BJs RESTAURANTS INC Q1 FY2022 Earnings Call

Good day, ladies and gentlemen, and welcome to BJ’s Restaurants Incorporated First Quarter 2022 Earnings Release and Conference Call. Today’s conference is being recorded. At this time, I’d like to turn the conference over to Greg Levin, Chief Executive Officer. Please go ahead.

Thank you, operator. Good afternoon, everyone, and welcome to BJ’s Restaurants fiscal 2022 first quarter investor conference call and webcast. I’m Greg Levin, BJ’s Chief Executive Officer and President. Joining me on the call today is Tom Houdek, our Chief Financial Officer. We also have Greg Lynds, our Chief Development Officer on hand for Q&A. After the market closed today, we released our financial results for the fiscal 2022 first quarter, and you can view the full text of our earnings release on our website at www.bjsrestaurants.com. Our agenda today, we’ll 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. After that, Tom Houdek will provide some commentary on the quarter and the current environment. Then, we will 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, April 21, 2022. We undertake no obligation to publicly update or revise any forward-looking statements or to make any other forward-looking statements 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. I’m highly encouraged by the recent trends in our business. BJ’s generated record Q1 revenue, beating our previous high set in 2019, even with the significant industry-wide impact from the Omicron surge in January. With Omicron in retreat, guest demand and team member staffing levels stabilized in February and then accelerated in March. Our team members shined once again, showing they can provide our guests with the gold standard level of service and gracious hospitality in every operating environment. Our average weekly restaurant sales improved from $96,000 in January to $110,000 in February and $118,000 in March. Compared to 2019, our comparable restaurant sales increased from negative 6.4% in January to negative 0.6% in February, and then to a positive 1.2% in March. Our solid performance continues in April with period-to-date weekly restaurant sales averaging $118,000, which equates to positive mid-single-digit comparable restaurant sales growth from the same period in 2019. Our restaurant margin also improved throughout the quarter with full quarter restaurant margin meaningfully better than January levels, which were impacted by Omicron. Our top line performance is being driven by improving underlying fundamentals. Staffing continues to be a key driver of sales, and we added hourly team members and further reduced the number of understaffed restaurants throughout the quarter. Due to our improved staffing position and solid guest demand, we began adding back more late-night hours starting in March. Our restaurant hours of operation are now approximately a half an hour less per day as compared to pre-COVID hours. Moreover, late-night comparable sales are now trending positive in April compared to 2019. Next, our team member turnover trends improved in the first quarter as well compared to the last several quarters. Our training and engagement programs designed to retain team members are working and are a key part of increasing our staffing and serving more guests. Finally, our net promoter scores rose in the first quarter and our guests scored us higher in Q1 than at any point over the past year and well ahead of our pre-COVID measure in each metric including overall recommendation, value, food, and hospitality. Our unwavering approach to flawless execution continues to be noticed by guests, as also evidenced by our traffic trends. While Tom will go into the cost side of the business in more detail, we continued to experience high inflation in Q1. Certain items such as fresh meats are down from their late 2021 highs, but remain elevated on a historical basis. Our food cost had contracted step up at the beginning of 2022. Related to labor costs, market rates continue to tick up, albeit at a slower quarterly sequential increase than the past couple of years. Given our re-staffing initiatives, we incurred extra hours on a short-term basis as we invested in training and experienced higher than typical overtime due to COVID-related exclusions. To mitigate some of the recent inflation impact, we implemented a menu pricing of 1.8% in February, and we’ll take an additional 1.4% in June. This amount of pricing is still behind current inflationary trends. While sales are improving with guest demand, we still have excess capacity at lunch and other day parts that we can drive guests into our restaurants to leverage the fixed cost in our business to improve margins. That is our number one focus to improve margins, and that is driving guest traffic. Therefore, we are carefully balancing driving traffic with overall pricing to manage margins as sales recover. After seven months as BJ’s CEO, I am confident as ever in BJ’s ability to deliver industry-leading results. Every BJ’s team member, from our restaurants to the restaurant support center, is committed to growing sales since driving incremental sales is the best way for BJ’s to deliver profitable growth. Recently, we galvanized our team around five key strategic initiatives that offer the best path forward towards meaningful, near, and long-term sales growth. They are: serve memorable brewhouse experiences; craft the people-first hospitality culture; build a large, profitable best-in-class off-premise experience; accelerate restaurant growth and new sales channels; and build a better guest and team member experience through the joy of technology. BJ’s well-defined strategic priorities set a clear vision that our leaders are now embarking on to drive the next phase of our concept's growth.

