BJs RESTAURANTS INC (BJRI) Q2 2021 Earnings Call Transcript

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

Thank you, operator and good afternoon everyone and welcome to BJ’s Restaurants fiscal 2021 second 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 and incoming CEO and Tom Houdek, our VP of Strategy and Financial Planning and Analysis and incoming CFO. 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 second quarter of fiscal 2021, which ended Tuesday, June 29. 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. Both Greg and I will then provide an update on our business and current initiatives. And then Tom will provide some commentary on the quarter and current environment. After that, we’ll open it up to questions. So, Rana, please 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, July 29, 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. Greg?

Thanks Rana. It's been an incredible experience leading BJ’s for almost nine years, and all my time here has gone quickly. As the old adage goes, time flies when you're having fun, and fun for me is defined by the ability to grow and evolve our business in many ways. I remember when I first came to BJ’s in 2012, meeting some of you in person and on calls early on, I made mention of the fact that I was attracted to BJ’s for a number of reasons, all of which are as relevant today as ever. First and foremost, I was attracted by the strength of the concept. The original founding group of BJ’s, then succeeded by Jerry Hennessy and Paul Motenko, and further iterated and evolved by Jerry Deitchle each contributed in their own ways to create a truly compelling and unique concept, as evidenced by the industry-leading traffic and sales volumes in the casual dining space. I was also drawn by the strength of BJ’s management team. Our operations leadership, along with our senior leadership team at our restaurant Support Center is made up of a majority of folks who were part of BJ’s before I arrived on the scene. This longevity and depth of experience, the most importantly the talent level of our team is an important competitive advantage and one we probably don't talk enough about. The dedication, resilience, and focus of our restaurant level teams at all levels, from dishwasher to general manager, has been a stalwart of our success throughout the years, and it has never been on display more than through the pandemic challenges of the past year and a half. So, a great concept together with a first-class team is a combination that's hard to beat. But when you add to that, a brand that because of this eclectic menu and timeless design, can continue to evolve without losing the core of its essence, along with a long runway for organic growth, I think you really have something. It has been my great honor to be entrusted by our stakeholders through our Board of Directors with the responsibility to lead this brand and this team over the past nine years. If I were a younger person, I'd look at the same brand assets and be even more excited about BJ’s prospects than I was even nine years ago. I’m delighted to be handing over the reins to someone as knowledgeable, passionate, and capable as Greg Levin. As many of you know, Greg and I worked together at California Pizza Kitchen, when he was a star up-and-comer on the finance team. It's been a thrill to see him develop as a leader through his dedication fueled by his love for this business and the people that made BJ’s what it is today. I look forward to helping Greg and the team in any way I can in my continuing role as a Board Member. I'll let Greg go through the current results. But I'll kick off with an observation I've repeated many times during the pandemic, and that I believe is being proven out as we emerge and recover. The resilience of the dine-in restaurant business, and I believe a particular strength of the BJ’s brand, confirmed by our recent research, centers around the basic human need to socialize with friends and family. We provide an oasis from the ordinary around the fundamentals of food and drink. It's a strong business model that certainly has been tested like never before, over the last 18 months. But we are seeing the strength of those human needs demonstrated by the enthusiastic return of our guests to our restaurants. Last but not least, I'd like to thank the thousands of team members who make all of this happen in our restaurants each and every day. They're the ones who take our ideas and passion to grow our business and make it a reality. So with that, I'll turn it over to Greg.

