Good day and welcome to the BJ's Restaurants, Inc. Second Quarter 2022 Earnings Release and Conference Call. Today's conference call is being recorded. At this time, I'd like to turn the conference over to Greg Levin, Chief Executive Officer and President. Please go ahead, sir.

Thank you, operator, and good afternoon, everyone, and welcome to BJ's Restaurants fiscal 2022 second quarter investor conference call and webcast. I am Greg Levin, BJ's Chief Executive Officer and President. Joining me on the call today is Tom Houdek, our Chief Financial Officer. After the market closed today, we released our financial results for the fiscal 2022 second quarter. You can view the full text of our earnings release on our website at www.bjsrestaurants.com. Our agenda today will start with Rana Schirmer, our Director of SEC Reporting, providing our standard cautionary disclosure with respect to forward-looking statements. I will then provide an update on our business and current initiatives, and then Tom Houdek will provide some commentary on the quarter and the current environment. After that, 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, July 21, 2022. 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. In Q2, BJ's generated the highest quarterly sales in our history. In fact, we beat the prior period record set in the second quarter of 2019 by 10%. We accomplished this by staying true to a key principle at BJ's: we are sales drivers, first and foremost. We delivered 4.8% comparable restaurant sales growth compared to Q2 2019, which is our best quarterly result during the pandemic era. We also added more restaurant operating weeks with 2 additional new restaurant openings during the quarter, both of which are off to very strong starts. Additionally, we finished the quarter with our staffing levels near full capacity compared to 2019 levels, providing us more opportunity to recapture dining room traffic and drive further sales growth. As we have all experienced, accompanying our sales growth was multi-decade high levels of inflation. Inflationary pressure on our operating costs accelerated in the second quarter and is now running ahead of our earlier forecast and remains ahead of the menu pricing we have taken since inflation began to really ramp up in the second half of last year. As we have shown throughout the various challenges presented during the past 2 years, we will remain agile and adjust our business for the current environment. In a moment, I will outline steps we have taken to manage our business given the current inflationary backdrop. Another aspect of high inflation is its impact on consumers as their pocketbooks are pressured. In the second quarter, we began to more closely track the underlying patterns of our guests to identify any shifts in our guest behavior early. We measure not only overall sales and traffic trends but deeper layers such as how often certain categories of guests visit and what is being ordered from our menu, and we review and analyze this data regularly. The good news is that to date through July, we have not yet found any measurable changes in our guest behavior. In fact, traffic patterns are following a typical seasonal trend and our guests are continuing to enjoy the usual amount of appetizers, drinks, and desserts in our restaurants. We haven't seen any uptick in the usage of our value offerings, including our Happy Hour and Daily Brewhouse special menus. If a consumer pullback does occur and impacts the industry, we expect that BJ's strong value proposition would lead to a better overall relative performance. Furthermore, we expect that any broad decline in demand would be accompanied by relief and input costs which could benefit margins. So as I've just outlined, we have not seen any changes in our guest behavior to date, but we will continue to monitor and, if need be, take appropriate action to effectively manage any changes in the environment. Returning to sales growth. As I outlined in detail on our previous quarterly call, we have a comprehensive set of strategic initiatives that offer the best path forward to our meaningful sales growth. These sales initiatives over the long run will allow us to leverage the fixed costs inherent in our business to drive margin expansion. During the second quarter, we made considerable progress on both the near- and longer-term sales catalysts. BJ's most impactful near-term sales driving opportunity heading into the second quarter was improving staffing levels. And boy, did our restaurants deliver. We hired more than 6,000 new hourly team members during the quarter and are now approaching pre-pandemic staffing levels in most restaurants. Approximately 1/4 of our restaurant team members have been hired in the past 3 months. As such, our second quarter labor costs reflect both increased training costs as well as lower efficiency as these new team members learn BJ's processes. I expect these investments will deliver a quick payback in the coming quarters as we are able to build even more sales while gaining labor efficiencies. Another area of growth within the 4 walls of our existing restaurants is our remodel initiative. The early results of this initiative continue to be very encouraging. We have now added additional seating capacity in 4 restaurants and have had similar success in each with a very attractive return profile. With the return profile we have seen to date, I am increasingly confident that remodels will be an important part of our capital allocation strategy going forward. We will continue to analyze and refine this plan through the balance of this year which will incorporate into our 2023 capital planning. We also made considerable progress in the quarter on initiatives that will drive future sales. For example, we continued our work on expanding our high-potential catering business. We are now testing a more high-touch catering experience to help further expand in the corporate catering channel which tends to have more recurring orders with a higher check average. In the second quarter, our catering business was up more than 70% over 2021 and we have our sights set on exponential growth from current sales levels. Next, we reached significant milestones with some great best-in-class guest and team member technology. We developed and are piloting a digital order tracker, so guests ordering takeout, curbside, and white label delivery can now track their order status in real time. We have