wanted to provide this information as context for the positive comparisons.

No, thank you for that. And just as my follow-up, Greg, you have given some color in past earnings calls about where margins could go as your sales restore. You've talked about a path to getting back to 2018 levels, or even better. Now, that you're sitting here operating against these volumes that are clearly improving closer to 2019 levels, can you update us on how you're thinking about margins in a 100% sales recapture scenario? I mean, it's clearly looking like that scenario is now imminent. But you did also talk a lot about the need to hire and train all these employees. So, any update on where you think margins go in a 100% recapture scenario?

I believe this is a two-part question. First, as sales begin to recover, we will need to onboard team members and provide training, which will involve an investment cost for our business. In the short term, this makes things a bit more challenging if we aim for full capacity. However, I view this as an opportunity. Our goal is not just to reach 100% sales volume but to exceed it, aiming for 105% or 110% of previous levels. By maintaining our off-premise initiatives, like the Beer Club and other strategies for our most valuable guests, we have the potential to increase weekly sales beyond our historical average of 110,000. Achieving this will ultimately lead to higher profits, which is crucial for us. While we do face short-term hiring challenges, which are common in the industry, I am optimistic about our path ahead.

Thank you. Thanks for the update.

Thank you.

We'll go next to Jeffrey Bernstein of Barclays.

Thank you very much. I have two questions. First, as you're reopening the dining rooms, it seems like you're optimistic about the off-premise sales. I think you mentioned in April average weekly sales were around 125,000 or 100,000. I wanted to clarify that you noted 25% of the 100,000 average weekly sales still came from off-premise. If that’s correct, I’m trying to understand how you measure the incrementality once the restaurants reopen their dining rooms. Are there examples of markets that have returned to 100% restaurant dining and how those two sales channels have performed incrementally? That would be helpful. I have one follow-up as well.

We don't have specific details on a micro level, but you are correct that we are maintaining sales around $25,000 a week. This is happening despite a notable increase in dine-in sales. I've long believed that delivery and takeout are distinct experiences, and there will be some pressure on them as dining returns, but they serve different needs. We're not observing a significant difference in sales between restaurants that have reopened their dining rooms and those that haven't; sales volumes have been stable even when dining rooms were limited in certain areas. We are pleased to see that we are sustaining these sales, and we plan to expand our off-premise business moving forward. We believe customers are responding positively to the product changes we've made, and we see considerable opportunities for growth beyond the current $25,000 a week.

Got you. Right. So, it's 25% of your sales are currently to go, and those are really holding up even in markets where total sales are reverting back to historical levels?

Correct.

Got you. Again, my just my follow-up in terms of labor, because I know you guys emphasized it in your prepared remarks. First of all, the fact that it was down 400 and some odd basis points for the quarter, very impressive, but I think you said it's actually quite close to the labor you saw as a percentage of sales two years ago, yet the average weekly sales are significantly lower. So, I'm just wondering, how much do you think is permanent or sustainable savings versus what's coming back? I don't know whether you can share a forecast for labor in 2Q or for 2021, we will let rehiring and training, but just trying to separate out what has to come back and maybe what is permanent savings or what you're expecting labor to be in the near-term? Thank you.

Yes, Jeff, I don't know if we have the answer to that, just because the amount of training that we're expecting to come back in is going to be much more substantial than what we've seen over the last year in that regards. And the other side of it, as you think about the dining rooms open where you're attaching a server to that additional sale versus the leverage that comes from off-premise. So, I think those two things generally will move our labor percentage up may be a little bit versus what we saw in the Q1 timeframe. And in my prepared remarks, I tried to basically say, frankly, sales right now are running ahead of labor. They're not where we'd like them to be in regards to our traditional staffing models; as much as our NPS scores are up and everything seems to be going in the right direction, the ability to hold on to those from a long-term perspective or sustainability, as we said, really comes down to making sure we've got the right team members on there; they're working the correct amount of hours in the right shift, so that they like and love working at BJ's from that standpoint. So, I think that the labor number gets a little bit up and down from that standpoint over this year. We have said in the past that I forget the exact number here, but with the change in the menu, and the things that we've addressed this year, we've pulled out labor hours in both the kitchen and the prep in the morning and the kitchen hours and other things from that standpoint, and that'll definitely stay out. The hard part about your question, Jeff, is really where inflation kind of moves into some of those positions within really the back of house or in the kitchen area of our restaurants. We know as well as the rest of the industry are all fighting to get good people back into the restaurants, and that will put some inflationary pressure on there. So, it's hard to kind of quantify labor hour savings versus what the dollar rates may be.