Thanks, Greg. Before I move into my remarks on the quarter and our initiatives, I want to take a moment to thank Greg Trojan for his nearly nine years leading BJ’s growth and progress as a concept, and personally for being a great mentor to me. During Greg's tenure, we expanded from 127 restaurants to 212, while setting our pathway for continued national expansion with a goal to more than double our current platform. We also initiated Project Q and a host of efficiency initiatives, while bringing innovation to our menu with offerings such as our healthy enlightened menu, our loaded burgers, and more recently, our highly successful slow roasted protein platform. During Greg's tenure, we emerged as leaders in developing and implementing a mobile app for casual dining, and to this day, we may be the only national chain using handheld server tablets in our restaurants to improve the guest dining experience. Greg will remain a guiding light as a BJ’s board member. With so much growth potential, I'm excited and look forward to building on this platform with the entire BJ’s team. Switching to our recent performance, I'm very pleased to report that the positive momentum in our business continued throughout the second quarter of 2021. Driven 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 $102,000 in April, as indoor dining restrictions remained in place with less than half of our locations seating up to 100% capacity. In May, our weekly sales average rose to $106,000 at certain states loosened restrictions and we had Mother's Day and the start of graduation season. In June, our sales accelerated even further with our weekly sales average increasing to $110,000 as the remaining dining room seating restrictions were removed, including in our California restaurants on June 15. We also benefitted from Father's Day. Our sales are also improving on a comparable restaurant basis, compared to 2019 levels, we improved by nine percentage points from negative 17% in March to negative 7.6% in April and May. The momentum continued in June and we improved to negative 3.8% for the reasons I've just outlined. In July, our sales are trending even stronger with a positive 1.6% of 2019 levels on a comparable restaurant basis, which includes headwinds from lapping a free Pizookie promotion in the first part of July 2019. The strength of our comparable restaurant sales in July reflects dining room sales that have now recovered to about 90% of 2019 levels and off-premise sales, which remain more than double pre-COVID levels. In terms of dayparts, our afternoon and dinnertime sales are higher than 2019 levels, while late-night remains challenged. Geographically, we have some very strong markets including Southern California, Arizona, and Ohio that are delivering comparable sales quite a bit higher than our average. Several other markets like Northern California and the Pacific Northwest remain well under our average, driven by key local employers that have yet to bring workers back to offices. Off-premise sales remain more than double pre-COVID levels, even as dining room sales recover. This supports our expectation that guests will continue enjoying the convenience of takeout and delivery going forward. Given the strong demand for the BJ’s concept, our number one focus this past quarter and going forward is to increase restaurant staffing. The demand from our guests for that differentiated higher-quality dining experience that we provide at BJ’s is clearly evident as sales continue to outpace our current staffing levels. We added nearly 3,000 key members in Q2, an increase of more than 15% from where the quarter began. Though our restaurant staffing today is still only in the high 80% range of pre-COVID levels. In our restaurants where staffing is most challenged, we are limiting the tables we seat in the near term, as we are uncompromising in delivering a best-in-class experience to each guest we serve. We believe our approach is the right long-term strategy to meet and exceed the expectations of our loyal guests and keep them coming back. This is underscored in our net promoter scores, which were at the highest level on record during the first half, despite the challenging staffing levels. Additionally, where our restaurants are fully staffed, we are delivering meaningfully stronger comp sales, which provides us confidence in future sales benefits as we continue to add and train more team members. From an initiative standpoint, we continue to be excited by the traction from our new beer clubs subscription services. As we discussed on the last call, we launched our beer club to the majority of our California restaurants in March of this year. As a reminder, our beer club is a subscription program where members pay $30 for every two months for unique and exclusive beers from our award-winning brewery team, plus additional food and beverage benefits designed to drive incremental visits and spending in our restaurants. Membership signups are trending well, and we remain very encouraged by the guests' interest and engagement with the program as well as its ability to drive visits and profit. Through the end of this year, we will continue to concentrate on California. However, looking forward, key states including Texas and Florida recently adopted permanent legislation allowing alcohol to go, thus increasing the markets where we can offer our beer club. With nice incremental sales and encouraging reviews, we continue to test Slow Roast, our virtual brand in approximately 30 restaurants in California and Texas. Our next phase of testing will be iterating on the menu to ensure we have the best brand and offerings. And again, we want to build our staffing levels closer to pre-COVID ranges before expanding on this exciting opportunity. As I said earlier, we know that fully staffed restaurants are delivering meaningfully stronger comps. Therefore, our number one focus will be restaurant-level staffing. Additionally, as Greg Trojan mentioned, this past year, we have been enhancing our guest research and our innovation capability. Our expanded guest research has helped us identify our most valuable guests and their needs and wants from BJ’s and will be a key lens from which to focus our menu innovation, marketing and hospitality initiatives going forward. While our innovation team is a cross-functional team from key areas in our restaurant support center and select test restaurants that are continually testing and innovating around better ways to improve the guest experience. Combining our guest research with quick prototyping innovation and testing, so we can learn even faster and provide better solutions for our guests will be a powerful driver of BJ’s performance going forward. Before I pass it over to Tom, no discussion of our growth prospects would be complete without addressing our best opportunity related to new restaurant openings. We opened our two 2021 openings in the second quarter in Maryville, Indiana and Lansing, Michigan. Early sales have exceeded our high expectations, which is fantastic as we continue expanding into new markets. We're also scheduled to reopen our Richmond, Virginia restaurant in a few weeks after temporarily closing it during the pandemic and recently completing a limited remodel there. As we look beyond 2021, we are seeking to increase our new restaurant openings so that we achieve a minimum of 5% plus increase in operating weeks over the longer term. This level of new restaurant expansion combined with driving positive comparable restaurant sales positions BJ’s to grow revenues in the high single digits or more range for many years. For 2022, we are currently targeting eight to ten new restaurants. As we have built a solid pipeline for next year, we remain incredibly optimistic about the opportunity for many more new locations as we continue on our path to at least 425 domestic restaurants. Finally, I'd like to take a moment to acknowledge my appreciation for every one of our team members, as they are the backbone of our rebound and will be the driving force for many successes going forward. Throughout Greg's tenure at BJ’s, he fostered a culture that values collaboration, inclusion, diversity, and celebrating each team member's contributions and accomplishments. This well-established ethos will not change as we transition to our new leadership structure. Tom and I are firmly committed to fostering the ongoing growth of BJ’s culture, and we will continue to prioritize integrity, collaboration, innovation, and the delivery of our gold standard of operational excellence. This will allow BJ’s to continue delivering memorable dining experiences for our guests, successfully grow the BJ’s concept and brand, and build value for shareholders. Now, let me turn it over to Tom, our current Vice President of Strategy and Financial Planning Analysis and incoming CFO to provide a more detailed update from the quarter and current trends.

