BJs RESTAURANTS INC (BJRI) Q3 2023 Earnings Call Transcript

Hello, and welcome to the BJ's Restaurants Third Quarter 2023 Earnings Release and Conference Call. All participants will be in listen-only mode. After today's presentation, there will be an opportunity to ask questions. Please note, this event is being recorded. I would now like to turn the conference over to Rana Schirmer, Director of SEC Reporting. Please go ahead.

Thank you, operator. Good afternoon, everyone, and welcome to our fiscal 2023 third quarter investor conference call and webcast. After the market closed today, we released our financial results for our fiscal 2023 third quarter. You can view the full text of our earnings release on our website at www.bjsrestaurants.com. I will begin by reminding you that our comments on the conference call today will contain forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. Investors are cautioned that forward-looking statements are not guarantees of future performance and that undue reliance should not be placed on such statements. These statements are based on management’s current business and market expectations and our actual results could differ materially from those projections in the forward-looking statements. 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. We will start today’s call with prepared remarks from Greg Levin, our Chief Executive Officer and President, and Tom Houdek, our Chief Financial Officer, after which we will take your questions. And with that, I will turn the call over to Greg Levin. Greg?

Thank you, Rana. BJ has delivered another quarter of positive comparable restaurant sales and year-over-year margin expansion. Our total revenues increased a little over 2%, led by a 1.5% increase in our average weekly sales, driven by continued positive comparable restaurant sales and the strong performance of our new restaurants. For the 10th consecutive quarter, our comp sales results beat the industry as measured by Black Box. We expanded our restaurant margins to 11.9%, representing an increase of 160 basis points from the prior year and generated adjusted EBITDA of approximately $20 million in the quarter, marking a 29% increase over the prior year. In fact, in the first three quarters of fiscal 2023, we have generated over $76 million of adjusted EBITDA, which is roughly equivalent to all of last year's with, of course, one quarter to go. Compared to 2022, industry-wide sales trends normalized in the 2023 third quarter. Historically, weekly sales volumes peak in May and June and then come down in July before taking further steps down in August and September. Last year, with consumers free of COVID restrictions, weekly sales average actually increased in August compared to July with a smaller step down in September. This year third quarter sales trends reverted to pre-COVID patterns resulting in a return to an August and September sales slowdown. Tom will provide more details on the quarter, but since regular seasonality returned in the fourth quarter of last year, we have seen our comparable restaurant sales rebound to positive low-single digits starting in October. As we mentioned previously, our sales and margin growth strategies are rooted in our in-depth consumer research and focus on building the BJ's brand over the long term quarter-by-quarter and year-by-year. We know that our guests escape to BJ's for a dining experience featuring familiar food items made Brewhouse fabulous with gold-standard service and gracious hospitality delivered by our restaurant teams, packaged in an ambiance that is higher quality, differentiated, and full of energy compared to mass market casual dining concepts. Therefore in the third quarter, to enhance our already high service and hospitality standards, we rolled out new server scripts as well as an updated mystery shopper program focused on consistently delivering gracious hospitality to our guests. As a result of these recent programs, we have increased hospitality scores year-over-year on our guest surveys. Additionally, our hourly and management staffing levels continue to improve year-over-year as we narrow the gap to pre-COVID levels. In fact, our hourly team member retention rate in September matched our pre-COVID level illustrating our improving operating environment, which has enabled us to execute at even higher levels of service and efficiency. We also rolled out a new menu that has 15% fewer items and is focused on familiar items made Brewhouse fabulous based on our guest research and careful testing in our restaurants. Having fewer items but the right items for our guests resulted in improved pay scores year-over-year. Our innovation team continues to create new menu items and drinks that provide the familiar yet made Brewhouse fabulous. In the third quarter, we rolled out our Big Twist Pretzel paired with BJ's Brewhouse Blonde Beer Cheese, and the Hickory Brisket Nachos for a limited time accompanied with a line of Wow margaritas, including our new White Peach Boba-Rita. Importantly, our culinary and beverage innovation is working to grow sales, adding both incidents and dollar sales to the appetizer and cocktail categories. In fact, the new innovative cocktails are now our top sellers in that category. We also just rolled out our limited-time-only Spooky Pizookie with orange-colored vanilla ice cream and chocolate syrup that guests pour over their dessert, which hardens to make a delicious chocolate shell over our world-famous Pizookie