integrated this with our well-received existing digital curbside check-in portal. Usage is strong, guest sentiment is very positive and it automates tasks that were handled by our team members. We plan to roll this out more broadly in the third quarter of this year. Another key initiative is our digital call-ahead waitlist. We built enhancements and are testing various versions using AI to determine and communicate accurate table wait times to our guests through digital and automated voice channels. This is another example where the tech helps both guests and team members since the current process is slower and more labor intensive. We strive to empower guests and team members by providing technology at the right time and not tech for tech's sake. We also recently introduced daily pay for our team members, allowing them to get paid as early as the day their wages are earned. Our team members love this option which fits with our strategy to find innovative ways to differentiate BJ's in the talent marketplace and be the employer of choice in casual dining. Sales are always a key focus as top-line growth results in leveraging fixed costs which expand margins and result in higher dollar profits. Though in the current environment with high levels of inflation, we are also maniacal about identifying, quickly testing, and implementing margin expansion opportunities throughout our business. We are careful to not impact what drives our guest love for BJ's which keeps them smiling and coming back, including our gold standard level of service, gracious hospitality, food quality on par with or better than much more expensive restaurants, and our high energy, like-new first-class restaurants. With respect to food costs, beginning in July, we changed certain pack sizes for some items to more common sizes which brings cost savings. Also, we are testing slow roasting our own chicken wings to drive cost savings. Let me tell you, because of our slow roast ovens, these products are delicious and early guest feedback is very positive. We are also evaluating different sizes and cuts of key inputs such as chicken breast, salmon, and avocados that would be less expensive to procure. We also have opportunities in both labor and operating occupancy costs. On labor, now that the majority of our restaurants are fully staffed and our teams are getting their sea legs, we can begin driving improved efficiencies around our ideal staffing levels while reducing training and overtime costs. On operating and occupancy costs, we continue to evaluate how we buy our chemicals, linen, glassware, and take-out packaging as well as many other items. While not everything we test will meet our high standards, I am very confident we have a number of meaningful near-term margin-enhancing opportunities ahead of us. The cost-saving opportunities identified to date could enhance restaurant margins by as much as 200 basis points, though actual savings will depend on which opportunities we decide to implement following testing. As we mentioned in previous earnings calls, we completed a deep dive into our guest research that has informed our menu strategy going forward. We know guests come to BJ's for food that delivers the comfort of a familiar with a brewhouse twist. Based on this research, we will begin testing a slightly smaller menu focused more on our core Brewhouse favorites and key differentiating items later this fall. A slightly smaller menu allows us to focus on our guest favorites and improve our operating efficiencies. And no inflation and margin conversation would be complete without discussing menu prices. Given the acceleration of inflation throughout the quarter in our input costs, we are now scheduled to take an additional 2% pricing round in early August which follows the 1.4% of menu pricing taken in early June. In aggregate, our pricing is still behind the current level of inflation. We will continue to provide strong affordability as we manage our good, better, best pricing strategy. For example, we will continue to provide our guests with our lunch specials starting at $10 in certain markets as well as our Daily Brewhouse Specials. At the same time, for guests that want to indulge in some of our Brewhouse favorites, we have items like our Prime Rib and double bone-in pork chop. During the second quarter, we opened new restaurants in San Antonio, Texas, and Framingham, Massachusetts. We have now opened 3 new restaurants this year, increasing our footprint to 214 locations. We are very pleased with the performance of these new openings, which continue to demonstrate that guests love the BJ's concept in both new and existing markets. We continue to expect to open up to 5 additional restaurants in the second half of this year, though supply chain constraints could impact our actual opening dates. As I stated earlier in my remarks, we are very encouraged by the early results in our restaurant remodels which have delivered strong returns by driving sales through added seating capacity. As we assemble our 2023 capital allocation strategy later this year, I believe remodel investments will play an important role, along with a measured approach to top-quality new restaurant openings, both initiatives focused on return on investments. I also envision that we will reintroduce returning capital to shareholders once conditions are more normalized. In summary, we are focused on a comprehensive set of initiatives aimed at significantly increasing our average weekly sales, growing our restaurant margins, and continuing our national expansion at a controlled pace in top-quality sites with the goal of growing BJ's sales to $2 billion and beyond and delivering meaningful earnings growth and shareholder return. In the meantime, we are incredibly optimistic that guest affinity for our brand and menu offerings, coupled with the trajectory of our business and current growth and margin-enhancing initiatives will enable us to achieve attractive near- and mid-term growth and margin objectives, even in the face of the challenging economy currently presented. In closing, I would like to express our appreciation and gratitude for each and every one of our team members who remain committed to making BJ's a gold standard in the casual dining industry. And to all the new team members that recently joined BJ's, welcome to the team. Now let me turn it over to Tom to provide a more detailed update from the quarter and current trends. Tom?