Thanks, Greg, and good afternoon, everyone. Before I begin, I wanted to take a moment to share my excitement for being named as BJ’s next CFO. Greg Levin is a true leader and mentor and I couldn't ask for a better leadership team to continue partnering with in my new role. And to all of our analysts and investors participating on or listening to this call, I look forward to spending more time with you in the coming months. Now on to the details of the quarter and some forward-looking views. Please remember, this commentary is subject to the risks and uncertainties associated with forward-looking statements as discussed in our filings with the SEC. As Greg just outlined, our sales improved sequentially and meaningfully throughout the quarter, which we believe was driven by both capacity and demand. On the capacity side, we began April with more than 70% of our dining room still operating with some form of dining room capacity limitations. In late June, our last remaining markets with capacity restrictions fully reopened and were once again allowed to fill every seat in each of our restaurants. Staffing is now the governor for us operating at our true full capacity. On the demand side, guests are clearly eager to dine out again. COVID cases declined throughout the quarter as vaccination rates increased, giving more guests comfort dining out. Anecdotally, we are seeing more regulars returning to our dining rooms and bars, which is fantastic. On a more macro level, household balance sheets are stronger than ever and guests in general have more to spend on experiential dining such as BJ’s. Total revenues for Q2 were $290.3 million and we reported net income of $6.4 million in diluted net income per share of $0.26 on a GAAP basis. The higher level of sales during the quarter allowed us to productively leverage certain variable and fixed costs in our business, resulting in restaurant-level operating margins of 14.8%, which improved by 330 basis points from Q1. Adjusted EBITDA also improved to $27.7 million, a 9.6% of sales in our second quarter, marking a more than 100% increase from $12.7 million in the first quarter. Inflation of key restaurant costs including food and labor ticked up as the second quarter progressed. We took approximately 2.5% in pricing in recent weeks, which is below the current inflationary environment as we regularly do to help offset inflationary elements of our cost structure. We will be watching labor and commodity inflation levels as we move through the second half, but believe our conservative approach to pricing during the pandemic to maintain our value leadership position will allow for additional pricing if the environment warrants. Cost of sales came in at 26.0% for the quarter, up 90 basis points from our first quarter. The increase was driven by higher commodity costs across our market basket and a higher incidence of our slow roasted proteins during the celebratory season. Labor came in at 35.9% in the second quarter, which was 70 basis points better than our first quarter as leverage from higher sales outpaced rising labor costs. While it remains difficult to compare labor to last year, our 35.9% labor is only 10 basis points higher than Q2 of 2019, when our weekly sales average was 7% higher at $113,000 versus $106,000 this quarter. Our labor productivity is a result of adjustments we made last year to create a smaller yet still very broad menu. Changes in management staffing levels based on weekly sales results, the continued strength of our off-premise sales, and the leverage we are getting from the continued increase in weekly sales. Our progress adding new team members resulted in approximately 20 basis points impact to labor, due to the extra training required over more normalized 2019 hiring and training levels. As Greg noted, we will continue to add even more team members to restaurants in the coming months, which we expect to have an incremental sales benefit. Operating and occupancy costs were 23.3% of sales for the second quarter, an improvement of 350 basis points from the first quarter as sales growth leveraged more than offset the increases in variable elements. Our Q2 operating and occupancy costs include 1.2% of sales for marketing. Also included in operating occupancy costs was $1.5 million of operating expenses for temporary patios, which we continue to get solid returns on and which generated over $5 million in revenues for the quarter. However, given how we can now fully seat in our dining rooms, we removed many temporary patios by the end of Q2. G&A for the quarter was $17.0 million. We are still targeting G&A of around $67 million for 2021, which includes more than $6 million for incentive compensation compared to less than $500,000 booked in 2020 due to the impacts of COVID on the business. As always, depending on results, the $6 million of incentive compensation may vary. Our G&A budget also includes approximately $7.1 million related to equity compensation, which is about in line with 2020. Turning to the balance sheet, our improving sales and resulting cash flow allowed us to repay an additional $35 million of debt in the second quarter, reducing our debt balance to $81.8 million. In fact, our cash flow generation in the second quarter has now put us in a positive net cash position with our cash balance of $88 million more than offsetting the amount of debt outstanding at quarter end. We also repaid an additional $10 million of debt subsequent to the close of our second quarter. We are beginning to use our strong liquidity to drive growth with construction started on two new restaurants we intend to open in early 2022 and another location where we will break ground in the coming weeks as well as further investment in our sales-driving initiatives. We are very pleased with the strength of our balance sheet and will remain consistent in our approach of prioritizing growth-driving investments to build new restaurants and improve our existing restaurants. We anticipate that next year, we will be in a position to determine the appropriate balance of investment and return of capital to shareholders. Shifting to today, we are very pleased with the continued improvement in our comparable restaurant sales versus 2019. We remain steady in the positive low single digits throughout July, finishing the month at a positive 1.6%. In fact, our July weekly sales average reached the highest level ever for the month. While we continue to monitor the COVID landscape including the Delta variant, we remain optimistic in our ability to continue to grow sales into Q3 and the rest of this year. Our weekly sales average has returned to a more regular seasonal trend since capacity limitations were lifted in June. As a reminder, Q2 is historically our highest sales quarter driven by big weekends for Mother's Day, Father's Day, and a lift for graduation celebrations. Q3 tends to be our lowest sales quarter as vacations and back-to-school season impact the regular schedules of our guests, a trend we expect to see again in August and September. For reference, our weekly sales in 2019 averaged approximately $113,000 in Q2 and $104,000 in Q3. Our sales goal for the second half is to build on our comparable restaurant sales versus 2019 and continue to set weekly sales records. With regard to the middle of the P&L, we are working with our supply chain partners to maintain ample supply of critical ingredients and have agreed to some higher near-term prices on certain commodities in order to avoid shortages. We expect these commodity headwinds to hold our cost of sales in the 26% area for the second half consistent with Q2 and taking into account our recent pricing round. We will have a better understanding of how much of this inflation is permanent versus transitory in the coming quarters and we'll evaluate further actions to help offset any continued effects as needed. Thankfully, with our broad menu, we have the opportunity to shift our menu mix at times based on different promotional activities, which we can also use to help mitigate inflationary pressures. Currently, we have about 45% of our food commodities locked for the remainder of this year. From a labor perspective, while we increased our hourly team member count by 15% in Q2, we remain understaffed in many of our restaurants. As we have said consistently, we are in a high touch business in which the precise execution of every aspect of our operations including food, service, and hospitality drives long-term sales growth and brand loyalty. As a result, we believe we can drive even more sales upside by continuing to recruit and train kitchen and front-of-house team members and restaurant managers, which in turn will help offset the additional labor investments. Therefore, we expect labor in the mid to high 37%, which would be slightly above Q3 of 2019 levels, taking into account the modest labor investment as we continue to hire and train team members and the typical deleveraging from seasonally lower sales in Q3. We expect an increase in labor efficiency once we are past the short-term investment of hiring and training. For operating occupancy costs, we expect to remain around $24,000 per restaurant operating week average for the balance of the year consistent with Q2 levels. I anticipate G&A to be in the $17 million to $17.5 million range in Q3, which will be up modestly from Q2 as we continue to ramp up the hiring and training of new restaurant managers, selectively add additional resources to execute our growth initiatives, and return to a more normal level of general business activity including travel. Additionally, I'm expecting our diluted shares outstanding to be approximately $24.1 million for the third quarter. In summary, we are now generating higher sales on a comparable restaurant basis compared to 2019 as we address the challenges related to labor, inflation, and supply chain. We also just delivered our highest sales ever in July, which is a testament to our guests' excitement to return to our high energy dining rooms and the sustainability of our delivery and takeout sales gains. Adding our gold standard level of food and service execution and the value proposition across our menu, including our daily brewer specials and happy hour results in clear differentiation that our guests love and a strong competitive advantage for BJ’s. While there may still be some near-term disruptions as the country and restaurant industry continues its recovery, we remain incredibly optimistic regarding our ability to continue delivering outsized growth both in the second half and in years to come. Thank you for your time today. And we will now open the call to your questions.