dessert. Our Spooky Pizookie has exceeded our expectations, becoming our number one selling Pizookie this October and selling out sooner than anticipated. Given the extraordinary guest excitement and demand for this product, expect to see Spooky Pizookie back next year. We are now looking forward to this holiday season as we plan to feature a new limited-time-only Brewhouse Blonde garlic shrimp appetizer, a special filet surf-and-turf entrée, and our new Tipsy Snowman and Winter Paradise Pomegranate Margarita seasonal cocktails. All of these items fit squarely in our menu strategy of familiar items again made Brewhouse fabulous. Furthermore, we know that guests come to BJ's for a better dining experience rooted in what we call Brewhouse Theater. Each of these new items provides the guests with more theater and quality than what you find at other mass casual restaurant chains. For example, our Tipsy Snowman cocktail includes a holiday marshmallow shaped like a snowman in a Belgian beer glass, and the Spooky Pizookie allows our guests to pour over the chocolate sauce and watch in anticipation as it hardens. All of these items allow guests to trade up and indulge at BJ's while creating a fun polished casual experience. Most importantly, for us to do this we needed to optimize the menu and simplify execution in certain areas so that we can provide our guests an even better culinary experience. All of this has been made possible by our menu optimization process that we began last year and the continuing passion and dedication from our team members. Through our research, we know that a key differentiator in full-service restaurants is ambiance. Guests don't want to visit old worn-out restaurants with wobbly tables, dirty floors, and broken chairs. Guests want a contemporary, relevant atmosphere that complements team members' gracious hospitality and BJ's delicious food. Our remodel program focuses on that relevant ambiance, providing enhanced seating capacity an updated bar statement, new lighting, artwork, booths, and tables. As we've mentioned before, the new bar statement is amazing and includes a much lighter more contemporary bar feature featuring a new 130-inch television that screens Brewhouse Theater. We are still targeting between 35 and 40 remodels this year, and we expect to have remodeled at least 20% of our restaurants by year-end. While the best way for us to continue our margin growth is by driving top line sales since every additional dollar of sales leverages the fixed elements of our cost structure, we also laid out a plan last year to identify at least $25 million of four-wall cost savings opportunities that will benefit our restaurant operating margins while maintaining our high-quality standards. We have now unlocked over $30 million of cost savings on an annualized basis as we reduce food, labor, and operating and occupancy costs. Additionally, the team has identified further savings opportunities, which we expect to roll out late in the fourth quarter, which will continue to improve our margins and our EBITDA year-over-year. We also continue to open new restaurants in a balanced manner. In 2023, we opened five new restaurants, including the relocation of our Chandler, Arizona restaurant. Our 2022 and 2023 classes of restaurants are doing exceptionally well, with weekly sales averaging more than $130,000 or approximately 10% higher than our system average and overall margins in the mid- to upper teens. As we discussed last quarter, we submitted new plans for the majority of our 2024 openings so that we can roll out our new prototype that will save us approximately $1 million per build versus our current prototype. Additionally, due to a more efficient layout, this prototype should provide an opportunity for labor optimization. Overall, we believe this new prototype will provide even better returns on invested capital by delivering better margins and being built at a lower cost. Therefore, I expect 2024 new restaurant openings to be similar in number to this year, before we plan for an increase in the rate of new restaurant openings in 2025. As we've said many times, our goal is to re-accelerate our new restaurant expansion and grow restaurant weeks by 5% or more annually. However, we are going to do so with the right quality and at the right investment cost to continue to drive strong new restaurant investment returns. With 5%-plus new restaurant growth, consistent comp sales in the low- to mid-single-digit range, and expanding restaurant margins, we should achieve very strong EBITDA and earnings growth for our shareholders. With the continued positive reaction from our guests to all that we are doing, coupled with our increasing margins and EBITDA, we reinstated our share repurchase program this past quarter. We are increasingly confident in our strategy to grow sales, expand margins, open new restaurants, and return capital to our shareholders in both the near and midterm. Finally, I am looking forward to seeing many of you at our Analyst and Investor Day on Tuesday, November 14, and the welcome dinner the night before. We'll host a special beer dinner featuring some of our most iconic beers as well as some of our new menu items and cocktails. At the November 14th event in Boston, we will share greater detail around our near-term opportunities and our longer-term strategy. So I hope you can all join us for that event. Now let me turn it over to Tom to provide a more detailed update from the quarter and current trends.

