BJs RESTAURANTS INC (BJRI) Q3 2022 Earnings Call Transcript

Good day and welcome to the BJ's Restaurants, Incorporated Third 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. Good afternoon, everyone and welcome to BJ's Restaurants fiscal 2022 third quarter investor conference call and webcast. I am Greg Levin, BJ's Chief Executive Officer and President. And 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 afterwards. After the market closed today, we released our financial results for the fiscal 2022 third 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. 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, October 20, 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. BJ's third quarter results beat our internal forecast showing our ability to leverage extra sales growth and drive incremental profit, despite the ongoing inflationary environment. While our sales have continued to recover nicely on a comparable restaurant basis, restaurant costs remain elevated impacting restaurant level margins compared to our historical levels. However, we have seen a more recent moderation of inflation, and we are beginning to see the initial benefits of our margin improvement initiatives, which when combined with our sales-driving initiatives give us the opportunity to expand our margins back into the mid to upper teens over time. From the top-line sales perspective, our quarter three comparable restaurant sales increased 8.2%, as compared to the same quarter in 2019, which accelerated from 4.8% in the second quarter on the same three-year basis. Likewise, comparable restaurant sales increased 8.9% over the same quarter in 2021. Looking at our different sales channels, dine-in comparable restaurant sales traffic trends improved in the quarter, reflecting our ability to staff at higher levels, ensuring that guests know they will be taken care of with our gold standard level of service and gracious hospitality during every visit. Our dine-in comparable restaurant sales have now outperformed the casual dining industry as measured by Black Box on a three-year basis every quarter in 2022. In fact, we increased our dine-in sales lead over the industry in each quarter of 2022, and the third quarter represents our widest lead yet over the industry during the pandemic era. Off-premise sales also remain very strong and continue to pace at more than double pre-COVID levels. Even as dining room traffic recovers, we continue to see very healthy sales levels for both takeout and delivery. Our comprehensive strategy to grow sales, as I outlined in detail on our previous quarterly call, is working even though we are only in the early innings. These sales initiatives over the long run will allow us to leverage the fixed costs inherent in our business to drive margin expansion. Our sales-building initiative starts with great best-in-class restaurant leadership and staffing. Earlier this month, we held our Annual General Manager's Conference in Denver. After spending time with our restaurant leaders from around the country, I am confident we have the right people with the right mindset to execute our culture around craft matters, gold standard level of operational excellence, and gracious hospitality to drive BJ's forward on our road to $2 billion in sales and beyond. To that goal, BJ's added the first standalone Chief People Officer, Amy Krallman, to its leadership team in early Q4. We are thrilled to have Amy join the team and know she will help make BJ's even more competitive in the marketplace. In the third quarter, hourly retention rates continue to improve and were better than year-ago levels, but still not back to pre-pandemic levels. Because there remains a strong correlation between restaurant staffing levels and comparable restaurant sales, we intend to continue adding team members as necessary in the coming weeks to capture more sales in the near-term and to have the right teams in place as we head into the busy holidays, so we are able to maximize our fourth quarter sales potential. Another area of growth within the four walls of our existing restaurants is our remodel initiative. We have now added seating capacity in seven restaurants and have had similar sales success at each location creating a very attractive return profile. We have also updated the bar statement in a high-volume legacy restaurant by modernizing the woodwork, streamlining the bar by moving the beers to the back wall and adding a new 130-inch TV as the centerpiece. It looks absolutely great, and we have another bar remodel planned for later this month. We also plan to remodel two patios in the fourth quarter to increase the number of days we can offer patio seating, effectively increasing the capacity for these restaurants as well. With the restaurant return profile we have seen to date, remodels improve the economics of our existing restaurants and 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 and we will incorporate a larger remodel initiative 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 testing a more high-touch catering experience to help further expand the corporate channel, which tends to have more recurring orders with a higher average check. In the third quarter, our catering business was up approximately 75% over 2021 and more than double 2019 levels. We expect the trend of more workers returning to the office and more in-person meetings to be a tailwind for catering in the near-term. Next, we continue to progress with some great best-in-class guest and team member technology. We updated the software in our server handheld tablets used for order taking to improve functionality and reliability. Our team member feedback has been fantastic, and our servers are much more effective with the devices. Additionally, our digital order tracker is now live, so guests ordering takeout, curbside, and white-label delivery can track their order status in real-time. We are seeing approximately 75% usage for the relevant orders, which proves how useful this technology is to our guests. As an added surprise light feature aligning with our brewhouse concept, the tracker is a pint of beer that fills up as the order moves through to completion. We have also integrated the order tracker with our existing digital curbside check-in portal. Digital curbside check-in usage has quickly increased by 5% with the rollout of the digital order tracker, illustrating the benefit of providing our guests with a broader set of digital convenience tools. Another key initiative is our digital call-ahead waitlist, which uses artificial intelligence to determine and communicate accurate table wait times to our guests through digital and automated voice channels. This is another example where our tech innovation and adoption helps both guests and team members, since the legacy process is slower and more labor-intensive. We have been testing digital call-ahead waitlist for a number of months and intend to roll it out across our system in the fourth quarter. Finally, we are far along the process of designing and building a new BJ's e-commerce platform. We