Thank you for your time today. We will now open the call to your questions.

Thanks and congrats to all of you on your respective next adventures. I wanted to follow up on the comments on the staffing levels. Yes, on the fully staffed units are driving meaningfully higher same-store sales, could you provide any color on what that gap looks like, and also how different the guest satisfaction scores are, what you're seeing there?

Alex, first of all, thank you for your introductory comments there. In regards to the range, it's a pretty significant range. And we've kind of broken it down to tiers, without getting into specifics. I would tend to tell you that restaurants that are at that 100% level, we can see up to high single and even double-digit comps in there and then some in those restaurants. So it's a pretty high number from that perspective. And then, obviously, at different staffing levels, it comes down. And then because we have really, as we said on the call, really made sure that we're providing the gold standard level of execution. Even in restaurants that have lower staffing, we are not in a position of basically giving a server 15 tables, or if we're limited with a certain amount of cooks trying to open up all of our tables out there and just not give the right hospitality and execution service to our guests from that standpoint. So because we've been able to do those things, our NPS scores don't have quite the dispersion that you see on the comp sales side of it when all of our tables are open.

Okay, makes sense. And then regarding the outlook on the third quarter, trying to think about what kind of assumptions generally you're making on volumes and capacity. And I guess there's a little more uncertainty now, given unknowns related to the virus and potential restrictions, but any color here would be helpful and also regarding the patios, just your ability to be flexible there and reopen if you need to?