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. In the third quarter, total sales grew 2.3% to $319 million. On a comparable restaurant basis, sales increased by 0.4% over the prior year. From a weekly sales perspective, we averaged more than $113,000 per restaurant. In a typical pre-pandemic year, the third quarter is our lowest sales quarter seasonally with the sales deceleration starting after Father's Day in June and continuing to step down into August and September as Greg mentioned. This year our sales followed this normal seasonal pattern consistent with industry trends in our markets. However, in 2022 the seasonal decline was much less pronounced as consumers enjoyed their first summer without any COVID restraints. As such last year's weekly sales averages actually increased into August before coming down slightly in September. This year's return to a more normal seasonal pattern resulted in comparable restaurant sales softening later in the third quarter from the mid-4% positive in July to about flat in August to negative low-single digits in September. Moving to more recent trends, comparable restaurant sales in the first three weeks of October are trending in the positive low-single digits, an improvement of more than 500 basis points from September levels as last year's seasonality normalized in the fourth quarter. Our comp sales improvement in October is being driven by improving traffic trends compared to both August and September and, to a lesser extent, our late September pricing round in the upper 1%. Looking at the sales trends from a different perspective, our comparable restaurant sales compared to 2019 were much more consistent throughout Q3 and into early Q4, providing us further confidence that 2022 seasonality was the main driver of the one-year comparable sales volatility in the third quarter. To date, we continue to see acceptance of our menu pricing rounds with no value-oriented shifts in our menu mix or less items ordered per check, which would indicate check management or changes in traffic patterns. Regarding dayparts, our late-night sales continue to outperform and grow faster than other dayparts. As our late-night check is lower than other dayparts, this channel mix shift is adding a modest headwind to average check. Our restaurant-level cash flow margin was 11.9% in the third quarter, an improvement of 160 basis points compared to the prior year. Comparable sales growth in conjunction with improving operating efficiencies and further progress on our cost-savings initiatives contributed to our margin improvement. Further illustrating our progress, our third quarter restaurant-level cash flow margin was within 160 basis points of the same quarter in 2019, marking a 90-basis point improvement from the 250-basis point differential in the second quarter. Also, Q3 was the first quarter in the post-COVID era where our restaurant-level cash flow dollars were higher than the corresponding quarter in 2019. We are encouraged by the progress made to date and continue to advance initiatives to further grow our restaurant margins. Adjusted EBITDA was $19.6 million and 6.1% of sales in the third quarter, which beat the prior year by $4.4 million with a margin that was 120 basis points higher. We reported a net loss of $3.8 million and diluted net loss per share of $0.16 on a GAAP basis for the quarter, both of which would have been an improvement from last year when excluding the $4.1 million tax benefit from the year-ago period. Moving to expenses, our cost of sales was 25.9% in the quarter, which was 140 basis points favorable compared to a year ago and consistent with the prior quarter. Food costs were about flat quarter-over-quarter and year-over-year, which was moderately favorable to our expectations. The inflation figure would have been higher if not for the accumulating benefits from the changes we've implemented to date across our food basket as part of the cost-savings initiatives. Labor and benefits expenses were 37.1% of sales in the quarter, which was 60 basis points favorable compared to the third quarter of last year. We made further strides improving our labor efficiency, which was driven in part by our reduced menu that requires less kitchen prep hours. A number of the labor efficiency metrics we track, including items per labor hour were better this quarter than pre-pandemic levels illustrating the high level our restaurant teams are operating at as well as the effectiveness of our cost-savings initiatives to date with respect to refining and optimizing our labor model. Occupancy and operating expenses were 25.1% of sales in the quarter which was 40 basis points unfavorable compared to the third quarter of last year. Approximately half of the increase was due to an investment in promotional and awareness-building activity to drive off-premise sales including catering, which has a high level of incrementality and return on investment. Our catering business continues to grow and delivered approximately 50% higher sales than the same quarter last year. G&A was $19.5 million in the third quarter. Included in G&A was a $100,000 deferred compensation benefit linked to fund performance in our deferred compensation plan compared to a $600,000 expense in Q2. As a reminder, this is a non-cash item that has an offsetting entry in the Other Income and Expense line in our P&L. For the full year, we now expect G&A to be in the $80 million to $81 million range which is on the lower end of our prior guidance. Turning to the balance sheet. We ended the quarter with a debt balance of $60 million which was $7 million higher than the end of Q2 and equal to where we started the year. We ended the quarter with net debt of about $48 million. Also during the quarter, we reactivated our share repurchase program to resume returning capital to shareholders. The resumption of our share repurchases reflects management's belief that BJ shares are currently undervalued and our confidence in BJ's longer-term prospects. During the third quarter, we repurchased and retired approximately 164,000 shares of common stock at a cost of $4.3 million. At the end of Q3, we had $17.8 million remaining on our authorized share repurchase program. Looking ahead to the fourth quarter, we are encouraged by recent sales and traffic trends as comparable restaurant sales have returned to positive low-single digits. Shifts in prior year seasonality have passed and we expect to continue delivering comparable sales in the low-single digits for the quarter. Factoring in our sales expectations and recent cost trends, we expect restaurant-level cash flow margins to be in the low 14% area in Q4, significantly above last year's Q4 margins. As a reminder, Q4 2022 margins had the benefit from a 53rd week and a one-time gift card breakage benefit which benefited last year's Q4 margins by approximately 130 basis points in aggregate. Regarding CapEx, our five 2023 new restaurants are now opened, and most of our 2023 restaurant remodels are completed. Included in our Q3 openings was the relocation of our Chandler, Arizona restaurant, which is off to a fantastic start with sales approximately 50% higher than our previous location. Also in the quarter we closed an underperforming restaurant which required a non-cash write-off in the Loss on Disposal and Impairment of Asset line in the P&L. Also related to CapEx, we invested an incremental $2 million to purchase upgraded server handheld tablets for approximately half of our system, which enabled additional functionality such as payment at the table and will lead to a meaningful operating cost savings with purchasing the tablets instead of leasing arrangements with our prior-generation devices. Due to this incremental investment as well as increasing the number of our restaurant remodels last quarter we are now targeting the high end of our prior $90 million to $95 million CapEx range for this year. Looking ahead to 2024. As usual for this time of year, we are in the middle of our planning process, but I can share some early thoughts. We expect food cost inflation to remain in the low-single digits. We will lock in most of our contracted items for 2024 over the next couple of months and we'll have a better idea of any variances when we report Q4 results in February. Labor inflation could tick up to the mid- to upper-single digits given the added impact of California's AB 1228 bill which is the bill that replaced the FAST Act. To note many of our California-based hourly team members earn near or above the new $20-an-hour minimum wage to be paid at fast-food type restaurants in the state starting in April 2024, but we do expect some impact. We expect higher menu prices in restaurants throughout the state as operators look to mitigate the added costs. We are still finalizing our menu pricing plan for next year but expect to be able to offset inflationary pressures. We plan to open four to six restaurants next year similar to this year and continue our remodel initiative given the attractive financial return profile. We also intend to continue repurchasing shares. In conclusion, we know the best way to grow margins and profit is to grow sales. Recent sales trends have been encouraging with demand for BJ's higher-quality experiential dining remaining strong, and we expect to continue making progress with our sales-building initiatives. At the same time, we remain committed to productivity and cost savings through our margin-improvement initiatives with momentum continuing to build. We have a clear path to sales and margin growth ahead and our long-term strategy and strong consumer appeal for the BJ's concept position us well to continue building on our successes and enhancing shareholder value. Thank you for your time today, and we'll now open up the call to your questions.