Thanks, Greg, and good afternoon, everyone. I will provide 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. For the first quarter, we reported total sales of $298.7 million. Our sales increased approximately 34% versus Q1 of 2021 and 3% versus Q1 of 2019, which makes it our highest Q1 sales ever. On a comparable restaurant basis, sales increased by 34% compared to Q1 2021 and declined by 1.5% compared to Q1 2019. As Greg mentioned, our comparable restaurant sales improved through the quarter and finished with positive comparable restaurant sales in March versus 2019. Deleveraging from early in the quarter Omicron sales impact and continued inflationary pressures resulted in restaurant margins of 9.8%, which was in line with our expectations. Restaurant margins improved sequentially through the quarter as our sales improved. Adjusted EBITDA was $13.2 million and 4.4% of sales in our first quarter, beating Q1 of 2021 EBITDA but behind Q1 2019 EBITDA. We reported net income of $1.5 million and diluted net income per share of $0.06 on a GAAP basis. Our net income included a $10.2 million income tax benefit, which includes the usual FICA tip credit and applying our estimated annual effective tax rate. The quarter started with January weekly sales per restaurant averaging $96,000 in comparable sales of 6.4% behind January 2019 levels as the Omicron wave was surging across the country. Encouragingly, our sales accelerated in February as COVID cases declined and we continued to add restaurant team members. We increased our weekly sales to $110,000 in February, which was within 0.6% of 2019 levels on a comparable restaurant basis. Our sales trends further improved in March with the weekly sales average reaching $118,000, which was 1.2% above 2019 levels. Moving to expenses. Our cost of sales in the quarter was 27.3% of sales, which was a 10 basis-point improvement from last quarter, but unfavorable to the prior year and to our first quarter of 2019. Food cost inflation was in the high single digits as compared to Q1 of 2021, and up in the low single digits from last quarter. Food cost inflation has slowed modestly with certain meats coming down from their highs at last quarter, partially mitigating inflation on other inputs across our commodity baskets. Labor and benefits expenses at 38.9% of sales in the quarter were unfavorable to the prior year and to the first quarter of 2019. As we previously reported, the Omicron surge had a severe impact on our operations in January and early February, which had a lasting effect across the quarter. We estimate that the Omicron impact weighed on labor and benefits by approximately 100 basis points in the quarter. Also, our training and overtime hours remained elevated in the quarter due to strong hiring and the impacted labor as a percentage of sales by an additional 60 basis points compared to Q1 2019. We believe the investment we have made in both managers and hourly team members are now driving meaningful sales growth in incremental profit as more guests come to dine at BJ’s. Occupancy and operating expenses at 24.0% of sales in the quarter were favorable to the prior year, but unfavorable to our first quarter of 2019. Due to the Omicron impact in January, we reduced our marketing spend in the quarter to 1.5% of sales, which remained below pre-COVID levels. We are encouraged by our ability to maintain off-premise sales at approximately double our pre-COVID levels, which results in certain costs such as to-go packaging and third-party delivery commissions remaining higher than the periods with lower off-premise sales. We also continued to invest in refreshing certain restaurants to look new first-class as we prepare to welcome back more guests into our restaurants. We continue on our mission to identify and implement cost savings across our restaurant operations. Our dual mandate is to find opportunities to save while maintaining our highest standards for our atmosphere, service, and food quality. We are committed to not impacting what makes BJ’s special and keep our best guests coming back time and time again. G&A for the first quarter was $18.3 million. We had some additional spend related to recruiting in the quarter, as well as a return to more regular business activities and adding resources to prepare for growth. We still expect to ramp up G&A spending as the year progresses and conditions improve, including investments that enable us to increase new restaurant openings and build upon our operating and talent capabilities, like resuming in-person operations development meetings, including our career development conference and leadership development conference. I expect full-year G&A to be in the $76 to $77 million area, including an additional $2 million in Q4 as 2022 is a 53-week year. Turning to the balance sheet, we maintain our debt balance of $50 million and ended the quarter with net debt of about $23 million. 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, improve our existing restaurants, and fund sales-driving initiatives. Given the strong pipeline for new restaurant which will result in breaking ground earlier for 2023 restaurants, coupled with some of the early and encouraging results from our remodel initiative, we are now expecting CapEx to be in the $90 to $95 million range. Looking to the second quarter of 2022, we are encouraged by our recent sales trends. Weekly sales have remained in the $118,000 area and we continue to add hourly team members to our restaurants to unlock even more sales. The second quarter is typically our highest sales quarter, which has the benefit from spring break and big sales weekends for Mother’s Day, Father’s Day, as well as large parties during graduation season. If sales continue on their current trajectory and follow the usual seasonal pattern, weekly restaurant sales should be in the $118,000 to $119,000 area. We would expect second quarter restaurant margins to be in the 13.5% to 14% range. Also, we expect an effective tax rate in the 5% to 10% range over the next three quarters of 2022. Finally, I would like to provide an update on three elements that impacted recent sales, but that we expect to benefit future periods: restaurant staffing, challenged dayparts, and media spend. First, restaurant staffing continues to prove to be the key to unlock higher sales. In the first quarter, restaurants consistent with pre-COVID staffing levels generated a 2.2% comparable sales increase versus 2019, which was more than 10 percentage points better than restaurants still in the process of rebuilding their teams. We continue to add team members each week enabling more sales growth. Next, in terms of dayparts, lunch and late-night remained the most impacted in Q1, which weighed on our three-year comp by more than 4 percentage points combined in the quarter. In early Q2, both dayparts are delivering encouraging top-line trends with lunch returning to approximately flat and late night now with positive comparable restaurant sales versus 2019. Our new lunch value menu continues to add weekday traffic, and late-night has benefited from us adding back more late-night hours, starting in March as our staffing levels have improved. Finally, media spend. In Q1 2019, we spent 40% more in media dollars, promoting BJ’s brand across channels, including television, when comparing to our Q1 2022 spend levels. Making the conservative assumption that our media investment just broke even, the incremental media spend in our 2019 base sales translated to more than 80 basis points of three-year comp headwind in the first quarter. With a more stable operating environment and improved staffing levels, we recently returned to a larger scale advertising campaign in our top markets. We are targeting investing approximately 2% of sales in the second quarter to increase brand awareness and drive additional traffic to our restaurants, which is incorporated in the Q2 margin expectations I provided earlier. We expect each of these factors to contribute to tailwinds in the second quarter and beyond and help drive incremental sales, and higher sales lead to higher restaurant margins. In summary, we know the best way to grow margins and profit is to grow sales. Recent sales trends have been encouraging, and we remain committed to being sales drivers, first and foremost. At the same time, we have elevated productivity and cost savings through our Project Q initiatives. We have a clear path to sales growth and margin recovery, and our long-term strategy remains intact.