Yes, so let me answer a couple of questions, since probably, I think others might have the same thoughts or comments on that. And one is, we have not seen really any changes in our business right now despite some of the increases on the Delta variant. Even in Southern California, where at least in the Los Angeles area, where mask mandates have come back into place, we haven't seen a change in the positive comp sales trends of the Los Angeles market in that regard. And the same thing as we look at other states. We did make the comment, I know Alex, you're up in the area, the Bay Area, just with people not back in their offices, is really, frankly, the softest market for us overall. And we've seen tech companies continue to push out their opening days in regards to bringing team members back or in their case, employees back. So we'd expect that area to stay soft. And I think like we've always done, we kind of provide you where the comps are at the time of our earnings and kind of use that as really just a springboard of how we think about the quarter I guess. And then, I'm sorry, your last comment on patios, while we pull down patios, we do have the flexibility to introduce them if needed. And we would do that, we would have to obviously work with our landlords and make sure that we got the permission, but our landlords have been very helpful with us, or the majority of them have been very supportive. They'd like to see us continue growing sales as well.

I wanted to ask about the pipeline for unit development in the context of the outlook for eight to ten units next year. What you've had out there, I'm wondering if you could comment on the factors that may be holding back that number from being even higher exiting the pandemic? And just does it take time to rebuild the pipeline and pausing for a bit? As a follow-up or related question, I believe the brand has opened as many as 16 to 17 units in years past. So could you see the company getting back to that type of growth in the coming years?

Yes. Again, this is Greg Levin. And I'll let Greg comment on some other points from that standpoint. But Drew, we have always prided ourselves at BJ’s in the fact that we've opened restaurants with high quality and consistency in that regard. We and at least my time here, and for those who follow BJ’s, have been here for a long time. We have not ever put out a press release saying that we're closing 15 of the last 50 restaurants that we've opened over the last couple of years, because we decided to grow for growth's sake. We want to make sure there's quality and consistency in that. And when you think about building new restaurants, it's making sure that not only do you have the real estate pipeline, but really as even Tom said about our current restaurant sales environment, the governor for that is going to be around team members and really managers. So as we exit the pandemic and we build up our manager pipeline, we are not going to sacrifice on our manager pipeline in regards to not having the people that can operate, frankly, $6 million averaging volume restaurants. So for us to get back to where we want to grow our business, we're going to do it in a very deliberate manner that allows that quality and consistency. So as we think going from eight to ten next year, that's still going to be a lot of investment into our business in regards to hiring managers, and going through our training program as well as hourly team members, and so forth. So when we think about that part of our business, we want to do as I said very deliberately, and over time, we'll continue to step that number up, so eight to ten will continue to increase. And as you noted, we have done 16 restaurants before, and I think our goal would be to get back there and become capable of driving that 5% plus increase in operating weeks as we continue to build this business. And I don’t know if Greg has anything from a pipeline standpoint that he wants to add?

Yes. I know, Drew, thanks for the question. I do think on our last conference call, we had mentioned that our pipeline is very strong. We are seeing more D type sites and C type sites, and the A sites are harder to come by. I will say in the last two months or so we have noticed an increase in deal flow. And we're pretty bullish and confident that over the next 24 to 36 months, there will even be more A sites available to us. And as you know, we have plenty of whitespace available with still a lot of states we haven't penetrated with only 212 restaurants in 29 states today.

That's sound very helpful. I wanted to also circle back on the staffing topic. I was wondering if the challenges there are concentrated in any particular region or market and just maybe stepping back? What are the company's specific initiatives that you have in place that could help accelerate your ability to fulfill those staffing needs, as opposed to needing the labor environment to improve?

Yes, Drew. There are always areas that are more challenging than others, and this has been the case since I started in this industry. For instance, the Bay Area has consistently been difficult, even back in the 1990s. There are various pockets across the country, each with its own set of challenges. Regarding incentives, we have pursued options like job fairs and other incentives, similar to many restaurant companies. Our focus is on how to incentivize and reward our existing team members. We believe it's not appropriate to offer bonuses to new hires when some of our team members have been with us for 5, 6, or 7 years. Our main priority is to take care of our current staff and foster a positive culture within our restaurants, which in turn attracts more people to BJ’s.

And last one from me, I was just wondering, and maybe I missed it, did you share the off-premise either sales mix or average weekly sales for Q2 and/or July? That'd be helpful.

Sure. For off-premise in total, so for Q2, our off-premise WSA was $24,000.

And your perspective on July?

Yes. We've observed off-premise sales remaining above $20,000, so we are currently in the low $20,000 range.

Thank you. Also want to say congrats to everyone. It couldn't be happening to better people and just such an awesome team. So excited. In prepared commentary, you had mentioned doing some guest research and talking about finding the most valuable guests and what are their needs? So I was curious, what did you find out? What do the most valuable guests have in common? Who are they? And what are they looking for?