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 second quarter, we reported total sales of $329.7 million. Our sales increased approximately 14% versus Q2 of 2021 and 10% versus Q2 of 2019, which makes it our highest quarterly sales ever. On a comparable restaurant basis, sales increased by 11.7% compared to Q2 of 2021 and increased by 4.8% compared to Q2 of 2019. The Q2 sales improvement, both in comparison to prior years and seasonally, led to a quarterly sequential improvement in restaurant margin to 11.9% compared to 9.8% in Q1 of this year, though the inflationary environment limited the margin upside. Adjusted EBITDA was $23.4 million and 7.1% of sales in our second quarter, behind our Q2 2021 levels which reflected the environment before outsized inflation began in the second half of 2021. We reported net income of $0.3 million and diluted net earnings per share of $0.01 on a GAAP basis. Our net income and diluted net income per share included a $2.2 million income tax expense or $0.09 per share, which reflects our estimated annual effective tax rate and offsets part of the $10.2 million income tax benefit recorded in the first quarter of 2022. As a reminder, our effective tax rate benefits from the FICA and other tax credits, illustrated by our $8 million tax benefit through the first half of 2022. From a sales perspective, we remained in the mid-single-digit positive comparable restaurant sales range throughout the quarter compared to 2019. This equated to a weekly sales average of more than $118,000 per restaurant. We maintained our off-premise weekly sales average in the low $20,000s while growing dine-in sales to approximately $97,000 in Q2, which was $10,000 higher than the first quarter as we benefited from seasonally stronger sales, improved staffing levels, and a more limited COVID impact. Moreover, the week in May that included Mother's Day was our highest sales week ever at nearly $130,000 per restaurant, beating the previous high sales we set in 2019 by approximately $4,000 on a per-restaurant basis. Moving to expenses. Our cost of sales in the quarter was 27.6% of sales, which was 30 basis points unfavorable compared to the last quarter. Food cost inflation continued at multi-decade highs and was exacerbated in Q2 by the war in Ukraine, which drove gas prices and other input costs higher in the quarter. This food cost inflation equated to approximately 10% higher than the second quarter of 2021 and 2% higher than what we experienced in the first quarter of this year. As Greg mentioned in his remarks, we have priced below inflation. Our restaurant costs have increased by more than the 4.6% of menu pricing we have added since our November 2021 pricing round when we began to combat this inflationary cycle. To help further mitigate the impacts of the inflationary environment, we are now planning an additional menu pricing round of 2% in August, following our 1.4% round in June. We have been consistent through this inflationary cycle and taking measured and more frequent pricing actions to limit the impact to guest traffic while we determine the true level of lasting inflation. Also, as part of our margin improvement initiative, we started implementing several smaller changes to save on input costs, such as switching to larger, more common pack sizes for a number of our ingredients. We also have a number of more significant cost savings opportunities in test, and we will continue to provide updates as we vet these opportunities. Labor and benefit expenses at 37.3% of sales in the quarter were favorable to the prior quarter but unfavorable to the second quarter of the prior year. As Greg discussed, we've made tremendous progress restaffing our restaurants in the quarter, which required a labor investment in training and lower efficiency after training was completed before we realize the full benefits of our new team members. As such, our training and overtime hours remained elevated in the quarter due to the strong hiring that impacted labor as a percentage of sales by an additional 70 basis points compared to Q2 of 2019. Also, as part of our margin improvement initiative, over the past month, we have fine-tuned our labor scheduling tools to unlock additional savings opportunities while maintaining the gold standard level of service to our guests. The labor efficiency