intend to launch our next generation web-based ordering platform by the end of this year. The team has been hard at work preparing the consumer interface and flow to make it easy and enjoyable for guests to order and reorder. We will then leverage the web design work to update our mobile app next year. We believe that modernizing digital ordering will deliver a strong payback in terms of increased digital orders. With regards to our new restaurant expansion strategy, last week we opened a new restaurant in Las Vegas, Nevada, which is our fourth opening this year. We are very pleased with the strong sales performance of all of our new restaurant openings, which continue to demonstrate that guests love the BJ's concept in both new and existing markets. We also recently closed a legacy small format restaurant that was no longer financially viable to operate, bringing our current footprint to 214 restaurants. We now expect to open two additional restaurants in the fourth quarter, which should bring our total openings this year to six restaurants. Through the supply chain and construction delays, we now expect these two restaurants that were initially slated to open this year to open in the first quarter of 2023. Looking to next year, our new restaurant pipeline is in excellent shape. However, we are still finalizing our 2023 new restaurant openings given the challenges from construction inflation, supplies of HVAC and kitchen equipment, construction labor shortages, and delays in permitting from municipalities. Additionally, we plan to prudently balance new restaurant growth with high return remodels, which drive sales through, among other things, added seating capacity. Therefore, while we have not finalized our 2023 new restaurant opening plan, I would anticipate that we will open a similar number of new restaurants next year. We also resumed returning capital to shareholders this past quarter through share repurchases. Therefore, as we finalize our 2023 capital allocation strategy later this year, we plan on prudently investing in sales-building initiatives, new restaurant growth, remodels, and opportunistically returning capital to shareholders. With respect to the broader macro environment and consumer demand, BJ's underlying guest measures have remained steady. Weekly sales have followed a pretty typical seasonal pattern, and our three-year comparable restaurant sales were in the middle to upper single-digit range throughout the third quarter and into the first three weeks of the fourth quarter, when adjusting for promotions and Hurricane Ian. Guest expectations rise with many prices, which I believe benefits BJ's getting our attention to providing exceptional service, hospitality, and food quality. We are committed as ever to making sure our guests leave smiling and wanting to come back for more. Shifting to costs, operating costs in our business remain high, though the level of inflation has moderated recently, which Tom will cover in more detail. As I outlined on our last earnings call, we launched our cross-functional margin improvement initiative to identify a wide range of cost-saving opportunities to benefit our restaurant margins. We have made tangible progress over the past quarter finding meaningful cost-saving opportunities. Our cross-functional team has been actively identifying, betting, and when appropriate, implementing identified cost savings. Our third quarter results reflect hourly labor savings as we rolled out more efficient labor scheduling early in the quarter. We also tested and approved a number of changes across our food inputs that save money while maintaining or even improving and enhancing food quality. These saving opportunities began rolling out in late Q3, so the benefit is largely not reflected in our third quarter results. We also have several other savings initiatives at different stages of testing and approval. So to offer more insight into our program and the effort and creativity of the team, let me quickly review recent changes we made to our chicken wings as an example. For years, we have served a large pre-cut bone-in wing that we would fry when ordered. An idea from our margin improvement team was to test sourcing raw jumbo wings, cooking them in our slow roast ovens that only we can do at BJ's, because of our technology in the chain casual dining segment, and then frying these slow-roasted wings when ordered. They say necessity is the mother of invention. These wings are delicious and the best wing BJ's has ever served. These new wings are in all BJ's restaurants as of earlier this month, and we are now saving materially by sourcing a commodity raw jumbo wing as opposed to a pre-cooked wing that was made specifically for BJ's. This change alone saves us more than $3 million annually based on current prices and benefits our restaurant-level cash flow margins by approximately 20 basis points. We remain committed to identifying cost-saving opportunities that could enhance restaurant margins by as much as 200 basis points. Given the progress to date and the number of opportunities still being explored, I am confident we will achieve this goal. Moreover, this is a powerful initiative since cost savings directly reduce the pricing required to offset inflationary pressures, which in turn further strengthens our competitive value position. 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 with a controlled pace in top-quality sites, with a goal of growing BJ's sales to $2 billion and beyond and delivering meaningful earnings growth and shareholder returns over time. In the meantime, we are incredibly optimistic that guest affinity for our brand and menu offerings coupled with the trajectory of our business and our current growth in margin-enhancing initiatives will enable us to achieve attractive near and mid-term growth and margin objectives. 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 third quarter, we reported total sales of $311.3 million. Our sales increased approximately 10% versus Q3 of 2021 and 12% versus Q3 of 2019. On a comparable restaurant basis, sales increased by 8.9% compared to Q3 of 2021 and by 8.2% compared to Q3 of 2019. Our three-year comparable sales accelerated from negative 1.5% in Q1 to 4.8% in Q2 to 8.2% in Q3. The comparable sales improvement in conjunction with certain savings we started to realize from our margin improvement initiative and the benefit of our August pricing round helped partially mitigate the typical margin decline that accompanies our seasonally lowest sales quarter. Our restaurant-level cash flow margin was 10.3% in Q3 of 2022, or 160 basis points lower than Q2 of 2022, which tends to be our highest sales quarter seasonally. As a reference point, in 2019, our restaurant-level margins declined 350 basis points from Q2 to Q3. So we are encouraged by the factors that helped offset a meaningful portion of the typical seasonal margin decline in Q3 this year. Adjusted EBITDA was $15.2 million and 4.9% of sales in our third quarter, behind Q3 2021 reported levels. As a reminder, we had a $3.1 million employee retention tax