Thank you. Today's first question comes from Brian Bittner with Oppenheimer & Co.

Hey, guys. It's Mike Tamas on for Brian. Hope you are well. I think you've talked historically about the fourth quarter margin being a pretty good read on what the next year's full-year margin might look like. So, I'm wondering does that still hold with the guidance for like the low 14% range this year? And what do you think the big variances might be if any against that? Thanks.

Mike, thanks for the question. You're correct. Looking back to 2019, our Q4 margins were very consistent with our full-year margins. For this quarter, we still have cost-saving initiatives being rolled out through Q4. The average for the quarter is expected to be in the low 14% range, but I believe the exit rate will be higher. We're currently addressing some significant supply chain matters and implementing changes for efficiencies on our operating and occupancy lines starting mid-quarter. As a result, we anticipate seeing larger savings as the quarter progresses. This situation is somewhat different from a typical year, but you’re right that Q4 generally reflects an average sales quarter for us, where margins align with our expectations for the year, with the added benefit of a stronger exit rate due to the margin-improvement initiatives we are actively pursuing.

Got you. Thanks. And then I know you haven't decided anything yet for 2024 on pricing, but if you didn't take anything, and I know obviously California is going to force your hand on that, but if you didn't take anything can you just give us a sense for where 2024 pricing would be just with what you're carrying for this year? And then if you could, can you just give the breakdown of pricing and traffic mix for the third quarter? Thanks.

Sure. So I think for a base case, there will be some pricing next year. So as we think about it, we will get some extra carryover because we did take a pricing round in January that was on the heavier side and another one in April. So again, we're still finalizing the plan, but let's say it is something closer to a 3% round taken in-year. We'll have extra pricing flowing through in the year because of the carryover from 2023. And I'm sorry, remind me the second part of the question?

I was just hoping you can give the breakdown from the third quarter. Thank you.

Sure. So we mentioned this in the prepared remarks, but through the third quarter, no extra pricing was taken. So pricing in the quarter was closer to in the high 6% or 7% area. And then we had another pricing round come in in late September. So that put us in that 7% to 8% range.

So in the quarter, 2% dropped off from last year. We replaced it with kind of upper-1%s. So it brought it down a little bit. And kind of our exit rate going into next year would probably be somewhere in the 6% to 7% range frankly with about 2% falling off in January of 2024. So we'll probably end up replacing that 2% with something around there or a little bit less, which means we'll probably start the year somewhere in the 5% to 6% range.

Thank you.

You're welcome.

The next question comes from Alex Slagle with Jefferies. Please go ahead.

Thanks for the question on pricing. How did the check component perform relative to pricing in terms of the mix?

I'll provide a summary, and Tom can add some details. Generally, what we've observed in our business is that there hasn't been any change in how consumers are placing orders or what they are choosing in terms of price. However, as Tom mentioned earlier, we have noticed an increase in late-night business, which tends to have a lower overall average check. When we analyze our business, we're seeing about a 200-basis point negative impact from this mix. This isn't due to consumers opting for lower-priced items; rather, it's simply that the late-night business is growing within our comparable sales. Tom, feel free to expand on that.