metrics have already started to improve in early Q3, and we will continue to work closely with our restaurants to ensure a smooth and rapid path back to more standard leverage of our labor hours. Occupancy and operating expenses at 23.2% of sales in the quarter were favorable to the prior quarter and to the second quarter of 2021. Included in our O&O expenses was marketing spend at 1.9% of sales which was higher than the second quarter of 2021 by 70 basis points, driven by a return to media, including television in certain markets to drive incremental sales. G&A for the second quarter was $16.9 million. Included in G&A is the mark-to-market on investments in our deferred compensation program. The recent downward pressure on investment accounts provided a one-time benefit of approximately $1.6 million to G&A this quarter. Given the one-time deferred compensation benefit, I now expect full year G&A to be in the $74 million to $75 million range, including the impact of our 53rd week in Q4. Turning to the balance sheet. We maintained our debt balance at $50 million and ended the quarter with net debt of about $12 million. We are pleased with the strength of our balance sheet and will remain consistent in our approach of prioritizing growth-driving investments by return profiles, including building new restaurants, improving our existing restaurants, and funding sales-driving initiatives. We continue to expect to spend in the $90 million to $95 million range on CapEx this year, which includes up to 5 additional new restaurant openings in the second half. We plan to open 1 restaurant late in the third quarter and as many as 4 in the fourth quarter. Additionally, we continue to believe returning capital to shareholders is an important part of our longer-term capital allocation strategy. We will continue to evaluate business conditions to identify the proper timing to potentially resume returning capital to shareholders. Looking to the third quarter of 2022, we are encouraged by our recent sales trends. Our comparable restaurant sales period to date in July are 4.0% higher than 2019 levels and 4.5% higher when excluding the impact of a popular Free Pizookie Day promotion we ran in 2019. As Greg said in his remarks, we have yet to see any meaningful shift in our guest trends, though we continue to monitor the situation and will remain agile to appropriately manage to any environment. Historically, the third quarter is our seasonally lowest sales quarter. For example, in 2019, our average weekly restaurant sales declined from approximately $114,000 in Q2 to $104,000 in Q3. The sales decline resulted in deleverage through our P&L and impacted margins with restaurant-level cash flow margins declining by 350 basis points over the same period in 2019. In Q3, I anticipate that our sales will follow a similar seasonal trend which will impact margins. Given the early margin improvement opportunities we've realized and other opportunities in front of us, in addition to our upcoming August pricing round, we are targeting restaurant level margins in the 10% area. Finally, looking toward the end of the year, in 2019, restaurant-level margins improved by 250 basis points from the third quarter to the fourth quarter as sales seasonally improved. Assuming a similar pattern of seasonal sales growth in Q4, coupled with more of our margin improvement initiatives coming to fruition, we have an opportunity to make meaningful additional progress building our restaurant margins through the end of the year. In terms of taxes, I expect the tax benefit in Q3 when our business slows seasonally following a tax expense in Q4 as sales ramp back up. I currently expect a modest tax benefit overall in the second half, but our GAAP taxes will be determined by our performance and any changes to our full year forecast. 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. We expect restaffing and training investments to pay back quickly with higher sales growth in those restaurants. At the same time, we have elevated productivity and cost savings throughout our margin improvement initiatives. We have a clear path to sales growth and margin recovery, and our long-term strategy remains intact. While we have seen new challenges emerge throughout the pandemic, we continue to meet these 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.