And then also, I would just say, as Greg was saying earlier, overall sales volumes will leverage our fixed labor and off-premise, we think is going to settle in at a much higher level than it was pre-COVID. So, given the lower labor content of there, those are the offsets again what we are continuing to see as wage pressure and inflation.

It's fair to say I think you've mentioned that you think labor as a percentage of sales would be higher than the 36.6 in the first quarter in the near-term as you invest so heavily?

That's correct.

Exactly.

But I do think just going on with right-size, he does break it down in a really effective way and that is, we talked about this before our hourly labor's down significantly year-over-year. Because of the changes, we've made the ability to get off-premise and that number is going to go there. When we look at labor versus two years ago, it's really because that management labor is deleveraging off on the lower weekly sales average. So, as that weekly sales average can get back to more normal levels, that management labor should come down a little bit and while the hourly labor goes up. So, if those two can offset, I think the ability to run more historical labor is out there. From that perspective, I just think in the short-term, as we work through the pushes and pulls, it's going to be a little bit more difficult.

Understood. Thank you.

And we'll go to our next question from Alex Slagle of Jefferies.

Hey, thanks. Just wanted to follow up on that conversation, just kind of what else you think you need to do to get the best people and retain them? I mean, do you think you need to raise wages more broadly? Or what else you might need to do to make sure you're able to execute like you want to whether you consider capping capacity at certain locations or something like that that maybe we hadn't thought of?

It's a good question. We've always had certain advantages, especially with our high volumes making us an attractive workplace financially, particularly in front of house roles. We've also put in significant effort to foster a positive culture. Despite the external pressures, we have managed to hire around 750 people in the last three weeks. We haven't had to reduce our hours of operation or limit seating in dining rooms thus far. Our team is coping well with the pressure, and we are experiencing success in recruitment. The key to our operations lies in creating a favorable work environment and optimal conditions. For now, we remain hopeful about navigating these challenges, although it is indeed more difficult at the moment.

Okay. Can you provide insight on the recent traffic in the bar area, particularly during late hours and shoulder periods? How do you anticipate bar activity will increase as restrictions continue to ease and people feel more comfortable? Also, please remind us of the historical sales volume from the period that was significantly affected.

Yes, Alex, generally, the late-night business is in the $12,000 to $13,000 range. If I take about $100,000 or $110,000 a week in sales, around 10% to 12% comes from that late-night period. We have seen gradual improvements. For example, when stimulus checks were distributed in March and the NCAA tournament occurred, it encouraged people to go out a bit more. With vaccinations playing a role, people seem to feel more comfortable. However, this segment is still down, and compared to other times of the day, it has experienced the largest year-over-year percentage decline. The future of this business will depend on how people perceive the pandemic and how different areas continue to ease restrictions. We expect that, at least through the second quarter, it will remain soft, but hopefully in the second half, we will see not only an increase in our restaurant capacity but also an uptick in late-night activity. Therefore, even though our weekly sales average is where we’d like it to be, I think it will remain relatively stable until we see significant improvements, including more vaccines and a decline in COVID cases.

As a reminder, we have reduced our operating hours and are closing our restaurants earlier than usual in most markets. We have begun to see enough volume in some areas that we are not adhering strictly to our typical hours, but we are extending our closing time by about an hour. This indicates that some of the business is returning. However, it's crucial for us to remain open to drive sales, while also ensuring that demand is present.

All right. Okay. Thank you.

Welcome.

And we'll go to our next question from David Tarantino of Baird.

Hi, good afternoon. I was wondering if you could comment on your views on how much this stimulus checks might be impacting the sales trends in the late March and April-to-date period. And I know that's a tricky thing to isolate, but perhaps you can talk about what's happening in the restaurants that aren't seeing capacity changes during that period as an illustration?

There really aren't any of those, so that's tough.

What I can say is that the sales volumes we're currently observing, excluding the capacity changes, show that markets like Texas and Florida, which have had looser restrictions compared to California, display sales trends similar to those from 2019. As we approach March, coinciding with spring break, we typically see a slight increase in sales, which aligns with the seasonal patterns we've noted in many existing markets. Additionally, when taking into account the vaccinations and the impact of stimulus checks, there seemed to be a notable uptick in sales for a couple of weeks in late March. Following that period, there was a slight decline, which reflects our previous sales trends, not including 2020. I do believe this had a beneficial impact, but it's not the case that just two or three weeks later the sales plunged significantly due to the stimulus ending. In fact, I would say sales levels have generally remained positive.