credit in conjunction with the CARES Act that benefited our labor and benefits line in Q3 of 2021. When removing this one-time benefit, our adjusted EBITDA and adjusted EBITDA margin both improved this quarter from a year ago. We reported a net loss of $1.6 million and a diluted net loss per share of $0.07 on a GAAP basis for the quarter, which was an improvement from a year ago. From a sales perspective, we averaged in the mid to high single-digit positive comparable restaurant sales range through the quarter compared to 2019. This equated to a weekly sales average of more than $111,000 per restaurant or approximately $8,000 higher than Q3 of 2019. We maintained our off-premise weekly sales average in the low $20,000s, while generating dine-in sales of more than $91,000 in Q3. Moving to expenses. Our cost of sales was 27.3% of sales in the quarter, which was 30 basis points favorable compared to last quarter. They were 10 basis points unfavorable compared to the third quarter of 2021. Food costs remained high but the increases to our food basket have moderated. Our food cost inflation was approximately 5% higher than the third quarter of 2021 and up modestly from the second quarter of this year. As Greg highlighted, we are implementing margin improvement savings that will benefit food costs. We rolled out some minor changes during the third quarter and expect to realize more meaningful savings opportunities beginning this quarter. To help offset inflationary pressures, we increased our menu prices by an additional 2% in August. We have now increased our menu prices by approximately 12% since the beginning of 2020, as compared to food cost inflation of about 23% over the same period. We raised menu prices slower than the inflation impacting our business to gauge the sustaining cost increases, while being careful to maintain strong competitiveness in known value items and offer our guests a range of options to enjoy regardless of their budgets. Our next menu pricing round is planned for January 2023, and we will price accordingly to further recapture restaurant margins and offset inflation that we are not able to mitigate through our margin improvement initiatives. To date, we have seen no guest pushback to our menu pricing rounds. Labor and benefits expenses at 37.7% of sales in the quarter were 50 basis points unfavorable for the third quarter of the prior year as reported, but 60 basis points favorable when removing the one-time Employee Retention Tax Credit benefit from the prior-year figure. Our hourly labor efficiency greatly improved in the quarter. We improved our hourly labor as a percentage of sales by 30 basis points from Q2 to Q3, even as our weekly sales declined seasonally by approximately $7,000. That's quite an accomplishment by our restaurant operators. Part of the improvement was driven by more efficient labor scheduling tools from our margin improvement initiatives. We also lowered our overtime and training hours, which are now 20 basis points higher as a percentage of sales than Q3 of 2019, an improvement of 50 basis points from the pre-pandemic comparison last quarter. Occupancy and operating expenses at 24.7% of sales in the quarter were 30 basis points unfavorable to the third quarter of 2021. Included in our occupancy and operating expenses was marketing spend at 1.7% of sales, which was higher than the third quarter of 2021 by 40 basis points, driven by media investments, including connected television in certain markets to drive incremental sales. Excluding the additional marketing investment, our occupancy and operating expenses would have been favorable by 10 basis points compared to Q3 of 2021. General and administrative expenses for the third quarter were $18.9 million, in line with our expectations. We continue to forecast full-year general and administrative expenses in the $74 million to $75 million range, including the impact of our 53rd week in Q4. Turning to the balance sheet. We've maintained our debt balance at $50 million and ended the quarter with net debt of about $31 million. We are very pleased with the strength of our balance sheet and remain consistent in our approach of prioritizing growth-driving investments by return profile, including building new restaurants, improving our existing restaurants, and funding sales-driving initiatives. We continue to expect capital expenditures in the $90 million to $95 million range this year, which includes six restaurants we intend to open in 2022 and two additional restaurant openings now slated for early 2023. Even though we postponed two restaurant openings to the first quarter of 2023 due to supply chain and construction delays, most of the related capital expenditures will still occur in 2022. As Greg alluded to earlier, the strength of our balance sheet allows us to continue our growth investments while again opportunistically repurchasing shares. Our operating stability, sales building, and margin improvement success positions BJ's to opportunistically return capital to shareholders through share repurchases in the third quarter. During the quarter, we repurchased and retired approximately 91,000 shares at a cost of approximately $2.4 million, which leaves approximately $22.1 million remaining available under our currently authorized share repurchase program. Looking to the fourth quarter of 2022, we remain encouraged by our recent sales trends. Our comparable restaurant sales period-to-date in October increased approximately 8% and 6%, compared to the same periods in 2021 and 2019, respectively, when adjusting for the impact of Hurricane Ian in 2022. As Greg said in his remarks, we have yet to see any meaningful shift in our guest trends, but we continue to monitor the situation and will remain agile to appropriately manage to any environment. Historically, our sales build from the third quarter to the fourth quarter driven by improving restaurant traffic leading up to the holidays. For example, in 2019, our average weekly restaurant sales increased from approximately $104,000 in Q3 to approximately $108,000 in Q4. In Q4 of 2022, I anticipate that our sales will follow a similar seasonal trend, which will allow us to leverage the additional sales and improved margins. Given the higher expected sales, the 53rd week, and early margin improvement opportunities we've realized and other opportunities in front of us, which will help mitigate inflationary pressures, we are targeting Q4 restaurant-level margins in the low to mid 20% area. In terms of taxes, I expect a modest tax expense in Q4. 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 intend to continue to build sales in what we believe will be a busy holiday season with demand for experiential dining remaining strong. At the same time, we have elevated productivity and cost savings through our margin improvement initiatives, which with nice momentum built over the last quarter. We have a clear path to sales growth and margin recovery, and our long-term strategy remains intact. While new challenges emerged through 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.