Late-night is certainly a factor. Some of our off-premise traffic is either increasing or some of the takeout check is decreasing. Our on-premise check will help us determine if there are any shifts toward more value-oriented items, and there hasn’t been any change there. However, we are noticing some decline in off-premise checks and the late-night segment. It's encouraging to see traffic pickup, although it is leading to a shift towards lower average checks. Overall, as Greg mentioned, the difference from pricing to our check growth is in the range of 1% to 2%.

Got it. And as you step back and look across your system of restaurants and see what the top tier of restaurants are doing, those that are driving the strongest traffic growth, I mean, is it largely the remodels that drive that, or are there other sort of differences like service levels or retention or something else that you'd point to that drives the strongest outperformance?

Yes, it's an interesting question, Alex. It's clear that service levels in well-staffed restaurants with experienced team members lead to higher comparable sales. We noticed this trend after COVID, and even though it feels unusual to reference COVID now, it's relevant as those restaurants have continued to perform well. On another note, California, especially the Bay Area where you are, has been slower to fully recover from COVID. In looking at the third quarter, we observed a certain pent-up demand last year, which led to a significant decline in sales across all regions. However, as we entered October, all regions have shown recovery, with California possibly bouncing back even stronger. Ultimately, service levels seem to have a more substantial impact on our business.

Helpful. Thank you.

You're welcome.

The next question comes from Josh Long with Stephens Inc. Please go ahead.

Thanks for taking the question. This is Tyler Prause on for Josh. I would love to hear more about just the general pricing philosophy at BJ's and where do you stand on third-party pricing. Like I think in the past you've talked about pricing tiers. So, any update on that would be great. And then the second one, if the industry were to shift to more of a value sentiment, how would you approach that situation?

I'll give you some more philosophical. I think Tom might be able to add some mechanics in there as well. Look our pricing strategy is always to be around a good, better, best pricing strategy. The good is our value items or items that we call KVIs known-value items. We want to make sure our burger or our chicken alfredo and other items that you might see across different casual dining concepts is very competitive. Then we want to have the ability for guests that want to indulge and know that they're coming to a higher-quality casual dining concept that they might want the double bone-in pork chop. They might want the filet or the rib-eye. Those all allow guests to kind of price up a little bit including things that are on our Slo Roast menu. The same thing actually goes for the bar and the beer side of it. We've been really working on what I would consider a best-in-class bar statement and it's allowed us to have some higher-end bar drinks or cocktails that guests want to spend up. They can, but they're getting a higher quality for it. They're getting uniqueness and differentiating what we call the Brewhouse Theater. At the same time, as part of our menu strategy as well or our pricing strategy, we have our daily Brewhouse Specials. So, those allow for guests to come in on specific days and get something at a really good value from a price point, whether it's our Slo Roast Thursdays where around $19 you can get a rack of ribs, two sides, starter salad and a full Pizookie dessert. That drives obviously a lot of guests into our restaurants because it's something that we can do and it's differentiated from a quality standpoint. So we're going to continue to balance across that. We also have our lunch specials as well. So depending on how the economy is or how we want to target guests in certain markets, sometimes we'll target them with a value statement around our lunch specials or our daily Brewhouse Specials. Other times we'll target them around some of the indulgent items or some of the limited-time-only items that kind of drive a fear of missing out. Our Spooky Pizookie perfectly played into that. That drove a FOMO from our guest standpoint. We need to come in the restaurant and get this Pizookie before it disappears. So it's a combination of different areas that we want to target based on those individual restaurants as well as the macro environment. And then I don't know, Tom, if you want to add anything specific towards our pricing.

Sure. Regarding third-party pricing, we have implemented an additional 10% across our third-party platform. This is already in effect. Additionally, we are currently re-evaluating our pricing tiers, partly due to California needing to be treated separately for some restaurants because of the new minimum wage, as well as recent changes in regulations concerning pork products that have increased costs. We are assessing which restaurants can be grouped together based on sensitivities that we can evaluate. This re-tiering process is ongoing and we expect to roll it out next year. I would also like to reiterate what Greg mentioned about promotions. We have consistently maintained our promotional efforts. While there may be other promotions increasing, we continue to offer excellent daily Brewhouse Specials, happy hour promotions, and valuable lunch options. Our marketing focuses on both brand building and increasing awareness to attract customers for these promotions. We are also evaluating whether our existing promotions are the right fit and if there are opportunities to generate even more traffic. As we observe the market landscape, we note that some brands are leaning more into promotions and value, but we believe we already have a strong and appealing mix in place that will attract customers regardless of market conditions.

Great. I appreciate all the color there. Super helpful. And just one follow-up. So the G&A kind of coming in at the low end of the range for 2023 is encouraging. And just kind of think how you're thinking about G&A going into full year 2024.

So right now we're in the middle of our budget season. But our goal always on G&A is to grow it at a rate less than top-line sales so we can leverage it going forward.

Yes. That's all from me.

Okay. Thank you.