Our next question comes from Jeffrey Bernstein with Barclays.

Great. Two questions. First one, just looking at the restaurant margins that you're referring to, it looks like the second quarter came in below your expectations, but it does seem like you have confidence as we look to the back half. So just wondering maybe what surprised you most in the second quarter. And if I understand correctly, the third quarter, you're expecting 10%. In the fourth quarter, seemingly, you'd expect more than the 250 basis point seasonal sequential improvement because of incremental initiatives that you have in place? So if you can give any color on that front, that would be great. And then I had one follow-up.

Jeff, this is Greg. I'll let Tom provide more details since he's closer to the situation. Based on our formal remarks, there are a couple of key takeaways. First, we observed a notable increase in the cost of sales, which rose by 2% compared to Q1. We had anticipated our cost of sales would be in the lower 27s, not the upper 27s, so this unexpected continued inflation was a surprise. Additionally, due to our significant labor hiring in preparation for the busy holiday season in May and June, our labor costs exceeded our initial projections. As Tom mentioned in response to the first question, we need to reevaluate our business practices and recognize opportunities for improvement. For instance, we've transitioned to larger pack sizes for certain items, which allows us to reduce delivery frequencies to once a week. This change saves on delivery fees and gives us the ability to purchase in bulk, thereby lowering our costs. On the labor front, we are now returning to our customary labor standards with our team members in place. As we implement these standards, we are seeing positive progress in July due to decreased training needs. Unlike other restaurants that have cut positions, we understand that our guests value the social dining experience and the quality service from our team, which drives our sales. We’re working to regain the labor efficiencies we experienced in 2017, 2018, and 2019, which will significantly reduce hours. We are also addressing cost challenges, particularly with our proprietary wings and slow roast oven, to create a more unique and differentiated product at BJ's. I’m optimistic about our upcoming initiatives. As Tom highlighted, there are seasonal challenges that tend to reduce weekly sales averages, affecting our fixed costs and complicating Q3. However, I believe we will see a stronger acceleration of margins as we approach Q2. Tom, I’ll now pass it over to you.

Thanks, Greg, and I'll answer the second question around as we look at Q4. Again, comparing it to more of a regular year, I do think that there is opportunity ahead of what we saw in 2019. That's really driven by what extra sales can we deliver. We still have capacity in our dining rooms that can continue to add more guests. And now with the increased staffing levels, I think there could be some upside there. The real question is cost of sales, if that stays flat or if it starts to drop a little bit or even goes up. So that could be the piece that we're just continuing to watch. But with the pricing coming in, with capacity there, with the margin initiatives that we spoke about, yes, we think that there should be some opportunity above the usual seasonal improvement from Q3 into Q4.

Understood. And then just my follow-up in terms of the unit openings. Wondering if you can share some early thoughts on whether or not 2023 would be an acceleration from the 8 in '22. I know you mentioned that new markets are doing well. Just wondering if there's any baseline metric we could assume as to what a new market sales and margins are relative to what an existing market is, just so we have a frame of reference when we think about new versus existing markets and those new openings for next year.

Yes. There are several aspects to your question. Firstly, we are pleased with the current remodeling efforts. We believe we can add extra capacity to around 70 of our restaurants. While not every location will perform as well as our existing ones, adding capacity tends to drive additional sales for BJ's. However, construction costs have remained high, with expenses rising from about $5 million to $6 million since before the pandemic. This increase ultimately doesn't alter our business outlook, but in the short term, we see high returns on some remodeling initiatives. As I look ahead to 2023, we haven't finalized our plans yet, but I don't foresee a significant increase in new restaurant openings. Instead, I plan to focus on high-return remodels that can boost our top line. I'm still developing our new restaurant pipeline for next year, and while it won't be drastically reduced from current levels, I don't anticipate a large acceleration in openings either, even though there are still great opportunities. Concerning our margin profile, it really depends on the specific markets we enter and their associated costs, such as minimum wage. A few years ago, we entered Michigan as a new market, and it has performed well in terms of sales and margins. It’s too soon to determine the performance of our Framingham location in the Boston area, although initial sales are exceeding expectations. However, it's still in its early stages. We are also expanding into Illinois later this year and are eager to see its performance. Historically, BJ's has been successful in new markets, and margin profiles have remained relatively consistent across locations. California, for instance, requires higher sales to reach its margin targets, but overall, margin profiles align closely with our ROI goals.

And our next question will come from Drew North with Baird.

Great. I have a follow-up on margins. And thank you for the perspective on the cost-saving initiatives. How are you thinking about the long-term margin opportunity for the business and the path to get there from the levels expected in 2022? Any perspective or framework in terms of how you're thinking about the longer-term margin opportunity would be helpful.