David, another point that may indirectly address your question is that we have observed strong growth in customer spending in our business, with the primary factor being the size of gatherings. People are going out and inviting friends and family, which has increased the average number of people contributing to each bill. They are also ordering more per person, including more alcohol. People are simply happy to be out, and they are spending more during these outings. This trend is not just a temporary spike due to stimulus checks; it has been consistent. I find it interesting in relation to the stimulus, which undoubtedly had some impact, but what we're witnessing seems to be a more fundamental human behavior of being excited to spend time with friends and family, and I believe this will continue for some time.

Very helpful. Thank you.

Okay.

And we'll go to our next question from Nicole Miller of Piper Sandler.

Thank you. Good afternoon. I want to ask first about labor and the hiring, and I mean it kind of sounds a little overwhelming as you can imagine. So, is there some perspective or context to how many BJ's employees you have in the field today to kind of right-size that? And then I know this is a super challenging question, but how many of the hires are familiar or worked with you in the past, how many are well-versed in the restaurant industry space? And how many do you have to like, really teach to do these jobs?

Yes, I'm considering all the different aspects of your question. Pre-pandemic, we had about 23,000 hourly team members. Currently, we have around 17,000 to 18,000, which brings us to the 5,000 figure that Greg Trojan mentioned earlier. As for the return of hourly team members, we seek individuals with high integrity and strong hospitality skills who can handle the busy environment at BJ's. We generally prefer candidates with restaurant experience. I anticipate that there may be an increase in applicants around early September when federal unemployment benefits expire, as these benefits were designed to support individuals in lower-paying service jobs. This has sometimes reduced the incentive for people to return to positions paying between $15 to $20 per hour. I can't say for certain how many applicants have prior restaurant experience, but we have a good reputation and have been successfully hiring in recent weeks. Our current retention rates are lower than they were in 2019, indicating that people enjoy working for us. We're competing not only with other companies but also with federal unemployment subsidies at this time.

That really does help. It makes sense. I know it's a really dynamic situation. The last question for me, you've always helped us think about leading indicators of same-store sales and I would typically think value for the industry and for yourselves. And then maybe it was the idea or notion of safety, and I'm just wondering now if it isn't like fun and entertainment. So, does your guests study lead you in any direction of what the leading indicator of sales might be?

I'll let them answer this. But thankfully, everything you just mentioned is BJ's: value, front-end entertainment, and safety. Those are all three things that we do very well.

You must have been in some of our focus groups, Nicole. We know that BJ's serves as a social gathering place, which is central to our brand's dining experience. This aspect has served us well, especially as we emerge from the pandemic. It provides a high-energy, comfortable environment for gatherings. Additionally, we are structurally equipped to accommodate large parties better than many other concepts, allowing us to do so without reservations, and we have been successfully managing this for a long time.

Thanks for the update tonight. Appreciate it.

You're welcome.

And we'll move next to a question from John Glass of Morgan Stanley.

Thanks very much. I wanted to ask about the two new emerging sales layers you've talked about; the Slo Roast virtual brand and the Beer Club. Any early sense of how we should think about the size of that opportunity relative to whatever else you want to think about, like maybe it's the overall off-premise business? And specifically in the Beer Club, you mentioned there's obviously regulatory issues in certain states, how many of your restaurants could you actually put that into now just given current regulations?

Yes. Regarding the Beer Club, I estimate it's around 70%. There's potential for that number to grow in Texas and Florida, especially since Florida may have recently changed some laws. Excluding those two states, I believe we can enter the majority of the other states, bringing us close to 70%. When you consider that in relation to our 210 restaurants, it's roughly in the 150 range. We haven't yet quantified how far these initiatives can take us. One goal of the Beer Club, as Greg mentioned, is to encourage more visits to our restaurants. In our tests in Sacramento and throughout California, we've seen an increase in visits from these guests. We'll need to monitor if this increase continues as more locations open in California. Currently, the Beer Club is attracting more visitors who utilize the perks and tend to spend more, thus driving additional revenue. Slo Roast is also contributing positively in this regard, with less cannibalization of our existing products based on our analysis. However, we're cautious about sharing specific figures until we observe how these initiatives perform over time during the testing phase.