Yes. So Nicole, I'm going to let Kevin Mayer, our Chief Marketing Officer probably handle a good portion of it. But as we've always said at BJ’s, we provide this kind of higher quality energy dining experience, which is very experiential, and I would unplug stealing over the thunder from Kevin, it's that whole experience that is really important. And I'll let Kevin build on that. He's the guy that's really been leading it up inside BJ’s.

Thanks, Nicole. I guess just from a methodology standpoint, we did a number of different things in our research, starting with a most valuable guest survey, which our guests that came in some cases 40 or more times a year. So we can really understand what why they had such a magnetism for our brand. We did expand that into a larger segmentation study. What we just found is that, as Greg was saying, there's an energy that they're attracted to when they walk in the door, there's a consistency of the execution, and there's ultimately the social aspect of the concept that they just love, whether it be the team members they are connecting with them. They have plenty of stories of our team members knowing their drinks when they walk in the door to actually being able to work through them with the menu, to the people that come in with them and the fact that they can come for any occasion ultimately at BJ’s. Through the segmentation, we found there are two core guests. And what they have really in common is the social aspect. They love to come for the energy, for the aspect of sitting back and feeling welcomed and comfortable. And then there are definitely nuances in terms of demographics and other needs, but a really good start to the research.

We will keep following up on that. We need to ensure we have a proper understanding of the situation. While "risk" might be too strong a term, we are looking at eight to ten stores next year. If we are modeling this correctly, have all the stores been identified? Are there signed leases for all of them? I want to clarify the timeline for the first and second half of the year to make sure we handle this accurately.

Yes. I think right now, somewhere in the kind of three to five unsigned leases, I don't have the signed leases in front of me. From that standpoint, I think from a timing, it's still pretty much spread out fairly evenly within the next year; some more in the kind of two in the first quarter, somewhere around three to four in the second quarter and in the back half of next year. So that's…

Yes, that's pretty accurate.

Great. I'll ask one more question. It might be frustrating, but many are likely considering taking the average weekly sales from 2019 and adding 2% to the comp. However, I'm a bit concerned about getting the seasonality correct, especially since you mentioned a decrease in off-premise sales. Is there any caution I should be aware of regarding using the $104,000 plus 2%? What would your thoughts be on that as a final question? Thank you.

I think that's a reasonable way to think about it. I mean, as we look at our numbers internally, we hope that obviously, as we bring on more team members and make sure we're doing everything right from that standpoint, that allows our effective capacity to expand that, frankly, would allow our comp sales to increase. When we talk to our operators and ask them where they feel they're operating, they will tell you that they think our capacity today is somewhere in kind of the 80% range, even though we have technically all the seats open for all of our restaurants. But just when we think about the staffing levels, and so forth, we're not necessarily seating or serving all of our guests, all of our seats in that regard. So we're always a little cautious from that standpoint, as we bring team members on. But I do think that, given the current environment and assuming there's not major changes related to COVID, I think looking back at 2019 from a comp sales perspective, that's how we were tending to look at it. And then, how the comp business is moving from there.

This is probably a tough question to answer, but I'm curious on your line of sight to getting fully staffed. Is that something that you're hoping to get to by year-end or even sooner? And then, curious whether the back of house or front of house is proving more challenging?

Yes, Sharon, that's a great question in that regard, because obviously, it's so key to driving sales and giving that gold standard level of execution to our guests. Ideally, we'd like to be fully staffed tomorrow. And we talked to our key members, and Tom alluded to it a little bit in today's call. That is, we're going to continue to invest and hire those team members. What generally happens in our business is, you get into Q3 and you get lower weekly sales averages as Tom mentioned, you go from $114,000 down to $104,000, clipping back to 2019. So generally, your operators are going to adjust their staffing levels because of that; that's just what happens if you come off the high watermark of June with the graduations. We have told our team members that while we need to be productive and efficient, it's more important to make sure you bring on people and you train them and get ourselves ready to take on the holiday period from that same or the holiday timeframe in November and December. So our goal would be to have fully staffed before we get into the fourth quarter, but it's going to be a challenge out there, especially with still the unemployment levels. The fact that people have this, as Tom said, solid balance sheets. They're getting the refund that supposedly is going to end in September, and we'll see how that plays out. But, as you said, it's a difficult question, but our goal would be sooner than later. And our goal is not to hold back on Q3 when seasonally weekly sales averages do come down; we'd rather make sure the staffing levels are correct and have those team members in there. So we can go into the fourth quarter when our weekly sales averages start to increase again, ready to go.

That's really helpful. I know you also mentioned the late-night business is still a bit of a drag, but has that started to improve? I mean, did you see an uptick there as the second quarter went on into July?