Thank you. And we will go to our first question from Alex Slagle with Jefferies.

All right, thanks. I have a question about capital allocation. Could you explain how your thinking has changed over the last few months regarding the restarted buyback efforts and the plans to expand the remodel program in 2023? Additionally, what insights do you have about the business and the remodel tests, and how you perceive the broader development landscape has evolved at this time?

Yes. I'll start off, Alex and sure Tom or even Greg Lynds, our Chief Development Officer might be able to add in here. So I think on a broad picture getting restaurants built on time has probably been a big challenge for us in the industry. I think it used to take us about 130 to 150 days to get a restaurant built, if maybe even a little bit earlier than that or quicker than that; and it's basically doubled. It's somewhere in the 260 range or so to get restaurants built. That's how we started to push at this. At the same time, we still like the sales levels and returns we're getting from new restaurants. But because of the challenges of getting restaurants done timely and just the supply and demand, we continue to see elevated construction costs. And while our sales to investment ratio are still above 1 based on the solid sales of new restaurants, it just makes us frankly kind of take a look across the board as to how we want to allocate capital at the current time, where we want to have the right balanced approach of investing in new restaurants knowing that now we've got these high return remodels, especially when we can add capacity and keep our concepts in a like-new first-class and contemporary manner. So I think as we go through this year knowing some of the challenges on the construction side, pivoting a little bit more towards remodels, being able to drive that sales, that will help drive the improved margins and economics in those restaurants. I would say that's a higher priority in our business as opening new restaurants, as well as some other sales-building initiatives. I think third on that three-legged stool is the capital allocation program; and we'll continue to evaluate that in regards to share repurchases, but we don't want to do it at the expense of being able to invest back into remodels at our sales building initiatives and building new restaurants.