We have seen new challenges emerge throughout the pandemic, and we continue to meet the challenges head-on, manage our business for both near and long-term objectives, and remain steadfast in our focus on providing our guests with the best experience which will allow us to continue delivering outsized growth in the years to come. Thank you for your time today, and we’ll now open the call to your questions. Operator?

Thank you. We’ll take our first question from Alex Slagle with Jefferies. Please go ahead.

Hey. Thanks. Good afternoon. Just had a question on the quarter-to-date same-store sales and average weekly sales. Just trying to think, is that all apples-to-apples in terms of the calendar and promotions, or anything to call out on the comp versus ‘19?

Yes. Alex, it’s Greg Levin. Yes, it is Easter. When we look at the numbers and what we’re talking about here in that $118,000 we’re in kind of the mid-single-digit comps, we’re still comparing it to 2019 being kind of the last time to compare it to. Back in 2019, Easter lined up the same weekend as this past weekend, so everything from an apples-to-apples perspective seems pretty much in line.

Great. And just consumer spending habits and overall health. I mean, just get an idea of what you’re seeing, if there’s anything in your data or anecdotal observations on consumer spending dynamics or health or any demographics, any kind of shifts you’re seeing just given the inflation headwinds? I mean, it sounds pretty strong but just curious if you have any other comments on that.

Yes. I’ll add some color to it. And I don’t know if Tom will have something to add to it as well. But I think what we’re seeing is, and we mentioned a little bit on the formal remarks, and that is our lunch specials are working really well with our guests, and that is the value play there. The ability to get full-service sit-down chicken parm for $10 and here in California for $11 in a higher cost area tends to be a great value, and we’re seeing that improvement in that lunch daypart. It's still a softer daypart for us, though, overall, and that’s where I think we can continue to lean into that and drive the excess capacity in that business. We have tended to continue to see an increase in incident rates, thinking about kind of from a pre-COVID standpoint, so guests are still ordering more items in that regard. And we did mention the late-night seems to be coming back. So, people are feeling more comfortable getting out from a late-night perspective. Other than that, from our mix, it’s been pretty consistent. I don’t know if there’s anything additional to that, Tom?

I would say in terms of the overall business, it’s great to have the everyday value across our menu, but we also have very sharp price points at Happy Hour and daily Brewhouse specials. So, the guests that are most price sensitive can come in at any time. But we haven’t seen any shifts in mix in the business really. And in terms of pricing, we when we go through these pricing rounds, we’ll measure to see what the flow-through is and if we’ve seen any trade between products. And really, we haven’t seen any shift there as well. So, we haven’t seen anything of concern. It seems to be still a very healthy consumer.

Thanks. And a follow-up on the overtime and training, how much of a headwind do you expect that to continue? I’m just trying to think about 2Q, is that starting to come off or is that headwind expected to continue that you talked about on the margin?

I would say, in the second half, we should see that improving. And I think it’s a gradual improvement as staffing improves. You hire less, you have better staffing and overtime goes down. So, I would say in the second half, we should see that adding more of a tailwind than it is right now.