We did, that business has improved. We have talked in the past that late nights somewhere between $13,000 and $15,000. It's moving in the better direction; we're still a good $1,000, a few $1,000 less than where we wanted to be there. But it has improved. I think frankly, the sporting calendar helped a little bit in that regard with NBA Playoffs and things like that. And then, removing the social distancing made a big difference here in Southern California for the longest time; you couldn't seat at the bars. Now you can seat at the bars, and we're getting those regular customers coming back, both in the mid-afternoon, which is Tom mentioned. Our sales are higher now in the mid-afternoon, but we're seeing those regulars come back late at night as well. So it's moving in the right direction; I would tend to say the two areas for us right now would be that late night. And frankly, the Northern California area, I think that kind of maybe two bigger areas that are keeping comp sales from even accelerating further, taking staffing and putting that aside.

And we'll move to our next question from Jeffrey Bernstein of Barclays.

This is a question for Jeff, and I want to congratulate everyone on their new roles. I have a broader question regarding restaurant margins. Given the ongoing inflationary pressures, Greg, as the new CEO, how do you view profitability? Are you open to accepting a short-term decline in margins to maintain your value leadership, or would you consider raising menu prices above your historical levels? Additionally, are there any potential cost-saving opportunities available, and if so, where do you see them affecting the profit and loss statement? Thank you.

That's a great question. And I'm going to be working with Greg Trojan and the rest of our Board of Directors and frankly, our senior executive team, as we just continue to evolve around Greg Trojan's strategies and the things that I would like to do that might be different or just a little bit of a change from that perspective. As we tend to think about your question, overall, one is, as I mentioned earlier, we have to get ourselves fully staffed to drive sales. Everything I've seen in this business over my many years, if you're not driving top-line sales, you're really not going to be able to save your way to success. Now, it doesn't take away from being productive and efficient. The Project Q initiative that Greg Trojan put in place today lives on in BJ’s and is a great example of us always going after efficiency within our restaurants. And we'll continue to drive that. But I think secondarily, looking at that, one of the things that we did, I'm not going to get into specifics here, we took a look at our restaurants that are driving positive comp sales in both May and June and compared them to May and June of 2019. We have noticed that those restaurants driving comp sales are able to manage margins; some of those restaurants have improved the margins dramatically from that timeframe. So there's the ability that as we drive comp sales positively, we can move those margins. Secondly, one of the things we looked at as well is how is throughput in our business? Frankly, the throughput in our business on the incremental sales is still just as much as it always was. That is if we can drive incremental sales, we can generate $0.40 to $0.50 of incremental dollars; dining room is going to be higher in the $0.50 or $0.4 to $0.50 range. Third-party delivery is a little bit less, and you pay the commission. But it really comes back to the fact that as you drive those sales, you drive the throughput, and that drives those margins in there. To ultimately answer your question, we're going to do it all. But if I had to air somewhere, I'm going to always air on driving sales. That probably means making sure we have value for our guests and that we're giving ourselves — giving our guests great service within our restaurants. I have not seen a restaurant company today eliminate servers and improve their sales. Everybody that's on this call can think back to seven or eight years ago when the whole talk of the town was putting tablets on their tables, and doing calculations, that servers are now going to go to 10 tables. And they tend to think about that as a dependent variable. Meaning I can do that and it's not going to change sales at top level. So our goal is that Kevin Mayer just mentioned earlier, looking at our guests, it's about the experience within the four walls of our restaurant, and we're going to make sure that we continue to deliver memorable dining experiences at BJ’s.

That's very helpful. I appreciate it. And congrats again, everyone.

We'll go next to Todd Brooks of CL King & Associates.

A couple of questions on staffing along with everybody else. Did you share or would you share a kind of number of bodies to fully staffed? I know that I think you talked about 20,000 on the last conference call. I believe earlier in this call you said you hired eight, but then again, demand has rebounded sharply. So where do we feel we are as far as additional bodies that we need to hire to get to that fully staffed level that you're targeting?

Yes, I don't know the exact number. I think we said at one time that we were around 23,000 team members. Today, I said our staffing levels are kind of in the mid to high 80% range. So I think if you kind of back into it that way, that puts you in the high teens in that regard.

Okay, great. And then as the quarter progressed, you touched on this, Greg, use of hiring as far as we've gotten closer to September, as some states have terminated the unemployment benefits earlier in the quarter, kind of the pace of bringing new applicants on board. Can you talk to how that's changed as we've moved into June and July here?

It's gotten better. I think there's a couple of things that have played in, and this is nothing original from Greg Levin and for guys. That is, Tom mentioned that balance sheets are strong for consumers, and for basically people that need to get a job. Now, regardless, they're getting the unemployment benefits. I'm getting back to your comment about some of the other states that have started to eliminate the federal but to get the unemployment benefits coming through. You still have childcare on there. And then frankly, as a country, we kind of opened up in June, right in the middle of summer, where people have gone, Hey, I've been stuck inside for the last year, do I really want to go out and get a job in the middle of June? Or can I have a summer before I have to go back and get a job? So I think as we get later into this year, I know unemployment benefits from a federal standpoint will end in September, that things will get easier. That's what I'm saying it knowing, and then you've got childcare that's going to help with people going back to school. All those factors forecast a better hiring scenario in the future. Even taking a step back from that, we have heard from our team members that certain states have eliminated the federal unemployment, and they've said it's gotten easier from that perspective. I would tell you going through the summer months, it seems to get easier every single month from that perspective as well.