Yes. Drew, it's interesting. When we talk on our calls, we still go back to 2019 as kind of our baseline. Even as we look at July to date here, the reason for that is that if you think about in 2021, things opened up, then Delta came, then in the fourth quarter, Omicron came, and so forth. So '19 is the last year that we kind of look at to normalize our business. We also look at '19 to normalize our business because that's where we want our margins to go. That's our target. We've got to look at that target from the viewpoint that we're not going to continue seeing 9% plus inflation year after year. That's what we're kind of facing right now in our business. As Tom mentioned, we've only taken 4.5% of menu pricing or so since really the November menu rollout, and this is when all the inflation started to happen in our business. We're adding additional menu pricing on top to go against that. But as inflation normalizes and we get price stability, it's going to allow us to continue to drive and optimize our business to work with our vendors and suppliers to figure out ways to do things differently and go after those targets back in restaurant-level margins back into the mid-teens. When I think about what that stair step would be, I think we'll see some nice acceleration in margins moving into Q4 of this year, as Tom talked about, because of some of the initiatives we have in place. As those initiatives continue to roll, we find other initiatives into 2023, I think that allows us to accelerate margins as well in the business. Now, I'm saying that also in the sense that inflation is going to have to start to stabilize versus the fact that it's continued to go from 8.1%, 8.6%, to 9.1%. Some of those have obviously played into our business as well. But that's how I tend to see our business. I see it going into next year, some nice improvement in margins. I think we'll see it actually coming into Q4 of this year as well.

The other piece, it's worth mentioning there as we look at margin improvement, we're also doing that on a higher sales level, too. When we think about comparing to prior years, being that we were up 10% from 2019 overall sales levels, we're multiplying these margins by a much higher sales level. As we think about the recovery, the profit dollars will come first, and the margin percent will come second. But given the amount of pricing and just other check that we have, I think that there's a good opportunity to keep expanding both there.

Okay. That's helpful. And one on pricing, how did you determine that 2% was the right amount of pricing to take this time around in August? Did signs of slowdown in sales exiting Q2, at least for the broader casual dining industry, give you any pause on taking more aggressive pricing? Or just any thoughts on your philosophy there?

Yes, Drew, as I mentioned earlier, we haven't observed any changes in consumer behavior within our business. While there have been discussions regarding broader macro trends, we haven't experienced these shifts ourselves. We utilize a mix of past pricing strategies and our objectives for improving margins, ensuring we can manage this without needing to alter price thresholds on certain items. Additionally, we conduct competitive analyses to maintain our good, better, best pricing strategy. In areas where we have unique and differentiated offerings, we can position ourselves more favorably. For items classified as known value items, we typically aim for more competitive pricing. We are aware that rebuilding our margins is essential, and while taking a large price increase may appear beneficial in the short term, it can damage our overall business value in the long run. Similarly, trying to save our way to success might yield short-term satisfaction but will also erode value over time. Therefore, we will adopt a careful and measured approach as we implement initiatives to advance the business.

And moving on to Alex Slagle with Jefferies.

So you made a lot of progress on the labor front and just kind of wanted to ask what the improving staffing situation means now, both in terms of things like operating hours and where that goes and the ability to close the capacity gap in the dining room but also in terms of promotional activity, what you could do there and also your ability to ramp other growth initiatives like the Beer Club, maybe the virtual brand and catering which you obviously are working on just now that you kind of have the staffing in a better situation, how far you've come if you're at a point now where we should expect to see a step up in any of these fronts?

I'll address the first part and see if Tom has any additional insights. Regarding the catering, we have been focusing on the Beer Club. In the second quarter, we increased our marketing efforts slightly. Tom noted that we began television advertising in a few select markets, and we are assessing the effectiveness of that. We plan to expand this even more in the latter half of the year, especially before the elections when media costs typically rise. Our slow roast concept, which includes around 40 restaurants, is performing well and positively contributing to our business as we refine menu pricing and consider the next rollout. We anticipate a more significant expansion of the virtual brand in the coming year, and we intend to proceed thoughtfully now that our staffing is stable. We are making adjustments to the Beer Club, and for those in California like Alex, you've likely noticed that growler refills were removed, so we've introduced 6 packs as an alternative. We want to evaluate guest reactions to this change as we continue to refine the Beer Club, which we believe is a strong differentiator for us. As I mentioned, we will focus on this in 2023 while testing various strategies. A key difference to your question, Alex, is related to our menu adjustments. We talked about slightly reducing our menu, and I appreciate the insights we've received from guest research that will help us optimize our labor hours and enhance our efficiency. This should enable us to expand our menu in some core areas where growth has been limited due to prior menu expansions into less critical segments.

And moving on to Todd Brooks with Benchmark.

A couple of questions for me, if I may. One, with the improvement in staffing levels, can you talk about maybe trends across the quarter retention-wise? Are retention numbers improving? How do they compare to pre-pandemic levels? And is that still an area of the staffing challenge that we need to work on?