We’ll take our next question from David Tarantino with Baird. Please go ahead.

My question is on the margins. And first, I wanted to ask, on the Q2 outlook, is that a good run rate to think about on an underlying basis, or are there some factors in there that you would consider temporary that are suppressing the margin? And then, I have a second question maybe about the longer-term outlook. But I guess, how should we think about the current run rate on margins versus what you think is normalized?

Yes, David, this is Greg. I believe that the current margin run rate is reasonable, especially considering potential inflationary pressures. Regarding your question, it also depends on how we model our sales trends, as we have not yet returned to our desired levels in the dining room. That represents an opportunity for us and will support the overall business moving forward. In this quarter, we saw cost of sales around 27%. Looking at the long-term prospects, the objective is to reduce that figure. This will involve some pricing adjustments as we introduce new items related to the Brewhouse menu, and over time, we will also optimize our labor. In terms of margins, I don’t see any reason why, in the long run, we can’t return to the mid-teens, reaching historical levels. This year is likely to still involve training, particularly in the second half. We may experience ongoing inflationary pressures in commodities. We are intentionally pricing lower compared to competitors, with increases of only 1.8% and 1.4%. Those figures are relatively low because we have sufficient capacity in our business to attract guests to the unique dining experience that BJ’s offers, and we have observed a clear demand for social dining experiences. I prefer to leverage that excess capacity to bring in guests and manage fixed costs rather than overly focusing on price increases, which I don't believe is the right strategy.

Yes, great. That’s helpful. That essentially answered the second part of what I was going to ask about. But with respect to traffic, could you give us a sense of how much traffic in April is down versus, I guess, the pre-COVID levels, or versus 2019? And I’m talking specifically about the in-restaurant transactions, just to kind of frame up what the opportunity might be if you recapture all those transactions?

Sure. So, looking at just April here, our traffic versus 2019 just dine-in is still down in the 10% to 20% range. So, there’s still a meaningful amount of dining of traffic capacity in our restaurants that we can add back. The sales levels that we talked about, I mean, the benefit of the off-premise being double where we were, it’s great because that pushes us to the comp positive position. But as we really see the opportunity of getting more staffing in our restaurants and being able to serve more guests, there’s a big opportunity to grow that traffic back over time.

Great. And last question, I promise. On the margin outlook, Greg, that you just mentioned, is it recapturing all of that traffic necessary to get the margins back to the mid-teens over time? I know there are several puts and takes, but is that how you’re thinking about it?

Not entirely. Right now, we are taking a very measured approach to inflation, which will require additional pricing. Everyone will need to implement this to offset some of that. Over time, as this additional pricing comes in, it will be part of our strategy. The strong off-premise sales we have means that we don’t necessarily need to bring back all the dine-in traffic to improve our margins closer to historical rates.

We’ll take our next question from Joshua Long with Piper Sandler. Please go ahead.

Great. Thank you for taking my question. And thanks for the commentary around the daypart trends. It was very helpful. Curious if you’re seeing similar trends across regions. So maybe, is West Coast, which had been hurt a little bit longer in terms of that late-night and some of the return to office pieces, if that had bounced back more, or just what you’re seeing across geographies as added the context to the daypart trends that we talked about?

Yes. I’ll give you a top level, and Tom, chime in here. But in general, Josh, everything has moved in the right direction across our business, meaning all geographic areas have been improving period-over-period from that perspective. I would still tend to say that the Bay Area is still softer, but it’s moving in the right direction, which obviously we like. We talked about the fact that late night is moving in the positive direction and lunch has improved. So, when you look at the business overall, and you look at both geography and dayparts, they’re moving in the right direction. But as Tom just said, and I’ve emphasized as well, there’s still a lot of opportunity to drive this dine-in traffic, and frankly, still to drive off-premise. We should be getting all-premise higher than where we are today. So, we like that opportunity that we have in front of us. When I talk about that opportunity, that opportunity is around transactions. It’s not guest traffic coming in versus driving the higher sales purely on menu pricing.

Got it. That’s helpful, particularly, in terms of the daypart piece. When we think about some of the remodels that you have lined up, it sounds like those are initially still early on, but initially doing pretty well. Curious if you could kind of frame up how you’re thinking about that, having a couple on your belt now in terms of being able to roll those out and at what speed or cadence the next grouping of those would entail?

Sure. The two locations we’ve opened have a restaurant model where about a quarter to a third have unused space that we can transform into three large booths. We notice the biggest capacity constraints during dinner service, and we’re seeing additional sales of up to 1,000 or 2,000 more weekly. The initial data from these locations is promising. We're still planning the schedule and rollout for more remodels, and we have additional ideas for updating other areas of our restaurants as well. It's early in this remodeling initiative, but the initial results are encouraging. When we evaluate the costs against the potential benefits, we see strong returns, and we’re excited about the possibilities ahead.