This is Greg Lynds. I think from a construction standpoint, when you think about what's happening in the future here, if we're out to bid right now, we're going to feel all the pressures that the development cycle has right now. So you're seeing not only the construction costs, but you're seeing entitlement delays, permitting delays, and inspection delays, and we do see that abating next year. So in terms of building our pipeline, we're really looking for mid to late '23 and 2024-type projects when we see a lot of this abating.

Thank you, Alex.

And we'll go next to Jon Tower with Citi.

Right, thanks for taking the questions. Just a few, if I may. The quarter-to-date commentary that's encouraging in terms of what you're seeing for same-store sales. I'm just curious if maybe you could give us any sort of color into perhaps if the California stimulus is helping that number at all? Or if you're seeing this more spread across the system?

Sure thing, John. We've looked at it when the stimulus has started earlier this month, and I would say Southern California has been outperforming on average, and it continues to. So there might be a little bit there, but it really hasn't shown up in any big way in the numbers. So we're happy to have it. But it does look like the business itself was performing well before and is still where we like it.

That's great. I'm curious about the fourth quarter margins, particularly regarding food cost inflation. You mentioned around 5% for the third quarter, but what are you seeing for the fourth quarter? Are you starting to get any insights for 2023 and how things are shaping up at the beginning of the year?

As we approach the fourth quarter, there are two key factors to consider: the overall commodity costs and the margin improvement initiatives that we expect to benefit from. We have experienced some modest inflation from Q2 to Q3, and we are not anticipating any deflation as we enter Q4. While the margin improvement initiative may offer some support, we expect inflation to continue into next year. It's still early to assess contract levels since most will be set in January. However, we anticipate that processed and labor-driven costs may increase. It's too soon to provide exact figures, but inflation is expected as we move into the new year, particularly for contracts already locked in. Overall, we are observing inflation at those levels.

Yes. I believe we will see ongoing inflation, not necessarily an increase, but I don't expect it to decrease immediately. Many contracts are annual, and as we enter the next year, labor costs will lead to negotiations with our vendors. I anticipate we will experience similar trends in January due to states adjusting minimum wages. Fortunately, in California, the minimum wage increase has been addressed, even though it's not linked to the Consumer Price Index, so there will be an uptick there. Consequently, I expect some inflation to persist into the first quarter of next year, but it should start to decrease after the contracts are finalized and companies progress. Additionally, we have not yet determined our pricing strategy for January as we are analyzing our fourth-quarter data to understand inflation trends and ensure we set reasonable prices to address it.

Awesome. I appreciate all the color on that. Just going back to the 200 basis points of margin improvement at the store level over time based on the initiatives that you've kind of dug into during the call, including the chicken wings, etc. Is that incremental to just underlying improvement that you expect in the business, meaning hitting that mid-teen store margin target that you discussed, is that including that 200 basis points? Or would that 200 basis points be additive?

I think it's a combination of both. Ultimately, we'd like to be above the mid-teens. We want to continue to drive that. Some of that comes from sales. So when you look at those numbers, it's always a function of sales that plays into it. It's additive in one sense, but at the same time, if sales don't continue to perform, it will be included in it.

Okay, got it. I will pass it along. Thanks for the time.

Thank you.

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

Thank you. Good afternoon. Can we just reconcile the price in 4Q? I had about 8% then I wanted to see if that was right. And then if you don't, let's just say you don't take price in January, knowing that it is under consideration. Does it ratchet down a couple of hundred basis points in February when you took price in this year?

Hi, Nicole, in Q4, the year-over-year change in price will be around 6%.

I misspoke earlier. I meant to say that we were approaching nearly 8% when we included the 200 basis points in August. That's what I was referring to. So, 8% might be a bit too high; we are looking at something in the 6% range for Q4, so there may be some adjustments from the previous year.

Correct. We took 1.4% in November of last year, which will roll off.