John, part of the reason for that is we haven't been at it long. When considering the time frame, we consciously decided to roll it out in Sacramento during the pandemic, which meant it has operated under varying conditions regarding dining room availability. It's been interesting to observe that even when our dining rooms were closed, customers took advantage of the off-premise offers, and the growler refill option became very popular. It's gratifying to see this response, but we need a longer period with more sustainable dining room openings to truly understand how it will settle. We're encouraged because the micrometrics and dynamics of the program suggest that guests are responding well. That is the most important aspect. However, we need a bit more time to see how it matures before we can form a clearer idea of its potential growth.

Thanks. Could you provide more details about the first quarter and store margins? What specific COVID-related costs did you incur? I understand there may be both positive and negative impacts, such as improved insurance costs due to reduced in-restaurant experiences, alongside possible increases in pay-related expenses. What were the various factors related to COVID in the first quarter that might not continue moving forward?

John, regarding those costs, I estimate they are linked to the patios. One change I mentioned on the call was the $1.3 million we spent on patios we didn’t have previously. There is also some property, plant, and equipment, likely in the $200,000 to $300,000 range included. From what I recall, the direct costs are probably around $2 million. It’s tough to address the insurance aspect because last year the insurance markets were quite volatile, and that doesn’t really relate to our actual business operations, like managing claims. The insurance market is currently very challenging, something we haven’t experienced in over ten years. This doesn’t reflect fewer customers in the dining area, so slip and fall incidents should be reduced, and general liability costs should decrease. However, the reality is that the insurance market was higher, and we self-insure for that. So, if I had to assess direct costs, they are around $2 million. Additionally, we have incurred significant expenses for overtime labor. As Greg mentioned, it’s crucial to hire more team members to reduce overtime, which will help us manage labor costs more effectively and improve the quality of life for everyone in our restaurants.

That's great. Thank you.

And we'll move to our next question from James Rutherford of Stephens Inc.

Yes, thanks for all the details so far. Most of mine have been asked, so I'll just do a couple of bookkeeping things if that's all right. First, within that $25,000 of off-premise weekly sales, could you share the split between curbside and delivery? And within that delivery bucket, what's the split of first-party and third-party please?

I'm looking at how the sales have played out. It's roughly split 50/50 when considering the numbers, possibly 55% delivery and 45% take-out. I lean towards thinking it's more like 50/50. In terms of delivery, about 85% of it is actually closer to 90% going through third-party delivery services. Almost all of it is third-party, with only about 10% being what we refer to as our white label, where customers order through our website instead of a third-party aggregator site.

Got it. Okay. Thank you for that. And then one more. Within your one-year comp, what is price running today? And do you foresee pushing a little bit harder on price given demand seems to be outstripping supply and given the ongoing wage inflation picture?

Thank you for asking that because I think it's an important element of where the business is right now. I mentioned earlier that we're really happy to see guest numbers and incidence driving healthy check growth. We're using this as an opportunity to price less, not more. One of the things that drives BJ's volumes and traffic is the fundamental value of our concept. We view this as an opportunity to invest in value while we have some other dynamics working in our favor. I would say we've been pricing in the low to mid-twos in the last few years; we're about 100 basis points below that.

Okay. Thanks very much, and congrats on the results here.

Thank you.

Thank you.

And we will go to our next question from Brian Mullan of Deutsche Bank.

Thank you. I was just hoping you could talk about current development expectations for 2022. Maybe some color or context around current thinking on how many units might be realistic next year? What are some of the key factors that will determine where that winds up in the end? And then is the intention right now to accelerate that number in 2023 just given the lead time the development pipelines tend to have?

So, Brian, so when we think about the business, the question overall, ultimately, I think what we want to get to is getting ourselves back to a restaurant growth of minimum 5% a year from that standpoint. So you start thinking about 200 restaurants, 5% puts you somewhere in the neighborhood of 10. I think going from two – let's call it three this year because we're going to reopen our Richmond, which is going to act like a new restaurant opening for us in regards to hiring, training, etc. Moving from that kind of three to next year is probably, and we said this before, in the eight to 10 range or so going into 2022. I think going into 2023, we would get above that again and start to move that into the low teens. We've done as many as, I'm looking at Greg Lynds, like 17 restaurants –

18 at the beginning of the year, yeah.