I’ll follow along as well and see how that progresses. One last one for me. In terms of thinking about the comp for the quarter and within the context of the menu price windows that Greg talked about taking, how much effective price was going in or was in place during the quarter? Just trying to create a base for some of those next windows that Greg outlined.

Yes. I don’t have the specific details here, but we typically introduce our menus in January, June, and around September or October. After the June rollout, we will adjust menu pricing again in September. Generally, our menu pricing is currently around 5%. However, looking back, the inflation that everyone is dealing with began to rise significantly in Q3 and Q4 of last year and has continued into Q1. During that period, our pricing was a bit lower, ranging from 1.5% to 2% at various times. As we encountered this shift toward higher pricing, we eased back on our overall pricing strategy while we work on developing the business. Looking back to Q1 and Q2 of last year, it’s likely around 5%.

Got it, and for 1Q. And then maybe to your commentary there, just some level of obviously, awareness, the sensitivity around managing that price. So, when you layer on the incremental 1.5% to 2%, does that get you meaningfully into that mid-single-digit range of pricing perspective, or as we take in those pieces that roll off on a year-over-year basis, does that keep you more or less in that mid-single-digit range?

Yes. That’s the latter there. As we roll over from a year ago, we’ll actually be maybe even a little bit less on pricing, because I think maybe Q1, Q2 might be a little bit more 2021. So it will still be in that 4% to 5% in total as kind of the constant pricing.

We’ll take our next question from Brian Mullan with Deutsche Bank. Please go ahead.

Just a question on staffing. It sounds as though things have gotten much better of late that has helped drive the recent sales recovery, but also that you’re still adding employees even now. So, just a clarification question, is staffing still an issue that is holding back sales at certain restaurants here in April, or have you now kind of officially moved past that point on staffing?

There are pockets, Brian. I want to say there might be a handful of restaurants that are a little bit more where the staffing levels are still below where we’d like them to be and that inhibits sales. So, we still have that in certain areas. The other thing that plays into this as well is your staffing levels might feel pretty good when we look at them on a piece of paper, but we still end up with callouts and other issues, just whether it’s COVID or something else that plays into it that will impact sales for that day or for a couple of days. So, staffing is not where it was in ‘17, ‘18 or ‘19 from that perspective. But, if I had to think about looking back on the last year plus, 15 months or so, we’re in a much healthier place today than where we’ve been over that time frame.

Okay. Thanks. And then, as a follow-up, in the prepared remarks, you indicated again, looking at ways to mitigate costs across the organization. Just trying to get a sense if there’s something unique you’d call out that you plan to do at the restaurant level, or is this more of kind of a corporate G&A opportunity actions that you have in mind? Just any color.

Yes. I’m going to hold off on the color there because, frankly, we’re testing a bunch of different things, and we don’t know what’s going to work or not work. At the end of the day, we want to take care of our guests first and foremost. So we’re not looking and saying, okay, maybe we eliminate server assistance, and therefore, we don’t have that position or we take servers to 7 or 8 tables. We know the reason that guests come to us is because of our people and taking care of them in our restaurants, and we want to make sure that our high-touch points stay there. What we wanted to continue to do is look at areas in regards to consumables, some of the operating expenditure costs, and see if there are other things that we can do that will help reduce costs or continue to keep the kind of the uniqueness in the posh casual look that we have at BJ’s. The challenge is, frankly, the macro world continues to make it more difficult. At times when supply chains seem like they were getting better, things in the macro made it a little bit more difficult. Again, with maybe things being shut down in China regarding some of our consumables, the supply chains have gotten longer. I want to say in February timeframe, we were able to start seeing a little more normalization of supply chains and allowing us to do some reverse auctions. But we’ve got a lot of different things going on from a test standpoint. When those work, and we don’t see any pushback from our guests and it continues to make BJ’s stand out and be differentiated, we’ll discuss those. The thing that I’m trying to make sure we at BJ’s, and we talked about this as our executive team, we are not going to succumb to the term skimpflation out there. We’re not going to all of a sudden raise prices and give our guests less. Things we’ve done already this year include increasing our chicken sandwich from a 4-ounce to a 6-ounce chicken breast. We’ve increased the amount of portion we have in our Chicken Alfredo. There are too many other businesses out there that want to raise prices and take away things. While that might make us feel good for a quarter, it’s not how you build the business for the long term. Everything we want to look at comes to the point that we’re still giving the guest a unique and better dining experience than our peers.

We’ll take our next question from Jeffrey Bernstein with Barclays. Please go ahead.