Great. And then a final question, if I may, you talked about Slow Roast and we're in 30 stores and testing now. Obviously, kind of holding it 30 until we get to staffing levels when we want, so probably into the fourth quarter. Is there any interim kind of early read data that you can share with us since we're going to be paused at these 30 units for a while on what you are seeing and incrementality maybe even as we're moving into the summer season from the Slow Roast brand as we're getting to a more normalized environment? Thanks.

Sure, thanks for the question. Yes, we have a lot of optimism even from the current test with these 30 restaurants out there that have it going. We've seen anywhere in the kind of six or more orders per restaurant per day and solid checks. So it's adding in over a point of comp as we've been testing it. So a lot of things to like about it and even looking at the overlap between the BJ’s guests, which is a key criterion to have how this fits in with our normal customers and it's in the 20% range, which is what you want to see for virtual restaurants. So yes, we're optimistic but still want to make sure that it's the right time to launch it with staffing levels, as we've been discussing, but also iterating to make sure that we have the best option possible to when it's ready to roll out.

And our last question comes from Jon Tower of Wells Fargo.

Awesome, great. I have a few, if you don't mind. First, echoing comments from everybody else, congratulations, Greg, Greg, and Tom on the new moves. Obviously, Greg Trojan, I wish you the best going forward. Just hoping to dig a little bit on the labor stuff. I know, everybody's been asking about it. But I'm curious, on the one hand, you're going to see elevated costs this third quarter related to recruiting. I am curious to get your thinking on how long that persists. And then going forward, thinking about how some of this, the menu changes that you did during the pandemic? And obviously, there's some of the off-premise sales coming through and some staffing changes around it. Now, where do you think that can reach maybe as a percentage of sales over the longer term? Do you think that even in the face of higher inflation, you'll be able to see some labor leverage on that line, say, relative to what we saw in 2019 or 2018?

Yes, Jon. I believe there are a few key points to consider. Starting next year, California will have a $15 minimum wage, which means that 30% of our restaurants will be impacted by a cost of living adjustment instead of a significant wage increase we previously experienced. We've demonstrated our ability to manage restaurants in high labor cost areas, unlike some other concepts that might face more challenges because of their operational structures. This development in California will be advantageous for us, as the minimum wage adjustment will shift to align with inflation. Additionally, when we analyze off-premise sales and consider our fully staffed restaurants, their sales performance compared to 2019 shows that their margins are on par or even better, depending on their market positions. Overall, I believe we have a solid chance to align with historical margins as we navigate current inflationary pressures impacting our business.

Great, thanks. And do you think this sort of near-term pressure on some of these incentives to get people back? Do you think that wanes in the fourth quarter or do you think it carries over into that period?

If we can return to our previous staffing levels, I believe we will see a reduction in overtime and training costs. Both of these factors significantly impact our labor margins and improve our position against inflation. Furthermore, there is a notable distinction between labor rates with and without overtime. As we become fully staffed and manage training expenses, which are currently about 20 basis points higher than usual, we can enhance efficiency in our restaurants from a productivity perspective. This means fewer hours will be needed because we will have the right staff, who will be more experienced. Consequently, we can eliminate the extra costs associated with overtime and training.

Great. And then just maybe this is a question for Kevin, in terms of the guest research that you've done. Are you starting to implement some of the information that you've learned from this study? Or is it still kind of more of a '22 or late '21 type of push? And if so, can you give an example of what you've done?

Yes, there's always more to learn from our guests. So let's just start there that there's a few other steps in this process yet. We're doing some things with some credit card behavioral data that's going to give us another overlay to really understand our guests on a daily basis in terms of how they behave with us. But going back to your question, we're now the whole point of this is to, as we understand our guests is to continue to create more differentiation within the space. What we found is that our restaurant is a place that kind of has the energy of a bar, which of course a big part of our business is from the bar, and yet we have this kind of comfortable bar environment to that people like to come and hang out with. So as we look at differentiation, we're looking at doubling down on some of the strengths we're doing. We're looking by department right now, how we can double down on those opportunities. We're applying some of this into the way we do targeted marketing. We're even looking at the way we look at our loyalty guests. And are there opportunities to continue to drive more frequency and up-sell, so kind of across the board. But this is probably, I'll call it a 12 to 24 month evolution to get to a point where we're really working on all cylinders with this new information.

Got it. Thanks. And then lastly, Tom, I just want to clarify, I believe you had said earlier that other OpEx expense at the restaurant level $24,000 per week, is that inclusive of the marketing spend for the balance of the year, I think you're saying or maybe it's just the third quarter?

I think that was just third quarter, wasn't it?

Yes, it should be a good estimate for the balance of the year, but that's correct.

And that does conclude the question-and-answer session, as well as today's call. We would like to thank everyone for your participation. You may now disconnect.

Thanks everyone.

Thank you.