The next question comes from Andrew Wolf with CL King. Please go ahead.

Thank you. Good afternoon. I want to switch to your lower cost to build the new restaurants and just kind of a basic question. Is that necessary, I mean, to get to the IRR hurdles you have talked about before which I think is 20%, or was the better-than-expected sales that the restaurants have been achieving already getting you there? And I also wanted to just ask you a math question. I'm getting to about a 2% to 3% higher return on investment by bringing the cost down $1 million. Just wanted to run that by you as a reality check.

That's a great question. We continually assess our prototypes over the years to ensure we're developing the right model for our business. As we evaluate and evolve our menu and other elements, we make adjustments that we believe are appropriate for our future direction. The $1 million reduction in investment costs will aid in enhancing our ROI, as you mentioned. By analyzing our WSA and improving margins, certain changes will increase our operational efficiency in running our restaurants. For instance, reducing square footage and optimizing our bar setup will provide us with efficiencies, as will some changes in the kitchen and team member roles. We also want to stay attuned to changing consumer preferences. For example, in markets like California, we might adopt a larger restaurant format due to stronger brand awareness of the BJ's concept. Conversely, in smaller markets, a more compact prototype may yield better efficiencies. Thus, it's a blend of both considerations. As we prepare to launch this current prototype for next year, Greg Lynds and his team are exploring what the next evolution will look like, including further changes aimed at optimizing costs and improving execution within our restaurants.

Andrew, just to – as you mentioned in your math, that's right. The $1 million coming out of the build cost improves the return by in that 3% area.

Great. Thank you for the color, Greg and feedback. I have a kind of analogous question this is my last question on the remodels. I'm just trying to sort of back into the sales lift. And I would assume it's a little less than a one-for-one dollar-for-dollar because the incremental profit margin is better. I just want to sort of check that. Or are you able to talk to directly what the sales lift is?

Certainly, Andrew. We’ve been implementing these remodels in a couple of different ways. The lower scope involves adding a few extra booths and making some minor improvements around the restaurants, which costs about $250,000. These remodels are generating an additional weekly sales increase of around $1,000 to $1,500, which indeed indicates incremental traffic and a favorable flow-through, resulting in returns of 20% or more. The larger-scope remodels that Greg mentioned are particularly appealing to us because they focus on brand enhancement and driving traffic. This includes refurbishing the bars, painting the exterior, adding murals, brightening up the dining areas, and rearranging the booths. Some of these larger remodels can cost $600,000, $700,000, or even more. Nonetheless, we are observing similar returns. As we evaluate the sales boost, we're noticing that these restaurants experience a significant increase in sales.

Okay. Thank you very much. That’s helpful.

Thank you, Andrew.

The next question comes from Nick Setyan with Wedbush Securities. Please go ahead.

Thank you. I appreciate the monthly cadence as the quarter progressed and obviously the October pickup. Any way to kind of parse out this was sort of x percent was seasonality and the rest was some kind of a consumer slowdown? I know it's a very difficult question but it would also help us have some confidence in terms of the go-forward trend as well. If it was seasonality then low-single-digit comp for Q4 makes sense. But if there was something else that you saw perhaps we should be a little bit more concerned.

Nick, that's a great question. We are all trying to make sense of various factors as you mentioned. The key takeaway for us when analyzing this quarter's performance is noteworthy. In my experience, I have never observed an August weekly sales average exceeding that of July, whether during my time at California Pizza Kitchen or BJ's. Typically, there's a decline moving from June to July, then a drop in August and an even lower September. However, this year, we noticed an unusual trend with August sales surpassing July. We also examined how sales in October, November, and December compared to 2019, noting that last year in 2022, those months followed a more traditional seasonal pattern. After September, when we entered October, our sales rebounded by more than 500 basis points, as Tom mentioned. Although we had successful promotions like Spooky Pizookie, this turnaround indicated a shift back to normal consumer seasonality. More specifically, we observed a slowdown occurring around the second or third week of August, coinciding with schools returning for sessions. Both you and I remember school starting after Labor Day, but that has changed now. The return to school in August marked the start of the slowdown. Additionally, in California, where we have over 60 restaurants, the impact on our business was significant. The Black Box data likely reflects that California experienced the largest drop, followed by the most substantial recovery. California also lifted COVID restrictions later than many places, and I personally remember facing COVID regulations there in 2021. Consequently, California experienced a significant rebound in dining last year in 2022. As quickly as we saw the slowdown in August, we've observed a reversal in October. As we often mention on our calls, we focus on our current sales performance. Just like when we reported in Q3, we discussed our sales for July at that time. Tom, do you want to add anything?

I believe Greg addressed most of the points. One additional aspect we noted in the prepared remarks was regarding the 2019 comparison. When we analyzed our sales over the same periods and months, it was very consistent. In September, we experienced a pricing adjustment from 2019, which caused a slight dip in the three-year comparison. However, after implementing our pricing strategy at the end of September, we observed a rebound. This trajectory closely mirrored the patterns we would expect from 2019 if the seasonality had remained consistent with pre-COVID times. Therefore, the data we are examining indicates that the 2022 seasonality was the key factor in the quarter's performance.