Two questions. One, I just wanted to talk a little bit more, Greg, about the unit side of things. I know you’ve often said quality over quantity. But it does sound like you found a way or you feel an increasing confidence in accelerating that new unit growth from what might be a 4% today to 5%, 6%, 7% future years. So, I’m just wondering if you can give a little more color on that. Whether we’re talking about new versus existing markets, any kind of color on that acceleration in the unit openings would be great.

Yes. Jeff, great question. First, even taking a step back here, our restaurants in our portfolio have always been very strong. I know we’ve accelerated over the times I’ve been here and then pulled back on other initiatives as we built the Company over time. There’s never been a concern that a portfolio of classes didn’t work or markets didn’t work for us from that perspective. So, as I’ve taken on this role and seen just a history of good restaurants that continue to work for BJ’s, I thought it was important that we get consistent in regards to our cadence of growing our business. You made the right comment that we’ve always used Quality over Quantity. Even as we look out and try to get it above 5% to 6% and 7%, we want to make sure that we’re doing it at the point that we can execute with really, really good quality. That high weekly sales average is so important to our business to drive margins and continue driving a high ROI, and you do that with great people. We want to make sure that it’s done at the right cadence that we can execute and not get ahead of our ski tips. I do feel good that as we build this year, back those regional training teams that need to be built, we need to rebuild our supply chain team, which is more difficult today than any time in the past because opening up a new restaurant takes a little bit of a different supply chain skill. As Greg Lynds, who’s here with me, continues to build out his team in regards to being able to open restaurants consistently that we do that this year, and that’s part of that G&A investment that will allow us to accelerate restaurant growth next year. I want to get above the 4%. I think we can do that at BJ’s in the 5%, 6%, 7% range. In regards to locations, and I’ll let Greg Lynds, he’s the expert to talk to it. Right now, we do have a lot of the ability to go into some of our existing restaurants, which I really like.

With only 213 restaurants today in 29 states, you think about Olive Garden with 800-plus, Texas Roadhouse with 600-plus, we have plenty of room within our 29 states or adjacent states to really keep our expansion within our existing markets and where we can leverage our supply chain, our supervision, our brand awareness. That’s our goal certainly for the next two years. But we’re excited about the opportunity to not only expand in our existing markets, but also take on a few new markets as we grow in the coming years.

Understood. And then, just following up, Greg, you mentioned longer-term targets that sales $2 billion plus, which accumulated the 400 units of the volumes you’re doing. But I know you mentioned that you have a variety of internal targets. I was wondering whether you’d share any incremental color on I think you said margins over time getting back into the mid-teens, kind of what all that translates to, if we go out over the next few years from an earnings perspective? Any kind of color you can give on that longer-term algorithm beyond just the top line sales?

Jeff, we’re still working through some of the details there and want to plan to present that to the investment community in the near future here. Generally speaking, from a very simple cadence, we’ve talked about this before, and that is getting that unit growth up to 5-plus percent, driving mid-single-digit comp sales starts to get your revenue getting close to kind of 10% range. Then, we have to leverage the middle of the P&L and drive earnings above the 10%. Also, at that time, we should be generating some significant free cash flow and using that to augment shareholder returns. That’s kind of the algorithm that we’re looking at in our business. It all starts with driving the weekly sales average because that’s going to allow us to continue to leverage the middle of the P&L to get that earnings above. Between all of us on the call, we hope to get to $2 billion in sales with less than 425 restaurants. That’s our goal. We’re not just wanting to get there by a double of the BJ’s restaurants. We want to grow that weekly sales average up, and I think we have a good opportunity in off-premise. We still have a good opportunity in the dining room because even what we’re doing today, as Tom mentioned earlier, we’re still seeing negative traffic in the dining room. I like the opportunities in front of us.

Understood. And also, to just confirm, I know you said 13.5% to 14% in the second quarter, and that was a good run rate for the back half of the year. What is it incorporating in terms of commodity and labor inflation as we look out over the next few quarters? Like, what visibility do you have on either of those, or what’s the assumption baked into that 13.5% to 14%?

In terms of the commodity inflation, it’s similar to what we’re seeing right now. We’re seeing, versus last year, up kind of in the high single digits. On the labor side, it is sequentially still going up, kind of more in the low single digits. So, that’s baked into the margin assumptions that we provided.

We’ll take our next question from Todd Brooks with The Benchmark Company. Please go ahead.

First, looking back, in April we saw $118,000 per week. I'm curious about the typical seasonality in this quarter, especially with significant events like Mother’s Day, Father’s Day, and graduations approaching. If we examine the pre-pandemic Q2 of 2019, how did April compare to May and June, and how did the quarter evolve in terms of average weekly sales?

Sure. In April, it was slightly lower than in May and June. You still see some good levels because of spring break. So, it's a bit less than May and June, but not by much. However, you do notice an increase as we move into May and June, primarily driven by those significant weekends, especially Mother’s Day and Father’s Day, where we observe considerable growth.