Okay. Perfect. I just wanted to clarify that so we can get the comparison correct. Is there anything else?

And just to make sure I have the right Q4 number, it's 6.5%. So that's the full number.

That's very helpful. Can you explain a bit about the relationship between contract mix and traffic, specifically regarding the nearly 9% comparison in the third quarter, while traffic was noticeably lower, or rather, prices were below that? How are mix and traffic impacting this?

We are still observing an increase in the number of guests per check and a rise in incidents within our checks. Guests are visiting our restaurants and spending more. Therefore, there's an improved mix contributing to our checks, which are higher than we would expect from pricing alone. This means we're also benefiting from an enhanced mix alongside the pricing increase.

Okay. And then just a final one, Greg, I also found your supplier commentary pretty fascinating. So is there anything in the underlying health of that business getting more back on track in terms of like stuff getting to you on time and there were substitutes and out of stocks, which I guess, to your point, made you kind of reinvent certain things like around the chicken wings that's interesting. Can you just talk about the delivery times and the product they're bringing and how that's trending. And again, just cover that mid-teens margin otherwise and then another 200 basis points, I mean that's pretty outstanding, but yet you maybe would invest against that. Is that the way to think about that? I just want to get that conclusion right.

Yes. So let me handle a couple of those things. So on the distribution side, things are continually improving. They are not perfect by any means, but they are getting better. And the things that you hear about in the airline industry, to the hotel industry, to the restaurant industry, that being also seen in the distribution or trucking industry in regards to drivers or things coming out of processing plants and so forth. But it is getting better, and it's moving in the right direction for everybody. So I do think going into next year, we're going to see even more consistency there and not having to worry about substitutions and out-of-stock areas. So that's the first part. It's not back to where we want to be, but it's getting better every day just like our restaurant staffing levels continue to get better. And then in regards to margins, the hard thing with discussing margins at times is people want to talk about margins outside or absent of sales levels. And this business leverages or deleverages a lot based on sales levels. So when we talk about the 200 basis points that we're going after, a lot of that is based on where we are today. But I can tell you, if our sales stay exactly where they are today and don't grow next year, the 200 basis points won't necessarily show up in a positive way per se on our P&L because we'll deleverage from other inflationary costs. So we need to grow top line sales. I think everybody in this industry sometimes just thinks about margins as such an independent variable versus being a dependent variable on sales. So when we talk about our capital allocation programs, we want to make sure we're investing in remodels because it drives top-line sales. We want to be investing in our menu. We want to invest in marketing and so forth to drive all that top-line sales that moved margins naturally up on the fixed cost and then again, leverage some of these other initiatives on top so that we can be above mid-teens. We will always invest back into our restaurants and our guests for the long-term nature of our business and the long-term value that comes from guests returning. As we consider certain options, I want to highlight that we could opt for frozen salmon, which we tested in our kitchen, and save money compared to fresh salmon. However, our fresh salmon is exceptional, and I encourage everyone to try it at BJ's restaurant. The way we prepare it is incredible, and there’s a noticeable difference between frozen and fresh. We also use fresh ground beef for our burgers, and again, the taste difference is clear. We will consistently prioritize quality to ensure the long-term success of our business.

Thank you for that. Appreciate it. Thanks, guys.

And Nicole, I want to ensure we communicate the pricing levels clearly. For this year, we experienced a year-over-year increase of about 5% in Q1, and approximately 6% in both Q2 and Q3, continuing to maintain around 6% in Q4 as we adjusted our pricing.

And we'll move to our next question from Drew North of Baird.

Great. Thanks for taking the question. I wanted to circle back to recent top line trends. Your results suggest some nice acceleration in comps exiting Q3. So wondering if you could share some perspective on what you think drove the strength in comps exiting in the quarter? And then perhaps why you think the underlying growth versus pre-pandemic or 2019 settled a bit here in October, when excluding the impact of the hurricane? And then just are you willing to share what the quarter-to-date figure would be including the impact of the hurricane, just to level set us there?