So nothing in terms of less attach rates trade-down, anything else you're seeing that would kind of imply consumers are becoming a little bit more cautious?

We analyze data weekly, focusing on incidence rates and the performance of items like the Pizookie, alcoholic beverages, and appetizers. If there were any changes in customer spending, we would notice it there. We are also monitoring our more value-oriented menu options, including happy hour, lunch specials, and daily promotions. When comparing this year's data to last year and 2019, we see a consistent performance week by week, with no indicators that suggest customers are reducing their spending or being more cautious.

Anything in terms of the holiday seasons and how that might impact or benefit Q4 this year versus last year to be aware of?

Compared to last year, Christmas will be on a Monday instead of a Sunday, providing a slight advantage that could translate to about 20 basis points for the quarter. While this offers a bit of support, it's not as impactful as changes in New Year's Day, which can significantly affect Q4. There may also be some different promotional strategies we consider around Veterans Day. Overall, I expect this quarter to be very similar as the calendar aligns.

The next question comes from Todd Brooks with The Benchmark Company. Please go ahead.

Thanks for taking the question. I've got a few for you guys here. Tom, if I could start off with you, very encouraging news on the further cost saves. I know you talked about $30 million and that's not an end point. If we take this out to a longer-term opportunity as we're looking into what could be harvested maybe going into 2025 what's the magnitude of this opportunity versus the $25 million that you guys thought was originally there to harvest?

We're still vetting the new opportunities that are coming in. We're not saying yes to everything, but we are increasing the scope every time we're meeting as a team to find more and more opportunities. So as we said, it's $30 million now that have been accepted and are rolling in. There's still more that's either waiting to be rolled out, or still in some term of vetting. So we don't have that number to share in terms of what it could be in 2025, but that $30 million we're at now is going to be higher. So we're going to continue to keep rolling them out and we'll keep everybody updated as we keep adding to it. But yeah we're encouraged by even some of the new ideas that keep coming in. It's great when you have a cross-functional team that are all focused on costs and growing margins and doing it the right way. And we're continuing to get some really good ideas coming out of this initiative that we'll continue executing against.

Hey, Todd. This is Greg to add to that. We're even looking at how we continue to cook items in the kitchen. We've got obviously our peak starts and we run some great things through that. It's one of the reasons we have such consistency. Can we move more items to that versus using a different other area versus maybe a flat top or the grill? And just looking at other areas in that perspective that can continue to help us. So I think as we go down this process not only as Tom talked about it that we'll have more than the $30 million but it's something that we've got to continue with. We've got to continue with that creativity in our business to continue to figure out ways to make us more efficient, more productive and at the same time reduce costs.

Okay. Great. And then Greg one for you. With the new streamlined menu I think going back to what you said in tests you hadn't seen much of a same-store sales impact from constructing some of the items taking them off the menu. Once the menu launched did that experience hold, or was there some sort of same-store sales headwind in actually moving across the full fleet to the new streamlined menu?

So it looked like it held. And we didn't do a holdout restaurant just to see how things played out because of how we did it in the test. But as we went into July and forgetting some of the seasonality but looking at all of our restaurants, it didn't look like there was any significant changes from one area to the other. So what we tried to do seemed to work in regards to driving operational efficiencies streamlining the fact that we didn't need 10 burgers or we didn't need 10 salads and so forth. As we moved down we saw guests shift into what we'd expected them to shift into. At the same time, as we put things on like a filet or we put the pretzel on we saw guests move into that within those different categories. But overall it seems like things have held as we expected.

That's great. And then just two quick follow-up additional questions. One, can you update us on where we are on returning the full fleet to late-night operations? And then secondly, you touched on this with California exposure, and I know you guys won't use weather as an excuse, but I was wondering, is there a way to tease out the impact? I mean, you don't get a lot of tropical storms/hurricanes in the California market. And just wondering what impact that may have had on the business with it hitting in August. Thanks.

I'll share some of my experiences since it's been a while. We were definitely affected. In California, where we're not accustomed to tropical storms, we pretty much stayed indoors all weekend. It was challenging. I can’t recall exactly how our comparisons were impacted, but people seemed reluctant to leave their homes, even though we've dealt with larger storms during winter. We would need to look further into this because it happened quite a while ago, and it didn't appear to have made a significant difference on its own. We also faced the impact of the hurricane in Florida during this period. We are currently in the process of rolling out late-night operations for all our restaurants. I'm not sure if everyone is up and running or if we are still working on it.