Yes, it’s surprisingly consistent. April typically shows a decent spring break number, which raises your weekly sales average significantly. As we move into May and June, there are fluctuations; Mother’s Day and Father’s Day both contribute to the increases, along with some graduations during that time. While there are peaks and valleys, it’s interesting to note that April doesn't drop significantly compared to May and June; they all tend to be relatively stable. In 2019, we had around 113 sales, and the difference between April and the sales in May and June is quite consistent.

Okay, great. How do you feel about the staffing levels to manage peak events like Mother’s Day and Father’s Day? It seems that staffing has improved significantly, but during those peak weeks, are you prepared to fully capitalize on the opportunities?

That’s a great question. And we were able to do it on Valentine’s Day in February, which is a tough day in and of itself. We’ve seen it on a couple of other days as well where we’ve broken some sales records here in Q1. Thankfully, we’ve got great managers in our restaurants that get prepared for that. We’ll end up doing other sales-driving initiatives and staffing initiatives that we’ve done around the other holidays. We’re always thinking about our staffing levels and making sure we have the right team members in our restaurants that can deliver gracious hospitality, take care of our guests, and make sure our managers take care of our team members. Ultimately, if we have that right culture in the restaurant, we’ll have great staffing, and we’ll be able to take care of our guests coming to these bigger celebratory events.

That’s great. And then March was in that $118,000 average weekly sales range. Can you maybe kind of try and take some of the noise out from early in the quarter when the Omicron hit the margins? Did March margins kind of match up with that 13.5%, 14% restaurant level that you’re guiding to? Is there some other improvement that needs to happen expense-wise in Q2 versus how you were exiting Q1 to hit the margin target?

Yes. I would say, the margins were in that area. We will be taking some pricing in June. We’ll see a little bit of that benefit in the back end of the quarter in Q2. But yes, for the most part, you’re thinking about it right.

Okay, great. The final one for me. This is just a follow-up from David’s question earlier. I know you say you don’t need to get dine-in volumes back to historic levels to get to the margin targets. But, I’m just wondering if you’re seeing anything or looking at the competitive environment, do you have any reason not to believe that you’re going to get the dine-in volumes back given just the number of competitive closures in the category? And scaled brands getting stronger over the course of the pandemic? Thanks.

No, I don’t see any reason why we wouldn’t get our dining room back. The trend toward historical dining patterns seems to be playing out. I know everybody wanted it to happen yesterday and so forth, but as we look at our business and people get more comfortable going out, we all of a sudden see late night now in a positive comparable restaurant perspective. I don’t believe there are any issues there. I still think, as Tom mentioned a little bit earlier, we’re getting there, and you talked about it as well, Todd, it is about making sure you’ve got the staffing to be able to handle it. While staffing is not like it’s been in the past, the more people we have and the better people we have, the more people we can take into our restaurants, so we want to continue working on that staffing. We’ll continue always looking for ways to drive efficiencies on there. While we didn’t talk about it specifically, I forget the exact amount, but things like mobile pay, or using the QR to pay, those are turning out to be fairly sticky in our restaurants. They’re not at the levels they were in the pandemic when everything was touchless per se, but there are little things like that that can make it faster for guests to make it better for guests from an experience standpoint and make it easier for us from a team member perspective and be able to therefore turn those tables quicker. We don’t see any reason why our traffic patterns wouldn’t return to where they were pre-COVID.

We’ll take our last question from Jon Tower with Citi. Please go ahead.

I would like to clarify something first. Regarding the commodity inflation guidance for the year, I understand you mentioned it being in the high single digits. You suggested this trend would continue throughout the year. How should we interpret this as we begin to compare against higher prices from the second half of 2022? Are you still anticipating high single-digit year-over-year inflation at that time, or will it be more like flat when looking at a two-year period?

It will be at that point and later in the year. When I was responding, I was talking about specifically about Q2. When we get to later in the year, we should see that flatten out a little more. If we think about year-over-year inflation, we’ll see high single digits or we’re expecting high single digits for the next quarter. It should still be probably in the mid-single digits, even slightly above that in the back half. But it does come down a little as we start lapping the higher inflation in the back half of ‘21.

Got it. That makes sense. I really appreciate the term skimplation that you mentioned, Greg. I'm curious if you're noticing that today from any of your chain competitors or independents in the markets where you operate. Following up on the pricing question, can you explain what influences your decisions on the incremental pricing you are implementing? Are you using your past data to determine that you can maintain prices above a certain level despite the unprecedented inflation we are experiencing? Do you observe any resistance at certain dollar or inflation levels compared to the rest of the industry? I'm trying to understand how you approach pricing.