Yes, Drew, I'll address the first part. We are indeed examining that aspect, focusing on our business and noting the strong comparable sales, which have slightly decreased in Q3 but remain solid, averaging in the mid-single digits, over 6%, as Tom mentioned. In analyzing the business, we've observed some data indicating that during the last two months of summer, we experienced larger groups dining with us. This aligns with trends in leisure and hospitality, where people are eager to travel, fly, and stay in hotels. As a result, our average guest count per check was higher during the summer compared to now. This appears to be a change in our business from the end of Q3 to the current situation. When we review this information, it suggests we're reverting to pre-COVID trends, where sales typically dip a bit in October before increasing again during the holiday season, which we've historically seen. Additionally, as Tom noted, the incidence per check or per guest remains high, with sales of appetizers and alcoholic beverages surpassing 2019 figures. While that metric is holding steady, the size of the parties has slightly decreased as we moved into the end of Q3 and into Q4. Regarding comps, I'll let Tom elaborate, but they seem to be decreasing progressively. So, our goal is to share our expectations for the run rate. Thomas, do you have anything to add?

Yes. The most impacted week was the first week. This is about the Hurricane Ian question you had. Our first week of October was the most impacted, and it was about a 100 basis point impact to comp that week. So we're three weeks in, so it would have weighed about, call it, 30 bps or so on this three-week window, rolling it out through the quarter won't be material, but I just wanted to kind of adjust for it for these early weeks as it's more material for just looking over 3 weeks.

Thank you. That’s helpful.

Sure. Thanks, Drew.

And we'll go to our next question from Joshua Long with Stephens Inc.

Hey, thanks for taking the question. Just wanted to circle back, you might have mentioned it, and if so, I missed it, but when you talk about trends through the quarter, from an average sales basis, was that relatively steady? I think that's what we had talked about in Q2, but just curious if there was any sort of upward downward trajectory during the quarter from an average of sales basis.

Josh, I don't believe so. It seems that everything has followed the seasonal patterns we typically expect. Average weekly sales tend to be higher in July and August compared to September after Labor Day. We're seeing those historical seasonal trends return to our business. As we look at Q4, it reminds us a lot of how weekly sales trends behaved in 2019. The key difference now is that we are dealing with inflation and supplier challenges that weren’t present in 2018 or 2019. However, from a top-line sales perspective, things remain very consistent. I would also note that off-premise sales reflect similar seasonal patterns, decreasing after Labor Day and adjusting to align with the overall weekly sales seasonality.

Thank you for the information. I appreciate it. Regarding the significant investments made in your workforce earlier this year, with around 6,000 new hires, it seems like those team members are getting up to speed well, and you're satisfied with their efficiency. Can you share any additional insights on this? Also, considering the ongoing hiring needs and efforts at the store level, how do you see that fitting into the current situation? Are we now at a more typical level where these additions align with seasonal trends and regular positions being filled?

Yes, that's a good way to frame it, Josh. We saw improvements over the quarter. It was great to see aspects like training and overtime returning to more normalized levels, though not quite back to 2019 pre-COVID levels, but much closer. Considering the new team members we hired in Q2 and the significant increase in our staffing, we're starting to see efficiencies reflected in the numbers, particularly in the third quarter and now into the fourth quarter. It feels much more in line with regular seasonal patterns. We increased our sales leading into Q4, and we usually hire more staff ahead of the holiday season. We're committed to adding to our team member base to maximize sales in Q4, and it feels much more seasonal than pandemic-related.

Got it. That's helpful. Lastly, regarding the fourth quarter, is there going to be an extra week, making it 14 weeks in total? If that's the case, can you share any thoughts on how to leverage that additional week, particularly as we compare it to a fourth quarter last year that was partially impacted by Omicron?

Yes, you're correct. We do have a 53rd week here. And as we forecasted, it is looking back to last year, but also looking back to the trends of ‘19, which seasonally we can see where we leverage the fixed cost. You get some leverage on the labor lines, you get some leverage on the more fixed elements of the restaurant costs and corporate costs in that just from the seasonal benefit of sales, but then also some of those fixed costs as well into the 53rd week. So as we guided on the restaurant level margins that were inclusive of that benefit we'd expect.

Great. Thank you.

Thanks, Josh.

And then we'll go to a question from Todd Brooks with The Benchmark Company.

Good afternoon. I have a couple of follow-up questions. Regarding the 200 basis points of savings from your cost and efficiency initiatives, in a recovering sales environment, what is the timeframe to realize those savings? How long does it take to achieve them if sales are on the rise?