I don't have in front of me just our turnover metrics. I would tell you that looking at them earlier, they were improving. They were actually going in the right direction, and we are seeing some of our best or highest retention numbers in a while, especially as everybody opened up. You almost have to think about the last 12 months because as businesses open up, everybody was hiring and that's when we see the voluntary resignations. They moved in the right direction. I believe, though, Todd, and I'm saying, I believe because I don't have it in front of me, that they're still above maybe where they were pre-pandemic. In that regard, I don't believe our General Manager and manager turnover is that much higher than pre-pandemic. I feel good on the manager side. The hourly has been going in the right direction for us and I believe, as I said, going into this quarter, we are seeing some of our best retention that we've seen over the last 12 months.

Okay. And Todd, just one additional point. Everything Greg said is accurate. Furthermore, the other improvement we noticed in staffing is really the increase in the number of people hired. When we look just at the net gains, while it's important to minimize the number of team members leaving, the larger benefit this quarter was truly the volume of new team members we were able to recruit and onboard. So, with that and the rising retention rates, we are performing well on both ends.

And Tom, typically, when you bring a new team member on, when do you start to unlock that efficiency? I know we're talking about a seasonal retrench to kind of 10% at the restaurant level in Q3. Does that imply that really a lot of that labor efficiency is more of a Q4 event when we get higher volumes?

I think we'll see it start in Q3 but with more upside in Q4.

Yes, in Q3, our weekly sales average is decreasing due to seasonal factors, which can be somewhat misleading. As mentioned during today's call, we are currently observing improvements in our labor efficiency model in July. This model tracks the number of items we can produce per labor hour, encompassing how many labor hours are required to prepare and serve items to our guests. These efficiency numbers have shown significant improvement in July, as we've returned to our established labor standards from 2016, 2017, and 2018. There haven't been any major adjustments to these standards, just minor tweaks. Compared to Q2, we are already noticing this improvement. However, as our weekly sales average declines from previously higher figures, there will still be a slight decrease in labor efficiency in relation to sales. This is a typical trend in our operations, particularly for fixed positions, such as those at the host stand or in designated areas like appetizers and pizza.

Okay. Great. And then a final question for me. You talked about really thoughtful pricing but being focused on still delivering value. Just wondering and you talked about some competitive shops, but do you have a metric of relative value to gauge if BJ's has expanded its relative value by being as conservative as you have on price? And secondly, on the value side. I know you talked about pack sizes coming in and maybe some different cuts of things coming in. But as far as portions on the plate, anything that you're touching there? Or is that a big part of the value delivery to the customer, and you're not going to touch that at all?

Yes. On the relative value, it's hard. We do pull over our peers and look at where they are, where they're priced at certain items, as I talked about from a KPI, as well as some of the differentiated items and making sure that we believe that the price affordability is in line across the board. It's something we worked really hard on, especially over this last year, to make sure that we have this good, better, best strategy across all of our menu items. In regards to where we're looking for efficiencies on the back side, it is, as you said, Todd, it's what we're bringing into our kitchen and into our restaurants to serve our guests. So as we look at things like salmon, for example, which I mentioned, we're still staying to fresh salmon. That's a quality differentiator for BJ's. So we haven't made a decision to all of a sudden go to a frozen this or something like that. We're just looking at how it comes in. We look at something that's going to sound a little bit trivial but like the Saku block that we use for Ahi that we're testing right now, we actually use a round and we can go to a square and save some money in that regard. What's happened is suppliers, they want to today, meaning manufacturers/suppliers, they want to run one SKU and get that SKU to everybody and then let us cook it and make it better and make it brewhouse fabulous. 3 or 4 years ago, they would say, hey, I can do this special cut or special run for you. Today, for us to do a special run, it's a huge premium. That's why we're looking at more traditional commodity lineups there to make sure we differentiate it. One of those differentiations that gets to your question at the end there is in regards to the portion on the plate or the value on the plate. We have not changed that. As we said earlier, we added 2 ounces Alfredo sauce to our Grilled Chicken Alfredo. We moved our Crispy Chicken sandwich up to a 6-ounce chicken from a 4-ounce. We've actually increased portions there. We added additional chips and we added black beans to our Taco dishes. We have not skimped or reduced any of our current menu items. Now at the same time, we'll continue to work on items that maybe blend themselves more to a lunch menu items. Some of the items we've created in our lunch items will be a smaller portion, specifically set for lunch and lunch only. We'll look at other menu items that might be new and have different sizes versus what we currently have. But we don't think it's the right strategy to all of a sudden go from 12 wings to 10 wings or in our case, we do a half a pound of boneless wings to all of a sudden, I guess, 1/3 pound of boneless wings. We know guests come to us because of the quantity that we're providing them in that value, and we think that's the right strategy to move forward with.