Yes, Jon, there is definitely a scientific approach involved. We analyze various aspects, including looking at groups of restaurants to see how pricing affects menu mix and specific items compared to those that were not adjusted. We assess our pricing across different categories to ensure we remain competitive, sometimes positioning ourselves below others. Furthermore, from extensive consumer research conducted over the past year, we understand what attracts guests to BJ's and their sensitivity to pricing. Regarding your additional question, I cannot specifically identify instances of skimpflation in our peer restaurants, though I've heard others mention it, such as offering fewer wings or reduced appetizers. During The Great Recession, many companies attempted to offer less at a lower price, which did not succeed, as guests expect a certain quantity for a set price. This trend is also evident in other industries, such as hotels and airlines, where service levels have diminished even as costs rise. However, I believe we can utilize the excess capacity in our restaurants to drive traffic. Increasing traffic generally contributes positively to our business, even if it flows through less compared to pricing. Our focus will be on this strategy going forward. We do plan to implement pricing adjustments, with a change scheduled for June, while continuously monitoring commodity prices. It's important to maintain what I refer to as price affordability on our menu, ensuring that it aligns with the value equation in the eyes of our customers.

Got it. It’s encouraging to see your unit growth numbers improving this year, and the confidence that this will continue into the future is promising. I’m interested to know if you are noticing any changes in the environment that are enhancing your confidence, particularly regarding increased site availability or if landlords are reaching out to you more than before?

I’ll let Greg Lynds handle this, but the one thing I would say, and I kind of tried to stay in this a little bit earlier as well is, we’ve always opened up really good sites. I’ve always felt comfortable and confident in our ability to pick great sites and build BJ’s Restaurants. In regards to the pipeline, I guess Greg Lynds, have you seen any changes from landlords?

Yes. Over the years, I've mentioned that there's consistently high demand for AAA sites. We're noticing more opportunities with B sites, as landlords are becoming more flexible and offering additional tenant improvements. Overall site availability for BJ’s remains steady, similar to our position in 2019. However, we are encountering more vacant restaurants or retailers that necessitate complete redevelopment, and we expect this trend to continue moving forward.

Yes. It’s almost all repurposed, either restaurants or other developed retail.

And not many major mall developments, right, if any. There are very few. The ones that we are seeing are more mixed use, with some type of apartments on top and residential involved.

Got it. And just last one for me for now. In terms of thinking about the labor spend versus 2019, can you talk about how much more you’re spending now per employee in total versus those levels? Are you up 5%, 10%? Just curious.

I don’t have the exact numbers in front of me, but if we look back to 2019, hourly wages have increased in the 20% to 25% range. Part of this is due to being in California, where wages went up by a dollar every year until last year. This likely means our labor costs are higher compared to others. I would estimate the increase is still in the 20% to 25% range compared to 2019.

That’s fair. In terms of hourly labor, we were in the mid-10s at the beginning of 2019, and now we’re in the 13 area. So, it’s yes, 25%-or-so just in terms of dollar per hour.

Yes, not including tips. With tips, our key numbers are in the $20 range.

We’ll take our last question from Nick Setyan with Wedbush Securities. Please go ahead.

Thank you. Just a couple. First, just to clarify, did you guys say that you’re comfortable with the 13.5% to 14% margin range in Q3 and Q4?

That was our Q2 range. Seasonally, we do see our sales decline a little in Q3, and then pick back up in Q4. I’d expect the margins to behave similarly with a slight decline followed by some improvement. Ultimately, the revenue will be the key factor in determining how we can manage labor and other fixed costs.

Transactions in the dining room are still down by about 10% to 20%. What factors are influencing this? Is it related to staffing, the time of day, geographical factors, or perhaps exposure in Northern California? This trend seems to lag behind the peer set. Internally, how do you analyze the current dining room transactions compared to the peer set?

Hey Nick, without diving into all the specifics, we can analyze Black Box dine-in traffic and sales trends. Due to our significant sales volume and the performance of our off-premise offerings, I believe we have potential for further growth in off-premise sales. When we focus solely on dine-in, in the last two periods, we've actually surpassed Black Box sales. Currently, the industry is experiencing a trend where off-premise sales are rising, positively impacting comparable sales. For instance, with our initial target of 100,000 WSA, when we see a 10,000 increase in our off-premise sales and another company experiences a 6,000 or 7,000 increase, the effect varies due to our higher starting sales number. The industry overall is observing some softness in dining room traffic, which, while gradually recovering, still faces challenges in certain areas. Factors like staffing levels and the number of people returning to offices contribute to this, particularly in the lunch period. Although dinner sales are strong, I believe there's room to attract more dinner traffic, which may also depend on geographical factors. In areas where we have strong brand recognition, we are seeing better sales compared to some smaller markets.

Ladies and gentlemen, this concludes today’s conference. We appreciate your participation. You may now disconnect.

Thank you, everyone.