Yes. It's probably through the first half of next year or so. Some of the things will come in faster. Some will take time to roll out. And Todd, we've talked in the past even about the wings. And we've been talking about the wings probably about 90 days, and we were just able to get them through supply chain here in October. So as we go through and test some other items that we have out there and things that we're looking at to get those lined up and supply chain and rolled out take longer, then wow, this is great; can it be implemented by Wednesday of next week, meaning can we get it done in seven days? So I tend to look at that aspect of it. At the same time, Tom has talked about the labor scheduling system and things that we put in place there, and we've seen some really nice improvements on labor. I think even to the other question that Josh asked the fact that we've gotten ourselves staff and team members have gotten their sea legs under them. That's improved our operational capability as well in the restaurants. But we still have some areas to go there as well that will continue to work through. So I think it's a gradual roll in over the next two to three quarters, including Q4 here.

Perfect. Thanks, Greg. That's helpful. Another quick one, the six openings that are targeted for next year, are there any, as of now, anticipated closures against those? And do you have a kind of a quarterly opening cadence beyond the two that you're sliding into early Q1?

As far as the opening cadence, I think we're looking at two in the first quarter. I don't know, look towards Greg Lynds and Tom here. In regards to closures, we've got a couple of leases that we're continuing to take a look at and we'll make decisions on them. Most of them are leases coming up at the end of the year and we're just trying to figure out, do we stick with that or do we relocate them in another area? As far as our legacy small footprint restaurants, I think there's a handful of those that as those come up, we will continue to evaluate those as well. But there is no initiative in place as of today that says, let's go and close 10 restaurants. It's mainly about the lease negotiations on a few restaurants here or there, but nothing too significant or too material.

Okay. Great. And then just a final one for me. Greg, on the last call, you hinted at continued work around menu rationalization and going through and testing some changes there. I guess where does that process stand? And if you are making any changes to shrink the menu, when should we expect to see that?

Great question, Todd. Currently, our restaurants have a reduced menu with about 20 fewer items, including some single-source items and some SKU rationalization. We plan to test this for approximately three to six months and evaluate the results. Depending on that, we might see a smaller menu by the middle of next year. Typically, we introduce new menus in January, which aligns with menu pricing adjustments. We also plan to adjust pricing around May and June. As mentioned, there will be a new menu around September or October. At this time, we are not planning to implement a smaller menu in January, as we want to complete testing through the holiday season, which means any menu reduction would likely happen in June. It’s important to streamline our menu to make way for new items that our culinary team is developing. Therefore, it’s probable that by June we will see a smaller menu, although it may not be a reduction of 20 items—it could be a net decrease of 15 if we introduce five new items at that time.

Okay, great. Very helpful. Thanks, Greg.

My pleasure.

And our last question comes from Brian Mullan of Deutsche Bank.

Hey, thank you. Just a question on the late-night business. Wondering what level of sales have you recaptured versus 2019 as of the third quarter? I'm just curious if you decided if all those operating hours are back? Or if maybe you made a decision that some of them might not come all the way back based on any analysis, I know in the past you were looking at?

The afternoon daypart has performed better than others during the pandemic, with late night being a close second in Q3, despite not increasing operating hours. On average, we're serving about half an hour less per restaurant per day. The late-night segment hasn't seen an increase in hours in many locations, as we want to ensure we're supporting our team members and managers while maintaining expected sales. Even without that additional half-hour, the positive comparable sales over three years are sometimes higher than the afternoon period and occasionally just below it. Overall, our late-night operations are performing very well.

Okay. So just to clarify, are the late-night average weekly sales back to the levels they were in 2019 overall? Or is there still an issue?

Yes, above.

Got it, okay. And then just a follow-up.

It's go ahead.

You know, go ahead. I'm sorry.

I just wanted to make sure that was clear that yes, on a comp basis versus '19, yes we're well above 2019 levels currently on a dollar basis.

Got it. And then just a follow-up, a similar question, but just the lunch business. I know you referred to the afternoon daypart, I don't know if that's separate, but could you just speak to the lunch business for 2019? Is that all the way back? And if not, are there some initiatives that you can proactively look at to drive that business specifically next year and beyond?

Yes, it's back to 2019 levels, and we're pleased about that. We've introduced a $10 to $11 lunch menu, which offers great value, helping us to regain traffic. However, part of the situation is that during the middle of the week, if people aren't back in their offices, they're not fully utilizing casual dining for lunch. So while we have returned to 2019 levels, I believe that as more people return to offices, it will provide additional support for the lunch business.

Thank you.

Thanks, Brian.

And so that does conclude today's question-and-answer session and today's call. Thank you for your participation. You may now disconnect.

Thank you, everyone.

Thank you.