And our final question today will come from Jon Tower with Citi.

I just got a couple here. I'm curious and I apologize if I missed this, but I think in the last call, you talked about high single-digit commodity inflation in the second quarter. It sounds like, obviously, that came in a bit higher and then mid-single digits in the second half. Does that second half outlook still hold? And just maybe a follow-up on that as well.

Sure, Jon. Thanks for the question. We did observe some inflation, approximately a 2% increase in the basket, from the first quarter to the second quarter. While there was a slight uptick, looking ahead at the commodity landscape for the next six months, we don’t anticipate any significant pressures that would cause dramatic price fluctuations. We continue to see some favorable conditions in key meat categories that we invest in, and some other areas are catching up due to recent contract resets in July. Overall, it seems like we are not expecting any major changes at this time.

Got it. So some of the spot markets checks that we're seeing with respect to prices rolling over, certainly versus peak in May, haven't necessarily shown up in your contracts yet or anything that you're seeing with respect to purchasing maybe later in the year but they'll want to hold your breath?

That's accurate.

Okay. And then just looking at your model and kind of looking or weaving in what you're discussing about next year with respect to remodels. I think store growth potentially staying at similar levels as to this year, if not ticking higher, and potentially returning cash to shareholders. I'm just curious if you can help me think through the puts and takes of the operating cash flow because I think that would require a pretty significant step-up in operating cash flows or a material step-up in leverage levels. So I'm just curious which one you think plays out next year in order to be able to satisfy one or all 3 of those initiatives, perhaps it's a mixture of both more debt taken on as well as an improvement in the operating side of the business?

Jon, as I was saying earlier, I'm expecting our margins to move up next year as we look through some of the initiatives around our margin improvement, getting into the run rate here in Q4 and then moving into next year. I think that is a big player into it. I think as we stabilize and grow from there, taking on additional debt is not something that we're against from that standpoint. We just want to maintain the flexibility in our balance sheet. That could play into it. But our plans are, frankly, for those margins to improve, both from a combination of the consumer coming into our restaurants from a sales perspective and some of the sales-driving initiatives that we continue to work on and the margin improvement initiatives as well. There's not much additional cost associated with the restaurant. We are converting an old bus station that we had stopped using into three large booths that can accommodate eight people each. This will primarily drive incremental sales for our restaurants. I believe that as we implement these booths, we will need a server to maintain our standard of service, although this may vary depending on the restaurant's layout. That is the area where we are currently increasing capacity. We are also considering options for enclosures and some other enhancements that will be addressed later in the third quarter. Overall, this initiative has not significantly increased our operating costs.

And our final question today will come from Sharon Zackfia with Blair.

Sorry if I missed this, my phone cut out but I was wondering how you're measuring kind of your value proposition with customers. And if you kind of have any data on how that's holding up or if it's maybe even improved versus 2019? And then did you give any information on how California might be trending either differently from the rest of the country as we've gone through this kind of more hyperinflationary period the last few months?

Yes. Let me touch on California, Sharon. We still see the Bay area with the most opportunity. There has been improvement. We have seen the comp and comparisons still to 2019 here, it's still sitting negative, but it's improving. That's the big difference in California. Really, Southern California looks a lot like the rest of the country, if not a little bit stronger. That's on the California piece. Greg, did you want to touch on value proposition?

You can go ahead, Tom. I mean we covered some of that in the call but you can go ahead.

Sure. Regarding the value proposition, we don't have a direct measure for that. We focus on well-known value items and observe guest interests as well as comparisons across brands, using that as a benchmark. We also monitor our internal measures, such as Net Promoter Scores related to value, which are our primary indicators. As anticipated, pricing has not led to any decline; if anything, our perceived value appears to be strengthening, and there's no indication that we have increased prices excessively.

Thank you. That does conclude today's conference. We do thank you for your participation. Have an excellent day.

Thank you, everyone.

Thank you.