So in late-night, to take you back to where we were pre-COVID, the place we have not added the hours back are really on the Fridays and Saturdays when we were open until 1:00 in the morning. We're still thinking if that makes sense and we're going to be able to drive the right type of sales and margin make sure that's dollar margin accretive. So that's the one area we have not done yet. But for the most part getting the restaurants outside of that Friday and Saturday, the Sundays through the Thursdays, most of our restaurants are now back to midnight. And that's been a very great success not just for the sales but actually seeing dollars as well as percent margin from those extra sales. You do get it in that last hour that 11:00 to midnight, but it also builds in that 9:00 to 10:00 and 10:00 to 11:00 hour. So we've seen some really nice return there. There's just a few restaurants that haven't added that back yet. But for the most part that midweek we're back to midnight. And still exploring and analyzing if it makes sense in at least some restaurants to go back to that 1:00 on the Friday and Saturday. But that we have not determined yet.

The next question comes from Sharon Zackfia with William Blair. Please go ahead.

Hi. Good afternoon. I guess, I wanted to go back to the California fast food wage hike that's happening next year. And I know, you're not directly impacted but obviously wages going up impacts everybody and you alluded to that. I guess, I'm wondering is there any way that you could paint this as a favorable scenario for full-service where the order of magnitude price increase that you would have to take to cover labor inflation would be much less than your limited-service peers? I mean, is there any market where you've seen a test case of this where maybe the gap between full-service and limited-service narrows somewhat in terms of price points?

Sharon, it's a great question. And obviously with the dining room team members or the front of the house you've got tips coming in. So those tips put people significantly over the $20-an-hour range there. And then most of our kitchen is already close to that if not over that in California. And we've even said we can be driving down the street and see a fast food or another restaurant with a sign outside saying, 'Starting Wages at $22'; and really not necessarily impact our restaurant in that general area. So I do think we've got an inherent benefit there. I also think to your point that because of this you're going to see fast food which already is and fast casual raising their prices and getting their prices closer to casual dining. I still think that it's a different experience at times in that regard, and we're trying to drive guests into our restaurants that want that more experiential dining from that experience I guess. We will always want to obviously make sure we can continue to drive off-premise and be close to them if off-premise is not with them if not the same price if not better on off-premise. But ultimately, what we're trying to do is have a differentiated food profile, trying to make sure we're driving guests that are wanting Brewhouse Theater, want that differentiation of a sit-down experience. And it's still an $80 billion-plus industry that we're going after. Now that being said, I'm not sure there is a market that we can compare to where we are today. Even if I had to look at certain cities that already have minimum wages in the $18, $19 range and look at our business and how we're comping versus again trying to look at it versus fast food, I don't know, if I've got that comparison. All I know is minimum wage in general hasn't been as impactful to driving top line sales. I guess, sometimes people think it tends to give more dollars in people's pockets, and they tend to want to go out and use it on discretionary items, and we get a benefit of that.

Okay. And then sorry, if I missed this I hopped on another call I know the menu rationalization seemed to go pretty well that you did in July. Are there thoughts to doing further rationalization, or are you pretty happy where you are at this point?

We need to remain disciplined in our approach. Personally, I would prefer to reduce our menu options. It's important for us to monitor where our guests are going with their choices and ensure we offer the right variety and differentiation. Our consumer research indicates that variety is crucial to our guests. Therefore, we intend to maintain that wide selection. At the same time, our Chief Growth and Innovation Officer, Putnam Shin, along with our Senior Vice President of Culinary, Scott Rodriguez, are continuously working on developing exciting new menu items that we aim to introduce. To achieve this, we must be disciplined about removing certain items. I’m not sure if we'll make another significant cut like we did previously, but we will remain disciplined moving forward to allow for unique limited-time offers to attract consumer traffic to our restaurant and create a sense of urgency.

Thank you.

You’re very welcome.

The last question today comes from Teddy Farley with Citi. Please go ahead.

Thanks for taking the question. Just one for me. As you think about return of capital and continuing the share repurchase program, what is your thinking around restarting the quarterly dividend that you had pre-COVID, if you're thinking about that at all? Thanks.

Yes. Teddy, it's something we'd have to bring up with our board of directors. I think right now where the stock is trading and look I'm not the one that determines the valuation of the company but I think management is very confident in its strategy and its ability to increase its EBITDA, and feels that at least share repurchases right now are the right way to return capital back to shareholders. As we continue to put together our 2024 and 2025 and beyond, capital program both CapEx and capital program I think we're going to be in a position that continues to generate a significant amount of free cash flow at that 5% to 7% new restaurant build and continue to expand margins. I think as we look at that, it's something to look and figure out what's the right approach here in regards to returning capital to our shareholders. Dividends do allow a certain amount of discipline within the capital structure because you've got to meet that each quarter. And I think that discipline is actually a good thing. At the same time, I think where we are today, being more opportunistic buying back shares makes more sense.

Awesome. Thank you.

You’re welcome.

Thank you. The conference has now concluded. Thank you for attending today's presentation.

Thank you.

Thanks. Thanks, everyone.