We've done 18 restaurants in a year, so we know we can get ourselves back there. We're going to do it with quality. We're not going to race to quantity from that standpoint, but we want to make sure we always have great quality sites and are building that pipeline. And really, we've said this before, and I think there's a good opportunity for us to exceed this. But that would be somewhere in that 5%, 6%, 7% unit growth, start thinking about 2% to 3% comp sales and you get yourself to around 10% revenue growth. And then our ability to leverage in the middle of the P&L allows us to drive EBITDA earnings growth into the low double digits.

Okay. Thank you. That's great. And then just a follow-up, just a quick one on capital allocation. In the past, you've carried a bit of modest leverage and you paid a dividend. I mean, do you view the dividend as necessary anymore coming out of this? And then what might you need to see to begin to feel comfortable doing share repurchase? I know we just went through development, which is the use of CapEx. But even with that, it seems like in a normalized year, the free cash flow is pretty attractive. So just wondering your latest thoughts, if anything has changed relative to how you used to do things?

Yeah. I think, look, this is something that we would obviously get together with our Board of Directors as we go through and put together the details of our plans as we come out of COVID from that perspective. But if we're in a position, where we have significant amount of excess cash coming out of our business, we would look to determine, what is the best use of that excess cash, which would mean to start thinking about a share repurchase or dividend program at that time. I think where we are right now it's still a little bit early to start to put that on the table from that perspective. I think we want to see the sustainability really start to see ourselves moving back to capacity restrictions being eased so we can get to 100% capacity or 90%-plus capacity. And when we start to see that, I think that's when we start to think about how we want to use our free cash flow in addition to what's extra after we continue to build new restaurants.

The only thing I can say with a lot of confidence is that we would not change our conservative approach to the balance sheet. As I mean, we don't need another year like we just had to remind us of the advantage of running our business that way. So that's one thing that I don't think we have any intention on changing. And the other is the first priority is going to be the best use of capital is finding productive ways to grow our sales and grow our business, either through new restaurant openings or improving the restaurants that we have. And then we'd look to dividends and share repurchases from there in that order.

Thank you.

And our last question comes from Sharon Zackfia of William Blair.

Hi. Good afternoon. Sorry, if I missed this, but in terms of the labor and kind of getting back to the staffing, you'd like both hourly and managerial, how long do you think that would take? I mean, is that something you expect to be made whole on here in 2021? And how do you kind of juxtapose that challenge with labor with the development accelerating into 2022?

That's a good question. Look, we don't have a crystal ball on this. It's our intention to certainly catch up to our sales volumes. Now, we're still not doing quite the sales levels yet, and you do have capacity restrictions. So we don't have to get all these folks hired tomorrow, right? But if and as we would hope and expect, we continue to see progress on the sales front, and we'd like to see – I actually think Greg's point on unemployment pulling back; we've even seen some states that are going to be joining the federal unemployment programs as well. That's going to be of help. And our hope would be by the holiday season, we'd be in a much more normalized place in terms of staffing, where sales and our staffing have reached a more normal equilibrium. And because we do need to hire managers, obviously, and establish that pipeline, but the numbers we're talking about are, Sharon, we have a high degree of confidence that we don't put new managers in new restaurants. Obviously, they all count as a manager here. But we think that we can manage through, and the kind of numbers we're talking about growing into are imminently manageable from a manager perspective. And because they're new trade areas, they aren't really impacted by the levels of where we are and hourly workers, right? So I think you're asking a really good question on the balance of how those all work together, but that's how I'm thinking about it.

Can I just ask a follow-up? Is the labor dynamic more stressed on the front of house? And I ask that because I'm trying to figure out with Slo Roast, the virtual concept, how you're protecting the kitchens if there is some shortage impacting kitchen capacity?

Actually, that's a great question because typically, in the last few years, kitchen has been the most stressed. By a fairly wide margin, it's like finding front-of-house folks, not that it's anything is easy in the labor markets for the last couple of years. But we've been much more stressed in terms of filling kitchen jobs. And interestingly, I'd say in part because we were still fairly staffed in our kitchens, there's a kind of a fixed amount of hours you need to run our kitchens that you're not going from the same low levels. When dining rooms aren't open, we don't have many front-of-house people. So we're going from not zero but close. We had a good cadre of folks doing on the takeout and off-premise side of the business, but not nearly the number of front-of-house you need to run a dining room, right? So there's much – there's more stress to the system on the front of house, which is different than it's been in recent history.

Thank you.

You're welcome.

And that concludes today question-and-answer session in today’s call. We would like to thank you for your participation. You may now disconnect.

Thank you, everybody.

Thank you.